Haemonetics Corp (HAE) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-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. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host, to Ms. Lisa Lopez, Vice President, Corporate Affairs. You may proceed.

Good morning. Thank you for joining Haemonetics' third-quarter fiscal '11 earnings webcast. Today I am joined by Brian Concannon, President and CEO, and Sue Hanlon, Vice President of Finance, who is standing in for Chris Lindop, our CFO, due to a sudden death in his family.

Sue's Haemonetics' career spans eight years in senior financial roles. She and our team are intimately involved in analyzing and reporting our financial performance.

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. Sue Hanlon will review our operating performance and expectations for the full 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 and income from the adjusted financial results we will talk about today.

In fiscal '11 our third-quarter and year-to-date adjusted results exclude $3.7 million and $6.6 million in pretax costs related to certain transformation events and integration activities, which were outlined in our fourth-quarter conference call in May of last year. Our year-to-date 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.

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

Thanks, Lisa, and good morning, everyone. The headliner for this quarter is that we turned the corner on plasma and saw strong momentum in our IMPACT accounts. Moreover, continuing improvement in our operating results helped drive strong growth in earnings per share.

We finished the quarter with 7% revenue growth, 23% operating income growth, 23% earnings per share growth, 120 basis points of gross margin improvement, and 240 basis points of operating margin improvement. Organic revenue grew 3%, reflecting growth in emerging markets.

The currency drag in the first half also reversed course. Currency was neutral to this quarter's operating income growth.

Let me give you some color on plasma. As we anticipated, our plasma business returned to year-over-year growth, up 1% in the quarter. This represents a 5% sequential increase from average weekly shipments in the previous quarter, and a 17% increase in average weekly shipments compared to the fourth quarter of last year, which was the low point in the recent plasma cycle.

We expected to plasma to recover from its recent correction, and now we see it in our numbers. Importantly, this recovery occurred despite increased whole blood collections by the Japan Red Cross, which hurt our plasma business there. Japan determined to increase whole blood collections because it needed more red cells, not more plasma.

In Japan, unlike North America and Europe, apheresis plasma is collected by the same agency that collects whole blood. When Japan's whole blood collections increase, more plasma is collected as a byproduct of whole blood, reducing its need for apheresis plasma collections using our technology. Through the third quarter, apheresis plasma collections by the Japan Red Cross have declined more than 20%.

Adjusted for Japanese plasma sales, our plasma business saw year-over-year growth of 5% in the quarter. While I'm not happy that Japan had less need for apheresis plasma collections, I know there is a limit to that market's need for incremental red cells derived from whole blood and therefore the amount of plasma recovered from that whole blood.

Let me emphasize something you have heard me say before. Beyond plasma returning to growth, there are two other key growth drivers for our Company.

The first is an improvement in general economic conditions, which in time will impact surgical procedure volumes, the demand for red cells, and trends in hospital spending. The second and more important is the impact we can have helping to influence customers' blood management practices and their day-to-day operations. We call this blood management solutions.

One will be responsive to macroeconomic trends, but the other we can influence. And we are already seeing results in our branded form of implementing blood management solutions, which we call IMPACT selling.

So let me give you an update on where we stand with our IMPACT accounts. In the quarter, we added an additional 47 IMPACT accounts, the most ever in a quarter, bringing our total number of IMPACT accounts to 165 versus our goal for the year of 175.

Of the 165 IMPACT accounts, 108 are North American hospital customers, which represent about 14% of total year-to-date North American patient revenues. For Q3 of fiscal '11, revenue for these 108 customers is up over 50%.

When we dive deeper into these numbers and look only OrthoPAT, 37 of these 108 hospitals are using OrthoPAT as a part of their approach to blood management. Despite an environment of declining orthopedic surgeries, disposables revenue in these 37 accounts is up over 30% year to date.

Our progress with IMPACT selling is not limited to North American hospitals. We are seeing solid progress with North American blood center accounts as well, which increased by 4 in Q3 to 20 accounts in fiscal '11; and these 20 accounts are seeing revenue growth of 7% year to date.

IMPACT selling outside the US is also accelerating, with 21 of the 47 new IMPACT accounts in Q3 coming from our international customer base, bringing the total number of international IMPACT customers to 37. The growth in these accounts is equally impressive, with patient revenues up over 80% and donor revenues up over 28%.

In summary, we are making progress bringing blood management solutions to our customers, but our progress continues to be masked by the economic challenges of the broader healthcare market. This is particularly so with orthopedic cell salvage. Here we are 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 simply on price and not on the overall economic value delivered by orthopedic cell salvage.

This will pass. As the economy rebounds and customers continue to seek ways to reduce costs while improving quality and clinical outcomes, we remain well positioned to guide them in this age of healthcare reform.

Moving down the highlights of the quarter, TEG continues to perform very well as a leading product with our blood management accounts in the hospital sector. In the quarter, TEG disposables grew 21%, continuing the strong start we saw in the first half of the year.

We have further good news about TEG. We are particularly pleased that improvements to our quality systems in this acquired business resulted in the FDA's decision to remove the facility's Warning Letter status. This eliminated what could have been a barrier to TEG's continued expansion in our emerging markets.

Speaking of emerging markets, our businesses in Eastern Europe, Latin America, and Asia continue to see strong double-digit. Our combined emerging markets business is now on track to generate greater than $100 million of revenue for the year, which would be an annual growth rate of 24%. 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 101% in the quarter, 14% organically. The Global Med integration is going well and continues to be ahead of planned operating income targets.

Finally, equipment had another strong performance in the quarter, growing 16% year over year. Equipment sales are a leading indicator of disposables revenue.

So all in all, we are slowly moving beyond what has been a challenging environment. We are continuing to see momentum in businesses and markets that are positioning us for future growth.

With that, let me turn the call over to Sue Hanlon, our Vice President of Finance. Sue will discuss in more detail the results of the quarter and the basis for our outlook for the remainder of the year.

Thank you, Brian. Good morning. This was another quarter of strong operating discipline. We delivered 120 basis points of year-over-year gross margin improvement, aided by continued productivity and supply-chain enhancements. Improved gross margin and spending controls delivered 240 basis points of operating margin improvement and strong earnings per share growth of 23% to $0.89 per share.

Let me start by reviewing revenue growth, then I will walk down the income statement in more detail. In the quarter, total plasma sales were $60 million, up 1% year-over-year and up sequentially by 5% from the previous quarter.

Excluding the declines in our Japan plasma business, which Brian described, in the quarter our plasma business increased 5% over the prior year. Year to date, plasma sales were down 3%, reflecting two quarters of declining sales in the first half of the year.

As we analyze quarterly plasma revenue growth, same-store sales were up over 1%. Our commercial plasma customers grew organically almost 5%, offset by declines in Japan. Price and share gains were not significant in the quarter.

Plasma is returning to growth as we anticipated. When we review average daily shipments of our global plasma product from the low of this current cycle in Q4 of last year, average daily shipments have increased 17% through Q3 of this fiscal year. We can now see this return to growth in our year-over-year comparisons, despite the secular headwinds in Japan.

We expect these growth trends to continue during the next quarter. For the full year we anticipate plasma growth in the range of zero to 2%.

Platelet revenues grew 3% in the quarter to $41 million. Year to date, platelet sales were up more than 5%. As expected, sales growth has moderated in the quarter, as we anniversary a slow start in the first half of fiscal '10, which was heavily impacted in certain emerging markets by the global recession.

Our platelet business grew 12% in emerging markets, which, by the way, is now larger than our Japan platelet business. For the full year, we expect platelet growth in the range of 1% to 3%.

Moving to red cells, in the quarter red cell revenues were down 3% to $12 million. Year to date, red cell sales were also down 3%. To some extent our red cell experience reflects industrywide trends in blood collection, which in turn are heavily influenced by surgical volumes.

We believe improving macroeconomic conditions will see a return to normal supply-and-demand dynamics for this product line, driving utilization of our technology. We expect red cell revenues to be down approximately 3% to 5% for the year, reflecting continued weakened market demand for red cells in the near term.

In our hospital business we continue to feel the impact of the same underlying trends in surgical volumes, offset to some extent by the positive trends we continue to enjoy in our IMPACT accounts. Surgical sales were down 4% in the quarter to $17 million, while OrthoPAT sales were down 6% to $9 million.

Year-to-date surgical and OrthoPAT sales were down to 5% and 2%, respectively. We expect our IMPACT account penetration will accelerate and thereby influence the total product-line performance as we finish the year. Our full-year guidance for the surgical line is for a reduction of approximately 5%, and for OrthoPAT a reduction of between 1% and 5%.

Moving to diagnostics, TEG disposable sales remained strong, growing 21% year-over-year in the quarter to $5 million and 23% year to date. TEG growth in our IMPACT accounts was over 200% year-to-date. Our value selling approach is helping overcome the capital constraints facing hospitals. TEG growth guidance for fiscal '11 is approximately 25%.

Software Solutions also had a good quarter. Sales grew 101% to $17 million. Year-to-date, Software Solutions sales were up 90%. Organic growth in our software business was 14%. Our annual growth guidance for this business is approximately 95%.

Equipment sales related to our apheresis and cell salvage devices increased 16% in the quarter to $16 million when compared to the third quarter of fiscal '10. Year-to-date our equipment sales increased 22%.

Excluding SEBRA, equipment grew 14% year-to-date. As Brian reminded us, equipment sales are a leading indicator of disposables revenue. For the full year we anticipate equipment revenue growth of 5% to 8%. Remember, the fourth quarter of last year included large equipment orders in our emerging markets and $2.5 million of one-time royalty revenue.

Now let me review the rest of the P&L results. Again, this year's numbers are adjusted, as Lisa mentioned earlier.

Third-quarter fiscal '11 gross profits were $94 million, up 9%. Gross margin was 52.9%, up 120 basis points. Year-to-date gross profits were $268 million, up 7%; and gross margin was 52.8%, up 40 basis points but reflecting the currency headwinds to our gross margin comparisons in Q1.

Operating expenses were $61 million in the quarter, up 3% or $2 million. Year-to-date operating expenses were $181 million, up 6% or $12 million. Acquisitions contributed nearly $13 million to the growth in spending.

Spending in the quarter was low, due to delays in hiring and delays initiating certain planned third-party collaborations. We anticipate spending will increase by more than $2 million in the fourth quarter. We continue to manage expenses well to ensure we deliver on our near-term and long-term commitments to shareholders.

Operating income was $32 million in the quarter, up 23%, reflecting the positive trends in both gross margin and spending that I mentioned. Operating margin was 18.5% in the quarter, up 240 basis points from our prior-year margin. Year-to-date operating income was $86 million, up 8% from $80 million; and operating margin was 17%.

While spending will increase in Q4 from Q3 levels, we anticipate meeting or exceeding our original annual operating margin guidance of approximately 17%.

Moving to our tax rate, our tax rate was 29% as we benefited from the reinstatement of the research and development tax credit in the quarter. We are now expecting our annual tax rate to finish between 28% and 29%. Our tax rate continues to be positively impacted by favorable Swiss tax rates as our Swiss subsidiary is the principal party for most of our non-US business.

Earnings per share were $0.89 in the quarter, up 23%, reflecting the delays in spending during the quarter which I mentioned earlier. Year-to-date, earnings per share were $2.42, up 16%.

We are narrowing our full-year guidance for revenue growth to a range of 6% to 7%. We are also narrowing EPS guidance to a range of $3.20 to $3.28. Further details of the full income statement and product-line guidance scenarios are available on our website.

Moving to the balance sheet, in the quarter we generated $37 million in free cash flow after making net investments of $11 million in capital expenditures and $3 million in cash transformation costs. We are raising our guidance for annual free cash flow to greater than $90 million before funding $15 million in cash transformation costs. We have $170 million in cash on hand after completing a $50 million share repurchase earlier this year.

So to close, while sales this year have been softer than planned, plasma is recovering. Software and platelets continue to trend positively, and we're achieving our targeted operating leverage in line with our earnings per share targets for the year. Our products and services remain perfectly aligned with the emerging needs of the market for enhanced blood management and healthcare reform.

With that, let me turn the call back to Brian.

Thanks, Sue. Like many companies focused on serving the healthcare industry today, we are experiencing challenges. However, I am encouraged by our product and market diversity, which helped us weather current economic conditions.

We have a lot to feel good about. We are growing our top line and our organic growth is accelerating quarter to quarter despite economic challenges. We are expanding both gross and operating margins, continuing an eight-year trend. And we are leveraging operating results to grow earnings at a differentiated rate.

Let's take a moment to consider where we are. Plasma has turned the corner, and we have put behind us one of the biggest overhangs affecting the perceptions of our Company in recent years.

Let's consider the pace at which this was achieved -- literally within two quarters of declining revenues in the first half of this year. We have consistently said that this industry responds differently today to supply-demand imbalances than it did a decade ago, and we are seeing that now.

Additionally, we are pleased to announce signed contract extensions with the two plasma customers that would have expired next fiscal year. So now, all of our major contracts -- representing 95% of our commercial plasma business -- are under contract to at least fiscal '14.

The Japan plasma trend was a fiscal '11 headwind that will moderate in fiscal '12. So what does all this mean? All-in, we expect mid single-digit plasma growth in fiscal '12.

It is true that much of our current growth is coming from our Global Med acquisition. But let's not forget that this acquisition delivers differentiated growth and margins, is perfectly aligned with our strategic goals for blood management solutions, and has delivered better than planned operating performance since it was acquired last March.

This is the largest acquisition in our Company's history, and nine months after its execution, integration is almost complete. Why is this important?

It's important because we now have a software solutions platform capable of meeting our customers' information technology needs in both the hospital and blood center environments. It is important because we now have the capability of creating a seamless blood supply chain between our hospital and blood center customers. And it's important because it reflects the substantial capabilities we have built to integrate additional strategic acquisitions.

As an illustration of our commitment to information technology as an enabler of our blood management solutions, let me take a moment to welcome Paul Black, who just joined our Board of Directors. Paul's 13-year career at Cerner in marrying information technology solutions to healthcare systems, most recently as chief operating officer, will be a great source of strategic counsel. We are pleased to have him join our Board.

Today, we are an acknowledged leader in our industry, well positioned to consolidate businesses which have focused on niche blood management solutions for our customers. We have a rock-solid balance sheet, significant financial flexibility, and a management team that continues to drive solid double-digit earnings per share growth.

We continue to invest in and open up new markets to drive and accelerate growth. As these emerging markets expand, we are well positioned to participate in that growth.

Five years ago our emerging markets represented approximately $50 million of our overall revenues. By the end of this fiscal year, emerging markets will have doubled, representing over $100 million in revenue. And as these markets become larger, their impact on our overall growth rate will become even more significant.

In our mature markets in North America and Western Europe, we are making great progress with IMPACT selling, our branded approach that brings blood management solutions to our customers. The power and traction of this information-enabled approach to defining and solving blood management problems continues to be demonstrated by the results I shared earlier. Like our emerging markets strategy, IMPACT will begin to influence our growth rates as we scale this approach to the market.

Despite the perfect storm of a plasma correction coinciding with tough macroeconomic conditions, which have impacted procedure volumes for red cells and cell salvage, we continue to grow the top line and deliver positive drop-through to double-digit earnings growth. This management team has a well-deserved reputation for operating discipline, and I am proud of the way they responded to the very real challenges we have faced this year.

With that, let me take your questions.

(Operator Instructions) Steven Crowley, Craig-Hallum Capital Group.

Good morning, folks. Question for you. It sounds like you are pretty happy with the software business, and your guidance implies a pretty significant jump in Q4 sequentially off the level it ran in Q3.

I am wondering what is behind that confidence. Is there a sizable piece of business that is incremental in Q4? Or is there a step-up in run rate for that business that we should be thinking about?

Well, there is a step-up. We have a very significant backlog in this business, Steve. This team -- we focus on why we acquired this business, and we have talked about the completion of the IT platform. Strategically very important.

But one of the things that we talked about all along is that we wanted a software-experienced, industry-leading management team. And we have that now with the Global Med acquisition. This team is leading our entire software business, roughly a $70 million business. 10% of our sales, but clearly the enabler of our blood management solutions.

So yes, you're continuing to see not only the impact of a solid integration, but an acceleration of our ability to take those products to market.

Okay, so the jump that is implied by your guidance in Q4 shouldn't be anomalous due to a period-specific deal. It sounds like it is a step-up in run rate.

Then my follow-up in general would be -- that is one of the things I think about, growth in your software business, as an enabler of better gross margin or improving gross margin as we look forward. What are the factors besides mix that could potentially affect gross margin over the next several quarters? Thanks for taking my questions.

Sure. I would tell you that the bigger impact to our ability to expand margins really comes from two areas. One of them is the continued work we do internally to reduce the overall cost of manufacturing. You're seeing that impact year-to-year.

But as our blood management solutions accelerate, these products are product lines that have significantly higher margins than our overall average margins. Our TEG, our OrthoPAT in particular, are very, very high margin products. So those are the things that will continue to accelerate both our gross and operating margins as we go forward.

Dave Turkaly, SIG.

Thanks. On the plasma side, I know historically we have talked about new placements out there. I don't think I have heard you guys throw a number out there. But given the strength you saw in equipment this quarter, do you have a number of new plasma systems that you would be comfortable sharing with us that you will place in fiscal '11?

As we look at the equipment, my recollection was that a lot of those were placed here. Is that plasma going -- are these systems going into emerging markets? Or how would you help us explain the strength there?

You have asked a couple questions there, Dave. First of all, we will give guidance for fiscal year '11 at the end of next quarter relative to where we go -- I'm sorry, fiscal year '12, we will give at the end of next quarter.

For fiscal year '11, we had in the quarter about 615 new devices placed. About 270 of those were our plasma devices, the PCS2. And the vast majority of those were in the emerging markets.

Thanks. Then the Japan issue you talked about; it sounds like you expect that to modify pretty quickly. I guess as we look ahead there, and I think you mentioned also that your platelet business was bigger in emerging markets than Japan now. But should we be thinking of that as kind of a one-time event in terms of -- or a one-year event that will modify next year?

What we said is that it will moderate next year. What you saw it do was ramp. It was -- the impact in the first part of the year was single digits to the decline we saw in Japan, to now it's over 20% this quarter.

They targeted overall a 20% decline. I think we will see that continue to have an impact on us next fiscal year; not as significant as this fiscal year. But it's just going to be the year-over-year comparisons that I think you will see.

What I am most pleased about, Dave, is just the fact that this market has turned. I think all of those -- all of us who have watched the plasma market for years should feel comforted by the fact that the vertical integration and consolidation that we have seen in this industry over the last decade has had a significant impact on the ebb and flow of this industry. And as supply caught up with demand, that turnaround was measured in quarters versus years; and I see that as very, very encouraging.

And for us you can see it reflected in the numbers. I feel good about the mid single-digit growth we will experience for this business as we look to the future.

Larry Solow, CJS Securities.

Hi, good morning. First off, actually, my condolences to Chris and his family. Hopefully everything is okay there.

Question actually on the IMPACT accounts, Brian, and everybody else. It seems like they've been accelerating. So it sounds like your initiatives there -- you're probably running ahead of expectations.

Just curious, though. If you look outside of those accounts, you have actually -- it looks like OrthoPAT and surgical sales are still not doing great. So is the market and the environment actually even getting worse out there for you guys? Or could it be a case of giving more focus to adding IMPACT accounts that you actually even get less focus on the other accounts? Any more color on that?

Yes, there's a number of moving pieces here, Larry, that you have talked about; and you have hit it. First of all, for an average hospital elective surgeries are roughly about 30% of their overall surgical volume. So we have all seen that happen. I don't think that is getting any worse.

What we are seeing is a very high priced disposable product, our OrthoPAT product, primarily in the US, that as those responsible for supply chain management look at overall cost, where we are not bringing our IMPACT solutions to these accounts, that sticks out a little bit. What helps us there is our -- you remember us introducing this and talking about it at our investor conference last year, our QuickConnect product, which allows us to use the reservoir first and then decide whether or not to connect the expensive disk.

We have been slow to react and get that in the marketplace. So I would tell you we're being affected by the macroeconomic conditions. But I would tell you that I am disappointed overall in our ability to stabilize that market. There is a performance issue.

Mike Kelly, he is our new President of North America, he has got a new Vice President of Sales focused on that market. I feel comfortable with the steps they are taking to address that. But I think it is a combination of those two pieces which I expect to stabilize as we go into the next fiscal year.

Okay. Then if I may just a quick question on a different area. Just in terms of the delayed operating expenses, some of the delayed investments, any particular areas? Is it something that is just spread out?

Would you -- is it just a push-out of expenses or would you expect more than the average acceleration over the next couple quarters?

No, I would tell you between Q3 and Q4, average them out and that is what you're going to see in terms of a normalized expense spending. Where was the biggest impact? Probably more R&D than any place else, which can represent some large chunks of spending.

David Lewis, Morgan Stanley.

Good morning. Thanks for squeezing me in. Brian, a couple things. I guess first off, you talked a lot about IMPACT on this call, and you talked about the growth rate in total IMPACT revenues. Can you actually talk about the revenue per IMPACT account and how that trended sequentially?

I don't have the exact numbers in front of me, David. But what we typically look at here and what we had last quarter -- so I haven't taken this through to this quarter yet. But we are looking at IMPACT accounts depending upon the number of solutions that they are implementing, anywhere from 2 to some -- and these are outliers -- as much as 5 times the average size of a hospital account for us.

What is that average size? Roughly about a $75,000 per year account.

Okay. Just as a follow-up, as you think about -- a lot of statements in this call seem to be really directed at improving organic fundamentals in the business heading into next year. Can you help us understand, just given organic growth trends this year, which are about 2% to 3%, your confidence level in an ability to accelerate those organic growth trends to something that could be closer to mid single-digit rates heading into fiscal '12?

Well, I am not going to really comment on fiscal '12 from a guidance standpoint. But I think you can go back and look at what we saw happen in fiscal '10 relative to our organic growth rates, and saw those decline and bottom out, and I would say that we have turned the corner on that.

Part of the biggest driver of that is certainly our plasma business. But we are seeing that in our base business as well. It is more coming from emerging markets than our established businesses in the US and Europe.

I am disappointed that IMPACT -- I am very pleased with what IMPACT is doing and the success we are driving there. I am disappointed that we are seeing more significant losses in our established businesses than we would have anticipated. But I do feel that will moderate as we go forward.

And I do feel that we will continue to have success with our IMPACT selling. We are seeing that today. 165 accounts is a pretty large in, when you look at the overall base.

Joshua Zable, WJB Capital.

Thanks for taking my questions here. Hey, Brian, just a couple of ones, just to clarify here. I don't want to beat a dead horse here on the plasma, but obviously you guys saw improvement in shipments last quarter. The growth obviously wasn't what you expected. But I guess Japan snuck up on you in terms of the magnitude. I know this has been going on.

So just to be clear, the magnitude in Japan -- because I know we have known about it for some time -- stepped up. And that is a function of when -- we think about fourth-quarter growth you guys are expecting about 10%, by our math, at the low end. So the US business or the overall business is growing that 17%; and Japan is offsetting it.

Then just going forward, I know you talked about plasma single digits. Does that include or exclude Japan? Just so we can understand, since Japan is stepping up, should we think plasma normalized at single digits and then haircut it for Japan? That is the first question. Thanks.

Well, first of all, we guided Q3 -- and that is the only product line that we give guidance on. But we guided Q3 low single-digit growth, so 1% growth in the quarter. Any of us would have liked to have seen that to be higher; but we guided the quarter at low single-digit growth.

In terms of the growth going forward, it does include Japan. We take that all-in.

One additional thing that I would add here, not to be lost in the noise of plasma is the signing of these two contract extensions. When you look at the stabilization of our plasma business, this means as that market moves forward we can feel pretty good about the fact that our business for -- 95% of the sales generated by our largest customers is under contract to fiscal '14.

Okay, great. Then just two other follow-ups. One just on the other businesses. It seems like Q4 the numbers are coming down here. I am just not sure if my math is correct, whether it is OrthoPAT or platelet. I know you talked about platelet having a tough comp; I am just wondering about OrthoPAT. That is one.

Then two, kudos on the spending here. Obviously, you guys have developed a well-deserved reputation as you said yourself on managing spend. I know you said you delayed projects -- or I should say delayed hiring. And then some -- a lot of it can come out of the R&D.

Obviously the big R&D project is whole blood. I am just wondering if anything has changed on that timeline, because that is the next big one coming up. Or that next quarter -- I mean, I guess you guys still have flexibility. Thanks, guys.

Yes, the spending, as I said if you look at both quarters it will average out between the two quarters. It is across-the-board relative to our overall R&D spending.

We will give more visibility to whole blood at the investor conference on May 12. In fact, we will give a fairly large amount of visibility to the automated whole blood project and what does that mean.

To include, we believe, we will be able to provide and shed some light on the regulatory pathway. But you get past the technical progress, we're in pretty good shape with all of the technical hurdles we expected to drive here in the quarter.

Then the other point that you talk about, Josh, before I forget, for the comps in Q4. We have to remember, last fiscal year had a 53rd week. So obviously that occurred in the fourth quarter, and so we are comparing 13 weeks in '11 to 14 weeks in '10.

Scott Gleason, Stephens.

Hey, Brian. Thanks for taking my questions and congratulations on the good quarter.

Thanks, Scott.

I guess first, Brian, if we look at the platelet business, I think that was definitely an item of strength this quarter. In terms of the guidance for the fourth quarter, it looks like even at the higher end of the guidance range you guys would be implying that would be down several million dollars.

Can you maybe give us a little bit more color on exactly what you guys are getting at there?

I think there's two things that occur in the quarter. Again, going back to what I just finished in the last point, being that the additional week of sales that we saw last year; and of course that can be lumpy in our emerging markets. So you see what we talked about with respect to equipment, the disposable sales can be equally as lumpy.

When they order the equipment in the emerging markets, they typically order large amounts of the disposables to accompany that. So that is what we are up against.

You may recall last year we did see an increase in the fourth quarter relative to our platelet business. So that is what that represents.

Great, Brian. Then I guess also can you talk maybe a little bit about the contract extensions that you noted on the call? I guess in terms of pricing, is there anything that has changed there? Or you guys feel pretty good it is relatively flat prior to where -- compared to where you were previously?

Yes, you know, we all know the challenges anybody will have relative to pricing in these economic times. We feel very good about where we are at with those contracts.

Certainly what we look to in terms of our guidance and what we have talked about, mid single-digit for next year, reflects that. The upside there is that as the plasma market continues to grow, even at the mid single-digit numbers that are talked about, ultimately you are going to see the plasma centers reach capacity. Whenever that happens -- next year, year after, even three years out -- this is where our EXPRESS software is going to be something that will come into play.

That is what I think you will see the real next shift relative to price represent for us, will be the adoption of our EXPRESS software.

Larry Keusch, Morgan Keegan.

Hi, guys; this Konstantin for Larry. So, a couple of questions here. So first of all, last quarter I think what happened with the second-tier plasma collectors I think caught you guys a little bit by surprise. Can you provide any kind of update what kind of plasma -- what kind of demand are you seeing from them? Also if there has been any change in collections with Octapharma.

Then my second question is in terms of your guidance. So your full-year guidance would imply that fourth quarter that the EPS would decline. Does that really just have to do with the timing of the expenses, even though you're going to have -- generate more revenue in that quarter?

Yes, the EPS question first, you nailed it. It is just simply the timing of expenses quarter-to-quarter. That is why we wanted to signal that, so that we didn't get ahead of ourselves there.

Speaking about the plasma collections, we have clearly our eyeballs on that part of the business today. We know it, we understand it, and it did not surprise us. It was what we thought it would be.

Octapharma continues to provide us their forecasts. We feel comfortable with the numbers and the information that they share with us. I think that is reflected in what we thought we would see in the quarter. And it's certainly reflected in both the outlook for Q4 as well as our mid single-digit guidance that we look towards for fiscal '12.

Brian. It's Larry. Sorry, I have been jumping back-and-forth between two calls. Just quickly for you, on the secondary suppliers. Again, have you seen any change in the velocity of their collections?

Then on the expenses, and I apologize if this came up in a prior question. Again just trying to understand what happened there, specifically; how did these timing issues crop up?

Well, some of it -- you want me to talk about the expenses first? Some of it just has to do with just solid management of our P&L. As you know, we manage our expenses extremely well. It was hiring delays that we just simply said -- look, let's be a little more cautious about certain roles, certain positions, until we understand what took place in Q2; what was that going to mean in Q3 and Q4. So it was the hiring delays.

The others were just simply some major elements of some R&D projects. That spending can be sometimes lumpy. But it was spending that in some cases we pushed out a bit; some cases we just frankly couldn't get it going fast enough.

So it will balance out. We have it. An example of this would be the RoHS work that has to be done in terms of the compliance for our devices. You may recall that that date has been changed and pushed out; so that gave us some flexibility there in reallocating certain spending to accommodate that.

So that is what you see reflected in the expenses. There is nothing that should be alarming to anybody there. We are just simply trying to give people some visibility to what that looks like quarter to quarter so we don't get ahead of ourselves.

Going back to the question on the secondary collectors, Larry, there are some that are higher, some that are lower. There are shifting sands that take place.

It depends upon who is buying -- of the major collectors, who is buying their plasma? So we can see that influence, but nothing of any significant shift.

What we feel good about is that the demand in the market overall is playing out collectively to our collectors as we expected. There are some puts and takes, but nothing that concerns us.

Daniel Owczarski, Avondale Partners.

Yes, thanks, good morning. Hi, Brian. Two questions on IMPACT. I guess with your success so far, number one, are there thoughts of being more aggressive with the rollout or ramp-up or putting more resources towards that?

Number two, with the success are you seeing more competitors or any competitors trying to replicate what you are doing with blood management software?

Well, speaking to the IMPACT, I said all along if we finished at 175, which was our goal for the year, if we finished only at 175 I would be disappointed. And I think that is playing out, and that is a positive.

What I am disappointed with is that that success is being offset by both the macroeconomic elements in the rest of the market as well as what I would say -- and I want to be clear -- is our failure to do some things that we need to do in that marketplace. I feel good that we have got the leadership team in place to get that turned around. I am frustrating that it's taking us as long as it has taken us.

But I believe we are headed in the right direction there. We continue to apply resources to IMPACT at the rates that we can apply them and that our customers can accept them.

So I do think that we are scaling that appropriately. We will give further guidance what that means for FY '12 at the end of the fiscal year.

In terms of the competition, there are some competitors out there. There are consulting organizations that are out there working with our customers. There is nobody that provides the depth and breadth of solutions.

So in other words, we can go in and advise our customers, but we can also bring them the solutions necessary to be able to implement the change that a blood management plan calls for. So we are able to not only provide the advice but we are able to stay there and implement the changes and prove that those changes have brought the value that was expected on the front end.

Thank you.

James Sidoti, Sidoti Company.

Good morning, Brian. Can you hear me ask you? Lisa, is this your last call?

I think so.

I just want to say congratulations. I am sure your family must be happy and now maybe I can get on the call a little sooner.

We will do what we can, Jim.

If she knew we were going to be calling you James, I think it would have come a lot sooner.

All right. You said on the call that you have got the plasma contracts extended through 2014. I assume that is with the four large providers you are selling to now.

No, what I said was we renewed contracts with two plasma customers that would have expired next fiscal year. And with that extension we do not have any plasma contracts that will expire until fiscal year '14.

That is with the four major plasma collectors now?

That's correct. Well, it is even beyond that. It's with all the collectors that represent about 95% of our total plasma volume today.

Okay. Now -- but there is still one other plasma collector out there that I think by 2012 will be open to you. When do you expect to start negotiating with them?

They are a customer of ours today, a very small customer of ours today. We are in a small number of their centers. So we have a continuing ongoing dialogue with them and that will continue.

Okay. Sue, just a follow-up on the tax rate. Is that 28% to 29%, is that good for fiscal 2012 as well?

I'm sorry, Jim. Can you repeat that?

Will that tax rate apply to next year's EPSes or earnings as well?

We are not giving guidance yet for next year, Jim, but that is -- what you are seeing is largely a structural rate particularly at the high end of that range.

Great, all right. Thank you.

There are no further questions at this time. I will turn the call back to Mr. Brian Concannon for any closing remarks.

Thank you, Jasmine. Q3 was a solid quarter with 7% revenue growth translating to 23% operating income and earnings per share growth. Both gross and operating margins continue to expand as we leverage the business to improve profitability.

As I said when I began this call, we have turned the corner on plasma and saw strong momentum in our IMPACT accounts. Our plasma business registered 1% growth in Q3, growth that was actually 5% independent of our Japan plasma business, and 17% growth in average weekly shipments over Q4 of last fiscal year. We continue to see growth in our plasma business going forward.

And 47 new IMPACT accounts give us confidence that more of our customers are beginning to value our blood management solutions. We understand that these efforts must translate to greater revenue growth. We're beginning to see this in some product lines, while others continue to feel the impact of the macroeconomic environment.

Progress is slow, but we are seeing progress; and we expect this progress to build as more of our customers recognize the economic and clinical value of our blood management solutions. We look forward to sharing more detail with you at our annual Investor Day here in our corporate headquarters in Braintree on May 12. 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.