Haemonetics Corp (HAE) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2009 Haemonetics Corporation fourth quarter earnings conference call. My name is Becky, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions). I would now like to turn the presentation over to your host for today's call, Julie Fallon, Director of Investor Relations.

Good morning. Thank you for joining Haemonetics fiscal year end earnings webcast. Today I'm joined by Brian Concannon, President and CEO, Chris Lindop CFO and Vice President of Business Development, and Lisa Lopez Vice President of Corporate Affairs. Please note that our remarks today include 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 Brian Concannon will review the highlights of the year. Chris Lindop will review our operating performance and provide fiscal 2010 guidance, and Brian will close with comments on key strategies. Before I turn the call over to Brian, let me review the restructuring costs incurred this year and a change to the way we report product line revenues going forward. So, first, a few items that affect our comparative financial results. 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 fourth quarter and full year net income excluded $2.4 million and $6.3 million respectively in pretax costs. In the fourth quarter and full year fiscal '09, we've incurred restructuring costs of $4.4 million and $7 million respectively in pretax costs. Again, for comparison purposes, we've excluded these costs from our financial results.

Now let me direct your attention to an important change in our reporting of product line revenues in fiscal 2010. Going forward we refined our segment revenue reporting to align reporting with blood management solutions and to give greater clarity to our revenue results. So on today's call we'll report fiscal '09 revenue results as we have historically. But for fiscal 2010 we've posted revenue scenarios on our website that break out revenue segments in our new format. You can find the scenarios on the investor section of our website under financials.

Finally, as is our normal practice, our press release and website include a complete P&L and balance sheet as well as reconciliation between our GAAP results and our adjusted results.

With that let me turn the call over to Brian Concannon.

Thanks Julie and good morning everyone. I'll start with a few comments about our year just ended. Fiscal '09 was an exceptional year, revenue grew 16%. Operating income grew 21% and earnings per share grew 17%. Chris will review the details. Let me just say that the last time your company consistently performed this well was the early '90s, more than 15 years ago.

As you know, we have a six-year history of double-digit growth in operating income. We committed several years ago to improve profitability, and we've delivered. But just as important, this is our second consecutive year of double-digit growth in revenue. I shared on our last call that any negative impact from the current economic environment on Haemonetics would be minimal. In fact, our blood management value proposition directly addresses customers' needs in this environment. And as you've seen, in a volatile financial market, our operating performance is noteworthy. As I transition into the CEO role, we will continue to focus on the two strategies responsible for our success. That is, to improve profitability and to expand our business. Our strategies will guide us as we focus on our long-term aspirational goals. These are to sustain a five-year revenue CAGR of 10% to 12% and operating income CAGR of 12% to 15%. We are well on our way to delivering on these goals. We're proud of the year's operational performance but we're just as proud of our strategic progress.

Here are some highlights of the year. We were named as principal supplier to Octapharma US for plasma disposables, and we launched a new plasma protocol that reduces plasma collection times and therefore significantly improves customers' productivity. We fully integrated the TEG Hemostasis Analyzer business, which we acquired late in fiscal '08. We also leveraged our global organization to take this business direct and five European countries. We acquired Altivation Software in March and the Neoteric in April. These acquisitions strengthen our information technology offerings for the blood bank and hospital respectively. I'll talk more about these later in the call.

We managed Phase II of ERP. Our implementation was completed in April so we'll start to harvest this significant investment. We completed our three-year business transformation with the restructuring of technical operations and R&D. The Company's operations are now structured entirely around delivering blood management solutions. We also completed a $60 million stock repurchase during the year, and we strengthened our management team.

At no time in our history has the depth and breadth of our management team been stronger. In addition to all this we made great progress towards realizing our long-term vision. I'll talk more about this later in the call as well but first, Chris Lindop will review our fiscal '09 performance and give guidance for fiscal 2010.

Thanks Brain. Well, let me say at the outset that I'm extremely proud of our results. We achieved the high end of our annual guidance and at the same time we continue to invest in the long-term. Let me start by reviewing our revenue growth drivers, then I'll talk about income statement and the balance sheet. For the full year, revenues grew 16%. Let me break that down for you.

In the year, the core business remains strong growing 10%. The TEG business we acquired in November 2007 added roughly 3% and currency added another 3%. Plasma software and services and to a lesser extent red cells drove revenue growth in the quarter. For the year, all product lines except OrthoPAT contributed solid growth. OrthoPAT growth of 3% for the year was below our guidance and is below our long-term expectations for this product. As I've said many times we have multiple growth drivers so if one product lags others can take up the slack.

Let me say more about our full year results. For the year, plasma disposables revenue was $202 million, up 30%. Market expansion and new contracts drove growth. We saw increases in all geographies as strong demand for IVIG and Albumen continued. In the US, Haemonetics also benefited from a new contract with Octapharma which we announced in Q1 in fiscal '09. In Japan, we saw stronger unit growth combined with year over year price improvement. Plasma will continue to be a growth driver going forward. More on that in a few minutes.

Moving to our second largest business, blood bank, for the year blood bank disposables revenues was $143 million, up 5%. The blood bank business is mainly platelet collection disposables. The platelet market is growing modestly in developed markets and growing double-digits in emerging markets. During the year revenues grew in eastern Europe, Canada, and parts of Asia. While we don't expect the blood bank business to be a significant growth driver in FY 2010, we're pleased to gain market share in developed markets and expand markets globally. Now moving to red cells, red cell disposables revenue was $50 million, up 7% for the year.

Let me remind you how we positioned our automated red cell systems. First, automation increases the blood supply with the existing donor base. Second, automation reduces collection costs, and third, automation improves quality and operating efficiency. Recently, US blood centers have reported stable blood supplies. That said, we expect blood centers will continue to grow their automation programs to improve their operations and reduce costs. So while red cell growth moderated this year we believe this under penetrated market remains a long-term growth driver.

The patient side of our business is also doing well. The patient business is our surgical and diagnostic systems as well as our orthopedic surgical blood salvage systems. First, surgical and diagnostics. With $88 million in sales, it grew 22% in the year. Growth was driven by the TEG acquisition. We saw the comparative benefit of the TEG acquisition through the anniversary of the purchase in mid-November. Going forward we expect the TEG business will continue to drive diagnostics growth. TEG is now a $20 million product line with a growth CAGR of over 20% over the last four years.

OrthoPAT's disposables revenue was $35 million, up 3% for the year. While disappointed with this growth, we remain bullish about long-term prospects for this business. Why? Well, first, the orthopedic market is virtually untapped for surgical blood salvage. So even though elective surgeries are down due to the economy there's still plenty of room to grow. Second, early results are very promising. In the hospitals we're calling our blood management accounts. In these accounts we're seeing OrthoPAT usage rates between five and ten times higher than our average accounts. And we'll talk more specifically about what we're doing differently in these accounts at our investor day. Software and service revenues were $44 million, up 12%. The software part of the business grew 31% for the year. But this growth was offset by the loss of a contract for service revenue that we had expected. Strength in the software business came from our contract with the US Department of Defense and from other new contracts. Software and solution sales will continue to be an important component of our blood management solutions strategy. In fiscal 2010 software sales will benefit from ongoing growth in the plasma business and from the Altivation acquisition.

Equipment sales were $36 million, up 8%. Revenues were particularly strong in our European business. In fact, equipment sales have been very strong over the past two years. This is a great leading indicator of future demand for our disposables. Having said that, current economic conditions may discourage capital spending.

As a result, we expect that equipment sales will be level or decline nominally in the near-term. This change is not expected to slow equipment placements or impact our disposables growth. That's because our strong balance sheet permits us to offer customers a variety of alternatives to finance equipment. More over, the current economic environment makes a compelling case for beginning or expanding automation programs and reaping the long-term cost savings.

So to summarize revenues, we saw balanced growth across multiple product lines and all of our geographies. North American sales were up 20%. European sales were up 13%. Asian sales were up 16%, and Japan sales were up 2%.

Now let me review the rest of the P&L. Excuse me, I misspoke, Japanese sales were up 10%.

Let me review the rest of P&L focusing on full year results. Our fourth quarter results are posted on our website if you would like more details on the quarter. Full year adjusted gross profit was $308 million up 20%. Gross margin was 51.6% up 160 basis points, and gross margin improvements benefited from manufacturing efficiencies, product mix, and currency. We managed operating expenses well in the year despite incremental expenses from the TEG acquisition which were not included in most of fiscal '08 expenses. We kept operating expense dollar growth to 68% of incremental gross profit dollar growth. Adjusted operating income grew 21% for the year.

Operating margin expanded 60 basis points to 15.5%. Other income declined in the year for three reasons. First, we used cash for a share buyback. Second, interest rates were lower year-over-year, and third, exchange rate volatility had an adverse impact. Our tax rate was 30%, lower than our historic tax rate of 34% to 35%, and this is because we benefited from the favorable resolution of a tax contingency and we leveraged our Swiss subsidiary as a principal party for more of our non-US business. Adjusted earnings per share were $2.45, up 17%.

Now moving to the balance sheet, for the year we generated $62 million in free cash flow after making net investments of $54 million in capital expenditures. Let me remind you that we began the year with $134 million in cash on hand. We then repurchased $60 million in Haemonetics stock. And we're closing the year with $157 million of cash on hand. This is an extremely strong cash generation model which only gets stronger in fiscal 2010.

So now let me move to our guidance for fiscal 2010. We expect revenue growth of 8% to 11%, operating income growth of 12% to 15%, and earnings per share in the range of $2.75 to $2.85. As Julie mentioned, on our website we've posted some scenarios for the income statement that you may find useful. The scenarios include a breakdown of revenue growth in line with our new reporting segmentation. Our success in fiscal '09 provides with us a strong base for growth in fiscal 2010. We expect all product lines except equipment will contribute to growth in fiscal 2010. We expect the strongest performance from surgical, diagnostics, OrthoPAT, and plasma. Surgical growth will be driven by new product sales. Diagnostic growth will be driven by TEG market expansion. OrthoPAT will benefit from our growing traction with blood management solutions selling in targeted hospitals.

Let me spend a few minutes on plasma. Since this is our largest business and a key growth driver. As we've stated previously, we expect plasma growth to moderate from the current high-growth levels. But let me be clear about this. We expect continued double-digit revenue growth in the plasma business for the next 24 months. As expected, plasma collection growth is aligned with the end use demand for drugs, and end use is still growing. Plasma derived drugs are used for very serious conditions.

For the people who are taking these drugs treatment is not optional. The demand for plasma-derived drugs will drive 7% to 9% growth in plasma collections annually. Our confidence that we can grow better than collection rates stems from three areas. One, an important product extension that enhances collectors' productivity by shortening plasma collections. Two, pricing improvements, and three strong device placements. We placed 2300 devices in fiscal '08 and an additional 2600 devices in fiscal '09. For every 2,000 devices we generate an incremental $26 million in annual revenue once they become fully operational, which is about 18 to 24 months after installation. We're planning 1400 to 1600 more placements globally in fiscal '10 based on contracts signed to date. So while growth will slow from 30% that we experienced in fiscal '09 this business is still growing, and we're confident in the guidance we're providing.

Okay. Moving down the P&L, in fiscal 2010, we'll continue to see significant improvement in gross margin and operating margin. Gross margin is planned to increase from 51.6% to over 53%, up more than 150 basis points. Product mix, structural cost savings, and manufacturing efficiencies from automation will drive growth.

As we look at expense management, we've done a great job of leveraging the P&L over the last six years. Fiscal 2010 will be no exception. We plan for expenses to grow at a rate of roughly 65% of incremental gross profit dollar growth, driving operating income growth of 12% to 15%. We expect fiscal 2010 operating margins to increase about 50 basis points to roughly 16%. In fiscal 2010 earnings per share will grow to between $2.75 and $2.85. To close out my financial comments on fiscal 2010, in the past several years we invested heavily in our plasma business and in our global ERP system. From a cash flow perspective we're now beginning to harvest these earlier investments. This, combined with strong underlying business growth, and the operating discipline you have come to expect from this management team will permit us to generate over $60 million in free cash flow in fiscal 2010.

Finally, I'm pleased to report that the Board of Directors recently authorized a $40 million share repurchase. So to close, if you like fiscal '09 you are going to like fiscal 2010. Revenue growth of 8% to 11% dropping through to 12% to 15% operating income growth and EPS growing to between $2.75 and $2.85. Gross and operating margin expansion and strong free cash flow generation. Our business fundamentals remain very strong. Despite pressing global economic factors and market extremes, Haemonetics is performing exceptionally well. Our investment thesis remains solid. Fiscal '09 was another great year. We look forward to repeat performance in fiscal 2010. And with that, let me turn the call back to Brian.

Thanks, Chris. Before I begin my comments on strategy, let me take a moment to thank Brad Nutter. As most of you know, in October we announced Brad's retirement as CEO. He remains as Executive Chairman of our Board. Earlier, I said that Haemonetics has not seen double-digit growth in revenue and EPS over two consecutive years since the early '90s. I said we've had six years of double-digit growth in operating income. This remarkable performance comes under Brad's six years of leadership and strategic direction. We thank him for his dedication to Haemonetics and we are very pleased that he will continue to work closely with us as Executive Chairman. It's worth noting that a key part of Brad's legacy as CEO is the team he has assembled. He would be the first to state that our past performance would not have been possible without a strong leadership team. Indeed, this is the team that remains in place today.

As we close out our fiscal '09, I'm extremely pleased with our operating performance. I'm equally pleased with the advancement of our vision. Just two years ago we shared our vision to be the global leader in blood management solutions for our customers. WE have made great progress. Haemonetics is 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. Six months ago, I shared with you that we've had some early success with a hospital embracing our blood management vision. We identified several improvements that the Atlantic Health System could make in its blood management program. Atlantic Health began with the integration of OrthoPAT. As a result, the hospital system achieved $1 million in net savings, and awarded Haemonetics a $500,000 contract for OrthoPAT.

Since my first report to you, Atlantic Health has completed the integration of Cell Saver, CardioPAT, and Information Management as standard practices in blood management. As the program continues to mature we are confident in significantly greater savings for the hospital and a reduction in transfusions that translate to improved patient care. Our contracts have grown to $1 million in annual incremental consumable sales to Haemonetics. With its implementation of OrthoPAT, Cell Saver, CardioPAT, and Information Management, Atlantic Health is now 10 to 15 times larger than our traditional surgical blood salvage accounts. Of savings for the hospital and sales to Haemonetics. That's a win-win.

Just as exciting is how quickly we're learning to integrate and accelerate blood management accounts. Baseline assessment required to benchmark an institution's blood use took us nine months with Atlantic Health. We reduced that to four months with our next blood management account. We got that down further to just 40 days with our most recent account. The speed at which we can now execute a blood management plan is remarkable. We'll share the details about how we do so at our Investor Day on May 14th.

Strategically, we've achieved key milestones on projects critical to our product offering in blood management. The automated whole blood system and a blood typing diagnostic. With our automated whole blood system blood donation and processing were significantly improved through a totally integrated approach that connects all the devices to information management systems. We also continue to work on a point of care blood typing system. We are targeting a system that is compact, forward and reverse type blood in a fraction of the time it takes current technology, and uses just a drop of blood and reagents. In the year we've progressed on the chemistry and technology. I look forward to showing you our progress on both key initiatives at our Investor Day.

We've broadened blood manage solutions through acquisitions. Earlier I mentioned our acquisition of Altivation Software. Its software product called Hemasphere is used today by blood banks to manage their mobile blood drives. Incidentally, mobile blood drives represent 70% of all collections in the United States. This application is critical to blood collection. The Hemasphere product complements and easily integrates with our existing software products. Here's the upshot, we can now meet all of our customers' information management needs for mobile blood drives. I am also pleased with our acquisition of Neoteric. Neoteric provides a solution that extends the lab control of blood units to the operating or emergency room suite. Control is maintained with smart refrigerators located in the suite that cross-match and issue blood units in a just-in-time fashion. Hospitals using Neoteric's products have meaningfully reduced costs and improved efficiencies. This acquisition is another tuck-in, bolt-on with a strategic fit to our hospital blood management solutions value proposition. These acquisitions have a near-term impact as well. As you know, we aspire to a revenue CAGR of 10% to 12% which includes 1% to 2% growth from acquisitions. Altivation and Neoteric combined add about 1% to revenues.

Business development remains a fertile environment so we'll continue to target a few tuck-in product lines or businesses each year. Our execution in the year to our strategic plan is noteworthy. Our consistent performance, strong balance sheet, and improving profitability demonstrates we do know how to execute. The current economic environment is trying, no doubt. But many economic factors favor Haemonetics' value proposition to the customer. I'm proud of our results and strongly believe the Company is very well positioned to move forward aggressively.

Let me close by saying thank you to our employees for their strong performance in fiscal '09. Thanks also to our shareholders for your ongoing support. I mentioned our Investor Day earlier. We'll spend more time that day on our fiscal 2010 operating plans and our strategic initiatives. So I invite you to join us here at our branch headquarters on May 14th. With that let me turn the call over to your questions.

(Operator Instructions). And your first question comes from the line of Steven Crowley of Craig-Hallum.

Couple questions. You gave us some pretty encouraging numbers on the number of plasma systems you placed this past year. What does that bring your installed base up to at this point?

The end '09, we're at 14,500, just including PCS 2. We also have other non-PCS 2 devices collecting in Japan. So over 16,000 all-in.

In terms of the financial performance recently, and what you are forecasting, there continues to be a significant component of SG&A growth, the complexion of the numbers you reported in your guidance is that you're doing quite a bit better than we would have expected on a gross profit margin basis but operating expenses in Q4 and maybe going forward are a bit higher than I would have expected. Can you tell us some of the things that -- some of the areas where that investment is taking place and where maybe those expenses are a bit beefier than we would have expected?

A couple of nonrecurring or one-off things, we are, as we like to say, a pay for performance company and our over performance triggered some over performance in bonus. That's one. We also had some warranty activity in the quarter that's a little higher than usual that we adjusted our results for, and we had a little bit of a head wind with exposure to the Korean won with our distributor over in Korea, which we dealt with in the quarter so there's a few things that make this quarter a little heavier in SG&A than normal.

Steve this is Brian. I'll tag on to that for just a moment. To take off of Chris' comments about pay for performance, we are a company that believes strongly in that. As you know, our shareholders get paid first, then we pay ourselves. I'm particularly pleased that we were able this year to not only beat the estimates from an earnings per share standpoint, but also be able to pay a little additional back to our employees per our bonus plan, so I'm excited about that and I think it's very warranted.

One follow-up. The new breakdown or breakout of diagnostics as a category, two-pronged question. As it stands now, is it really just haemoscope in that category, and is the breakout an indication to us that that's an area you would like to beef up significantly?

Sure. Obviously we have a major investment ongoing in Arryx, which is really a diagnostics initiative, and we see TEG coming into its own and growing, so we're trying to sort of create that visibility in disaggregating it.

Thanks for taking my questions. I'll hop back the queue.

next question comes from the line of Larry Solow of CJS Securities.

Just to follow up on Steve's comments, never mind Q4, but how about looking forward into fiscal 2010?

I can fully appreciate you guys are spending money on kind of future stuff, including automation of the whole blood market, but it seems like when do you expect sort of to get more operating leverage? Clearly you are getting good leverage on your margin, on your gross margin line, but not the operating margin line. Any color on that? What kind of expenses are going into SG&A and R&D in '09 that might be investment type or discretionary?

We are continuing to invest in the business as you pointed out. We've talked about three major areas of investment which we think will yield great benefits in the future. Of course, is Arryx, which is a longer-term investment. There's a relatively near-term investment in whole blood collection, then there's this overarching blood management solutions investment that we're putting money into to ensure that we can really accelerate the data mining informatics work that we want to do with our hospital customers where we think there's a terrific opportunity to leverage our growth in cell salvage and other products using this blood management solutions value proposition. So that's where the investments are being made, and I think we're showing 50 basis points of margin expansion, and we feel pretty good about that at the moment.

Larry this is Brian. I would also tell you, we're remaining true to our philosophy of for every incremental gross margin dollar that we generate spending and plowing $0.65 of that back into the business and investment. So to Chris' point we still think we have a number of things to continue to invest in. We're spending more money on Arryx than we've ever spent as we continue to take that technology forward, and blood management solutions will remain a focus for us from both an investment standpoint as well as a growth opportunity as we go beyond FY '09 into FY 2010 and beyond.

Not to steal your thunder from your presentation, your upcoming meeting, I'm sure will you talk a lot more about, but your entry into whole blood, do expect that in fiscal 2010?

We'll give you more insight into that, Larry, next week. We've got some exciting things to share with you, and to tell you anything beyond that now would steal our thunder from that.

Absolutely. Just one housekeeping question. Do you have the depreciation for the quarter and your expectations for the upcoming year?

D&A in the quarter is $10 million, or almost dead on. You can expect that would be a reasonable run rate for next year.

Great, thank you.

and your next question comes from the line of David Lewis of Morgan Stanley. Please proceed.

Good morning, guys.

Good morning, David.

Hi, David.

Couple quick questions here. First, Chris, on guidance, couple lines you spoke to some of this, but specifically, OrthoPAT, obviously looks like it's going to accelerate in the forward year. Obviously, TEG is going to accelerate in the forward year. Software adjusted for the acquisition actually looks flattish. So specifically on OrthoPAT and TEG, can you walk us through are there new reps being added or specific plans that gives you confidence in the reacceleration, and is my math wrong on software?

Okay, on TEG, let me make sure I get -- that's long question. On TEG, we are going, as Brian alluded in to his comments, going direct in five countries which gives us confidence. We have other plans in our North American business. I don't want to go into specific details. Certainly we will be adding sales capabilities. We see this as a terrific opportunity. In software, we're dealing with a couple of factors. There's -- we're not, first of all, in our guidance, including Neoteric in that category. This is really Altivation, there is some growth in the business but we're also dealing with shifts in contracts in the business.

Okay. Then on OrthoPAT, just the confidence there and the acceleration.

Yeah, we -- our strongest indication there is what Brian talked about in -- with Atlantic Health. There's such a difference between Atlantic Health and the average OrthoPAT account and what we have been able to demonstrate in recent months is that we can accelerate our ability to do the diagnostics analysis for the hospital to demonstrate the value of cell salvage. So we believe, as we get out and go from, as Brian said, 9 months to 4 months to 40 days, we'll be able to accelerate the up tick in blood management and OrthoPAT is a leading -- it the point of the spear for blood manage.

I'll take on that a little bit further. In each of these accounts, as Chris indicated this is what we start with and next week at the Investor Conference we're going to give you some real good insight into what this benchmarking is that we do, this baseline as we call it for an account. And hopefully it wasn't lost in the comments but the progress we've made from 9 months, now down to something around 40 days is significant. And we expect to minimally have 9 to 12 accounts that we'll have baseline in implementation completed on in this fiscal year, and if these are accounts similar to what we've seen with Atlantic, we believe that's what's going to fuel this growth. But the baseline really gets to helping a hospital manage their blood in a very, very different way. And the information provided causes them to look at a number of factors well beyond blood use which I think is what's most exciting to hospitals as they look to implement this, things such as not just their blood use but blood use by department, by doctor. Infection rates by department, by doctor. Hemoglobin triggers by department, by doctor. So some very real and meaningful information that hospitals haven't been able to get at on their own. Very significant for us and for them.

Extremely helpful. Thanks, Brian. Maybe two more quick ones. One just on Chris. The gross margin always strong to end the year but extremely strong this quarter. Any reason to believe some of those gross margin improvements would not carry through to the remainder of the year? Secondly, in capital deployment last year you spent -- you bought back stock equal to free cash, this year guiding for below that. Is this just conservatism or is there any reason why you cannot spend sort of the free cash or obviously balance sheet cash on greater buy-backs?

Just taking the cash question first, we have a little saying here, cash is king, and we think it's a good thing to have in uncertain times like this, so you could argue it's greater conservatism. But we could spend more if the board were to authorize us to do that. So we feel pretty good about that.

Let me jump in on the cash question, then let Chris go back, David, if I could. We've always said that we'll spend our cash first on acquisitions, then we'll spend it on things like buybacks. We really believe that there's some opportunities that exist in these times. And as we consider where we're going to be going with automated whole blood, this has opened us up to another area of opportunities relative to acquisitions. So we want to be careful about how we use our money, and that's all you should take from that, and recognize to Chris's comments, we want to be conservative there and keep our powder dry, so to speak. And beyond that, we're really testing with our ERP implementation complete this year, we're really going to test the cash generation of this business this year. I want to understand and appreciate just what we can generate in cash going forward. With that I will turn it back to Chris.

Then with gross margins, David, just to confirm the scenarios that we have out there, we feel pretty confident about the gross margin guidance we're giving for next year.

Thank you.

And your next question comes from the line of Joshua Zable of Natixis.

Everyone, congrats on a great quarter and thanks for taking my call.

Thanks, Josh.

First, Chris, on the tax rate, can you tell us going forward what we should expect, just to clarify that? I know I'm on your guidance page. I just want to be sure I'm correct here.

We're looking at 31% for next year, so a couple of factors, I guess that come in here. One, we're putting more and more of our business outside the United States through our Swiss operation. In Q4, we got a favorable ruling on our tax rate in Switzerland. So that benefited in Q4 with a bit of catch up and will be embedded in our rate going forward. It's just a factor of more and more business outside the United States being oriented through our Swiss operation as the entrepreneur of that business, if you will. Also, you'll see when you get the 10-K and the discussion we had the resolution of a favorable tax contingency this year, in the year we've just completed. We don't obviously anticipate in that next year's rate, so 31% is a good rate for the year.

Great, that's very helpful. Now, just trying to -- obviously the quarter looked very good so I just kind of want to nit-pick here, the stock is down. I'm trying to figure out what people are picking on. First, let me ask, on equipment, obviously not the best quarter you've had. Given what's going on out there can you just give us a little bit of color, whether it's just people slow to replace? Is it orders are delayed? Just kind of give us some help there.

Yes, sure. It's a relatively simple explanation. In Japan, we tend to have one large equipment order each year, and last year it fell in Q4. This year it fell in Q3. And that's probably of all factors that would be the biggest one.

In fact, Josh, typically every year it's fallen in Q4 since I've been here so this is the first year for the most part that it's happened in Q3. Additionally, I'd remind you that we expected this year the equipment to be flat, so we're pretty pleased that we're up 8% for the year overall, especially considering these economic times. So we don't -- we're not any less bullish on where we stand in terms of our equipment. Also, going forward, we have the flexibility to offer our customers alternatives. So we'll continue -- we feel we'll continue to see maybe not the purchases outright but certainly the placements continue as we go forward.

And your next question comes from the line of Dave Turkaly of SIG.

The plasma placements, I think you said you expect double-digit for 24 months from now. On the visibility side do you have a number of systems you think will you place over this year and maybe the next year?

In my comments I said what we know about based on the contracts today is between 1400 and 1600 (multiple speakers).

And then the software side, can you just remind us how that works for you guys in terms of kind of a -- is a perk like model right now --or is it more of an annual contract that gets updated?

Well, it varies, but mostly it's software as and service, and in some cases it's software as a service billed on a per click basis. We do have some licenses and some other contract work. Change order type elements of our revenue, but those are -- the preponderance of our revenue is from sort of a per click or service model.

Then in the last -- the tax -- the lower 30% range, going forward in the future out 2011, is that probably a good range for you guys now?

I'd like to be it at 30% or lower, and we will keep pushing towards there.

And your next question comes from the line of James Sidoti of Sidoti and Company. Please proceed.

Good morning, Brian. Good morning, Chris. Can you hear me?

Yes, we can, Jim

Good morning.

Can you give us a little more color on the plasma market? Are you seeing any signs that inventory levels there are stabilizing, or do you think you will get steady demand going forward? Are you seeing any trends where some of the countries you deal with are switching back to source plasma for factor 8 because of the price difference?

I don't have any detail on the factor eight question, Jim, and we'll try to get you more detail on. That we continue to see strong volume growth in collections. We're targeting 8% and obviously we talk to our customers when we build our plans, and this is sort of the consensus that we are basing our plan on.

And, Jim, this is Brian. This is an area we think we have some pretty good visibility into. As we've talked about many times, there's five companies that make up the majority of this market, close to 80%. We have contracts today with four of them. We meet with them on minimally a quarterly basis, in some cases monthly basis so we have great visibility into their plans and their intentions for this market as well. So we think we understand that pretty well and feel pretty good about the guidance we have provided.

Jim, this Lisa, on the answer to the question about recombinant, we're seeing a little bit of softening in that part of the marketplace, but it's really minor.

Thank you.

And your next question comes from the line of Anthony Petrone of Maxim Group.

Good morning, just a follow up a little on equipment, then go back into plasma and a couple of high level questions there. If we look at equipment, you mentioned 1400 to 1600 replacements for PCS 2. In terms of the beginning of the year this year relative to last year what is the difference as we look in the beginning of the year what the pipeline looked like heading into this fiscal year and what do you expect in the acceleration toward the end of the year?

Well, if you go back to last year, we actually placed 2600 devices. Obviously coming into the year, we thought it was going to be a very strong year, and no kidding, it was. We just grew 30%. We're anticipating a lower -- what we can see very clearly is a lower placement level between 1400 and 1600, and our growth rates are commensurately lower. But the placements definitely support the growth rates that we have.

To put that in perspective, we went into last year believing we would place about 2000 devices for the year. We finish the end the year at 2600 (inaudible).

So overall equipment, if we look at the guidance, I know we're changing it up a little here, equipment and all other 5% to 10% --.

One clarification. We don't sell plasma equipment, we place it. So don't get that confused with equipment revenues.

So to go back in, and that's helpful to go back into equipment, on the hospital side, if you look at reform issues coming down in a big way in June, and as we move into the summer and will have some legislation coming out and debates going forward, are you seeing anything in terms of equipment on the hospital end where you really have a good indication that it is actually temporary and it's not an issue of access to cash or more intrinsic P&L issues that each customer is dealing with individually?

We're seeing the hospital customer certainly be challenged in these economic times, and cash is tight for them, but our equipment is not very expensive, and we're able to provide them, if the cash is tight, we're able to provide them with placement plans that prevents them from having to put an outlay in cash. So we think we've got enough options for our hospitals to be able to progress forward regardless of their current cash position. In fact, frankly, we think that because of the financial times, there's even greater incentives for these hospitals to be considering our value propositions, our blood management solutions in these challenging economic times. To put that in perspective, at Atlantic Health, we just talked about this, in our OrthoPAT placement there, we went from virtually nothing to 35 devices there with no cash outlay for them. They were able to begin their program and recognize some very, very significant savings.

Okay, and just one final one on plasma, just to go back to plasma. In terms of recently, I think one of the trends we've been seeing in terms of source plasma donors coming in, as a result of rising unemployment, we've seen a little bit of an up tick there, and Baxter actually had come out with comments stating they're in a position where they can actually go out and drive demand for the first time in many years. So is that trend -- are you still seeing that? I know you touched on it earlier, Chris, but in terms of some of these companies actually building inventory or having that ability due to the economic conditions is that a short-term situation you are seeing, or is it something that has reversed itself already? Thank you. I'll hop back in queue.

I think it's a short-term trend if at all. The one thing we take great comfort with in this industry just now, and what is fundamentally different about it from maybe the industry we saw five or six years is these are large integrated very successful companies that allocate capital rationally and build their plans rationally, and therefore collect their inventories rationally. There has been a trend of cutting back on donor fees because of the abundance of donors. So that's a classic rational response to supply and demand by a large company allocating capital appropriately, so that's what we see.

As a reminder, ladies and gentlemen, that's star 1 to ask a question. Your next question comes from the line of Daniel Owczarski of Avondale Partners.

Can you talk a little bit about pricing? I think you've said in the past that plasma disposables are tied to either CPI or PPI. Is that correct? And what about pricing on other consumables? How does that contribute to your overall growth?

Most of our pricing for our contracts are tied to CPI and PPI. Around the world that's typically how we manage that. We have been a little more aggressive in our distribution markets where we had an opportunity to take pricing up, as we focused in those environments a little bit more, but that's how we manage pricing across the board, and we've seen the benefit of that. It's one of those factors that has driven the profitability of this business even in spite of the growth in plasma, our lowest margin product overall.

And then as far as those contracts, how long are they? What's the term or the length of those typically?

That's different for each business. Plasma contracts are typically longer-term contracts. Hospital contracts are typically shorter-term contracts. And these (inaudible) are typically an annual (inaudible) of most hospitals have us address this even we're on a fiscal year they'll have us address this on a calendar year basis so that's how that typically works.

Okay, thank you.

You are welcome.

And your next question is a follow-up question from the line of Steven Crowley of Craig-Hallum Capital Group.

In terms of the plasma system software that you're rolling out that significantly increases throughput, what's been the real-world experience with the throughput improvements your customers are seeing, and how is that working into your financial model and into your guidance?

This is Brian, Steve. Let me grab that one. We expected that this software would enhance our customers' productivity by about 20%. We're seeing that and then some. It's going extremely well where we have implemented this new software. We're also seeing there are some other additional beneficial factors being realized as a result of it, such as yield and some things that we didn't anticipate in. We're trying to understand that a little bit more as we go forward. We expected that we would be able to implement this in about 25% of our centers this year. We are on track for that. We still believe -- feel good about that so overall this is going very well for us.

Great. And, I mean, the result is that you will be able to sell more razor blades for the installed base of razors.

It will allow our customers to be more productive as we go forward and be able to manage their collections. You go back to the previous question. Our customers have multiple ways to manage this business, and express gives them even greater flexibility. They can manage hours; they can manage the timing of their facilities, the fees that they charge people. It just gives them one additional tool to manage this. But I would also tell that you we still after number of customers that are opening new plasma centers. It's not at the speed that it's been in the past but that activity continues, and so that's why we -- we take the unit growth, you add on to it what we've done with pricing, you add onto that our Express software, and add onto that as we continue to leverage the contracts that we've signed over the last couple years. We feel good about the growth prospects of this business for the next two years and certainly feel good about our guidance at 14% to 17% this year.

Steve, just one point of clarification, which your question raised for me. We're actually charging for Express. As a premium on the cost of the consumables, so it's not simply about more bulls in the same installed base, which would, in fact, be a benefit, but it's also about charging the customer for the increased productivity.

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

Brian you talked about, or maybe it was Chris talked about the ability to structure, I assume under reagent rental contracts. Just want to confirm you always had that opportunity. Do you see an increasing amount of Reagent rental contracts this year versus last year or more just sort of stating what you've done historically?

You're talking the placement of equipment?

The financing of equipment?

That's correct.

We're seeing that increase. It's gone -- especially in the hospital market, when cash was more available we saw our business shift from less of a use plan to more of a purchase of our hospital base devices, and that is definitely shifting back now as we go forward. So it really is something that's based off the economic times but to Chris' point, our equipment sales are only based off of those that we outright sell. In many countries around the world they are required to purchase equipment. You can't use a use plan.

On plasma, couple questions here, first in terms of some of the large [practioners] have talked about constraining collection times and donation times. Have you -- are you factored into any of that on your guidance for fiscal 2010?

Yes, as I've said earlier, we meet with these large customers monthly for some, quarterly at a minimum for all, and we have very good visibility into their plans for the year, their growth, their expectations, their expansions of centers, their contraction of others when they change hours. So we have very, very good visibility into that, and that's reflected in the guidance that we've provided.

Brian, what makes sense in the next 24 months? Should we assume 7% to 9% volume, 1% to 2% price and anything else incremental would be share gains for Haemonetics?

You take 7% to 9% unit volume, 1% to 2% price if you want add Express in that pricing scenario, you can take that further on price, because we're charging for that. So that would take us beyond that number. I don't have a number off the top of my head to give you right now. We can get that for you. On top of that, growth in the market, our gains on the existing contracts, yes.

And your next question comes from the line of Joshua Zable of Natixis.

Two quick follow-ups. Just on the equipment side. Sorry, I got cut off. Just going forward, because your projection last year was flat, and like you said this year it really is more a reflection of difficult comps. Are you seeing anything or are you just being cautious about the equipment going forward? Because it's still projected higher than you thought it would be this year. So I'm just trying to gauge if you're just seeing what everyone else is seeing or just kind of being cautious.

Josh, as you look at our guidance we've lumped equipment and our service -- our equipment service business, the servicing of our installed base together. So equipment is -- within that number equipment is more flat.

Okay. Is that stuff you guys are seeing, or is it just more a function of being cautious?

It's a factor of a little bit of caution, frankly, Joshua. We don't have huge visibility into some of these buying decisions, so we try to be a little bit cautious.

We took this same approach last year, Joshua as we went forward. We finished a little bit better about that. It's just a very tough thing to predict at this point.

And there are no further questions at this time. I would now like to turn the call back over to Brian Concannon for closing remarks.

Thank you Operator. The strong management team Brad Nutter built over the last six years is the management team in place for your company today. I'm very proud to be leading this team going forward. This is a team that tells what you we're going to do and then we do it. FY '09 was an example of this discipline. And so has been the last six years. As a result, your company delivered a six-year CAGR of 10% revenue growth and 23% operating income growth. Today we've given you our guidance for FY 2010. This should look familiar as this guidance is similar to what we told you we would do in FY '09. Why should you continue to have confidence for FY 2010? Because what we're telling you we'll do in FY 2010 is what we've done for the past six years. The bottom line is we have multiple product growth drivers, including but not limited to plasma. Geographically, we are very balanced as well. All our geographies grew double-digits in FY '09. Our ERP implementation is now complete, and we will continue to leverage this new tool in FY 2010 and beyond. We have a strong cash position, and we will focus on this even more in FY 2010 generating more than $60 million in free cash. Blood management solutions is right for our customers and we're gaining traction. We continue to make progress with the automated whole blood collector and we're excited about entering this $1.6 billion market. To wrap up, your company is well positioned for the short-term and long-term. Before we end, let me remind to you join us at our Investor Conference here in Braintree on May 14th. We'll be giving even greater insight into our FY 2010 plan and the exciting projects we are working on to enhance our position as the global leader in blood management solutions for our customers, plans that will continue to sustain and drive shareholder value for your company. Thank you very much for your time this morning. Good bye everyone.

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