Haemonetics Corp (HAE) 2009 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Haemonetics second quarter fiscal year '09 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 Investor Relations for Haemonetics.

Good morning. Thank you for joining Haemonetics second quarter fiscal 2009 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. And additional information concerning factors that could cause actual results to differ materially is available in our press release. On today's call Brad Nutter will review the highlights of the quarter, Chris Lindop will review our operating performance, and Brian Concannon will talk about our progress against key strategies. But before I turn the call over to Brad, there are a few administrative items that I want to make you aware of.

First, next, quarter, that's our Q3 call, we'll begin webcasting and we'll send out more detail on that in advance of the call. Second, we'll be leveraging our website more often as a means of disclosure. So while we'll continue to distribute press releases over the wire for significant material information, additionally our website contains industry news, presentations and fact sheets which are only available there, so please, if you haven't already done so, go to our website and register for updates. Finally, I want to review a few items that affect our comparative financial results. In connection with the ongoing transformation of our business, we incurred restructuring costs in both fiscal '08 and fiscal '09 that we have excluded from the financial results we're talking about today. In fiscal '08, our adjusted second quarter and year-to-date net income excluded $1.2 million and $2.8 million respectively in pre-tax costs associated with the ongoing restructuring of our European business.

In the second quarter of fiscal '09, we incurred restructuring costs of $0.3 million pre-tax, and year-to-date we have incurred $2.2 million in pre-tax costs. And again, we have excluded these costs from our numbers today, so that we can give greater clarity to our operating results. As is our normal practice, our press release and website include a complete P&L and balance sheet and you'll also find these have reconciliations between our GAAP results and our adjusted results. With that, let me turn the call over to Brad Nutter.

Thanks, Julie, and good morning, everyone. Before we review a great second quarter, let me comment on our succession plans. Now as you saw in our press release this morning, Brian Concannon will succeed me as President and CEO effective April, 2009, which is the start of our next fiscal year. Until that time, I will continue to serve our shareholders as CEO. In April, 2009, I will continue to serve as Chairman of the Board and I'm really energized with this role. I'll focus on Board governance and support the implementation of our vision, strategies, and succession plan. In this roll I'll continue as an employee and have an office here in Braintree. Now most importantly, I'm delighted with the Board of Directors' selection of Brian Concannon as our next President and CEO. I have known and worked with Brian for more than 20 years. His career with Haemonetics has been outstanding. His proven leadership during the past five years with Haemonetics makes him an excellent choice as our next CEO.

Finally, we have a strong team culture here at Haemonetics and I congratulate Brian on his promotion and look forward to working with him and the rest of the team in the future. Now let's turn our attention to a great Q2. As many of you know, at the beginning of the year, we shared that we aspired to become a Company that can sustain a five-year compounded growth rate of 10% to 12% in revenues. We also stated our aspirational goal for operating income is to grow 12% to 15%. Back in July I indicated how pleased I was with our strong start for fiscal '09, as revenues grew 18% and operating income grew 22% and both gross and operating margins improved. I'm very prod of our consistent strong performance. As we review our Q2 result, our revenue increased 20% and operating income grew 52%. This is the sixth consecutive quarter of very strong double-digit revenue growth and I'm pleased with our year-to-date positive drop-through with operating income growing more rapidly than revenue.

The consistency of our improvement in both gross and operating margins for the quarter is performance that you should expect from your Company. Also, our cash flows continue to be very strong. Now let me be very, very clear. The fundamentals of the business continue to trend very, very positively and we see outstanding prospects for growth in the future. Our performance on a year-to-date basis exceeds our expectations and therefore, we'll be raising our guidance, which Chris Lindop, our CFO, will detail a moment. I a market place of financial turmoil, Haemonetics' consistent performance, strong balance sheet, and improving margins are a result of excellent execution to our strategic plans. Now let me turn the call over to Chris Lindop, who will review our quarterly and year-to-date performance, as well as our new guidance for the remainder of fiscal '09. Chris?

Thanks, Brad. I am extremely pleased with our results in the quarter and year-to-date. The business continues to run on all cylinders. As Brad highlighted, 20% revenue growth dropped through to 52% growth in operating income, both well above our annual guidance range and our aspirational long-term goals. Let me start by updating guidance for the year, then I'll go through revenue growth drivers and other highlights of the income statement and balance sheet. First, we're increasing and have narrowed our annual revenue guidance range to 12% to 14% growth. The increase is based primarily on strength in our plasma business and, to a lesser extent, our blood bank and equipment lines. I recognize that revenue growth in the first half of the year is 19%, but three factors will impact our growth rate in the second half of the year.

First, this is our fourth consecutive quarter of revenue growth greater than 18%, so we will have comparisons to two very strong quarters in the third and fourth quarter of fiscal '09. Second, currency, which contributed about 5.5 percentage points of growth in the first half of the year, will be neutral to revenue in the back half. And third, the anniversary of our TEG acquisition is in November and TEG contributed about 4 percentage points of growth in each of the first two quarters of this year. Now we'll leverage revenue growth with spending discipline and plant operating expenses for the full year at approximately 60% of incremental gross profit dollar growth. As a result, we are increasing operating income growth guidance to 21% to 25% for the full year. We're also increasing our EPS annual guidance range. Our previous guidance range was $2.33 to $2.43 and our new range is $2.38 to $2.44. That's EPS growth of 13% to 16%. Now let me move to revenue growth in the quarter.

Our revenue growth of 20.4% breaks down as follows -- the core business remains strong with 11% revenue growth excluding currency and the TEG acquisition; and year-to-date reported revenue growth is 19.3%. Revenue growth in the quarter continues to come from plasma, red cells, diagnostics, software and equipment. We also had a good growth in the quarter from OrthoPAT and our blood bank business continues to grow better than we originally anticipated with mid-single-digit growth. So first plasma, our largest business, with fiscal '08 annual revenues of $155 million. Plasma disposables continue to grow exceptionally well at 32.8% in the second quarter and 31.6% year-to-date. This growth is driven by market expansion and new contracts. We saw increases in all geographies, including Japan, as demand for IVIG and Albumin outpaces global supplies of plasma. Demand for IVIG continues to grow at about 10% and we expect that trend to continue in the near-term.

In the US and Europe, Haemonetics also benefited from the new contracts with Ophtapharma Europe and US, which we announced in Q2 of fiscal '08 and Q1 of fiscal '09 respectively. In Japan we saw stronger unit growth combined with price improvements, as we released a safety enhancement to our plasma collection system. As we've shared previously, we expect plasma growth to moderate from these extremely high growth rates, but we continue to expect double-digit revenue growth in the plasma business for the next 24 months. The blood bank, mainly platelet collection disposables, is our second biggest business with $136 million of revenue in fiscal '08. Blood bank disposables' revenue grew 6.2% in the second quarter and 7.1% year-to-date. The platelet market has nominal growth rates in the developed markets, but we have identified areas for growth in emerging markets through our distribution network.

In addition, as you may recall, this year we are benefiting from market-share gains through a contract with Canadian Blood Services. We have converted about 75% of CBS' platelet collections to Haemonetics systems. We'll see the benefit of the CBS contract through the third quarter. And we are pleased that our blood bank business continues to contribute to overall revenue growth and we remain confident about achieving full year revenue growth of approximately 4% to 5% in fiscal '09. Now moving to red cells. The red cell disposables business, which had revenues of $46 million in fiscal '08, grew 8.5% in the second quarter and 8.4% year-to-date. The growth came from unit increases of our MCS red cell collection system. We'd originally planned for red cell growth rates in excess of 10% and we're disappointed that we haven't achieved that in the first half of the year, but we continue to stay focused on achieving 10% growth in red cells in fiscal '09.

The patient side of our business is also doing very well. And let me remind you that the patient business consists of our cardiovascular surgical blood salvage systems and our diagnostics, which are grouped as surgical and diagnostics, as well as our orthopedic surgical blood salvage system. So first surgical and diagnostics, a $72 million business in fiscal '08, grew 36.2% in the second quarter and 35% year-to-date, primarily due to the TEG acquisition. In the quarter, TEG sales were $4.8 million and we'll see the comparative benefit of the TEG acquisition through the anniversary of the acquisition in mid-November. OrthoPAT, a $34 million business in fiscal '08, grew 6.9% in the second quarter and 7.2% year-to-date. We expect that OrthoPAT revenue growth will increase in the second half of the year as it did in fiscal '08. Still we're disappointed in our year-to-date performance against our goals and now expect to finish the year at around 10% growth for OrthoPAT at the low end of our original expectations.

Software and services, a $39 million business, regained momentum in the second quarter with revenues up 14.5%. Now remember, Q1 revenues were flat to prior so year-to-date revenues is up 7.5%. The software part of the business is up 34.5% year-to-date, but this growth was partially offset by a decline in service revenues in Q1. You may remember, we had a large consulting services contract last year, which did not repeat in fiscal '09. Strength in the software business came from our contract with the Department of Defense and from other new contracts. Equipment, with $33 million of sales in fiscal '08, is a less predictable part of our business. Sales continue to be strong with equipment up 29.6% in the quarter and 24.2% year-to-date. Equipment sales were particularly strong in our distribution network, where sales of platelets and cell-processing systems were up significantly.

As part of our transformation initiative, we restructured our Europe and Latin American distribution business with dedicated resources and we're beginning to see the benefit of those efforts. So to summarize revenues, our largest business, plasma continues to be our highest-growing product line and all leading indicators show this market to be strong for the next two years. We continue to see growth across multiple geographies and product lines and feel great about the prospects for the business going forward. Now let me review the rest of the P&L. Q2 fiscal '09 gross profit was $75 million, up 24.7 %, and gross margin is up 51.2% -- excuse me -- and gross margin is 51.2%, up 180 basis points. Year-to-date gross profit is $148 million, up 21.9%, and gross margin is 50.9%, up 100 basis points over the first half of fiscal '08.

Gross margin improvement benefited from currency and price increases, partially offset by raw material price increases and product mix, as we continue to see exceptionally strong revenue growth in our lower-margin plasma business. In the quarter, we managed operating expenses very well. Despite incremental expenses from the TEG business, which were not included in our Q2 fiscal '08 expenses, and ongoing ERP expense, we kept operating expense dollar growth to just 45% of incremental gross profit dollar growth. And for the full year, we plan to manage operating expenses -- operating expense growth to approximately 60% of gross profit dollar growth. Adjusted operating income grew 51.7% in the quarter and operating margin expanded 340 basis points to 16.4%. Year-to-date adjusted operating income growth is 36% and operating margin is 15.6%, up 200 basis points.

Other income declined in the quarter compared to the prior year, as we used cash for the Haemoscope acquisition in Q3 of last year and for our recent share buyback, which we completed in Q2 of this year. Adjusted earnings per share was $0.58 in the quarter, up 28.4% from Q2 of fiscal '08, and $1.17 year-to-date, up 22.4%. Now moving to the balance sheet. We closed the quarter with a cash balance of $111 million. And in the quarter, we generated $28 million in cash flow from operations and made a net investment of $60 million in capital expenditures. As you may remember, in May the Board approved a $60 million share buyback and we spent about $25 million against the plan in the first quarter and completed the remaining $35 million of the buyback in the second quarter.

Now before I turn the call over to Brian, let me reiterate, we are well positioned for strong balanced revenue growth. Despite pressing global economic factors and market extremes like we have never seen, we are performing exceptionally well. The investment thesis for Haemonetics remains strong. Q2 was another great quarter and it positions us very well for the year. With that, let me turn the call over to Brian.

Thanks, Chris, and good morning, everyone. As many of you know, over the past five years Haemonetics has successfully executed the two strategies. One, improving profitability, and two, expanding our business. Last quarter, I talked about strategy number one and the affects of transformation on our business. This quarter, I'm going to share a brief update on business transformation. I will then spend the rest of my time on strategy number two, with an update on our progress with blood management solutions, new product launches, and products in development. So to start with transformation. Remember that we have made changes in our international businesses to position the geographies for faster revenue growth, improved profitability, and business expansion. And we have done well. In the quarter, Europe grew 30% and Asia-Pacific grew 16%. And as planned, Japan was fairly stable with revenue growth of 2%. Three of our four geographies are achieving double-digit revenue growth.

In the quarter, we spent $320,000 and year-to-date we have spent $2.2 million of the $5 million to $7 million targeted for this year's transformation. We have aligned our manufacturing, quality, and R&D with our sales and marketing resources to more effectively deliver blood management solutions to our customers. With these changes, we can more nimbly respond to market and business needs. Now let me move on to our second strategy, expanding the business. Two years ago, we stated our vision to be the global leader in blood management solutions for our customers and we have made progress here as well. With new products from internal R&D and acquisition, Haemonetics is now uniquely positioned as the only Company to offer a depth and breadth of products, information management systems and services which span the blood supply chain from donor to patient. As an example, we are seeing early successes in selling business solutions rather than devices.

Atlantic Health in Morristown, New Jersey performs about 1400 orthopedic and 1,000 cardiovascular procedures annually. Atlantic Health was not a current Haemonetics customer, but we approached them with our blood management solutions. But through Haemonetics blood management consulting business, we are now developing best practices for managing blood in orthopedic surgery. As a result of our initial efforts, Atlantic determined that it would save about $1 million annually in blood usage and related costs and awarded us with more than a $0.5 million contract for the OrthoPAT system. And remember, this was a hospital that had done no business with us in the past. We have expanded our relationship further into cardiovascular services. Atlantic Health would be the first hospital to integrate a full suite of Haemonetics blood management solutions for both cardiovascular and orthopedic surgery.

We have several other hospitals moving down a similar blood management solutions path. We are pleased that our solutions selling is taking hold in hospitals. On the donor side of our business, we are enjoying an equal level of success. In China, we worked hand in hand with a Shanghai blood center to develop a platelet donor recruitment and retention program with breakthrough success. These efforts have helped the Shanghai blood center raise the number of platelet [acoreisis] donations to 6,000, or more than double in a single year. These are just two examples that validate our value proposition. Clearly, we are making progress. Our concepts work. Now we will develop the processes and efficiencies to scale our programs for more rapid expansion in multiple hospitals and donor centers. Now moving to new products. We continue to believe in the value proposition of our new products.

We recognize that for some of our products we are creating new markets and that takes time. But we are not satisfied with our progress here. In the first half of the year our new product sales were $2.1 million and that's against an annual plan of $7 million to $9 million. We recognize that new products are important to our long-term strategy and frankly, we have been distracted a bit by the growth in our base business. However, let me state emphatically that we remain very bullish on these new products and the markets and customers they serve. As we speak, we're implementing plans to drive stronger and faster growth, particularly by significantly increasing use of newly installed devices. Here is what we are going to do about it. Our new Oracle system provides us visibility at a very granular level to the performance of new devices. That is the rate of actual use in each territory around the world.

During the second half of this year, we'll perform intense new product training focused on underperforming accounts and territories. Additionally, in fiscal '10, our sales compensation program will aggressively reward growth for new product sales. We will implement these changes over the remainder of fiscal '09, so that we are prepared for a strong start next April. Now let me spend a few minutes on product development, because this is important to our blood management solutions vision. At our May investor meeting we shared our plans for an automated whole blood collection system that will include a collection device, an on-board information management system, and a mobile blood storage system. As Haemonetics enters the whole blood collection market, our market potential will expand significantly by $1.6 billion. I am pleased to report that in the last six months we have made further progress.

We have enhanced the internal component systems. We began the integration of ELinks and EQ, our information management systems, into the platform. And we have identified important component suppliers. By year-end we should have a baiter built to prove manufacture ability, which will in turn allow us to move to clinical trials late next year. The second product in development that we have talked about comes from our Arryx Advanced Technology Group. The advanced technology group continues to work on a point of care, blood-typing system that is portable, can type blood in minutes, and uses just a drop of blood and reagent. In May we shared that we have been able to forward type blood in just a matter of minutes. Since then we have made progress on the typing chip. The chip is a glass slide that is used in the typing. We now have reduced the slide down to five layers from seven, which is significant, because the chip will be easier to manufacture to scale.

We have also made further progress on the chemistry used in the system. We look forward to updating you on our progress. Haemonetics has been and will continue transforming to strengthen the business. Our blood management solutions vision is gaining momentum and we have got products in development that will add meaningful market potential to our blood management portfolio. I am extremely pleased with our quarterly results. I am pleased that our efforts have delivered strong consistent growth in revenue, earnings per share, and free cash flow in each of the last five years. And I'm confident that we position ourselves very well for ongoing success.

Before I close, let me tell you how humbled and honored I am to be named as the next President and CEO of Haemonetics. Brad has done a tremendous job leading this organization for the past six years and I am delighted that I will be able to continue to work with Brad and learn from him in his role as Executive Chairman. We have a great vision, a solid strategy, a talented and dedicated leadership team, and a group of employees that is unmatched in our industry. This gives me great confidence in our future and I remain committed to driving the results that you have come to expect from your Company and improving shareholder value. Now let me turn the call back to Brad.

Thanks, Brian. To our shareholders, let me comment that I'm proud of our ability to consistently implement to our strategic plans. With our new higher guidance targets for the year, you can see that we're extraordinarily confident in our ability to consistently perform at a very high level. Now Haemonetics has a very compelling investment thesis. But it's not just that we have seen six consecutive quarters of double-digit revenue growth or that we have improved margins by 500 basis points over five years or that we have a strong balance sheet. It's not that we have just launched seven new products or expanded our global market potential to more than $2.6 billion of opportunity and are entering a $1.6 billion whole blood market in 24 months with new technology and services to meet our customer's needs. And finally, it's not just that we have created success implementing our blood management solution vision or that we are making progress in our diagnostic initiative with Arryx platform.

What is really consistent and an impressive investment thesis for Haemonetics is the fact that this leadership team has consistently performed at a very high level by implementing strategic plans that have not changed over the last five years, nor will change in the future. These strategies are successful and the team's execution is successful. The facts, plus the performance, indicate that the future of Haemonetics is brighter today than it has been at anytime in our recent past. Now let me thank Haemonetics's employees for their outstanding efforts during Q2 and in the first half of this fiscal year. I'm really proud to be able to represent this team to you, our shareholders. Now let me offer a bit of perspective. Assuming we hit the year-end guidance range that Chris talked about. we'll have a six-year compounded annual growth rate of more than 10% on the revenue line and 20% on operating income growth.

Now as impressive as those growth rates are, the perspective I would like to add is that they are really an output of consistent leadership by one heck of a management team. What has changed the most regarding Haemonetics over the last six years is the breadth and depth of this management team. We continue to lead our marketplace and consistently produce the kind of results you should expect, not from a good Company, but from a great Company. I'm proud of the fact that Haemonetics has become, with this management team and the results we have produced, one heck of a great Company. Now, I will turn the call over to your questions.

(OPERATOR INSTRUCTIONS). Your first question is coming from David Lewis.

Good morning, guys.

Good morning, David.

Good morning, David.

Two-part question here or two questions. The first is on plasma and the second on blood management strategy. Just on plasma, thanks, Chris, for your commentary. I wonder if you could tell us what is really driving plasma growth now? Or more specifically when do you think the plasma growth will shift to more customer penetration to true utilization. You talked about 10% or better growth in the next 24 months. That sounds like a utilization or demand number. I'm just kind asking you to comment when we're going to shift from equipment to more utilization and demand. And secondarily on plasma, on gross margins extremely strong this quarter given a very strong plasma. Maybe you can give us some more detail on what drove gross margin strength. And second part of the question was just on the blood management strategy, plasma is very strong, certain components of blood management were not strong. If you can give us sort of an outlook on when you think the blood management strategy can start to be a source of real upside in the given quarter that would be great. Thank you.

That's more than one question. (Laughter) Well a couple of things in terms of plasma, we highlighted for you that we are benefiting from market share gains that we have already shared with you in past quarters, primarily related to if you look at the comparisons Hema AG, Ophtapharma Europe and Ophtapharma US. So of course as we work through those -- those big contract additions, that's really us grabbing market share and I think the anniversary on Ophtapharma US is around about April or May of next year, because we announced it at our investor conference this year. And as I said also in my comments, we -- as we look at the underlying unit growth in IVIG demand, it is around 10% and so we see that 10%, approximately 10% level as being sustainable unit growth for the foreseeable future and will trend down from the market share gain rates that you are seeing just now into that more normal, we say, low double-digit rate over a two-year period. I can't be more specific than that, I'm sorry, David.

David this is Brian. Let me maybe chime in here on the blood management solutions question. I would tell you that blood management solutions is working for us now. I gave a couple of examples of where we're seeing that take affect. And frankly, the platelet growth we're enjoying, which is a bit of a surprise for us, is coming from those efforts, particularly outside the United States. So we are starting to see that occur for us and I think we'll continue to see that accelerate through the back half of the year and into fiscal year '10.

On gross margin, Chris, if I could get that one real quickly, just in terms of the specific in strength.

I was just going to volunteer that. I wasn't trying to get away from the question. When we look at that a couple of big items that have benefited margin in the quarter, one of course is currency, just as it benefits us on the top-line it can benefit us on the gross margin line in a disproportionate way. And secondly, we added Haemoscope is in this quarter and as we said before, that business had a highly accretive margins to our base business. So those are a couple of big items that are helping.

This is David, this is Brad. It is important to recognize too that in commercial plasma we expect margins to improve in the future. And there are a couple of reasons why. Number one, each contract calls for annual price increases. And number two, we are about six months away from getting our plant expansion in Pittsburgh up and operating, and we're automating that, a lot of the manufacturing there, and that will have a margin improvement opportunity in commercial plasma as well.

It's one thing, as well, David, this is Lisa, that in this economy plasma collections are up in some part due to the increased interest by plasma donors who are of course paid for their donation.

Okay. Thank you very much. I'll jump back in queue.

Thank you.

Thank you. Your next question is coming from Larry Solow

Congratulations, Brad and Brian.

Thank you.

Just to follow-up a little bit on the gross profit, it was very nice to see you had a great increase to spite the fact that plasma makes up a lower, has a lower margin. Would you expect or have you seen some impact already from the price of oil falling and if it kind of holds in these levels, would there actually be more upside there?

We'll see some benefit going forward, but you remember that even in the period where oil prices ramped up, we were able to hold our raw material costs until quite recently.

Right. Okay. And then on -- then operating income, which was actually plus 340 basis points with significant expansion, probably greater than we expected, and probably greater than most expected. And I see now you had 45%, I guess, of incremental gross profit was spent down from, I think, mid-60s last quarter. I mean, is this -- obviously you don't think it's totally sustainable, because I think your guidance now is 60% for full year and I believe it was 65% before this quarter.

Yes, if you -- in year-to-date we're at about 55% --

Right.

-- of the growth in gross profit dollars is equivalent to the growth in operating expenses and we think we'll finish the year -- if you look at your guidance now is somewhere between 57% and 60%, depending on how the numbers shake out. We did benefit from strong currency trends in the quarter and that helped us. We also, of course, I'm just talking now about nominal operating income growth. We also, of course, had the addition of the Haemoscope acquisition, which has the effect of obviously bringing in operating income dollars and the tradeoff is down below where we spent our capital and reduced our other non-operating income. But I would say fully half of the growth in operating income was associated with either FX or acquisition.

Okay.

Larry, this is Brad. Remember that by year-end we expect to see over 100 basis point improvement in both gross margin and operating margin. You might remember on our first quarter call we indicated that we expect to see that not only in FY '09 but also in FY '10. So there are a number of factors that are ongoing that will continue to allow us to improve our margins.

Okay. Then just last question. Have you got, just to play devil's advocate, have you seen any negative impact, I know Lisa mentioned that the economy maybe having a positive impact on driving more plasma donors, but have you seen any negative impact or perceive any from customers or having funding difficulties or anything? Hospital difficulties or anything out there?

Larry, this is Brian, the answer to that question is yes, we're going to see challenges in the hospital industry, but we see that as a positive to our business and not a negative. I think Lisa spoke to you about the positive impact that we're seeing on the plasma side. On the hospital side they are going to be more motivated than ever to be trying to find ways to manage cost and improve clinical outcomes and that is exactly what our Blood Management Solutions does for our customers. So we believe that it's going to continue to increase the demand for exactly what we're doing today.

I would also add, Brian, that hospitals can't run without blood and that's about a third of our business is in the hospital environment. The rest is in commercial plasma and the rest is in blood bank. We haven't seen a big impact, Larry, nor do I expect we will, in the short-term. So this is a marketplace because of the need for blood, you can't run a hospital without it, that we are really absolved with from a lot of pressures that perhaps other device companies are faced with.

The other, I think positive thing to note about our business model is we're not a big capital spend for the hospital. As you know, we're sort of almost 90% of our revenues are from consumables and in many cases and a lot of our business we place the equipment. So that's another positive, I think, in the current environment.

And that current environment, Chris, that throws off a ton of cash. As you folks know, we did about $11 million in cash in Q2, $16 million year-to-date, and we have $111 million in cash, and only $14 million debt, so in a volatile marketplace, we can fund any expansion very, very conservatively through our balance sheet.

Thanks a lot, guys.

Yes, thank you.

Thank you, our next question is coming from Dave Turkaly.

Thanks, back over to plasma. Given the little bit of consolidation out there. Do you guys have a number of kind new systems you are placing? And maybe a shot at what that trend looks like included in your kind of 10 or double-digit sales growth for the next two years.

Number 1, as you look at the Ophtapharma agreement, and that's both in Europe and the United States, we're just now beginning to see some of that tick up in Europe and we'll see more of it tick up in the United States. So that's part of that double-digit growth going forward. You might remember, David, that we have gone from about 4,000 machines, to more than 12,000 machines within the last four years. That has really allowed us to make sure that we continue to see the number of turns per machine and really grow that business. Finally, I would comment that we have a product line, which is a software product line, called Express, which will allow plasma collectors to increase their through-put by about 20% using the same machine once they make that software change. So that will improve their through-put, which is a huge customer benefit and obviously improve our sales opportunities as well.

Yes, just to give you some numbers. In the US we placed about 527 new plasma devices in the quarter and worldwide that number was 686.

And year-to-date we're going to do approximately over 2,000, is that right, Chris?

Yes, we're on a run rate to get (inaudible) 2008.

But it's worth emphasizing that the growth in plasma continues to be driven by market forces, where the underlying increase in transfusion -- or I'm sorry not transfusion, but in prescription of plasma derived medicines, predominately IVIG, is what's driving the increase in the need for collection of the raw materials.

Got you.. And then ERP, do we have an update there? I think that is suppose to wrap up this year but I just wondered how much you spent and where we stand there?

Yes, in terms of ramping up, we expect that to conclude at the summertime of next year. We're on time and on budget with Phase II. We're implementing Phase II, which will include two component parts. Number one, our HR systems will convert at the end of December onto that platform and then as we go into FY '10, in March we'll convert our manufacturing platform over to that. So we're right on time and that will be the last phase and we'll be completed with ERP.

Yes and the run rate there is about just shy of $7 million in terms of the implementation expense. But do remember that there is a cost of ownership associated with having this global ERP system that we have communicated in the past will be between $5 million and $6 million just associated with licenses, the center of excellence, et cetera.

Thank you, your next question us coming from John Putnam.

Thanks. Nice quarter. Very nice quarter. Just sticking on plasma for a second, are there any other large plasma fractionators that obviously consolidated the market here. Are there any others that are out there to be had, I suppose?

John, this is Brad. The one big plasma contract that we don't have is a relationship with Baxter. As you know Baxter spun off Fenwal a couple of years ago and they have a contractual relationship for a period of time with Fenwal, so they are continuing to support that platform by contract, we understand that. Should Baxter choose to expand, then, and build out new plasma collection centers, it's our understanding that we might have an opportunity to service that customer. But it's really premature to look at that yet.

Okay. And then a question on Arryx. Besides the typing diagnostic, are you guys working on other opportunities there and can you share any of that with us?

Most of our effort is going into typing and infectious disease screening, of course. The final phase of typing, which is detecting antibodies in plasma, will set us up for infection disease screening from a platform technology perspective. We do from time to time embark on contract research activities associated with cell separation for different applications and generally, we do that when it's -- we're obviously getting paid for it, and where the -- where the research work we are doing is complementary with our diagnostics initiative. But most of the effort just now is in diagnostics, in blood diagnostics specifically.

Thank you the next questions is coming from Joshua Zable.

Hi, guys, congrats on a great quarter and thanks for taking my call here.

Thanks, Josh.

First, I want to wish congrats to Brian, well deserved, although it is my humble opinion here, but if I do say so myself, so congrats and Brad I'm sure we'll get to say thank later on.

Thank you and you can repeat that.

Josh, you are still stuck with me, I am not going anyplace.

He wants his $10 back, Josh.

You didn't say that's exactly as I wrote it.

Fair enough. Couple of questions. I'll try to make it quick because I know we are moving through the call here. First OrthoPAT, I guess a little slower and you said in the release, you expect momentum to pick up. Just curious as to what you are seeing. I know there are a lot of questions I have got is specifically on OrthoPAT, elective surgeries here given the economy, et cetera, et cetera. Can you just talk a little bit about your confidence going forward on OrthoPAT.

Josh, Brian, here again. What we are seeing this year almost mirrors exactly what we saw last year. A little bit of a slower start in the first two quarters of the year, with a second half pickup, and we believe we are going to see the exact same thing happen this year. I think that we'll -- is there going to be some question about elective surgeries as we go forward, I think the answer to that is yes. I think the best indicator of that will be the orthopedic companies.

But I go back to the comments that I made earlier about our blood management solutions and how we're positioning our services for our customers. And the example that I gave with respect to Atlantic Health, focused specifically on orthopedics and it's a great place for us to start for the hospital, because it's probably, from a blood management standpoint, it's probably the least understood area within a hospital today. So that's going to be our focus. We believe that blood management solutions is going to be something our hospitals desperately need and something we're very well positioned to provide for them. We think that's going to offset anything we're going to see there in terms of short-term declines in elective surgeries.

Okay, great. That's helpful, thanks. And then I know Lisa made a comment about plasma collections being up. People earnings a couple of bucks for it. Interesting, I read an article here in New York that general blood collection is down because, frankly, a lot of the banks do them and given the state of the banks here it just seems like blood drives, et cetera, are down. Are you seeing anything related to general volumes? Obviously you're seeing plasma good things, red cell, anything like that?

We haven't seen that in the data yet and remember that part of the value proposition to our customers is that with the diminishing number of donors or collections, we can double the number of units of red cells collected. Similar to the answer that Brian just gave, we're not pushing OrthoPAT, we are responding to a request for blood management. Similarly, we're not pushing a particular technology product. We're responding to our customers' needs to improve or increase the number of red cells they collect.

Thank you. Your next question is coming from James Sidoti.

Good morning. Can you hear me?

Yes.

First question on R&D, down at $5.2 million, that's quite a bit lower than last year and it is quite a bit lower than the last four or five quarters. Is this something that was particular this quarter or do you expect to stay at this level?

No, we'll increase from this level and it was some refocusing that we were doing in this quarter as we move in new and exciting directions. Some of the stuff that we talked about at our investor conference with whole blood et cetera.

So some of the projects were ending and now you'll start other projects.

Exactly.

Exactly right.

And then on currency and margins, I have followed you guys for five or six years now and margins have always benefited or been hurt due to currency when you have quick swings. Is there anything in this cycle that you can do to mitigate that, make it a little less significant.

It's a good question, Jim. Of course, we are hedged down to operating income as best we can and so we have some stability in terms of planning from that perspective. As you look at the current crazy volatility, we're sort of in a strange but fortunate position in that we're long both yen and euros in our base business. So against our plan rate, the yen has strengthened considerably. I think we planned at 1.10 and we're down around 95 today. And in euro land we planned at a little over 1.40 and change and we are down about 1.26. So it kind of swings in roundabouts. So we're not in bad shape, I would say, relative to some other company.

No, what I'm asking, though is if you look out into this time next year, is there opportunity to move more manufacturing overseas or any other steps you can take so you don't get hurt by it a year from now.

We have ongoing initiatives focused on exactly that outcome. I mean, in terms of our Asian business, which is growing rapidly, we're looking at local sourcing for product there and doing more and more of that overtime.

Jim, this is Brad, it's probably good to reflect back over the last five years. We have seen currency headwinds and we have seen currency tailwinds. And as Chris indicted, we hedge and have been since I came to the Company and before, and if we were to hit the revenue targets that we put on our website, we would have, over the last six years, a compounded annual growth rate on revenues with headwinds and tailwinds of more than 10%. So this is a Company that is performing very, very well independent of currency impact. We are going well into the double-digits if you extract the impact of -- of foreign exchange this year, . So we're very confident in our ability to continue to grow the base business as we have done very consistently each quarter for the last 5.5 years.

Thank you. Our next question is coming from Daniel Owczarski.

Yes, thanks, good morning and congratulations.

Thanks, Dan.

Thanks, Dan.

Just a couple of quick follow-ups on plasma. Can you talk a little bit more about that Express software upgrade. It sounds like it is available now, but is it -- have people, are they trying it? Is it -- do you have customers using it? Is it contributing? And if not, when would you start to see it making a difference?

The answer is yes, we have implemented it in customers, we implemented it very successfully and are achieving the through-put rates that we expected or higher. So it's out there and it is working well.

The other thing I would add to Brian's comments, Dan, is we don't have a full scale implementation yet. There's some upside to this as we begin to continue to implement at other plasma collection centers on a global basis. When you think of the fact that plasma collectors are struggling to collect as many liters of plasma as they can and on the same machine with a software change they can get a 20% improvement on their productivity time frame with this software change, that's a big deal. So we're going to have to make sure that over the next 12 to 24 months, we roll this out appropriately throughout the commercial plasma industry. But it's a real margin improvement opportunity and a wonderful opportunity for the customers to improve their productivity.

Can you give us any idea about penetration? Are you talking about maybe 5% of your accounts that have it right now?

No. No. We're not even close to that at this point in time. So it's really a 24-month kind of program to launch and get those 12,000 plus machines up and operating.

To give you a little more visibility, Dan, we have implemented this at one customer. We wanted to test our implementation processes. We certainly wanted to test the software. It has worked exactly as we expected it to work. The implementation went well. And Steve and his team have a schedule that they will begin looking at Q3, really, more Q4, and as we get into FY '10, to see the impact of this new software.

Thank you. Your next question is coming from Steven Crowley.

Good morning, gentlemen. Congratulations.

Thank you.

Thanks, Steve.

Couple of questions for you. In terms of the delta in your guidance around the software and service business, is that primarily completely partially due to the -- more of the service business, or it is a blend? And what can you tell us about what is going on there and what you see happening over the next, let's call it 18 months?

Yes, it is a blend and this is a business with extremely strong backlog, but it's also a business that in order to begin recognizing revenue, we have to go through implementation steps and those implementation steps require the cooperation of our customers. So as we've re-timed the implementation of certain of the parts of the business, we have trimmed our guidance for that reason.

In terms of the backlog growth and your efforts to kind of fill up the pipeline for next year's revenue growth, are you pleased with what is happening there? Or have you seen setbacks on that front?

We are very pleased with it. We have significant backlog over a year's run rate in revenue.

Steve, to put that in perspective, our backlog, our current backlog today exceeds $50 million in terms of contracts that are out there.

And is that a high-water mark by a significant amount relative to history?

It has been something that has been growing for us over time, yes.

Yes.

Great. And then in terms of some of the blood salvage products, the CardioPAT and OrthoPat that we have talked about and a bit more of a focus on utilization of the equipment in the field. My sense was in Q1 you had a pretty good period for placing those units in customer's hands. Has the continued? And is it more a challenge of getting these things up and running and consuming consumables?

It's a combination of both. But the answer is in general, yes. We really need to work with our customers to ensure that they maximize the use of these products, but, again, this goes back to our blood management vision that we've talked about. This is, especially in orthopedics, an area where we need to work hand in hand with our customers, to help them fully understand and appreciate how to use the device and in concert with a total blood management solutions within the hospital. The other area that we're starting to see some traction is in our emerging markets. We've invested in some resources in our distribution business to focus on our patient business, the surgical cell salvage side of our business, and we're starting to see some traction take place there for us as well.

Thank you. I would like to turn the floor back over to Mr. Nutter for any closing comments.

Thank you, very much. The fundamentals of the business continue to trend in a very positive manner. We see outstanding prospects for growth going forward. Our performance on a year-to-date basis certainly exceeded our expectations and we're pleased to raise our guidance. Haemonetics continues to lead our marketplace and we have consistently produced the kind of results that I said earlier you should expect not from a good Company, but from a great Company. And I am proud of the fact that Haemonetics has become just that, a great Company. We look forward to visiting with you at the Q3 call. Thank you, very much.