Haemonetics Corp (HAE) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2010 Haemonetics Corporation earnings conference call. My name is Dan. I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Julie Fallon, Director of Investor Relations. Please proceed.

Good morning. Thank you for joining Haemonetics' first quarter fiscal 2010 webcast. 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 our remarks today include 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, Brian Concannon will review the highlights of the quarter, Chris Lindop will review our operating performance, and Brian will close with summary comments.

Before I turn the call over to Brian, let me review the restructuring costs incurred last year. With the recent transformation of our business, we incurred restructuring costs in fiscal 2009 that we have excluded from the financial results we'll talk about today. In fiscal 2009, our adjusted first quarter net income excluded $1.9 million in pretax costs. We have no restructuring costs in the first quarter of fiscal 2010, so again, for comparative purposes, we have excluded these costs from our fiscal 2009 financial results.

Let me also remind you of a point we shared last quarter. Effective this year, we've 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 2010 revenue results in our new reporting structure. We've posted the comparable fiscal 2009 results on the Investor section of our website. Finally, as is our normal practice, our press release and website include a complete P&L and balance sheet as well as reconciliations 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. With our first quarter now complete, I'm pleased to report that we're off to a very good start. On sales growth of 7%, we had extremely strong positive drop-through, finishing with operating income growth of 24% and earnings per share growth of 18%. This marks the sixth quarter out of the last seven of double-digit operating income growth for your company. Positive drop-through was driven by gross margin expansion of 310 basis points and continued strong operating expense discipline that you have come to expect from this management team. Let me remind you in that May we shared our fiscal 2010 guidance, which is sales growth of 8% to 11%, gross margin expansion of greater than 150 basis points, operating income growth of 12% to 15%, and earnings per share growth of 12% to 16%. With Q1 results under our belt, we continue to feel very confident, and we are affirming this guidance.

Let me spend a few minutes on some of the highlights from the quarter. By doing this, you will see why I feel so good about the rest of the fiscal year. As I already said, we had strong positive drop-through with 7% revenue growth and 24% operating income growth. We continue to deliver on our commitment to invest approximately 65% of incremental gross profit dollars back into the business. We're off to a good start as expenses were significantly leveraged, spending only 48% of incremental gross profit dollars in Q1.

Plasma grew 26%, significantly above our guidance of 14% to 17%. Gross margin expanded by 310 basis points, the second largest quarterly increase since FY 2005, finishing at a near record high of 53.8%.

Operating margin also grew significantly, up 240 basis points and finishing at 17.1%. This is the highest operating margin since Q4 FY 2007. Profit optimization is near complete, resulting in an effective tax rate of 30.3%.

ERP implementation is now complete. For the first time in our history, the entire business is managed on one financial platform. We're making great progress, delivering even more production capacity for our plasma products. Our new $25 million facility in Salt Lake City is on track to be up and running by July of 2010.

On the heels of a patent win last January, the court ruled in the quarter to enjoin Fenwal from selling the infringing ALYX disposables, effective December 1st, 2010. We continue to make progress building our blood management solutions division, completing two small but strategic acquisitions with Altivation and Neoteric. We continue to generate cash, finishing the quarter with $174 million of cash on hand.

But the most significant highlight is finishing the quarter with earnings per share of $0.69, up 18% over prior year. This marks the 18th quarter out of the last 21 that we have generated double-digit earnings per share growth. Said another way, since the end of FY 2004, and that's five-plus years, Haemonetics has delivered double-digit earnings per share growth in all but three quarters. Now, that's the kind of shareholder value you've come to expect from your company, and that's the kind of shareholder value this management team expects to deliver.

So we're off to a very good start. This is an impressive list of accomplishments. I'm very proud of the job done by this team as we complete our first quarter. In spite of one of the most challenging economic downturns in recent history, this team continues to deliver. We have much work to do as we implement our blood management vision, but we are making progress, and we believe that our best years are ahead of us.

So with that, let me turn the call over to Chris Lindop, our CFO. Chris will cover the underlying trends in our growth drivers, both in the quarter and for the remainder of the year, and review in more detail the results of the first quarter.

Thanks, Brian, and good morning, everyone. As Brian commented, this was an extremely positive quarter. Top line strength in our flagship plasma and software solutions businesses combined with margin expansion and operating leverage to deliver outstanding results -- results which are even more remarkable when you consider the broad economic environment and the challenges facing the healthcare sector. Let me start by reviewing the revenue results, then I'll walk down the income statement providing some color on the quarter.

Plasma is an ongoing success story. In the quarter plasma sales were $59 million, up 26%, and that's nine consecutive quarters of double-digit growth in our largest business. Sustained plasma growth has led to manufacturing efficiencies, driving plasma gross margin growth of 150 basis points. Plasma gross profits grew even faster than plasma revenues. So plasma is both a revenue and a margin expansion story.

We shared in May how our Express protocol will contribute to both of these trends. Remember that the Express is a device software enhancement priced on a per procedure basis. Express is completing its limited market release. It's already installed at three of our 13 plasma customers in multiple collection sites. Several other customers have begun pilot testing. Feedback by center managers and owners has been extremely positive. Customers have seen donation times reduced by more than 20%, and donors are returning more often because the donation is comfortable and fast.

When we spoke with you in May, we were bullish about the plasma business. So in some ways, our strong start in plasma was not unexpected. But plasma has been even stronger than we originally planned. So for the year, we are increasing our annual growth guidance range for plasma from 14% to 17% to 19% to 22%. And the trends for plasma remain very positive.

The software solutions business also had a good quarter. Sales grew 17% to $8.5 million in the quarter. Because Haemonetics provides the information management platforms for plasma centers on a per-donor fee, strong plasma collections contributed to software solutions growth. Also, as we've shared in the past, we have an agreement with Optipharma. As Optipharma expands its plasma collection capacity, our software solutions business is benefiting from Optipharma's business growth. In addition, our Altivation and Neoteric acquisitions contributed $900,000 to software growth in the quarter. Our original growth guidance for software solutions was 9% to 13%, and we confirm this range for the year.

In our platelet business, revenues declined almost 4% in the quarter. In Q1, we saw a slowdown in Asia, where currency devaluations in Korea pressured platelet revenues. This trend will reverse in Q2 and beyond. Additionally, Japan platelet sales were down modestly. Finally, we are switching distributors in a few key markets. While these distributor changes put pressure on platelet sales in the first quarter, the changes will contribute to platelet sales growth for the full year. We are updating our guidance for our platelet business to approximately flat to 2% revenue growth for the year, consistent with our long-term expectations for this product line.

Moving to red cells, we are confirming red cell growth guidance for the year of between 6% and 8%. In the quarter, red cell revenues were essentially flat year-over-year. Our two largest customers had high inventories of blood. We believe that these high inventories resulted from three things. First, fewer elective surgeries, reducing demand for blood. Second, 5% more donors due to 16-year-olds now permitted to donate blood. And third, for certain customers, less blood exports to other markets.

But these trends can shift quickly, and, in fact, we're already seeing evidence of changes that we expect will lead to increased red cell collections in the near term. By late June, blood centers collecting 65% of the blood in the eastern United States were reporting only one to two days of blood on the shelf. By early July, there were critical appeals for blood across the East Coast, the Midwest, and parts of the South. Blood centers are reporting that blood drives at local businesses are down significantly due to the impact of downsizing, and blood bankers know that the fastest and easiest way to combat blood shortage is with automation. So despite the short-term market pressures experienced in the first quarter, we remain confident in the growth opportunities for the red cell product line.

In addition to the market trends I just spoke about, you should be aware that in the past two months, three blood centers have committed to convert to Haemonetics from the Fenwal device. Remember that Haemonetics had a favorable patent ruling against Fenwal in June. So we're seeing some market share gains that will help drive full year growth of 6% to 8%.

Moving to the hospital side, surgical and OrthoPAT product lines were essentially flat in the aggregate year over year. In the current environment of declining elective procedures, I think it's fair to say that flat is the new up. Given the declines in procedures, we're now guiding to OrthoPAT disposable sales growth of 5% to 7% for the year.

In the face of these challenges, and perhaps because of them, we made good progress in executing to our plan to convert traditional customers to blood management solutions, thus driving penetration to offset procedure declines. We'll share more details later in the year about the successes we are seeing at our blood management solutions accounts. But let me say that we remain confident that blood management solutions will drive growth in the hospital business later this year and beyond.

Moving to diagnostics, TEG disposables grew 9% while total diagnostics revenue, which include TEG equipment sales, was down 2% in the first quarter. The equipment portion of the TEG system has historically been purchased by hospitals, and because of this business model, we include these equipment sales in the revenue line for diagnostics. In the current economic environment, hospitals are resisting even the modest capital purchases associated with our diagnostic device. So to drive equipment placements, we've recently implemented a leasing program for our TEG business similar to our other businesses. The 9% TEG disposables revenue growth came from strong equipment sales that we saw last year. So we're already seeing the benefits from attaching the Haemonetics brand and our global sales organization to this acquired product.

In addition to the leasing program, in Q2 we will convert one of our North American distribution markets for TEG to direct sales. We plan a second conversion in North America in Q3. These distributor conversions will also drive TEG sales growth later in the year. Our original growth target for our diagnostics business was 20% to 25%. We now anticipate annual revenue growth of 15% to 20%.

Sales of our apheresis and cell salvage devices were down 15% in the quarter when compared to last year, our fiscal 2009. Similar to our diagnostics business, equipment sales are being impacted by hospital spending pressures. We now expect flat to 5% revenue growth for equipment for the full year.

But let me add some color. We track our installed base of devices, and our installed base includes devices that we have sold to customers, but also devices placed with customers under rental or use plan agreements. We still sell very healthy growth in our installed base of devices. We added 870 devices to our installed base in Q1, and that's 2.4% sequential growth in the quarter, which is in line with our long-term annual growth goals for the business. Growth in our installed base of the PAT products and the cell salvage outpaced last year, with notable growth in North America and Japan. We continue to see strong growth in the installed base of platelet technology in the distribution markets. The important point is our installed base continues to grow.

With respect to new products, disposable sales grew 65% to $1 million in the quarter, led by the CardioPAT system. I'm very pleased with this performance. Total new product revenues, which are disproportionately dependent on equipment sales, are flat year-over-year.

We're off to a good start against our plans, and I'm confirming our revenue growth target of 8% to 11% for the year. Our mix of sales is different than anticipated, but we are very confident in our annual growth guidance.

Now let me review the rest of the P&L results. Again, fiscal 2009 numbers are adjusted, as Julie said. First quarter fiscal 2010 gross profits were $82.9 million, up $9.8 million or 14%. Gross margin was 53.8%, up 310 basis points. Remember that for the year, we guided to gross margin of roughly 53%. So in the quarter, we're off to a very good start against that target. Gross margin improvement benefited from currency and manufacturing efficiency. The improvements were offset somewhat by the impact of product mix, primarily related to the strength of our plasma business.

Let me be clear that the strength we saw in gross margins which was from currency was anticipated in plans for the year. Knowing we had locked in rates permitted to us plan for investments in the business and still deliver strong operating income growth. Our annual guidance for gross margin anticipates reduced currency tailwinds in the last three-quarters of the year.

As I mentioned earlier, long-term growth and pricing improvements in our plasma business helped to drive 150 basis point improvement in plasma margins year-over-year. So our largest business is beginning to see the margin expansion that we planned, and we're very pleased with this. However, the relative strength in the quarter of our plasma business, which, as you know, has lower than average gross margins, partially offset the positive impact from currency on our gross margins.

Operating expenses were $56.6 million in the quarter, up $4.7 million or 9%. We managed operating expenses well in the quarter and remain focused on investing in the business. R&D expenses were up over $900,000 or 16%, funding development of our automated whole blood collection system and our Arryx blood diagnostic system. Incremental expenses from the Altivation and Neoteric acquisitions were $700,000, which were not included in the first quarter of fiscal 2009's expenses. Incremental spending for our final ERP go live was another $1 million in the quarter. So despite increased R&D funding, acquired company expenses, and ERP spending, we still kept total operating expense dollar growth to 48% of incremental gross profit dollar growth. This trend, which is better than the 65% we targeted in our annual planning, benefited from the growth in gross margin attributable to currency.

Operating income was $26.3 million in the quarter, up $5.1 million or 24%. Operating margin was 17.1% in the quarter, an increase of 240 basis points year-over-year. And for the year, we guided to operating margins of approximately 16%. So once again, a great start with respect to achieving this goal.

Our tax rate was 30.3%, consistent with our annual effective rate guidance of between 30% and 31% that we shared at the beginning of the year. As we said in May, our tax rate is positively impacted by favorable Swiss tax rates. Remember that our Swiss subsidiary is the principal party for most of our non-US business.

Adjusted earnings per share was $0.69, up 18%, and we are affirming our original EPS guidance of a range from $2.75 to $2.85, which is growth of 12% to 16% for the full year. I have an important point to emphasize here. In recent years, trends in our business have resulted in a sequential dip in EPS between the first and the second quarters. So don't get ahead of us based on first quarter EPS and operating income performance.

Now moving to the balance sheet, in the quarter we generated $5 million in free cash flow after paying annual bonuses for fiscal 2009 and making net investments of $21 million in capital expenditures. We have $174 million in cash on hand, and we continue to have a strong cash generation model, and we're confirming our annual free cash flow guidance of greater than [$60] million.

So to close, we performed very well in revenue growth. We showed excellent drop-through from revenue to EPS. We also showed strong growth in gross and operating margins. Our business fundamentals remain very strong, and we made excellent progress against our blood management solutions goals. With that, let me turn the call back to Brian.

Thanks, Chris. With one quarter behind us, we're off to a very good start. We had strong performance in plasma and software solutions. And while our mix of sales is different than anticipated, we remain very confident in our annual guidance. Our blood bank and hospital customers are feeling the impact of these challenging economic times. And in the face of healthcare reform, there is much uncertainty.

But one thing we do know -- those companies that can deliver economic and clinical value will excel in this new environment. This is our value proposition. Our blood management solutions vision meets the long-term needs of our industry. Our customers are realizing that they must change. This takes time. But we are already starting to see the results, and as Chris said, we will share more of these success stories with you later this year.

At our May investor conference, I reminded you of the underlying growth drivers of our business. Our base business will grow 7% to 9%. So we're off to a good start. With over 6% organic growth and strong equipment placements in Q1, I'm bullish about our ability to achieve this guidance. New products will contribute 1% to 2% growth. And while we have a small base to build off of, new products disposables increased 65% in the quarter, signaling that we are beginning to see traction. We still have much work to do as we learn how to launch new products. But this is an encouraging sign, and an area of focus that will continue for every one of our salespeople around the world.

And finally, acquisitions will contribute 1% to 2% growth. As I mentioned earlier, we recently completed two small but very strategic acquisitions with Altivation in March and Neoteric in April. These will contribute about 1% growth in fiscal year 2010. In fact, Neoteric's BloodTrack is already starting to have an impact. As a reminder, BloodTrack is a smart blood distribution system which controls blood inventory at the point of care. We've had recent sales success with new contracts at Atlantic Health, our leading blood management solutions account, and at Puget Sound, a large blood center. Puget Sound provides integrated transfusion services to 19 hospitals in the Pacific Northwest. I'm pleased with how quickly we're integrating BloodTrack into our full offering of blood management solutions.

So acquisitions will continue to play an important role, and to this point, I will remind you that we have $174 million in cash to fund small bolt-on acquisitions, acquisitions that allow to us build upon our growing blood management suite of product. Also remember that we plan to launch our new automated whole blood collection system in late FY 2011. Combine this significant new product with a few key strategic acquisitions, and you can see why I remain very consistent our ability to execute on our vision of being the global leader in blood management solutions for our customers. Our five-year aspirational growth goals, goals that don't include upside from the automated whole blood system, are very achievable.

I want to take this opportunity to thank all of our employees for their continued commitment. Despite some of the most challenging economic times in recent history, this team grew sales 7% and delivered double-digit operating income and earnings per share growth once again. This is the type of performance you've come to expect from this management team for your company. And now we'd be happy to take your questions.

(Operator Instructions). Your first question comes from the line of Larry Solow of CJS Securities.

I joined the call late. Excuse my repetitiveness, if you have already answered this -- but on the international side, was the weakness more related to the currency and the change in distributors, or was there anything else out there?

It was more currency and change in distributors. I have one anecdote which I think is relevant. Our Korean market, which we talked to you about on the last call, suffered significant devaluation of the won, and we're selling into that market in dollars. We changed the revenue model and we had one full quarter without any sales into Korea. That was about $1.3 million of revenue that wasn't in the quarter in our international markets. We're also changing our distributors and that is causing a little bit of dislocation in the distribution markets just now. But these are temporary trends. We see our way through them as the year progresses.

Larry, this is Brian. To add a little color on that, the impact in Korea was primarily platelet. So see that impact on platelets. And another phenomenon that we're seeing is with our distribution business, primarily in Europe, and specifically in the Russian market, which is healthcare spending is determined based off the price of oil. So we saw a fairly significant impact, in that marketplace in the quarter. And as you know, oil has rebounded, and we're already starting to see a rebound in that market as we move forward as well.

okay. Just in terms of your gross profit, which was actually very strong, and you clearly indicated you expected the benefit from currency was anticipated, but net of that, was your -- I know it's only one quarter, and not to get ahead of you, but was this quarter ahead of your expectations?

It was right about where we thought it would be. I'd say that the -- we thought we'd have a slightly different mix, and so a little bit softer than we had anticipated.

Best way to put it, Larry, is we anticipated and planned for what happened in currency. We didn't anticipate what had had happened with respect to mix. Net-net, probably a little bit better than we anticipated, but that's the value of having multiple ways to win.

Okay. I know you -- last question. I know you have this $8 million unallocated investments, which gave you a little wiggle room on the downside. Do you still expect to spend that $8 million?

Yes, we still expect to spend that as we go through the year. But very targeted strategic spending, much like you heard us talk about in this quarter. Obviously less on ERP and more as we expand in blood management solutions and invest in R&D.

Your next question comes from the line of Steven Crowley from Craig-Hallum Capital.

Good morning, folks.

Hi, Steve.

Question for you. Obviously you had a great quarter in plasma. In terms of the number of system placements you anticipate for this year, has that changed at all?

In plasma?

In plasma.

No, we're still net 1,400 to 1,600 range.

In terms of the penetration of Express, you gave us some customer detail -- but in terms of thinking about percentage penetration, you're still well under 10% at this point.

Yes, and our goal is to get -- to end the year about 25% penetrated, and we're working hard to do that.

On the hospital side of your business, you also gave us some good qualitative information about customers adopting, I guess the Insight and the Impact programs. How does the performance in terms of those customer sign-ups play relative to your current annual goals, and how do those programs translate to revenues?

Couple of things. This is Brian, Steve. Couple of things. Chris made the comment -- we're seeing hospitals impacted by the current economic trends. So flat is the new up. And try to get your hands around just what the declines are in hospitals -- the challenge. So I'm not necessarily disappointed that we're flat there, because of the progress that we're starting to see happen with respect to our blood management solutions.

We talked about Insight. Insight we expect to have 9 to 12 accounts this year. We'll give a lot more color as we go through the year, but just a little peek. We currently have three customers are signed contracts; two that are very, very close to signing contracts; and three additional customers that are currently in an assessment phase. And those are the full full-blown blood management type of account much like Atlantic Health that we have talked to you about before.

Impact, which is more focused on blood management using a device, we had had targeted 40 of those customers for the year. We currently have 13 under agreement with three more pending, and an additional 23 in data analysis phase. So we want to wait as we get further into the year to see these start to really gain the traction. We have a pretty good handle on these. We feel good about these numbers. We feel good about traction that's being built here, and we expect the revenues from these account to start to build as we go through the fiscal year.

One more question and I'll hop back in queue. Chris, for you, on the operating expense side, your guidance implies a pretty big jump here over the balance of the year, and do you anticipate a step function relatively quickly and to level out there? Maybe you could help us understand how the expense ramp is likely to play out and how it fits relative to your guidance.

It will be a gradual ramp. We keep a tight grip on it so that we can manage that expansion to ensure that we deliver on our commitment to our investors. So you should expect that to move up gradually over the year.

And is that the biggest component of a little sequential decline, or the sequential decline in EPS that's traditional here from first to second quarter, that expense ramp?

Yes, Q2 tends to be a softer quarter, and we have more linear expenses, or gradually increasing.

That's helpful. Thanks for taking my questions.

As a reminder, please limit your questions to one and a follow-up. Your next question comes from the line of David Lewis from Morgan Stanley. Please proceed.

Good morning.

Good morning, David.

A few quick questions. First, given the strength in plasma in the quarter, I wonder if you could comment on -- you are probably not going to give the absolute levels, but on a year over year basis, the basis point improvement in plasma gross margins year-over-year -- and perhaps from the growth perspective you can give us a sense of how the growth is breaking down across price, mix, and volume?

Sure, happy to do that for you, David. As we said in the prepared remarks, about 150 bips of margin expansion and gross -- in margin expansion in plasma, excuse me -- when we look at segmenting our growth overall, the actual growth in procedures, and this frankly, is -- it was a little higher than we expected, around 16% in our same-store sales. Price contributed about 3% and share about 7%.

Okay, very helpful. Brian, I'm looking at TEG. Given that you have no competition getting [inside] with the technology, I'm surprised about how the growth to me does not appear to be inflecting. It sounds like you are okay to do something similar in TEG as you did in history with OrthoPAT where you are going to go from indirect to more direct distribution. What gives you the confidence that that change in strategy is going to lead to some type of acceleration in the TEG line?

Let me back up a minute, David. What we're seeing more with respect to TEG and the impact is the fact that even for that device, we're seeing hospitals balk at that type of capital expense. The biggest change we're putting in place there is where we're going to implement the model much like we have with our devices where we will place the TEG for the incremental disposable sales. As we said, our disposable sales were up 9% for the quarter. So we still have great confidence in the TEG. In terms of what we're doing with distributors, it's more based off the fact that we feel we can do a better job in the marketplaces where these distributors are today, not just with respect to managing the sales function, but also relative to what that means in blood management solutions. So that's what's driving the decisions.

We are direct in certain markets in North America, so we can objectively compare the productivity of our sales force to our distributors. There's no question this is something that needs to be done and will be done.

One more piece there, just to add a little color, remember Metacell and our acquisition in Europe -- our acquisition of our TEG distributor there. That has proven to be extremely positive for us as we've gone through last year into this year as well.

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

Congratulations on another great quarter. Thanks for taking my questions. Thanks for all the color. Just a couple quick questions. Getting back to those programs in the hospital, because I know you guys obviously have commented that you're confident those programs will come through. Can you give us a little bit of color as far as -- obviously the hospital business, I know the hospital environment is difficult. But even though it's flat and that is the new up, it's still a little disappointing. Can you talk about how those programs are going to play out through the rest of the year in terms of maybe we're thinking about this was a timing issue, and so the revenues are still going to come? I'm just trying to understand how, relative to your guidance, relative to expectation, we should think about these programs coming through on specifically the hospital side.

Josh, I will tell you that we struggle to get our arms around what's taking place in that market with respect to growth. We say flat is the new up. But I don't want anybody to feel like I'm satisfied with our hospital sales being flat. I'm not. What I'm encouraged by is what I'm seeing in terms of activity. And that's what I just covered in terms of both the Insight and Impact accounts. We have targeted 9 to 12 Insight accounts -- these are the full blood management accounts, much like Atlantic Health we've talked about for the year. We already have three of those under signature through the first quarter. It is really a ramping of this. This is a real difficult challenge in that we're changing the way in which people manage and run their businesses. For some hospitals these are very significant clinical changes, but we're starting to see an impact. We're starting to see traction with respect to this.

Likewise with our Impact program, we're seeing similar success. We have 13 accounts under agreement in the quarter against the target of 40. But probably what's most significant is the number of accounts that are requesting data analysis. We currently have 23 that we're working through that type of process for, and that's what's encouraging. So I think what we'll see, as this market continues to rebound, we'll benefit from that. But as we continue to drive traction with respect to blood management solutions, I believe that that will accelerate that growth.

Just to clarify, on the first program, 13 accounts is the target. You obviously have three. And the second one is 40. That's to hit your guidance effectively?

9 to 12 is the first account -- that's the target where we have three. And 40 and higher is on Impact. To hit our guidance there, we have 13, yes.

it seems by the numbers you mentioned that you would be on track to hit those. So just in terms of the shortfall, for lack of a better word this quarter, again, is it a function of the timing of the ramp or the timing of the signed contracts -- is that more than anything else, or is it really the outside, ex these programs, it's the other devices that were weaker?

It's across the entire slice of hospitals. We're not losing accounts, but we're seeing less generation of our disposables based on the impact in that market. So it's not just these accounts. We're generating less than we would have originally anticipated. But it's across the entire slice of the hospital we're seeing that impact.

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

Good morning Brian, Chris. Can you hear me?

Yes, good morning, Jim.

You mentioned that you have already started to work with three blood centers that had been using ALYX, and you convert them over to your -- I assume your Cymbal system. Have you had any success converting them -- their platelet collection equipment as well?

This is simply a focus on red cell, Jim, and these are three centers that have committed to us. We're in the process of implementing with them. So the impact of this will be later in the year.

Are these centers using your platelet equipment now, can you tell us?

I don't know off the top of my head. I couldn't answer. We can get that you information.

Is there any way to package the two together?

You can always look at the full program. We understand the challenges we have with the platelets here in the US market here. I think where we're going to see the biggest impact on that is with the launch of our automated whole blood collector system later next fiscal year.

Please limit your questions to one and a follow-up, then reenter the question queue. Your next question comes from the line of Anthony Petrone from Maxim Group. Please proceed.

Good morning, Brian, Chris. How are you? One on platelets, then I'll move over to plasma quickly. You mentioned Japan in the prepared comments. Just wondering what specifically is the issue in Japan? Is that related to the distributor or is it a situation of systems and/or volume?

We're direct in Japan for our platelet business. You may know that historically we've enjoyed market shares of around 70% in Japan for platelets, and we've also known that our big customer there, the Japanese Red Cross, has the goal of more balance in the market. So we've seen a gradual decline in platelets. The good news, we feel like we stabilized in this quarter at around 60% market share in platelets, and it's really the year-over-year comparison of that gradual decline to 60%, which is what we're seeing in our Japan platelet numbers.

Can I add a little more color there? This is our largest customer, the Japanese Red Cross, who has said, we want to see greater balance. We're still being able to maintain a greater share of that impact. And that decline is being offset by what we're seeing in terms of growth in plasma in Japan as well. So our Japanese business overall continues to be stable for us.

Our plasma business grew 10% in Japan.

So overall, Japan revenues were up for the quarter.

Yes.

A couple on plasma here, if I may. You broke down plasma performance in the quarter. I'm just wondering in the raised outlook, what is coming from I guess you would clarify as organic growth, growth in pricing versus express?

Well, a shift towards the end of the year reflects improved pricing both from contracts and Express. Market share gains will start to get annualized towards the end of the year. If you remember, that was about 7%. In terms of the procedure volume, we don't honestly expect it to continue at 16%. And that will modify over the course of the year. Exactly where it it lands is a difficult estimate to make, but it it will presumably trend back towards the high single digits we think is the underlying growth demand for IVIG.

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

Thanks, good morning. You talked about plasma -- the gross profit growing faster than revenues. Is there still potential for that to continue, or is there still room to gain some there with your move to more automation?

Sure, sure. There's a couple of factors there that should lead to that inevitably. One is if you think about pricing, the way that we're selling Express protocol, if you think about the long-term contracts with increased pricing -- and if you add to that the fact that our plasma automation, which we have talked to you about in the past, is really coming out of its [burn in] just now in Pittsburgh. And that automation, when it's fully up and running, has the potential to improve our operating efficiency. So all of those are contributors -- and remember that we're moving some of our plasma manufacturing to Salt Lake City, and that will be really begin to affect our numbers next year. So all of those factors should continue to keep upward pressure on our plasma margins.

When would the Pittsburgh facility be truly fully up and running? Then also I wanted to talk just quickly on the three blood centers you talked about moving from Fenwal. Are those single cases or are those more and more conversations you're having with Fenwal's situation?

Speaking of Salt Lake City, we'll be distributing out of that location later this year, and our manufacturing will be up and running next summer. So that is not too far in the distant future. But Pittsburgh should start to contribute meaningfully in the back half of this year, the automation there. Speaking about Fenwal centers that are converting, these are meaningful discussions that we are now having. To be clear, we were not out trying to sell to current Fenwal customers during the litigation and during the court proceedings. Now that the court has ruled, we have a responsibility to be out there to not only communicate effectively with those customers what that means, but to also, over the course of the next 18 months, transition that customer base to our products. So we are out there very actively and aggressively communicating and working with those customers.

(Operator Instructions). At this time we have no further questions in the audio queue. I would now like to turn the call back over to Mr. Concannon for closing remarks.

Thank you, Dan. So again, we're off to a very good start in Q1. Q1 is just the beginning to what will be a very good year for your company. Plasma growth continues, and we're raising our guidance for the year. Blood management solutions is gaining traction, and equipment placements in the first quarter provide a positive sign, as this is the leading indicator for disposables growth. Progress continues with the development of our new automated whole blood collection system, and we plan to enter this $1.6 billion market in late FY 2011. Our ability to generate cash remains strong. With $174 million of cash on hand, we are well positioned to fund small bolt-on acquisitions that will allow us to continue to build upon our already strong blood us to continue to build upon our already strong blood management offering.

I'll finish by reminding you of something I've already said. Despite some of the most challenging economic times in recent history, this team grew sales 7% and delivered double-digit operating income and earnings per share growth once again. This is something you have come to expect of this management team, and frankly, this is something this management team expects as well. Thank you very much for your time this morning.

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