Haemonetics Corp (HAE) 2011 Q2 法說會逐字稿

Good day, ladies and gentleman. And welcome to the second quarter 2011 Haemonetics Corporation earnings conference call. My name is Jasmine, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, to Ms. Lisa Lopez, Vice President, Corporate Affairs. Please proceed.

Good morning. Thank you for joining Haemonetics second quarter fiscal 2011 earnings webcast. Today I'm joined by Brian Concannon, President and CEO, and Chris Lindop, CFO and Vice President of Business Development. 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. Additional information concerning factors that could cause actual results to differ materially, is available in our annual report on Form 10-K. On today's call, Brian Concannon will review the highlights of the quarter. Chris Lindop will review our operating performance and expectations for the year, and Brian will close with summary comments.

Before I turn the call over to Brian, let me mention the treatment in our adjusted results, of certain items, which by their nature and size, affect the comparability of our financial results. Consistent with our past practice, we have excluded certain charges from the adjusted financial results we'll talk about today. In fiscal 2011, our second quarter adjusted results, exclude $1.1 million in pre-tax costs, related to certain transformation events and integration activities associated with our Global Med acquisition, which were outlined in our fourth quarter conference call in May of this year. Our second quarter adjusted results also exclude $1.9 million of contingent consideration income.

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. And with that, let me turn the call over to Brian

Thanks, Lisa. And good morning, everyone. In the second quarter, we continued to make progress towards many of our goals for the year. Finishing the quarter with 6% revenue growth, 4% operating income growth, 16% earnings per share growth, 110 basis points of gross margin improvement, increased impact penetration, 24% growth in our TEG product line, double-digit growth in emerging markets, and solid progress with the Global Med integration, which is trending positively to expectations.

However, not everything went as planned. So, let me tell you about the challenges we faced, and what we're doing about them. I'll begin with the challenges in the quarter and how we expect them to be reflected in our results going forward. I will then review parts of the business, which are tracking ahead of plan, which we expect to continue for the rest of the fiscal year. But before I do that, let me mention that currency, which last quarter had a significantly negative impact on our reporter results, was essentially neutral in the current quarter.

So, let me start with plasma. Our plasma business declined 5%. Performance similar to Q1 of this year, but behind expectations we set for low-single-digit growth in the quarter. So, what happened? As I've said before, though our customers have made long-term commitments to our products, in the short-term, we will not influence customer behavior or plasma collection volumes. However, we must predict how our customers demand patents, will impact our business. Frankly, we have struggled to do this so far this year.

Some of our larger customers fall short of their forecasted collection goals. And there were even bigger shifts in the forecast of some smaller customers, who saw the demand for plasma drop significantly. Our plasma business is further complicated by the recent regulatory actions impacting a large plasma customer, bringing greater uncertainty to the back half of the year. In spite of this, we still expect to return to year-over-year growth in our global plasma business, as the plasma business rebounds. Average daily shipments through Q2 of this fiscal year have increased 12%, from the low in Q4 of last year. This will translate to low-single-digit growth in Q3, and low-double-digit growth in Q4. This guidance, when combined with our performance earlier this year, implies an annual growth rate in our plasma business in fiscal 2011, of approximately 0% to 3%, an average sequential growth from Q2 in the high single-digits.

Now, let me turn to our patient business. Cell Saver, which declined by 4% in the quarter, and represents the lion's share of our patient business, tends to follow surgical procedure volume trends, which are not positive. We expect the launch of the new Cell Saver Elite in fiscal 2012, will allow us to capture greater share and reverse the revenue trend. The OrthoPAT, which is a key growth element of our patient franchise, declined 5% in Q2, and is flat year-to-date. On the surface, this is disappointing. It is disappointing because the growth rate of OrthoPAT, a product which is not highly penetrated, is something we can influence using our blood management approach with our hospital customers. And this is exactly what we are doing. However, our progress here is masked by declines in our non-IMPACT hospital accounts. Let me explain.

We continue to make great progress with IMPACT selling, our branded approach to bringing blood management solutions to our customers. Now, this is important. Some of you have asked when you will see evidence that IMPACT selling is working. The answer is now. In the quarter, we added 28 IMPACT accounts, bringing our total number of IMPACT accounts to 118, versus our goal of 175 in fiscal 2011. Of the 118 IMPACT accounts, 86 are North American hospital customers. These 86 hospital customers represent 10% of total North American patient revenues. Through Q2 of fiscal 2011, disposable revenue for these 86 customers is up 71%. When we dive deeper into these numbers, and look only at OrthoPAT, 29 of these 86 hospitals are using OrthoPAT as a part of their approach to blood management. These 29 hospitals represent 16% of total OrthoPAT sales. But OrthoPAT revenue in these 29 accounts is up 44% year-to-date.

We are making progress bringing blood management solutions to our customers. But our progress is masked by the economic challenges of the broader healthcare market, and this is particularly so with orthopedic cell salvage. Here we're seeing declines in OrthoPAT sales in non-IMPACT accounts, where elective procedures are down, and cost pressures are forcing our customers to make decisions based on price, versus decisions based on quality, clinical outcomes and overall economic value, something our IMPACT selling clearly highlights. These economic pressures will eventually abate, but it is these pressures that make our IMPACT program more compelling.

Our IMPACT selling will continue to gain scale. Therefore, I expect OrthoPAT sales to return to growth in the back-half of the fiscal year, and I'll provide with you further insight into our IMPACT success, later in the call. The trend in red cells, which is also impacted by the trend in elective surgeries, is improving. The 4% decline in Q1 slowed as expected, to a decline of 2% in Q2. We're pleased about this improving trend, and continue to expect to finish the year roughly flat in this product line.

Moving to other positive highlights of the quarter. Our TEG product continues to grab customer attention. This is especially true with IMPACT selling, as TEG is used in over 33% of all IMPACT accounts today. In the quarter, TEG disposables grew 24%, continuing the strong start we saw in Q1. Platelets, our second largest product grouping, grew more than 6%, both in the quarter and year-to-date. This reflects strong double-digit growth in our Eastern European, Latin-American and Asian business units.

Our platelet business in these developing markets is now larger than our Japanese platelet business, and growing much more rapidly. Our combined emerging markets business, which includes China, is on track to generate $100 million of revenue in fiscal 2011, with an annual growth rate greater than 20%. Emerging markets are a key focus of our future growth.

Our software business, which includes Global Med, as well as our legacy software products, grew 77% in the quarter. The Global med integration is going well. We're ahead of planned operating income targets.

And lastly, equipment had a very strong performance in the quarter, growing 32% year-over-year. Excluding the SEBRA acquisition, equipment grew 18%. Equipment sales are a leading indicator of disposables revenue.

So while we face some tough challenges in the quarter on the top line, there are definitely positive trends in other parts of our business, which gives me confidence about the long-term prospects for your Company. Having said this, as we assess the rest of the year, taking into consideration the slower than expected recovery of the plasma market and continued negative trends, we are revising our annual revenue growth guidance, from a range of 9% to 12%, to a range of 6% to 9%. Chris will provide more details in a moment.

While I am disappointed to revise our revenue guidance scenarios, let me remind you of something that many of you already know about our Company. Our planning processes and operational disciplines assure that, despite delays in the return of our plasma business to growth, we are well-positioned to deliver our earnings per share commitment to our shareholders. I am happy to raise our original earnings per share guidance, from a range of $3.15 to $3.25, to a range of $3.18 to $3.28 for fiscal 2011. While the change in revenue growth represents a headwind to operating income, Chris will explain why we are confident in our ability to deliver our earnings commitment. With that, let me turn the call over to Chris Lindop, our CFO. Chris will discuss in more detail the results of the quarter, and the basis for our outlook for the remainder of the year.

Thanks, Brian. As Brian said, this was a quarter where we demonstrated excellent operating discipline, with 110 basis points of year-overyear gross margin improvement and strong earnings per share growth, delivering $0.80 per share. Though plasma was behind expectations in the first half of the year, and we face tough end market conditions related to surgical procedure volumes and the related demand for red cells, we saw 4% organic growth in the non-plasma part of our business. Let me start by reviewing revenue growth. Then I'll walk down the income statement, providing some color.

In the quarter, plasma sales were $56.5 million, down 5% year-over-year, but up sequentially by 1% from the previous quarter. And year-to-date, plasma sales were down 5%. When we analyze trends in quarterly plasma revenue growth, we look at three areas. Same-store sales, price and share. First, same store sales. That's plasma collection trends at existing customer sites. Same-store sales declined 5% in the quarter, and price and share gains were nonsignificant. Plasma is returning to growth more slowly than we anticipated. But when we review the average daily shipments of our global plasma products, from the low in Q4 of last year, average daily shipments have increased 12%, through Q2 of this year. We can see the beginning of a return to growth, and anticipate these trends will continue during the next two quarters.

In our platelet business, revenues were up more than 6% in the quarter, to $39.7 million. Year-to-date platelet sales were also up more than 6%. As expected, sales growth has been strong in the quarter and year-to-date, as we anniversary a slow start in fiscal 2010, which was heavily impacted in certain emerging markets by the global recession. As Brian mentioned, it is important to note that our platelet business, in the high-growth emerging markets, is now larger than our Japan platelet business, which remains stable. We continue to expect 0% to 2% growth in platelets, for the full year.

Moving to red cells, in the quarter, red cells revenues were down 2% to $11.3 million. And year-to-date, red cell sales were down 3%. We continue to expect revenues to be flat for the year, reflecting continued gradual improvement in demand for red cells. We also believe we can influence red cell results with our under penetrated double red cell technology. This technology, when fully implemented and optimized, can deliver significant value to our blood bank customers. Economic pressures on hospitals to control blood costs, are already being transmitted back through the supply chain to blood banks. This increased pricing pressure and competition makes the status quo untenable. Change is no longer an option, it is inevitable. In this scenario, we are well-positioned to help our customers analyze and implement change, to improve operational efficiency in the supply side of the blood supply chain.

Moving to the hospital side of the business, as Brian mentioned, we were impacted in the quarter by underlying trends in surgical volumes. Surgical sales were down 4% to $16 million. And OrthoPAT sales were down 5% to $8.3 million. Year-to-date, surgical and OrthoPAT sales were down 5% and flat, respectively. While we anticipate our IMPACT account penetration will accelerate and influence the total product line performance later in the year, based on the slow start, our annual guidance for the surgical line has changed, to a reduction of 2% to 1% growth. And our OrthoPAT annual growth guidance, is reduced to growth of 1% to 3% for the year.

Moving to diagnostics. TEG disposable sales remain strong, growing 24% year-over-year in the quarter to $4.6 million, and 24% year-to-date. And to underline the point Brian made about the effect of our IMPACT selling on the rates of penetration, TEG growth in our IMPACT accounts was 225% year-to-date. Our value selling approach is helping us overcome the capital constraints that hospitals are facing. TEG growth guidance for fiscal 2011, was 18% to 22%, but based on our very strong start, we now anticipate annual revenue growth for diagnostics, of approximately 25%.

Software solutions also had a good quarter. Sales grew 77% to $16.1 million. Year-to-date, software solutions sales were up 86%. Excluding the impact of the global med acquisition, our legacy software business grew 2% year-to-date, reflecting the rationalization of certain product lines. Our annual growth guidance for software solutions, is revised to approximately 95%.

Equipment sales increased by 32% in the quarter to $14.2 million, when compared to the second quarter of fiscal 2010. Year-to-date, our equipment sales increased by 26%, and excluding SEBRA, equipment grew 11% year-to-date. Growth rates will moderate for the remainder of the year as we anniversary the SEBRA acquisition, as well as the weakness in our comparables for the first half of 2010. So for the full year, we anticipate equipment revenue growth in the high-single-digits.

Now, let me review the rest of the P&L results, and, again, this year's numbers are adjusted, as Lisa said. Second quarter fiscal 2011 gross profits were $87.8 million, up 8.4%. Gross margin was 52.6%, up 110 basis points. Year-to-date gross profits were $174.2 million, up 6.3%. And gross margin was 52.8%, up 10 basis points, reflecting strong currency contribution to gross margin in the first half of 2010. Operating expenses were $59.6 million in the quarter, up 10.5% or $5.7 million. Year-to-date operating expenses were $120.2 million, up 8.7% or $9.6 million.

In the quarter, expense growth was driven by acquisitions, which contributed over $4.5 million, or 80% of the growth in spending. We continue to manage expenses well, and deliver in our near-term commitments to our shareholders. Operating income was $28.1 million in the quarter, up 4.1%, and operating margin was 16.9% in the quarter, up 30 basis points from our full-year margin in fiscal 2010. Year-to-date, operating income was $54.1 million, up 1.3% from $53.4 million, and operating margin was 16.4%.

As we mentioned on our Q1 conference call, the fiscal 2010 Q1 margin benefitted from significant currency trends. In constant currency, margin improved 50 basis points year-to-date. As we mentioned last quarter, significant currency adversity, which was present in our first quarter operating income comparables, will diminish over the course of the year. This has occurred as we expected. In Q1 we experienced a $4.4 million headwind from currency, in our year-over-year comparison of operating income. In Q2, currency represented a $500,000 tailwind to the year-over-year comparison of operating income. And for the remainder of the year, we anticipate currency will represent a $1.2 million tailwind to our operating income growth.

Moving to our tax rate, our tax rate was 29.2%. We're now expecting our annual tax rate to finish bewteen 29% and 30%. As I've said, our tax rate is positively impacted by favorable Swiss tax rates, as our Swiss subsidiary is the principal party for most of our non-US business. This initiative has permitted us to leverage 4% operating income growth, into 11% net income growth in the quarter. And earnings per share was $0.80, up 16%. Year-to-date earnings per share was $1.54, up 12%. And we're very confident about achieving our revised EPS guidance of a range from $3.18 to $3.28.

Let me review the outlook, and explain why I'm so confident in our earnings per share guidance. The change in our sales guidance reflects a decline of roughly $20 million, and this in turn, puts pressure on planned contribution of roughly $8 million. However, two things give us confidence about our ability to hit our earnings guidance. The first is, that when we build our plan, we include downside protection with unallocated expense dollars. In addition, Management bonus payments are predicated on hitting targets for sales and operating income. The combination of these two factors, is a hedge that offsets the operating income headwinds we're experiencing now. So, as a Management team, we'll continue to deliver in our bottom line commitment to our investors.

Moving to the balance sheet. In the quarter, we generated $22 million in free cash flow after making net investments of $9 million in capital expenditures, and $2 million in cash transformation costs. We continue to have a strong cash generation model. And we are affirming our annual free cash flow guidance of greater than $70 million, after funding $15 million in cash transformation costs. We have $115 million in cash on hand, after completing a $50 million share repurchase.

So to close, we are achieving our targeted operating leverage, and ahead of our earnings per share targets year-to-date. We have strong confidence in our ability to deliver our earnings goals for the year. Despite end market pressures on our top line, we are financially very strong, and in an excellent position to weather current conditions. We have products and services, which are perfectly aligned with the emerging needs of the market for enhanced blood management. With that, let me turn the call back to Brian.

As Chris said, we remain very confident in our bottom line guidance, and believe that we have revised our top line guidance, in line with the challenges and opportunities we face. We're making excellent progress in leveraging our manufacturing infrastructure. This is reflected in our gross margins in the second half of the year, along with some currency favorability. While the slow recovery in plasma growth rates is disappointing, it is not a matter of if, but rather a matter of when, this important business returns to growth, in line with our corporate averages.

Industry analysts believe that the plasma market has bottomed out. We agree. Hospital admissions are down, and we are all aware that our customers are facing significant challenges in the current environment of increased scrutiny on healthcare economics. Blood is a significant cost to our hospital customers. Therefore blood management is gaining the attention of administrators, and clinicians alike, who seek ways to reduce costs and improve clinical outcomes. And more and more, they are turning to Haemonetics to address these needs, through the many blood management solutions we have to offer.

18 months ago, when we first told you about IMPACT selling, we had five pilot accounts. We introduced the bold notion that we could transform our industry, something you do with your customers, and not to your customers. We said we would do this by implementing blood management solutions that reduce cost, improve clinical outcomes and enhance quality. We said this would not be easy. As in many cases, this requires changing the standard of care that's practiced today. 18 months later, we have 118 customers using data to optimize their management of blood. We are making progress.

Let me share some additional detail about our IMPACT accounts. Of the 118 IMPACT customers, 86 are North American hospital accounts, 16 are North American blood center accounts, and 16 are European accounts. We begin fiscal 2011 with no accounts outside the US. We launched IMPACT selling in Europe at the beginning of Q1. So we made great progress there in only two quarters. We also made progress in North American blood centers. To date, our business in these 16 accounts is up over 2%, versus the 2% decline we see for the business in total. A small but important shift. More importantly, they are adopting our double red cell technology, as they streamline their internal operations, positioning themselves to react more rapidly to the rebounding red cell market. This is just one reason why we are confident in our red cell guidance for the year.

IMPACT online also continues to make progress. We currently have contracts for IMPACT Online with six accounts, but activity is extremely high, with more than 45 customer demonstrations conducted. Additionally, we are seeing strong interest with our blood center customers who want to purchase IMPACT Online as a way of bringing greater value to their hospital customers. For those who ask, when will IMPACT selling start to show results? I hope you share our confidence that blood management is real, and it is starting to show results. Blood management is necessary, and our customers are responding in a meaningful way. And this will clearly translate to more positive top line growth, in the back half of the fiscal year, and in the years to come.

As I close, let me thank our employees for their continued commitment. Despite headwinds in our largest business, and challenging economics in our end markets generally, this team continues to make tremendous progress, bringing critically-needed blood management solutions to our customers, and has delivered strong double-digit earnings per share growth, once again. And now, we would be happy to take your questions.

(Operator Instructions). Please limit yourself to one question and a follow-up, and then you may re-enter the queue. Our first question comes from the line of Larry Solow with CJS Securities.

Hi, good morning.

Good morning, Larry.

Just considering what the IMPACT theme is, it seems to be a certainly a nice, positive and a long-term theme. Do you think this environment is -- you're seeing less or more resistance from new customers? Obviously the macro-trends are not great for them. So, does this make it an easier sell when you go into hospitals or a customer is just not wanting to deal with this right now, because they have other issues?

Yes, Larry, we're seeing strong receptivity by our customers. The challenge is how rapidly we can ramp, and that's really based upon our customers' ability to manage change. What do I mean by that? If the customer has an established blood management committee, they can move much more rapidly. We see that occurring in weeks and months. If they do not, we still see the receptivity as being very high but there are certain steps they must take to be able to take the solutions -- to be able to analyze the data, take the solutions and implement them. That's why you see the differences in the adoption rates.

Okay. And then I'm sure many people have questions on plasma. So, I'll pass on that. I'll go right to the platelet side of the business. I realize you anniversaried a very easy comp in the first half of the year. So, that probably helped some of your growth. But if I just do the math, it looks like you're expecting sort of a downturn at least sequentially in the back-half of the year, or sort of flat sales. Or, is this just a conservative, not sure what the market is going to do, so, I'll leave guidance where it is?

I would -- let me answer it, Larry. This is Brian, I'll answer it then I'll let Chris chime in. What you really see is the reflection our good start up against strong comparables and the second -- the back two quarters of the year. Chris?

Yes, the other factor, Larry, which benefited us, as often happens in healthcare stories, the dengue fever trends in India were very strong in this quarter. And while they tend to come every year, they were stronger this year and seasonally focused on the quarter we just finished. So, we're just being a little bit cautious of our outlook .

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

Good morning.

Good morning, David.

So, I guess first question, well two questions, I'll give them both up-front here. The first is just on plasma. The comps for your business in the back-half of the year actually get easier. So, I guess my question would be, Brian, is the business actually getting stronger in your opinion? And what assumption did you make for that customer that is experiencing regulatory difficulties? I believe, that customer has said back on the market by December, what expectation did you make your guidance? That's number one for Brian.

And number two, for Chris, just in terms of the revenue guidance. Obviously, revenue coming in lower but the earnings coming actually in line or better. So, I know you talked about this bowl of expenses that you held back. But maybe any specific guidance on where sort of that ability to modulate the bottom line is coming from? Thank you.

All right, David. I'll grab the plasma question first. If you look at our overall plasma change, it represents about a $13 million decline. Rough numbers. We think $7 million of that is in the first half. We expected it to moderate another $6 million in the back-half. And about half of that $6 million was related to our large customer and the regulatory challenges they're facing. We see that as worst-case scenario, it may be a bit conservative there, but we want to be cautious. Chris?

Yes, and just to follow up on the spending. As I said, we build our plans with unallocated expenses. So, we had about $3 million in the back-half that would fit that category. And also in terms of our bonus, there's at least as much, again, that is in play in the back-half against our current outlook. So, that helps to manage. Otherwise we look at other discretionary spending decisions and focus on holding tight on those things.

David, I would add a little more color here, in just saying, this is a practice that we've had for years. It serves us well. And we're where holding off spending, it is not in the projects that we've talked to you about primarily. It is in other areas of where we would like to spend to move more rapidly. So, to say it another way, we don't feel like we're putting anything in danger relative to the major projects that we've discussed.

Our next question comes from the line of Steven Crowley with Craig-Hallum Capital Group. You may proceed.

Good morning, folks.

Good morning, Steve.

Couple of questions for you. We've heard from a number of the major players in blood typing and screening that hospitals are becoming more judicious in their blood utilization. It seems like you're part of what's going on, but it sounds like that's a big enough story where hospitals must be finding other ways to address this cost center. And what are you seeing and how can you play into that? Is there some competition there? Help me understand what's going on?

Steve, let me take a crack at this and then I'll let Chris take a crack at it. I think the end markets, in general, are basically challenged. So, I think that's what's affecting all players within the healthcare industry. I turn to our IMPACT success. And I've given a lot more detail about IMPACT this quarter because I really want people to understand that it is just not 118 accounts that we've signed a contract with, but it is 118 accounts where we're making a significant difference.

If you think about what's happening elsewhere for us, and I can't speak to everybody else, but what's happening for us. And you take OrthoPAT as an example, when you have a disposable that costs in excess of $400 on average out there. Those are the types of things that in a blood management environment where they're not using data to analyze good decision. They're making pure economic decisions which might not be the best decisions for them. And so, our teams are very focused in our OrthoPAT accounts to stabilize that non-IMPACT base of business, as rapidly as possible. Because you can see, take over to our IMPACT accounts, that's why I broke out OrthoPAT progress. IMPACT accounts, you can see where we highlight the data and what it means for our customer. It is having a very meaningful impact for them. Chris?

The only thing I would add to that, Brian, is what we're seeing in our blood bank customers is that more and more of their blood supply contracts, their business, is up for bid. And so, what was not an intensely competitive environment, which permitted status quo to some extent. Has become a much more intensely competitive environment being fed by procurement decisions being made by large hospital groups. And that, in turn, is leading our blood center customers to want to differentiate their offering with their customers. And, we've been able to look at opportunities to partner with them, in helping them go to their hospital customers with a blood management solutions offering. So, it is not just about supplying the blood but it is about IMPACT Online and other consulting services. So, that's an exciting development and one which we think will help.

Your next question comes from the line of James Sidoti with Sidoti & Co. Please proceed.

Good morning, Chris. Good morning, Brian.

Good morning, Jim.

Hi, Jim.

Lisa, you still there?

I'm still here.

Good, I don't want you to think I forgot about you. Questions on cash flow, with the revised guidance, can you give us an update on what you expect cash flow to be for the rest of the year? And can you also give us an indication, are you going continue to buy back share. Or are you going to get back in the mode of putting cash in the bank and saving for an acquisition?

Well, free cash flow for the year, we're reaffirming our guidance at $17 million. That's after, funding all of the integration and transformation costs that we disclosed last May, right about the time we announced the Global Med acquisition. So, that's still good and year-to-date free cash flow is $21 million. So, in order to hit that, we're going to generate about $49 million or more between now and the end of the year -- or between Q2 and the end of the year.

Jim, I'll pick up on the second part of your question, which is the share repurchase. That was completed in the first quarter, so that's behind us. And use of our cash, priorities haven't changed. We still plan to use it first to make acquisitions that continue to expand our ability to bring blood management solutions to our customers. Secondarily, to buy back shares.

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

Hey, guys, thanks for taking my question here.

Hi, Josh.

I have a couple of questions, so I'll start with the plasma just as a follow-up. I know you made a comment about underlying shipments, 12% I think you said. I'm wondering specifically if that's what you're seeing as far as your shipments or you're talking about PPTA. And then with regard to that, I guess that would help me answer -- Q4, you have an extra selling week, obviously last year, so it is a tougher comp. Obviously, from a growth standpoint, an easier comp and you're expecting it to ramp. So question one is, maybe you could walk us through plasma, what you're seeing, what gives you the confidence. I know, Brian, you said that's a worst-case scenario. It still seems like Q4 has to be solid. That's question one, and I'll get my follow-up in a second.

Okay, Josh, let me take the first part then I'll turn it over to Chris. What we talked about was average daily shipments. We see those up 12% in the first two quarters of the fiscal year over average daily shipments in Q4. So those average daily shipments includes the 53rd week in the quarter. That's why we were able to give you a comparison. Now, year-over-year, our Q4 last year was flat to the prior year and so, we have some lesser comparisons that we're up against in the back half of this fiscal year for plasma. But that average daily shipment is a real measurement of what we're seeing Q1 and Q2 versus Q4 of last year. Chris?

And, we do see sequential growth between the Q2 results and the back-half, even adjusting for the items that Brian mentioned on the call.

Yes, and Josh, just one last piece to be clear. The data that we're giving you is Haemonetics. It is not PPTA's or anybody else's. That's our comparison, our results.

Your next question comes from the line of Scott Gleason with Stephens. Please proceed.

Hey, Brian, hey, Chris, thanks for taking my questions.

Hey, Scott.

Hey, Brian, I was wondering if, to start off with, if you could just look at -- if we look at the Cell Saver and OrthoPAT product lines. If you can maybe give us an idea of how the installed base of actual capital placements has change over the last year or two here? Just so, we can think about what a normalized number might look like there.

Just so -- let's look at OrthoPAT and Cell Saver for Q2, OrthoPAT devices -- device placements were up 78. Cell Saver device placements were up 97. Chris, what do we have for Q1?

In Q1, it was 88 for Cell Saver and 33 for OrthoPAT. Just to put that in context, our fiscal 2010 installed base for the end of the fiscal year were OrthoPAT 3200 approximately, and Cell saver, 7100.

So, what you're seeing there, Scott, is some good progress in the quarter. That's what we talked about with equipment. These are placements in total, sold and placed. We're seeing that continue to ramp and that's an indicator of our potential and future revenue growth.

Your next question comes from the line of Larry Keusch with Morgan Keegan. Please proceed.

Hi, good morning.

Good morning, Larry.

So, I'll just ask the two questions. I guess the first one is for Brian and, perhaps, Chris. I'm just trying to understand, clearly you guys commented that the plasma disposables have come in lower than you had forecast for the first half of the year. You're also clearly indicating that you've got this average daily shipment that's up 12% for the first half versus the fourth quarter. And you also have indicated in prior calls, that customers were providing you with forecasts for increasing collections. So I guess, I'm trying to really understand, what went wrong in the first half of the year relative to how you guys are looking at it? Then just trying to gauge, when you look at the second half of the year. How do we gain the confidence that, again, you feel that the second half of the year forecast is more realistic than the first half has been?

And then, the second question really is, when you think, Chris, about that discretionary spending that you've got baked in, and you talked about the Management bonuses, et cetera. How much of that have you utilized in the first half of the year to get to your numbers? And I think, you've already indicated what you've got for the second half in front of you. I'm just, again, trying to gauge how much you've used in the first half of the year to get where we are thus far?

Okay, Larry, I'll take the first half -- the first question on plasma first. Try to give you a little more color, a little more clarity here. We talked about in both Q1 and Q2 that the forecast from some of our larger plasma customers was down slightly. Not significant, down a little bit. Where we missed at, and this is the real -- this is the question you're asking. Where did we miss?

Well, there's the secondary market of smaller customers that, frankly, was down more significantly in Q2 than we had expected or anticipated. And, what has happened there is that many of the larger customers purchased from some of the smaller collectors. They purchased plasma from some of the smaller collectors. So, while we had visibility to their forecast in their collection centers for us, we lost visibility. We shouldn't have, but we did lose visibility to what they were going to be receiving from the secondary collectors. And, that was our miss. Why do we have confidence going forward? We think we understand that pretty well now. We understand the mistake we made and we have our arms around that. Chris?

Yes and, Larry, when we plan in both bonus and our unallocated expenses, we tend to allocate them ratable to the -- across the quarters, across the four quarters. And when we make our estimates, we make our estimates through the end of the year and then adjust earned bonus accordingly. So, pretty much what we get in the front-half is what we'll get in the back-half for those two items.

Our next question comes from the line of Dave Turkaly with SIG. Please proceed.

Thanks, can you hear me?

Hi, Dave.

Hey. Two quick ones. As we look at -- and thank you for all of the detail, the plasma and you mention the pricing and the share were flattish. Have we seen anything new from your private competitors? I know share gain has been a big part of the story. Will we still see upside there, and is there anything new from them? And then the second question would be, given the strength you've seen in emerging markets. How much green space is there, out there for you guys? I, kind of, always thought as platelets as mature worldwide. I mean, is there's still places that you can bring either platelets or any of the other offerings -- geographies, that is, to continue your growth, like you did this quarter?

Well, let me try to combat that, Dave. Regarding our competition, we've seen our competition try to provide software upgrades to their devices that take their speed up. It does not match the speed that our software changes represent in our devices. So, our competition is not going to sit still. We recognize that. But beyond that, we've not seen any significant movements, beyond that. The business that we're seeing -- that's why we talk about share. The business declines that we're seeing is really a function of the collection market.

Speaking about the emerging markets, what we're seeing there -- Chris talked about the uplift in India relative to dengue fever and what that meant for our platelets, so that needs to be understood. But we're seeing the emerging markets emerge a little more rapidly, if you will, particularly the Chinese market. We saw the Russian market rebound. Are there other products that have application in those markets? Without question we see other opportunities in those markets. Primarily, if you will, with our surgical products.

What you're seeing is an emerging class of people that have an increased appetite for healthcare, modern healthcare, and so we're seeing that happen more rapidly. And we're working in those marketplaces to position our products to meet those needs for our customers. So, that's another area I would tell you that we have a focus on in those markets with our surgical products.

Just to add one other point there, when you look at platelets, units transfused per 1000 head of population. That's kind of an interesting benchmark. The Western world and Japan are around about 6000. When we look at China and India, those are sub-1000. And, if you look, even, at Russia and Brazil, they're just slightly north of 1000. When we take those ratios and apply them to the likely population in those large countries that will have access to modern healthcare in the next 10 years. We see significant multi-hundred-million-dollar markets for platelets that are untapped.

Your next question is a follow-up from Steven Crowley with Craig-Hallum Capital Group. Please proceed.

Hey, guys. As a public service, your analysts are being incredibly brief with their questions because they're not getting their follow-ups through. So, I'm coming back to my follow-up question which relates to the competitive landscape. In the hospital, and also in your red cell business, whether or not anybody's tried to jump into the hospital business with a blood management solution that's anywhere comparable to you guys, and even the management dashboard? And on the red cell side, what's happening out there in the marketplace and also on the legal front with the lawsuit with Fenwal? Thanks for taking my questions.

Okay, Steve, and thanks for the public service announcement, as well. Speaking of the competitive landscape, blood management is gaining a great deal of attention. Everybody in our space refers to at least an element of their business, if not in total, that they're positioned with blood management. We try to really expose our approach to that. There are other companies out there that are trying to work to provide customers access to their data. These companies don't provide the solutions, they simply provide data analysis. And, I would tell you, I don't believe it is as deep or as rich or as automated as what we do. We look at this at coming from the whole solution. Not just getting the data, mining it, analyzing it and developing a customized solution for the customer. But also being able to provide the solutions and the team of people to implement them. I think that's what's most powerful, and I think that's why you see such an acceleration in our IMPACT selling.

Chris touched on one point, which is important here. And, that is the advent of interest that you're hearing and seeing from our blood center customers. As they focus on their hospital customer, the mutual customer we both serve. And, they're recognizing they can no longer sit still in this market. Demand for -- the purchasing of blood for the first time is being put out for bid on many different fronts. So, our blood center customers are looking for ways to increase the value they bring to their customers, and we can help them do that. And that's something you'll hear more about as we go through the rest of the fiscal year. Let me turn it over to Lisa, to answer your questions relative to red cells and the legal question.

Steve, earlier this year, several months ago, the Court of Appeals for the Federal Circuit were reversed the trial court on claims construction. Which had the effect of reversing both the injunction and the damages award, and sent the case back to the trial court and we are back in the trial court. Importantly, we continue to believe, that even under the claims construction decision by the Court of Appeals. That the competitive ALYX product still infringes the Haemonetics patent and we're proceeding on that basis.

Our next question comes from the line of Joshua Zable with WJB capital. Please proceed.

Hey, guys, thanks for taking the follow-up here. First question, is related to gross margin. I know you guys are expecting it to improve. I'm just wondering if you can comment on that. Maybe is it mix? Obviously with plasma down, that would benefit. I'm just kind of wondering. Chris, maybe you could walk us through the ups and downs of the margin going forward.

Then I'll ask the follow-up here before I get cut off. Brian, I think you made a comment on the rebounding red cell market, I know you guys talked about the dynamics, there's some consolidation going out -- going around with red cell. Obviously surgeries affect the red cell business as far as collections, as well. There are a lot of things going on. I'm just wondering if you guys -- if we've seen the worst in your opinion. If it is still going on? Maybe talk about the red cell guidance in that context. Thanks, guys.

On gross margin, Josh. As you know, each year, we take on cost saving challenge within our supply chain, and this year, we had a large challenge. That (inaudible) by it's very definition because the projects get started at the beginning of the year to be more back-end-loaded than front-end-loaded. The good news is that everything, we think, we need to do to hit our target is identified and baked. And so, with a great deal of clarity, we can see how that will roll into our numbers in the back-half. That's what's -- a portion of what's happening, and then a little bit of mix.

Just talking about the red cell market, Josh. There's two things happening there. We're seeing -- we've seen the decline in demand for blood bottom out. But we're also seeing our efforts pay off. I gave you a little more clarity relative to IMPACT selling for our blood centers. Not a huge number of accounts, but these are certainly much bigger accounts.

And interesting thing, let's compare what Lisa talked about with respect to the legal actions versus the current environment. We've had more success converting customers to our double red cell technology since the ruling of the Court of Appeals than we did when the injunction was standing out there. And, I believe that that has been driven by our success in IMPACT. It is not significant but it is an indication of the progress that we're making. So, bottom line, have we seen the worst? Yes, that's what our customers are telling us. We're seeing it rebound and we're seeing our IMPACT selling, also, play on that success.

Your next question comes from the line of Larry Keusch with Morgan Keegan. Please proceed.

Hi, just one more. Chris, I think, you guys indicated that you anticipated roughly a $3 million decline, in, if you will, revenues from that large customer that you were talking about, that is currently off the market. I understand -- then something was said, that's in the spirit of, hopefully, being conservative. Have you actually witnessed them to date, change any of their collection volumes or is this, again, forward-thinking that that may begin to happen?

They have provided an update on what they expect to need in the back-half of the year.

Okay, perfect. Thanks, very much.

Ladies and gentlemen, this concludes today's Q&A. I will now like to turn the conference back to Mr. Brian Concannon for any closing remarks.

Thank you, Jasmine. With two quarters behind us, we feel that we have a good grasp on the trends of our business. The plasma market is rebounding and expected to return to growth in the back-half of the fiscal year. We have accounted for the uncertainty of recent regulatory actions impacting one of our large plasma customers. And, emerging markets continue to represent solid growth and will generate revenues in excess of $100 million for the first time in our history.

The economic pressures facing our blood center and hospital customers are a catalyst to their adopting our blood management solutions. Red cell declines are finally moderating, and our blood center customers are realizing they must deliver blood management solutions to their hospital customers. IMPACT selling is accelerating, and the results are impressive. And, IMPACT Online continues to attract attention as a critical tool for managing blood in the future.

Our guidance reflects the reality of the markets we serve. But make no mistake, we are making steady progress in transforming our industry. We look forward to sharing this progress with you, as we expect momentum to continue to build in the back-half of fiscal 2011. Thank you for your time this morning.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.