Haemonetics Corp (HAE) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Haemonetics third quarter fiscal year 2009 earnings review. At this time, please let me introduce Ms. Lisa Lopez, Vice President of Corporate Affairs for Haemonetics. Please proceed, ma'am.

Good morning. Thank you for joining Haemonetics' third quarter fiscal '09 earnings webcast. I'm joined today by Brad Nutter, Chairman and CEO; Chris Lindop, CFO and Vice President of Business Development; and Brian Concannon, our Chief Operating Officer. 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. 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 global market trends and key strategies.

Now before I turn the call over to Brad, let me remind you that as we shared last quarter, we'll be leveraging our website more often as a means of disclosure. Of course, we'll continue distributing press releases over the wire for significant material information, but in addition, our website contains industry news, presentations, and fact sheets which are available only there. You can register on our website to have this information automatically sent to you via e-mail.

Okay, let me begin -- 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 '09 that we've excluded from the financial results we'll talk about today. In fiscal '08, our adjusted third quarter and year-to-date net income excluded $1.2 million and $4 million respectively in pre-tax costs associated with the restructuring of our European business. In the third quarter and year-to-date for fiscal '09, we've incurred restructuring costs of $400,000 and $2.6 million in pre-tax costs respectively. Now, let me remind you that our full year guidance for fiscal '09 excludes $6 million to $7 million of restructurings in this, our final year of business transformation. Again, we've 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. Both the release and website include reconciliations between our GAAP results and our adjusted results. And with that, let me turn the call over to Brad Nutter.

Thanks, Lisa, and good morning, everyone. Once again, I'm extremely pleased with our quarterly and year-to-date results. In the quarter, revenue grew 16% and operating income increased 20%. Gross margin increased 90 basis points to 50.4% and operating margin grew 50 basis points to 16%. Earnings per share is $0.63, up 10% year-over-year. This is the seventh consecutive quarter of strong double digit growth, and we continue to achieve positive dropthrough with expanding gross and operating margins. Year-to-date, revenue was up 18%. Operating income is up 30%, and earnings per share is up 18%. We are very well positioned to achieve the high end of our annual EPS guidance and we are increasing our annual revenue guidance. I'm very proud of our consistent strong performance.

Now as I met with investors this past quarter, not surprisingly, I was asked about current market forces and their potential impact on our business. And these questions were basically focused on three areas -- first, currency and its impact on our business; second, plasma, and the near term outlook for this business which has grown so significantly in recent years; and third, global economic trends and specifically, the impact that financial pressures on hospitals may have on our patient business. So we'll address each of these questions today. Chris Lindop will cover currency and describe its impact on our business now and over the next 12 months, but on the topic of currency, let me add some needed perspective.

As this fiscal year ends, we'll have enjoyed a six year reported revenue CAGR of about 10%. Our six year operating income CAGR exceeds 20%, as does our EPS CAGR. Now in some of those years, we've had currency tailwinds, and in some we've had currency headwinds. But regardless of these temporary effects, your business has performed very well over the long term.

Chris will also talk about the ongoing strength of our plasma business. Plasma is a big business for us and all the broader market indicators show that this business will continue to be a growth driver for your company. And finally, Brian Concannon will talk about the impact of the current economic environment on hospitals and explain why the time has never been better for our blood management solutions vision. We expect the issues of elective surgeries to have a very modest impact on Haemonetics in fiscal '10.

As many of you know, we aspire to become a company that can sustain a five year compounded growth rate of 10% to 12% in revenue, and we've also said that our aspirational goal for operating income is to grow 12% to 15%. Now at the end of this fiscal year '09, we expect to be a company with a six year compounded annual growth rate of 10% in revenues and over 20% in operating income. So as we embark on fiscal '10 on the strategic plan developed by this management team, the fundamentals of the business continue to trend very positively and we continue to see outstanding prospects for long term success. Now with that, let me turn the call over to Chris Lindop, who will review our quarterly and year-to-date performance as well as our guidance for the remainder of fiscal '09. Chris?

Thanks, Brad. Well, let me say at the outset that I'm extremely proud of our results. We're well positioned with our year-to-date performance to achieve the high end of our annual guidance, even as we continue to invest in the long term success of the business.

Now let me move to the revenue growth drivers and highlights of the income statement and balance sheet. Our third quarter reported revenue growth of 16% breaks down as follows -- the core business remains strong, with 12% growth excluding currency and the TEG acquisition and year-to-date reported revenue growth for the entire business including TEG is 18%. Revenue growth in the quarter came from plasma, diagnostics, and blood banks, and year-to-date all product lines are contributing with solid growth.

As we've said many times, we have multiple growth drivers, so let me share more insight. First, plasma, our largest business with year-to-date revenues of $150 million. Plasma disposables continue to grow exceptionally well at 30% in the quarter and 31% 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 outpaced global supplies of plasma. In the US, Haemonetics also benefited from a new contract with Ophtapharma, which we announced in Q1 of fiscal '09. And in Japan, we saw stronger unit growth combined with year-over-year price improvement related to a plasma safety enhancement released in Q1 of this year. It is important to note that plasma drive drugs are not considered elective treatments and as such are not impacted by current economic trends. Fractionators continue to make investments in their business and industry analysts report collections are expected to grow about 12% over the next year to meet ongoing drug demand. So as we've shared previously, while we expect plasma growth to moderate from the current extremely high growth rates, we currently expect double digit revenue growth in the plasma business for the next 24 months.

Blood bank, which is mainly platelet collection disposals, is our second biggest business with $108 million in revenues year-to-date. Blood bank disposables grew 10% in the quarter and 8% year-to-date. The platelet market is growing nominally in developed markets, but we've identified areas for growth in emerging markets -- specifically Eastern Europe and parts of Asia. In addition as you may recall, this year we are benefiting from the market share gains through a contract with Canadian Blood Services. We saw the comparative benefit of the CBS contract through our past quarter. We are pleased that our blood bank business continues to contribute to overall revenue growth as we continue to gain market share in the developed markets and expand markets globally.

Moving to red cells, the red cell disposables business, which has revenues of $37 million year-to-date, grew 5% in the quarter and 7% year-to-date. While lower than our original expectations for growth in this product line, our outlook has us growing at between 8% to 10% for the full year. The patient side of our business is also doing 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.

First, surgical and diagnostics -- a $66 million business year-to-date grew 21% in the quarter and 30% year-to-date, primarily due to the TEG acquisition. In the quarter, TEG sales were $5 million. We saw the comparative benefit of the TEG acquisition through the anniversary of the purchase in mid November. The TEG business is growing at about 15% year-to-date. OrthoPAT, a $26 million business year-to-date, had level sales in the quarter and grew 5% year-to-date. While we're disappointed with growth for this product line in the quarter, we remain bullish about the long term prospects as a critical element of our blood management value proposition as hospitals begin to come to grips with the impact of blood use on their finances, and Brian will go into more detail later in the call.

Software and services has $30 million in revenue year-to-date and in the quarter revenues declined 10%. Year-to-date, revenue was up 1%. Now the software part of the business is up 27% year-to-date, but this growth was offset by a decline in service revenue that we expected. Service revenues can fluctuate from quarter to quarter and last year we had a large consulting service contract which did not repeat this year. Strength in the software business came from our contract for the Department of Defense and from other new contracts. Equipment sales, which are a great leading indicator of future demand for our single use disposables, are $27 million year-to-date and this represents an increase of 21% in the quarter and 23% year-to-date. Equipment sales were particularly strong in Japan as the Japan Red Cross purchased a large number of platelet and plasma collection devices.

So to summarize revenues, we continue to see growth across multiple product lines. And so far this year, we have balanced double digit growth in all of our geographies, with North American sales up 21%, European sales up 17%, Japan sales up 11%, and Asian sales up 21%. Again, that's double digit growth in all of our geographies. The prospects for this business continue to be very solid.

Now let me review the rest of the P&L. Third quarter gross profit was $78 million, up 18%, and gross margin is 50.4%, up 90 basis points. Year-to-date adjusted gross profit is $226 million, up 20%, and gross margin is 50.8%, up 100 basis points over fiscal '08. Gross margin improvements benefited from currency, manufacturing efficiency, offset by product mix. In the quarter we managed operating expenses well. Despite incremental expenses from the TEG business which were not included in most of fiscal 08's expenses, we kept operating expense dollar growth to 66% of incremental gross profit dollar growth, and for the full year we plan to manage operating expenses to approximately 60% of incremental gross profit dollar growth. Adjusted operating income grew 20% in the quarter and operating margin expanded 50 basis points to 16%. Year-to-date, adjusted operating income growth is 30% and operating margin is 15.7%, up 140 basis points. Other income declined in the quarter compared to the prior year for three reasons -- first, we deployed cash for a share buyback; and second, interest rates were lower year-over-year; and third, exchange rate volatility impacted us adversely. Adjusted earnings per share were $0.63 in the quarter, up 10% and $1.80 year-to-date, up 18%.

Now moving to the balance sheet. We closed the quarter with a cash balance of $125 million. In the quarter we generated $14 million in free cash flow after making net investments of $16 million in capital expenditures. Now let me remind you that we began the year with $133 million in cash on hand. We subsequently purchased $60 million in Haemonetics stock and we're closing out this quarter with $125 million on hand. This is an extremely strong cash generation model. Based upon the strong performance year-to-date, we feel very comfortable updating our annual revenue guidance and affirming that we should be at the high end of our previously published scenarios for operating income and earnings per share. Fiscal 2009 revenue growth is now expected to be between 15% and 16%, operating income growth is expected to be between 23% and 25%, and EPS growth is expected to be between 14% and 16% or between $2.40 and $2.44 per share. Now clearly, on all points our fiscal '09 results will be very strong. But remember that our growth is benefiting from strong currency tailwinds and a significant acquisition. And as I said many times, look to the current product portfolio to deliver 8% to 11% growth in revenue. So this will be a great year, but please, guys, don't get ahead of us.

Now before I hand over the call to Brian, let me share some comments on foreign exchange as some of you have asked about the impact on Haemonetics of recent currency fluctuations. Bottom line, in fiscal '10, the impact from currency on revenue will be about 1% positive. And as Brad said earlier, by fiscal year end we'll have had a six year compounded revenue growth rate of 10% over a time when currency has been both with us and against us. So while currency risk is certainly an environmental factor that we have to address and manage from year to year, we remain focused on managing your business for the long term. Let me remind you that we have a hedging practice that gives us 12 months visibility into the impact of foreign exchange on the business's operating income so that we can plan appropriately.

Our hedge contract supplements the natural hedge of the cost structure inherent in our global organization. Currently, we have locked in exchange rates on anticipated international revenues through Q3 of fiscal '10, representing our anticipated net loan position in those currencies. Obviously, this is a unique time because currency fluctuations have been so significant. The strong yen benefits us as nearly 15% of our total company revenues come from Japan, but these tailwinds are offset by the weakening Euro. On the other hand, the relative weakness of the British pound and the Canadian dollar on our manufacturing and other costs we incur in those currencies is helping gross margin and operating income. We had not previously hedged the pound or Canadian dollar, relying instead on our correlation with the Euro and the US dollar respectively, so we're seeing some benefit from these currency market fluctuations in the current quarter. As we look forward into fiscal '10, we expect relatively modest positive impact on revenue due to currency. So for those of you modeling, let me be specific again. In fiscal '10, the positive impact from currency on revenue will be around 1%.

In summary, we are well positioned for a strong balanced revenue growth by product line and geography, and our currency hedging strategy has locked in for the next 12 months the positive trends that I described earlier. Despite pressing global economic factors and market extremes like we've never seen, Haemonetics is performing exceptionally well. The investment thesis for Haemonetics remains strong. Q3 was another great quarter and positions us well as we close out the fiscal year, and with that let me turn the call over to Brian.

Thanks, Chris, and good morning everyone. Chris just mentioned two key points -- global economic factors and market extremes. And some of you are asking, how will Haemonetics be impacted by the turmoil in the global economy, the predicted downturn in elective surgeries, and lower capital spending at hospitals? So let me try to address these questions, but first, let me give you the bottom line. We expect any negative impact in fiscal '10 to be modest. Haemonetics is the global leader in blood management solutions. At the heart of our business is blood, and transfusions are a critical part of every health system around the world. Try to run a hospital without blood. It's impossible. Let me share one example. Recently, a leading hospital network which accounts for about 5% of inpatient admissions in the US released some key statistics. The company said that for the nine months ended September 2008, blood costs represented 6% of its total expenses, and in this period while its inpatient census grew at about 2%, blood costs were rising at nearly 18% year-over-year. This statistic was compared to pharmaceutical costs which rose at about 1% per year and med/surg supplies which grew roughly at 5%. So we know there are large core profit organizations which incur blood costs affecting their income statements. Inevitably, healthcare providers will have to better manage blood costs and they have only two choices -- stop surgeries or control the costs of blood, which is a better financial decision.

Haemonetics' value proposition directly addresses our customers needs. Our blood management solutions save hospitals and blood collections money while improving patient care. Our consulting services help hospitals better manage blood supplies. Our software provides critical tools for measuring baseline and success, and our devices can predict demand for blood before surgery and salvage blood during and after surgery. These in turn can reduce demand for donated blood, which can be costly and lengthen a patient's hospital stay. We have hospitals struggling to manage blood expenses, and this is a strong validation of our strategy. Haemonetics is the only company in this market that can reduce total blood costs.

Now let me cut this another way. More than 30% of our business is plasma collections, and as Chris shared earlier, this is a growing market with ongoing demand for plasma derived drugs. Industry analysts see that demand continuing. 35% of our business is platelets and red cell collections and 15% of our business is cardiovascular surgical blood salvage and diagnostics. The fact is if you need a transfusion as part of your cancer treatment or if you need heart surgery, these are not elective procedures. So one area where we could have exposure in the changing economic climate is elective surgeries and specifically orthopedic surgical blood salvage. But here, our total exposure is just around $35 million annually. Less than 6% of total corporate sales come from our OrthoPAT. The OrthoPAT device can save the hospital costs and the orthopedic surgical blood salvage market is less than 10% penetrated. Downward pressure on large joint procedure reimbursement, a 25% decline in 10 years, combined with increased implant prices is putting pressure on healthcare providers' profitability. So what does all of this mean? In order for hospitals to make money in a procedure, the cost of the surgeons, nurses, the OR, and yes, the blood products has to be managed. If we can save hospitals money on blood costs in our underpenetrated market, then some elective surgery issues can be resolved.

Now when you consider that a recent study by the Annual Hospital of New Jersey estimate the total cost of delivering a unit of blood per transfusion is approximately $1,100, the value of avoiding or minimizing transfusion becomes clear. Even in the declining procedure market, there is significant opportunity for OrthoPAT growth for market penetration by helping hospitals to control total blood costs. Let me remind you of Atlantic Health, the health system we spoke about last quarter. Atlantic Health implemented Haemonetics blood management systems and saved about $1 million in blood related costs. Final point. We place devices and generate revenues from the sale of disposables that save the hospital money every time they are used. With this business model, we avoid the inevitable pressures of tightening capital budgets. We are not in the capital equipment business.

So in closing, nearly all of Haemonetics revenue comes from products, systems, and services that healthcare providers need despite a downturn in the economy and pressures on healthcare systems. Our strategy addresses a growing need. We believe we are uniquely positioned in these troubled times as the blood management company. We are the only company which can help customers control blood costs throughout the total blood supply chain from the donor to the patient. Haemonetics will continue to address customers' needs. Our blood management solutions vision is gaining momentum. And we've got products in development, whole blood automation and a blood typing system, that will add meaningful market potential to our blood management portfolio. I'm extremely pleased with our quarterly results. I'm pleased that our efforts have delivered strong consistent growth in revenue, earnings per share, and free cash flow in each of the last six years, and I'm confident that we've positioned ourself well for ongoing success. Now let me turn the call back to Brad.

Thanks, Brian, and let me thank Haemonetics employees for their outstanding efforts for the third quarter. I'm very proud to be able to represent this team to you, our shareholders. As you know, this will be my last investor call as CEO, as I transition in April to become your Executive Chairman. To our shareholders, let me thank you for the opportunity to lead your Company. This has been a very rewarding experience. I'm proud of our results over the last six years and strongly believe that the company is positioned to make the next six years very strong indeed. I'll look forward to focusing my attention on Board governance as your Chairman, and I'll continue to work closely with the Haemonetics leadership team on strategy and our blood management solutions vision that Brian and Chris have talked about.

Our leadership transition is going very well. We have continuity in our people, our annual operating plan, and our long term strategic plan. Folks, the playbook that has served us so well over the past six years isn't going to change. In a marketplace of financial turmoil, Haemonetics consistent performance, strong balance sheet, and improving margins are a result of excellent execution to our strategic plans. We've had six years of excellent performance and we're positioned with a strong experienced management team to lead us going forward, a strong plan to which we are confident we can execute, and an economic environment that favors Haemonetics' value propositions to our customer. As I've said before, I'm proud of our results over the last six years and strongly believe the company is positioned to make the next six years most productive for you, our shareholders. Now with that let me turn the call over to your questions. Operator?

Thank you. (Operator Instructions). Your first question comes from the line of Larry Solow with CJS. Please proceed.

Good morning guys, and congratulations on another good quarter, Brad, and congratulations to you. And I'm sure with the management team you build we expect a seamless transition.

Thanks, Larry. You should expect that.

Absolutely. Just a couple questions on plasma first of all, could you maybe talk A) about the revenue outlook with 12% expected growth in collections, would you expect over the next 12 months to -- you have been taking market share, to at least achieve a number in the mid single to the mid double digits? And then the second question would be, what is your cost outlook and with the Pittsburgh facility I think near completion, would you expect some further improvement in plasma margins specifically?

Larry, this is Brian. I'll take that question for you. As we look out -- and as we've talked about in the past, we have some pretty good visibility with our customers as this market has consolidated and our position with four of the five largest collectors of plasma. We believe that this is a business for us that will continue to grow in the mid teens over the minimally over the next couple of years. As it relates specifically to the margin, we've done a number of things that will improve the profitability of our business. Our new automation is now online as we burn that in in Pittsburgh and we qualify that equipment over the fourth quarter, and we expect that to provide us some benefit as we've talked about before. Our contracts have escalators that are driven by CPI and PPI, so nominal impact there. And we've launched our express product which we expect to be a benefit for us, particularly as we will be more aggressive in the focus of that going into FY '10, so I think those are the factors I would consider.

Larry, this is Brad. I'd also add that as you know, we got the approval from the Board a couple quarters ago to launch a commercial plasma manufacturing facility out West. That will be in Salt Lake City, and we're really working hard to get that up and operational and will be again another opportunity to better serve our customers out in that part of the country.

Okay, great. Thanks a lot.

Thanks.

Your next question comes from the line of David Lewis with Morgan Stanley. Please proceed.

Good morning.

Good morning.

So Brad, I've got a picture of the stock chart in front of me over the last five years, so once again congratulations on creating a dramatic amount of shareholder value, you and the team.

Well, the team has done a great job and will continue to do a great job, David, thank you.

So two questions, the first is following up on the plasma comments. You're basically forecasting to Brian's comments over the next 12 to 18 months growing 500 or 600 basis points faster than the market. Can you just give us a sense whether this is how you had the visibility on that type of outperformance? Are we talking about across all of your customers? Are we talking about one specific customer driving this type of market share gains?

It's generally across all customers, David. We have really good visibility with the commercial plasma customers. As you know there are a limited number of customers in this market. We have those contracts where we are the primary provider of devices and disposables plus our IT program. So as we have our integrated IT systems in with a lot of these key customers, we get great visibility from their demand all the way through. So we are able to build that into our modeling and that's why Brian and Chris are so confident that this will continue to be double digit growth going forward.

Okay, and so I guess the other strategic question would be -- it's not quite A Tale of Two Cities here but the plasma business is so dramatically strong, but the next strategic vision of the business, blood management -- whether it be TEG or surgical is weaker than expectations and has been for a couple quarters. Is now the time, given margins are heading in the right direction dramatically on plasma growth to dramatically reinvest in blood management to try to get that business in a position next year where it may need to be, if plasma is going to decelerate? Have you considered reinvesting more dramatically?

David, this is Brian, and the answer to that question is not only are we investing but we're also providing for a different focus. One of the things we've not done a lot of -- just had a lot of discussion about -- is the changes we've made in our patient business to provide a greater focus in the orthopedic area. Today we have 14 dedicated resources specifically on the OrthoPAT to focus on this part of our business. This is the pulled side of the business and we believe we need to be able to drive that business in that sense. As it relates to TEG, TEG is going well for us and it continues to go well for us and we believe that will continue to be a growth driver for us as we move forward. But the focus will be -- if we're disappointed in our results this quarter in one area, it would be the OrthoPAT. But we continue to remain bullish about what this can represent for us and it's a key pivot point in the hospitals that will really drive the adoption of our blood management solutions.

Brian, I would address one part of David's question a little bit more in detail, and that is as you know, when Baxter spun out Fenwal, they had a long term contract that they were going to continue to use Fenwal's equipment over a five year period. Now Fenwal has been an independent company owned by the Texas Pacific group and other investors over the last two plus years. And given the fact that Baxter is one large contract that we don't have, we would anticipate looking forward to an opportunity of serving Baxter's business in the next three years. So that would be a growth opportunity well past that 24 months that Brian and Chris are talking about and it's a very large contractual opportunity for us.

Your next question comes from the line of Steven Crowley with Craig-Hallum Capital Group. Please proceed.

Congratulations guys on another great quarter.

Thank you.

A couple questions. You talked a little bit about your automation efforts in the plasma business. One factor that would appear to be on the horizon of helping you on the cost side and I'm wondering to what extent over what timeframe lower input, lower raw material, petroleum based raw material prices might play into your equation?

We're already beginning to see some of that in our negotiations with our customers. Of course, our prices didn't go up as much as the cost of -- proportionately with the cost of raw petroleum, and they hadn't come down as much either. But we have already begun to get some of those advantages in our cost structure and as Brian said, the equipment is coming online, burning down in Pittsburgh today and hopefully we'll start to see the benefits of that as we trend out through fiscal '10.

And Steve, this is Brian. I'd add that as you know this is an area of our business that we don't talk a ton about, but we have a great focus there and that's the cost parts of our business from a manufacturing standpoint. We've had great success over the years of taking cost out year-over-year. It's a part of our planning process, part of our planning process that we continue and in fact, we're going to continue to look at ways to focus on procurement specifically and how that might help us going forward.

Okay, and in terms of follow-up, a couple things you've touched on. Both Express and that upgrade and the adoption of that upgrade -- I'm wondering where you are at this stage, where you think you could be a year. And then also, on OrthoPAT and some of the focus you've put on that product line, when did you put these people and when have you made some of the changes to increase the focus on the product line there? And then I'll hop back in the queue. Thanks for taking my questions.

Thanks, Steve. This is Brad. I would share Express is relatively new. We've launched over the last quarter. As a matter of fact we're working with Baxter in a few select centers on the Express product line. That's a new opportunity for us. It's not a big piece of business, but it's an opportunity to engage in sharing with them our total capabilities in plasma. I'll let Brian comment on the other part of the question. And just to expand on that further, Steve, as Brad indicated -- very early adoption, we've had some successes. We've put this out in some pilot sites to make sure we understand how the product works, is it driving the benefit to our customers, is it getting the results we expected? And the bottom line is we feel good about that, and we'll grow this further as we go forward in a broader launch in the first quarter of fiscal '10.

Your next question comes from the line of Joshua Zable with Natixis. Please proceed.

Hi, guys. Thanks for taking my question. Congrats on a great quarter.

Thank you.

Brad, congratulations and thanks for everything. I know a bunch of people said it before us, but congrats for all your hard work and kudos for building up a team, and I think all of us have confidence in it.

Thank you.

To get to my questions first, can you clarify -- you just made a comment about a new commercial plasma center in Salt Lake City, so can you just give us a little bit more details when that's going to be up and running? If you just started it, and what you think that will do for you guys other than obviously better service? Maybe on the manufacturing side or cost side, et cetera?

Josh, this is Brad. I'll ask Brian and Chris to also comment, but we anticipated about 90 to 180 days ago the need to get into expanding our commercial plasma manufacturing capacity. As you know, we have one plant in the United States. And so as part of making sure that we can go to our plasma customers and have the continuity of supply, we really felt we needed to build out a separate operating platform if you will, a manufacturing plant servicing west of the Mississippi River. We looked at a number of locations and selected Salt Lake as a great geography for us to have a new plant up and operating and the timeframe is about 18 months.

Has it started? You guys have started building it already?

We're just in the process of looking for leased space versus building out a building, number one. So it will be a leased low cost kind of model which is very similar to the model we have in Pittsburgh and we'll be taking an automation line that we're just getting up and operating -- in Pittsburgh, we're validating that now. We've done a number of runs on that automation line. We'll be building that out in Salt Lake as an automated facility as well, so we'll improve our manufacturing capacity substantially, and with that because it will be automated lines, we see margin improvement in both the Pittsburgh plant and the Salt Lake plant.

Josh, just to follow-up on that with a bit more granularity, once we get into the site, we'll use it as a western distribution center which has logistics efficiencies for that we'll get the benefit in fiscal '10. And then the manufacturing will come online after that and will be really a duplicate of the manufacturing automation that we're building and bringing in Pittsburgh today.

And Josh, Chris brings up a great point. That distribution site will not only be just for commercial plasma, but it will be distribution for other products as well. So we think there will be a distribution cost savings with that plant which will have distribution capacity. So it's across multiple product lines.

Great. And then just on the P&L, a couple quickies. Chris, I know you mentioned there might be still somewhat of a minor tailwind on currency. I know you mentioned sort of on the other expense line it was higher due to volatility. So just to clarify that, A) should we see higher other expenses going forward offsetting or does it depend on the volatility? And then B) just because I know you guys cut us off after question two, so let me sneak this in, just on the SG&A front, obviously on a percentage of sales it keeps improving on an absolute basis going up still with your sales growth, which is fine. I'm just trying to gauge how we should really think about it if we should see that 31%? I know you talked about 60% in total, so that seems to make sense but even going forward it's at that level where it should stay.

That's a complicated question. Okay, so yes, we have a little bit of currency tailwinds on the top line in Q3 and we see modest currency tailwind in Q4 like about 1%, something like that, maybe less. In terms of the volatility effect, really you got to go to the month of October and look at the relative interest rate environment between US, Japan, and Europe and see those spreads contracting radically. And so what ended up happening for us was that the revaluation of the points on our forward contract gave us a big negative hit in other income. We don't expect that necessarily to impact us again going forward. It's just one of those very unusual effects of the volatility that we saw. And in terms of going forward, we're going to maintain that discipline of the 60% to 65% of gross profit growth dollar growth being invested and therefore the balance being dropped through the bottom line.

Your next question comes from the line of James Sidoti with Sidoti & Company.

Good morning, Brad. Can you hear me?

Yes, Jim.

Can you make some comments on the Fenwal settlement that came across Friday?

Yes, I'll ask Lisa who coordinated our efforts on that to make a few comments.

Jim, I want to be clear this is not a settlement. I'm frankly delighted to report that on Friday a jury in our Boston Federal District Court here returned a verdict in our favor that the double red cell collection of our only competitor infringes a Haemonetics patent. The jury awarded damages in that case of about $15.7 million. And now to be clear the verdict is subject to appeal and there's no immediate impact on our financial statements. So we'll just have to see how the process plays out.

So based on this verdict though, will you go the next step and try and get Fenwal out of this market completely?

I don't want to comment on that because it's part of an ongoing legal process.

All right, but that is an option, it sounds like?

That is an option.

All right, thank you.

Your next question comes from the line of Anthony Petrone with Maxim Group. Please proceed.

Thank you and congratulations to everyone. Congratulations Brad, and lots of luck to you on your next role with the company.

Thanks so much.

Okay, just a couple to go into plasma here and I'll be quick here. In terms of the body language, given the economic backdrop in plasma, collectors here are expanding collection capacity. Is there any language that they may slow that process down given the backdrop? And then secondly, any outcomes regarding [CLS] Talecris -- what would be the implications either way for the company?

First in terms of strength for the market, I think you're exactly right that this market is going to continue to be strong. Frankly, when we look at the beginning of the year, our original guidance was 15% to 20% growth and we felt very comfortable about that. And as we've seen the strengthening of the market, we performed significantly better than that. So our ability to work with the plasma fractionators and have them predict their business -- they are just seeing it and you can see it with Baxter and other ZLB and other organizations are doing a tremendous job, Ophtapharma in this marketplace. So they are really playing catch up and therefore as are we, and we're seeing strong growth. So we anticipate that going forward. I don't want -- nor would Brian and Chris want to get ahead of ourself and suggest it for next year we're going to continue to grow at 25% or 30%, but I think this will be a strong growth market. Baxter is in Phase III clinicals on IVIG with an application for Alzheimers. Ophtapharma is doing work on that as well. So ultimately we see this as a strong growth market going forward. It's our largest business, and I think what you'll see in the future is commercial plasma will focus on gross margin in the next couple years. Not only are we going to see good sales growth, but we're doing a number of things these guys have talked about to really improve the margins of our biggest business as well.

Absolutely, that includes the manufacturing expansions that we've talked about and distribution efficiencies.

As well as Express and the price increases on the contracts and those contracts are going well. The last part of your question was the ZLB and of course Talecris -- those are two existing customers of ours. We've been pleased to serve them as their primary vendor. They are coming together. We expect that's going to be sometime in the next five or six months that would go through all of the regulatory process. We don't have any clarity more than that as to when that would come together, but ultimately since we serve both customers, that will be good for us.

Thank you again, and congratulations.

Thanks.

Your next question comes from the line of Mr. Daniel Owczarski with Avondale Partners. Please proceed.

Hi, good morning. Congratulations.

Thanks.

Hi, Dan.

Can you talk a little bit more about Japan? I mean, was that a higher growth rate than what you were expecting and what seemed to go right there?

Sure. I mean, Japan is a lot of good things going on there. We had a big equipment quarter which bodes well for future utilization of disposables. It's always a market share balancing in terms of the equipment fleet that the GRC has. We had good performance in plasma, just very very strong market conditions for plasma over there, and currency helped us. So all those things went with us in the Japan business.

I would also mention, Dan, that we've seen great balanced growth in all geographies. North America is up 21%, Asia is up 21%, Europe is up 17%, Japan 11%, although as Chris indicated some of that currency. But the fact is this is the first time in a long time that we've seen all our geographies all growing double digits. So that's a tremendously strong aspect of our business when you consider more than 50% of our sales are outside of the United States. We like that balanced growth. Now North America has done that for four years in a row, but it's nice to see both Asia and Europe do it two years in a row.

Okay, and then as far as red cells you had talked about that maybe still a little bit below what your targeted growth rate of what, double digits 10% or so. What can you do specifically there to get to bump up that growth rate in red cells?

Dan, this is Brian. I'll take that one. We continue to remain confident in our ability to get to a 10% growth rate in this business. What we've seen is as we put the symbol out there, we've seen with the hot plasma market that the symbol adoption has not been what we hoped it would be because of not having a plasma protocol on that device. So we've seen increased strength in our MCS product, which does have a plasma protocol. So that bodes well for us as we go forward. We believe that this is a market that can be grown 10%. Our focus is there to drive that at 10%, and we believe that as we continue to emphasize our blood management solution connecting hospitals and our blood banks together, we can have an impact as we go forward there as well.

Dan, this is Brad. I'd make one additional comment. Brian has talked about the MCS -- that platform that really drives a lot of red cell growth as well as symbols. But when Lisa was talking about the patent infringement, that product line [Alex] is a product that we've had displacement over the last 12 months in the marketplace of 55 Alex and we've placed 143 placements of our technologies. So whether it's symbol or MCS, the important part is that we have two product platforms that will allow us to grow in a marketplace with two different platforms to meet the needs of our customers. That uniquely positions Haemonetics to serve their needs.

Okay, thank you.

You have a follow-up question from the line of Steven Crowley with Craig Hallum Capital group. Please proceed.

Just want to come back around and ask you again on the OrthoPAT -- you'd mentioned that you'd placed more focus and some people specifically on the OrthoPAT. I'm wondering when you did that and what fuse you think there is to some benefit? And then a question about M&A opportunity set, what you're seeing in these roiling seas in terms of opportunity for you to add to the business?

Steve, this is Brian. I'll take the OrthoPAT question and I will turn that over to Chris for the M&A. With respect to the OrthoPAT, we did this over the last quarter. So those announcements have now gone out, our selling organization is focused. I think that they will settle into that in the fourth quarter and i expect that to really benefit us as we go into fiscal year '10. We're pleased that year-to-date we've added 154 OrthoPAT devices out there, and in total, we've got over 2,900 devices being used by our customers today. So again, this is a business that we feel does have the ability for further penetration, further growth, and we feel good in its ability to grow in the 10% to 15% range as we look to the future. Okay.

And Steve, on M&A, no real change there -- just to recap, we're modeling M&A as a 1% to 2% contributor to our growth rates over a five year period, over strategic planning period. That means we're not looking at real big companies, we're looking at companies that are tuck-ins. We have a very strong strategic discipline, a map if you will of what we're interested in and where we're going to go to get it. And so we're not opportunistic. So when you see roiling markets, you may see opportunistic acquisition activity. You wouldn't see that from us. You'll see us sticking to our game plan, being very disciplined, and hopefully bringing forward a list of acquisitions that when we tell you we've done them, you'll go yes, that makes sense.

Does the environment we're dealing with make it easier to execute the strategy or does it add to the degree of difficulty?

No. I think it's probably makes it a little easier, although I don't want to say that in front of Brad and Brian or it will affect my bonus, but obviously it makes it a little easier. People view the benefits of being associated with a large mothership that's in the same, has the same strategic focus and says yes, maybe now is not a good time to do it. So hopefully that will continue and we'll be able to build a great company focused on blood management solutions.

Great. Thanks again for taking my questions.

Sure.

Due to time restraints there are no time for further questions. I would now like to turn the call over to Mr. Nutter for closing remarks.

Thank you very much, operator. These are very very difficult capital markets. All of you are aware of that. Yet Haemonetics' consistent performance, strong balance sheet, and improving margins are a result of excellent execution to our strategic plans. I firmly believe that we're positioned with a strong experienced management team to lead us going forward, a strategic plan to which we are totally confident that we can execute upon, and an economic environment that favors most importantly our value proposition to our customer. So as I go into my new role with the company as your Executive Chairman, I'll look forward to seeing you on May 14th at our annual Investor Conference in Braintree. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.