Haemonetics Corp (HAE) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 Haemonetics Corporation earnings conference call. My name is Lacy and I'll be your coordinator for today. At this time, all participants are in listen-only mode. Later we will facilitate a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mrs. Susan Hanlon, Vice President of Finance. Please proceed.

Good morning. Thank you for joining Haemonetics fiscal 2011 year-end 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 and additional information concerning factors that could cause actual results to differ materially is available in our 10-K and 10-Qs.

On today's call, Brian Concannon will review the highlights of the year. Chris Lindop will review our operating performance and provide fiscal 2012 guidance. And Brian will close with comments on key strategies.

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 and guidance we'll talk about today.

In fiscal 2011, our adjusted fourth quarter and full-year results excluded $1.7 million and $8.3 million respectively in pretax costs. Our year-to-date adjusted results also exclude $1.9 million of contingent consideration income. In fiscal 2010, our fourth quarter and full-year adjusted results excluded $26 million and $26.5 million respectively in pretax costs. Also excluded from the results for the fourth quarter and full year in fiscal 2010 is $2.3 million in contingent consideration income.

In fiscal 2012, we also planned certain transformational activities, focused on the infrastructure supporting our research and supply chain activities and our software organization. We will spend approximately $8 million in one-time costs to drive cost reductions of $7 million in fiscal 2012 and $10 million each year thereafter.

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, Sue, and good morning, everyone. Let me start with a quick recap of our financial performance in fiscal 2011 and then I will put that performance into context with the business environment we faced.

In fiscal 2011, revenue grew 5%, operating income grew 9% and earnings per share grew 15%. This marks the eighth straight year of double-digit earnings per share growth for your Company. While I'm pleased that we finished at the upper end of our EPS guidance, we could not ignore the challenges we faced throughout the year, so let me start there.

In fiscal 2011, we faced 2 very big challenges and a 2% revenue growth headwind, resulting from the comparison to a 53-week year in fiscal 2010.

The first challenge related to plasma, our largest business, where we saw a cyclical slowdown with our commercial plasma customers and the recall by 1 of our largest customers of their principal plasma-derived product. In addition, we experienced a change in collection practices for plasma in Japan, which affected the need for our apheresis technology. These challenges impacted our ability to accurately forecast demand throughout the fiscal year.

The good news is that the cyclical adjustment in plasma happened more quickly than in prior corrections and our commercial plasma business has stabilized. From the low point of Q4 fiscal 2010, our plasma business grew 11% on a per billing day basis in fiscal 2011. We now see a clear path forward, returning to mid single-digit growth in this important part of our business for the foreseeable future.

Secondly, we faced another year in which economic conditions and unemployment weighed heavily on elective surgeries. This in turn negatively impacted our surgical cell salvage business and resulted in reduced demand for red cells, negatively impacting our double red cell business. These economic conditions are going to improve. It's not a matter of if they will improve, but when they will improve.

Now, we're not simply waiting for the economic winds to shift. While surgical volumes and demand for blood were a big headwind to our patient and red cell businesses, we demonstrated during fiscal 2011 that our IMPACT selling approach is an effective strategy to counter the challenges we faced. In Q4, we closed an additional 32 IMPACT accounts, bringing our year-to-date total to 197 versus a goal of 175. We have proven that this approach works.

In our North American patient business, we have implemented IMPACT at 115 hospitals and these accounts grew 25% in fiscal 2011 versus an 8% decline in the rest of our North American patient business. The revenue for the average North American IMPACT account is 2.5 times the average revenue of a non-IMPACT account. As importantly, these 115 accounts represent less than 5% of the addressable market, so we feel like we're just scratching the surface.

In fiscal 2012, we will shift our IMPACT selling focus from the number of accounts we close to the size and quality of the accounts we close, with a focus on larger, more prestigious hospitals. In fact, of the incremental $10 million of growth that we will generate in North American patient sales in fiscal 2012, $9 million of that growth will come from our IMPACT accounts. To put that into perspective, in fiscal 2011, North American patient IMPACT accounts delivered $3 million of revenue growth.

Our focus will not stop there, as we work to stabilize our base patient business. We have new leadership in our North American business and we have rebuilt much of our North American selling organization. We will launch our newest surgical cell salvage device, the Cell Saver Elite in Q1 of fiscal 2012. This new device has been designed to meet our customers' growing blood management needs and replaces our 14 year old Cell Saver platform.

Last week, we announced a voluntary recall of our OrthoPAT devices manufactured prior to 2002. This decision was made after a review of service and repair records, which indicated high levels of maintenance associated with blood spills and inappropriate cleaning. This fleet maintenance created excessive downtime and dissatisfaction for our customers and lost revenue and maintenance costs for Haemonetics.

The improvements we make will enhance the reliability of these devices, creating a more robust blood management product, thereby improving the overall customer experience.

Our fiscal 2011 results include approximately $1 million of expense for the repair or replacement of customer-owned OrthoPAT devices. In fiscal 2012, we also anticipate spending approximately $10 million of capital to upgrade the OrthoPAT fleet owned by Haemonetics. These actions are contemplated in our fiscal 2012 guidance.

We will also focus on implementing QuickConnect, the newest enhancement to our OrthoPAT disposable we launched last year, which allows our orthopedic customers to salvage the surgical field but only connect the OrthoPAT disk when there is enough blood to be transfused.

As a leader in blood management, these are 2 important opportunities to improve the overall customer experience with our products.

We also made great progress with IMPACT Online. We now have 14 contracted IMPACT Online hospitals, up from 7 at the end of Q3. Our collaborative approach and consultative selling are helping our customers more rapidly recognize the changes they must make to implement and sustain new standards of care that deliver real economic and clinical improvements.

At the beginning of fiscal 2012, we launched IMPACT Online version 3.0. Version 3.0 is a significant leap forward on our blood management business intelligence platform, that includes benchmarking and drill down capabilities for all service lines, personalized dash boards and reports, additional infection and complication metrics and many other improvements. We are taking blood management to a whole new level.

Our IMPACT success has not been limited to our patient business either. We now have 20 North American donor IMPACT accounts, where we have helped our blood center customers optimize their approach to collecting blood products. These 20 IMPACT accounts are growing over 7% versus an 8% decline in the rest of our North American donor business. This will prove important as the economy rebounds, surgical demands rise and the corresponding demand for red cells increases.

We launched our IMPACT selling process in Europe this year and it has accelerated rapidly as we finished the year with 62 IMPACT accounts.

So in spite of the challenges we faced, we continued to grow the business driving double-digit earnings per share growth once again, while achieving some very important strategic and operational goals that will contribute to growth in fiscal 2012 and beyond.

And our progress did not stop there. During the year, we successfully completed Phase I of the integration of our combined software businesses, creating a platform for the development and commercialization of an information highway focused on the compliance, productivity, availability and safety of blood products from the donor's arm to the patient's arm.

Software is an important enabler for our-- for customizing and implementing our blood management solutions, and our software business continues to do well, both strategically and financially.

We worked hard to improve our quality system, and we obtained clearance from the FDA lifting the warning letter at our Haemoscope facility where we manufacture our fastest growing product, TEG. In spite of this, our TEG business continued to do well, growing 16% in fiscal 2011. With the warning letter lifted, we are able to expand further internationally and to seek approval for product enhancements, positioning us to accelerate growth in fiscal 2012.

So we made good progress strategically during the year and withstood some tough external factors while delivering on our earnings growth goal. Most importantly, I want you to know that we understand what has to be done and have already taken steps to ensure that we achieve our goals for fiscal 2012.

Now, let me hand the call over to Chris Lindop, who will review our fiscal 2011 performance in more detail and provide guidance for fiscal 2012.

Thanks, Brian.

Let me say at the outset that given the challenges we faced, I'm pleased to report that we achieved the high end of our annual earnings guidance and at the same time, continue to invest for the long term. Let me start by reviewing our revenue growth drivers and then I'll talk about the rest of the income statement and the balance sheet.

For the full year revenues grew 5%, our base business was flat and acquisitions contributed 5%. Currency was neutral to revenue growth for the year. Adjusted for the 53rd week in fiscal 2010, our business grew organically 2% in fiscal 2011.

All geographies grew in fiscal 2011. For the year, North American sales were up 4%, Europe sales were up 4%, Asia sales were up 20% and Japan sales were up 1% despite the trends in plasma collections.

In fiscal 2011, plasma disposables revenues were $227 million, down 2% for the year and flat in the fourth quarter. Adjusted for the 53rd week in fiscal 2010, our plasma business was flat for the year and grew 8% for the quarter. For the year, our overall plasma growth reflects a 2% decline attributable to our Japan business, offset by 1% growth in the average weekly collections by our plasma customers outside of Japan.

There were no material share gains in the year and pricing was stable. The growth in average weekly collections is attributable to the same-store collection growth.

In the fourth quarter, our North American commercial plasma business grew 7%, or 14% adjusted for that extra week in fiscal 2010. Plasma will resume its role as a growth driver going forward with planned growth for fiscal 2012 from 3% to 5%.

And moving to our second largest business, blood bank. Disposables revenues were $203 million in fiscal 2011, up 2% for the year but down 1% for the quarter. Adjusted for the 53rd week in fiscal 2010, our blood bank business grew 4% for the year and 6% for the quarter. The blood bank business includes platelet collection disposables, which had revenues of $156 million in fiscal 2011, up 3% for the year but down 1% for the quarter.

Adjusted for the 53rd week in fiscal 2010, our platelet business grew 5% for the year and 6% in the quarter. Emerging markets played an important role in the growth of this product line. Our growth in fiscal 2011 was also influenced positively by the severity of the Dengue fever outbreak in India.

Red cell revenue was $47 million in fiscal 2011, down 3% for the year and down 2% for the quarter. Adjusted for the 53rd week in fiscal 2010, our red cell business was down 1% for the year and up 6% for the quarter.

As Brian mentioned, we have seen unprecedented levels of red cell availability as a result of trends and surgical activity over the last 2 years. Notwithstanding this, blood centers should continue to grow their automation programs to improve their operations and to reduce costs.

We have demonstrated this value proposition with our blood center customers in North America, the largest market for our double red cell technology. Similar to hospitals that engage in our IMPACT approach to data-driven decision making, we see healthy double red cell growth at blood banks which are IMPACT accounts.

In North America, we used IMPACT at about 13% of our existing customers, representing 39% of our blood bank revenues, and saw a 7% year-over-year account growth compared to an 8% decline in the remainder of our blood bank customers. So while average weekly shipments for red cells were flat this year, we believe this underpenetrated market remains a long-term growth driver, especially as demand for red cells rebounds. Our blood bank disposables are expected to grow between 1% and 2% in fiscal 2012.

Now moving to our hospital business, which includes our surgical and diagnostic products as well as our orthopedic blood salvage system. First, surgical with $67 million in sales in fiscal 2011, this business declined 5% for the year and 6% for the quarter. Adjusted for the 53rd week in fiscal 2010, our surgical revenues declined 3% for the year but were up 2% in the fourth quarter.

Our TEG diagnostic business with $19 million in disposable sales in fiscal 2011 grew 16% for the year and declined 1% in the fourth quarter. Adjusted for the 53rd week in fiscal 2010, our TEG business grew 18% for the year and 7% in the quarter. TEG is now a $19 million disposables product line with a 5-year CAGR of more than 20% and we expect strong double-digit growth to continue.

OrthoPAT's disposables revenues were $36 million, down 4% for the year and down 8% for the quarter. Adjusted for the 53rd week in fiscal 2010, our OrthoPAT business was down 2% for the year and down 1% in the quarter. As Brian mentioned, we are taking a number of steps to improve the reliability of our OrthoPAT and to return to growth.

In North America, IMPACT accounts which use OrthoPAT reflect 24% of all OrthoPAT customers. These accounts saw 13% year-over-year growth in OrthoPAT revenues compared to a 13% decline in the remainder of our OrthoPAT customers. Why? Well, this consumable continues to be challenged from a value perspective when compared to the direct cost of a unit of blood, but it clearly demonstrates value when configured for just-in-time cell salvage using our QuickConnect reservoir and when measured against the total cost of a blood transfusion. IMPACT selling reinforces this value proposition and we can see it in the results so far.

Hospital disposables growth driven by new products and IMPACT selling, is expected to be between 7% and 10% in fiscal 2012. Software solutions revenue was $67 million, up 86% in fiscal 2011 and up 75% in the quarter. While the vast majority of our growth relates to the Global Med acquisition, the combined underlying business is delivering organic growth. The combined software solutions business has a multi-year compound organic growth rate in the high single digits.

As Brian said, software solutions are a critical element of our blood management strategy and it has great positive momentum going forward. Software solutions are expected to grow between 9% and 11% in fiscal 2012.

Equipment and other sales were $58 million, up 7% for the year but down 22% for the quarter. Adjusted for the 53rd week in fiscal 2010, our equipment and other revenues were up 10% for the year and down 16% in the quarter. In the fourth quarter of fiscal 2010, equipment and other grew 36% benefiting in part from a non-recurring revenue in that quarter. We anticipate equipment and other revenue growth in mid single digits in fiscal 2012.

Now let me review the rest of the P&L, focusing on full-year results. Our fourth quarter results are posted on our website, if you'd like more details on the quarter.

Full-year adjusted gross profit was $355 million, up 5%. The gross margin was 52.5%, up 20 basis points. Gross margin improvements resulted from manufacturing efficiencies and product mix, but were negatively impacted by certain inventory charges.

We managed operating expenses well in the year despite $17 million in incremental expenses from acquisitions, which were not included in fiscal 2010's expenses. We kept adjusted operating expense dollar growth to approximately 50% of incremental gross profit dollar growth. Adjusted operating income grew 9% for the year. Operating margin expanded 70 basis points to 17.3% and adjusted earnings per share was $3.27, up 15%.

Moving to the balance sheet, for the year, we generated a record $93 million in free cash flow before funding $15 million in cash transformation costs. Now let me remind you that we began the year with $142 million in cash on hand. We then repurchased $50 million in Haemonetics' stock and we're closing the year with nearly $200 million of cash on hand.

Now let my provide more details on our guidance for fiscal 2012. As I said, for the year, we expect revenue growth of between 4% and 6%. I know many of you are interested in plasma, so let me spend a few minutes discussing our plasma revenue guidance in more detail, since this is our largest business and a key growth driver.

As we stated previously, we expect plasma growth to accelerate. Our major commercial plasma customers are forecasting collection volume growth of mid single digits for fiscal 2012. With low single-digit impacts from both share gain and pricing, we expect revenue growth of approximately 5% to 7% in the commercial plasma business, which represents greater than 70% of our plasma business. This growth will be offset by a further decline, more pronounced early in the year, in our non-commercial plasma business with the Japanese Red Cross. This decline relates to the JRC collecting more whole blood to address its growing need for red cells, resulting in more recovered plasma, a by-product of whole blood and therefore less apheresis-derived plasma.

As expected, long-term commercial plasma growth in collections is aligned with the global end user demand for plasma-derived drugs, trending in the 5% to 7% growth rate. Our commercial plasma business is accelerating back to those growth levels.

In summary, the vast majority of our plasma business is expected to grow between 5% and 7%, offset by further declines in Japan. The combination of these factors has us guiding 3% to 5% growth in plasma.

Adjusted for the $8 million of pretax transformation costs, we expect to see significant improvements in both gross and operating margins. Gross margin is planned to increase by at least 200 basis points in fiscal 2012. Product mix, structural cost savings and manufacturing efficiencies from automation will drive growth in our gross margin. We expect margins to expand over the course of the year, as we implement improvements and achieve cost reductions.

As we look at expense management, while we've done a great job of leveraging the P&L over the last 8 years, in fiscal 2012 we will be increasing our investment in R&D projects for our core business, and for the connectivity of our software and device products. We plan for expenses to grow at a rate of approximately 70% of incremental gross profit dollar growth, driving operating income growth of 8% to 10%. We expect fiscal 2012 adjusted operating margins to increase by about 70 basis points to roughly 18%.

Now, let me pause and bring something to your attention. Operating margin expansion will not happen right out of the gate. In fact, we expect to see operating margins compress in Q1. With the strength of our IMPACT program, we are making important investments in the sales force, as well as in the reliability of our OrthoPAT device. These investments are key to our growth in hospital disposables.

Additionally, as we execute on our transformation actions, we will deliver cost reductions in the back half of the year. We expect adjusted earnings per share in the range of $3.50 to $3.62 in fiscal 2012. We posted some scenarios on our website for the income statement and for product category growth that you might find helpful.

This year, we're simplifying our revenue guidance to our major product categories, that's plasma, blood bank, hospital and software solutions. Our success from fiscal 2011 provides us with a strong base for growth in fiscal 2012. We expect all product lines will contribute to growth in fiscal 2012. The strongest performance will come from plasma, hospital and software products. Hospital growth will be driven by further TEG market penetration, a new Cell Saver platform and IMPACT selling in North American and European hospitals. Software will benefit from the launch in community blood banks of our ElDorado Donor donation management software.

From a cash flow perspective, we're now beginning to harvest earlier investments in our installed base and manufacturing infrastructure and automation. This, combined with our strong underlying business growth and the operating disciplines that you've come to expect from this Management team, will permit us to generate $85 million in adjusted free cash flow in fiscal 2012, after paying $9 million in cash for the transformation costs discussed earlier in the call.

Additionally, our Board of Directors has authorized a $50 million share repurchase. We will implement this repurchase program as market conditions dictate.

So to summarize, in fiscal 2012 we'll see revenue growth of 4% to 6%, dropping through to 8% to 10% adjusted operating income growth, and adjusted EPS growing to between $3.50 and $3.62. Gross and operating margins will continue to expand and once again will generate strong free cash flow.

Our business fundamentals remain very strong. Haemonetics is performing exceptionally well. Our investment thesis remains solid and our vision is more a reality than ever before. Fiscal 2011 was a year with many challenges, which we were able to meet and for the most part, overcome. We look forward to a better business environment in which to operate in fiscal 2012.

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

Thanks, Chris.

As we close out fiscal 2011, let me say this, I'm pleased with our ability to advance our strategies and at the same time drive solid operating performance.

Revenue growth has been disappointing. But I believe we have put this behind us and we are positioned for success in fiscal 2012. We successfully integrated and rationalized our software business. We overcame some difficult and challenging economic conditions, and we continued to implement IMPACT selling while rebuilding our hospital sales force. These efforts allowed us to leverage mid single-digit revenue growth into another year of double-digit earnings per share growth.

The acceleration of our organic growth rates in fiscal 2012 will be an important next step in demonstrating the resilience and strength of our unique blood management franchise.

So why do I have confidence in the organic growth that we planned for next year? Well, first and foremost, I have confidence in our plasma business, which represents one third of our revenue. This business has stabilized, and Octapharma has signaled its expectation that their IG product will return to the market early in the fiscal year.

Additionally, several other commercial plasma customers have signaled increases in collections. Remember, adjusted for the extra week in the fourth quarter, our global plasma business grew 8% against a very weak comparable, but growing faster than our overall expectations of between 3% and 5% growth in fiscal 2012.

Second, I have confidence in our hospital products and the unique value demonstrated by our IMPACT approach to our customers. We have a great selling tool, an enhanced product offering and a winning team in place to execute on our plans to grow our hospital business between 7% and 10%.

Third, our business in emerging markets, which totaled more than $100 million, growing double digits in fiscal 2011, will continue its positive growth trajectory, growing double digits once again in fiscal 2012. This growth will continue to be driven by our platelet disposable business, but importantly, this growth will also be fueled meaningfully by our hospital product lines.

Fourth, we successfully completed integration of the 4 acquisitions that we made from late fiscal 2009 to early fiscal 2011, with the most significant being the integration of Global Med, forming a single nearly $70 million global software business.

We are currently implementing and will shortly go live with the first installation of our new donor management software product for community blood banks. The pipeline for this product in blood centers and the need for our transfusion and cellular therapy management products in hospitals give me great confidence that we will grow our software business between 9% and 11%.

And finally, our strong cash position with nearly $200 million cash on hand will allow us more flexibility to aggressively pursue additional acquisitions that will enhance our blood management solutions offering and expand our presence in global markets. The recent acquisition of Caridian by Terumo confirms the value and potential growth associated with blood management. It also confirms the size of the overall market opportunity at roughly $12 billion, a figure consistent with our own estimates. Clearly, this is a market worth pursuing.

Two important elements of this value chain are whole blood collection and blood typing. So let me comment on each of these.

I'm happy to report continued good progress in our approach to automating whole blood collections, and remain very excited about the opportunity this market represents. We intend to enter this market late in fiscal 2013, with an entry level floor automation product suite focused on data capture and enhanced collection, which will improve the productivity of mobile collections.

Development of our automated whole blood collector will be concluding this quarter and it will remain an experimental device until the completion of the NDA of our whole blood disposable in 2014.

We have other activities planned but not consummated to further accelerate the broadening of our offering related to whole blood.

We also continue to make good progress with regard to blood typing, the next product under development that will allow us to expand our position in blood management. On the basis of results achieved in the lab, we believe that we will be able to meet our goal of forward and reverse typing and screening for adverse antibodies in less than 10 minutes. A feasibility device to demonstrate the stability, accuracy and speed of testing will be completed in July of this year to be used in a definitive trial in a clinical setting, head to head with existing FDA-approved technologies. A readout of our results is planned for early October.

As we move from the lab into a clinical setting, we are actively reviewing the commercialization approaches of this truly revolutionary device. We look forward to providing more details of our progress on both of these key initiatives at our investor day on May 12.

As I close, let me thank our employees for their continued commitment. Fiscal 2011 was a challenging year on many levels, yet they remained focused on our goal of helping our customers transform their business during one of the most challenging economic periods in our country's history. These efforts allowed us to translate mid single-digit revenue growth into a double-digit earnings per share growth for the eighth straight year.

We are proud of this strong financial performance that you've come to expect from this Management team. And now, we'd be happy to take your questions.

(Operator Instructions)

Larry Solow with CJS Securities. Please proceed.

Hi, good morning guys.

Hi, Larry.

Good morning, Larry.

I'm going to leave the plasma alone, because you guys gave some good color there and I'm sure some others will ask. But just on the gross margins, they've been sort of flat, slightly up the last couple of years and I know we've been looking at some increases. Why all of a sudden do you see this nice acceleration expected of 200 basis points? Is it just a lot of things coming together at once? Any more color on that, or what's the real main driver behind it?

Yes, Larry, let me take that.

We actually-- if you could disaggregate our numbers, you would see that there was a positive momentum coming from cost saving initiatives that we had set up last year and which are going to continue into this year offset by absorption. You could see that our organic growth was flat and so when you're not growing organically, it's hard to leverage your fixed infrastructure.

As you can see from our-- the plan that we've laid out for this year, we do anticipate solid organic growth and that organic growth will help to drive, that combined with the cost savings initiatives that we initiated last year and which will continue into this year, will drive the margin expansion that we expect to see.

Okay, and then just a quick follow up.

I think this year you -- normally I know you guys target spending about two-thirds of your increase in gross profit, your incremental gross profit increase, and this year it looks like you spent less than 50% of that. I know normally you sort of create like a discretionary pool. Was there anything this year that was vital that you cut or what did you not spend on? And do you sort of have a little bit of that excess pool carried over for this year?

Larry, this is Brian. I'll start and then maybe Chris provide a little more color there.

We always go into the fiscal year with what we call a lock box, to be able to account for the inevitable that we expect in our business. But the reality is that we have to continue to invest in this business. We cannot sustain cutting things that are important for our growth in the future.

We didn't cut anything that is alarming for us. But what this reflects is the fact that we have to make these investments to sustain our growth rates and move from what is mid-single digits today to upper single digits as we go forward. That, being fueled by acquisitions and new product launches later in our strategic plan, moving us back to a double-digit growth rate. So that's what this reflects.

And another important element that I'd add is that, as you know, we tie our bonus performance to delivering our commitments to Wall Street and we didn't make all of those commitments. Therefore, there was under spend in bonus this year and you'll see some growth plan next year, because we anticipate meeting our commitments and therefore funding bonus.

Larry Keusch with Morgan Keegan. Please proceed.

Hi, good morning, guys.

Hi, Larry.

Just-- so 2 questions for you.

First, Brian, I want to make sure I caught this, could you run through again on auto whole blood? You made a distinction between something that you were going to launch in the end of fiscal 2013, and then the time line associated with the, I guess full blown auto whole blood system that you're developing?

Yes, what I was talking about there, Larry, is at the end of the fiscal year 2013, we'll launch what we call an entry level floor automation product suite that's focused really on data capture and enhanced collection.

We'll give you a lot more color on this at our investor conference next week, but this is the combination of what we've learned from a study we did with consultants this past year. We spent a lot of money to understand what our go-to market would look like, as well as where was the real opportunity for us to save our customers cost, as well as enhance the collection process, combined with the regulatory pathway. So we'll provide more color for that next week at the investor conference, but that's what that contemplates.

Okay, got you. And then the second question is, if you could help us understand sort of Management's thought process as well as the Board's thought process in the following.

When you look at the balance sheet for the Company, you've got $200 million in cash, virtually no debt; as Chris indicated, you're going to generate roughly $85 million in free cash flow. And I'm not understating the importance of the $50 million in share repurchase, but I'm just really trying to understand why this Company continues to want to run with what I would consider a very underlevered balance sheet with very good cash flow generation and obviously mechanisms, if you're going to do acquisitions. Which is, you clearly indicated, outside of just your cash position. So if you could walk us through, again philosophically, why the focus on maintaining so much cash?

Yes, this is a bit of maybe a lengthy question and an even lengthier answer, but I'll try to be succinct here.

We did not do any acquisitions in fiscal 2011. We were really concentrating on integrating the acquisitions that we had made over the previous, call it 15 months. And I'm very pleased with the work we've done there. We understand better how to do due diligence, we understand better how to plan for the integration, we understand better how to integrate these businesses into our overall blood management solutions offering.

What we're signaling to you is that we plan to get very aggressive once again relative to acquisitions.

One of the things that, in the question that Larry Solow just asked, you talk about, where we're going with automated whole blood. The regulatory pathway is certainly one that we have to contemplate. We talked about the NDA in fiscal 2014, but we also contemplated other activities that we're not prepared to speak about here.

We're clearly signaling that we're going to be more aggressive. Our current growth rates of 4% to 6% guidance only contemplates organic growth. Remember, that our 5% growth last year was almost exclusively from acquisitions.

So, we're back to a growth profile organically with our base business, and we also plan to be more aggressive relative to acquisitions, which will be accretive to those growth rates.

Steven Crowley with Craig-Hallum Capital Group. Please proceed.

Good morning. Thanks for taking my questions.

Hello, Steve.

In terms of the fourth-quarter performance, I was looking at the performance of the segments versus what you had guided coming out of Q3. I think you largely tackled the $5 million to $9 million negative variance in plasma versus those thoughts by largely calling that a Japan issue.

But in software, there was about a $3 million negative variance from the $70 million that you had guided to coming out of Q3 versus what you actually delivered last year. Now, I'm trying to understand what transpired there and what our level of comfort about that business growing as rapidly as you think, should be?

Let me jump in on software, Steve.

As you know, the software revenue recognition is heavily influenced by GAAP and certain trigger points that may be, to an outside or an untrained eye, a little non-intuitive. Certainly, we had a bit of that in the fourth quarter and-- but none of the good work that we've done in development or the customer relationships that we're establishing are at risk. It just means it gets pushed out a little bit.

Yes, more a timing piece than anything on thing on the software, Steve. But let me come back to your point on plasma, because I want to make sure we're really clear on plasma.

Plasma in Q4 was not all just the result of Japan. We had a number of collectors who are now really struggling to ramp up their collections. We saw in the fourth quarter coming into Q1 collection rates, collection reimbursement to donors increased. We saw collection hours increased, changed.

Why do I have such confidence in plasma as we go forward? Because that demand is there. We see it. We see the demand of the end market in drugs. We see collections trying to be ramped up rapidly.

Just to put that in perspective, we've just completed April. April finished last month, the first month of the fiscal quarter. We already see our plasma growth at 4% to 5% through the first month. Now one month does not make a quarter, but remember that there's a fair amount of plasma business in our distribution markets and those markets don't see those orders ship until typically the final 5 to 6 weeks of the quarter. So I feel very good about the plasma business. I just want to make sure I'm clear in terms of what took place Q4, what's coming into Q1 of this fiscal year and why I do have confidence going forward.

That's helpful.

My follow up is historically you've talked about some aspirational goals for the growth of the business being kind of 10% to 12% on the top line and 12% to 15% on the operating income and EPS line. Should we view those as under review or what are your-- have they changed at all? What kind of color can you give us there? And thanks again for taking the questions.

Yes those growth goals are always under review, clearly they're always under review. But we're not backing off those growth goals. They may seem aggressive in our planning period as we look at that, but we're gaining more and more confidence in our automated whole blood product and recognizing what this means for our customers.

Importantly, we're going to start working more aggressively with customers in this fiscal year and be in that market next fiscal year. As we anticipated, a little bit differently than we anticipated, because of the regulatory pathway, but we're going to be in that market. That's going to be important helping us understand where that goes, and that will allow us to start to generate some nice revenue from new products.

I do expect our base of organic business to accelerate back up into the, call it 6% to 8%, 7% to 9%, over time. I expect new products to contribute that 1% to 2%, and even probably more than that. And as I've already signaled, we are going to get more aggressive with acquisitions and we have the money to do it. Importantly, not just the money, but now I would like to say we have the knowhow to do this. I think we can do it even faster, even better.

James Sidoti with Sidoti & Company. Please proceed.

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

Yes, good morning, Jim.

Good morning, Jim.

First question, you talked a little bit about an OrthoPAT recall, but I think you said units shipped prior to 2002. Now that's pretty early in the lifecycle of the product, is that less than 10% of the fleet that's out there?

No, that represents about half of our fleet that is out there, Jim. But let me kind of provide a little more color on that.

The issue has to do with these devices pre-2002, did not have what we call a fluid ingress containment bag, which is a bag that is used to collect blood from a disk leak, should it happen, or collect cleaning fluids on the cleaning of a device after the use of a device. So we see it importantly that many of these devices were coming back for repairs that were expensive for us and creating a lot of dissatisfaction for our customers. So, that represents about half the fleet.

The fleet today is generating roughly about a half a disk per week of revenue. As you know, our goal and our ability is to generate about 1 to 2 disks per week of revenue. So, our selling organization is out there as we speak, moving some very unproductive devices into our accounts that are generating our revenue.

90% of our revenue is generated from 40% of our customers. So, we will shift those unproductive devices pre, or I'm sorry, post-2002 unproductive devices to those customers. We have about roughly just under 400 devices that we can now move out to the market and we will begin building new devices to supplement those in July, roughly at about 160 devices per month.

So everything that we've told you, everything that relates to this recall, is contemplated in not only our fiscal 2011 finish, but our fiscal 2012 guidance.

Alright. My follow up to Chris, can you tell us what the impact of currency was in fiscal 2011 and what you would expect it to be in 2012?

Well, our planning assumption is always that there's no change in rates and looking at the full year, it was a modest headwind to our sales growth. And our operating earnings in constant currency actually grew 13% compared to the 9% that we reported. So it was a bit of a-- in the end, a bit of a headwind to our earnings and results.

David Lewis with Morgan Stanley. Please proceed.

Good morning.

Hi, David.

Brian, first a strategic question.

You mentioned Terumo in your prepared results. Just given your experience with the Japanese government, or JRC specifically, and with the Terumo/Caridian deal and the government's preference for sometimes hometown competitors, would you expect any share disruption in the next 2 years based on the integration of Terumo and Caridian?

Well, if we go back and just take it on the face value of what the Japanese Red Cross has stated is, they've always wanted to see about a 50/50 balance relative to the share of different competitors.

Our platelet business is not far from that today. Our plasma business is certainly better than that, it's the preferred product, the preferred way to collect when done through aphaeresis, obviously being impacted by the collection of whole blood. So do I see it changing? No, I don't see it changing appreciably. Certainly it's going to provide a more robust device with Caridian's double red cell collection, something that the Japanese are not doing today and likely aren't going to do for at least several years.

Okay, and just a quick follow up maybe for Chris. Chris, I'm still confused on gross margin outlook. Basically your 200 basis point expansion is the biggest GM year in 3 or 4 years, and I appreciate last year was pressured because of the lack of organic growth, but can you just point to a specific product line that may be driving the performance of which you're guiding to? Because it doesn't sound like it is currency necessarily, but I imagine there's at least 1 or 2 primary drivers of that?

That would be helpful, thank you.

Let me just say and something that I didn't make clear in my earlier response to this question. We did have some-- over $1 million of inventory reserves that were taken in the fourth quarter of this year, which in a sense dampened some of the expansion that you might otherwise have seen.

I will go back to the earlier explanation, David, which is accurate, that we changed out manufacturing leadership and supply chain leadership over a year and a half ago and that team has taken on aggressive cost management goals. They had a goal last year, which they have achieved, and a goal this year that they achieved.

The primary difference between the performance last year and what we expect to happen this year is absorption, which probably cost us $7 million to $8 million over the course of the year.

In terms of particular product lines and mix, of course TEG is getting scaled and it is a very high margin product line. The introduction-- well, the general growth rates that we're anticipating for our hospital products tend to be higher margin products and those are contributing and of course software growing is also higher than our average margins.

Dave Turkaly with SIG. Please proceed.

Thanks. Just quickly back to the, what you mentioned in the quarter on the SG&A spend, can you quantify what impact that bonus accrual actually had because the number for SG&A was a little bit under what we were expecting?

Yes, about -- it's hard to -- I'd say around $6 million, David, that the effect would be of non-accruing a normal bonus in the quarter and of unbundling previously booked bonuses because we didn't achieve our targets. So, that's the sort of swing when you look forward to Q1 that in a sequential trend that you'll begin to see. Plus in Q1, as I said in my comments, we're going to start to spend on the sales force and marketing initiatives.

Thanks, and then given the large impact, do you expect the new accounts to have in the year, can you -- do you have any goals in terms of the number of total accounts for impact? And did I hear you right, did you say $9 million of that incremental disposable business will come from those accounts? Thanks.

Yes, David, this is Brian.

Next year, we're going to shift from just the numbers, because this year we really wanted to focus on numbers to prove the concept. I think we're well past that. Mike Kelly and his team have shifted their focus from just proving this concept into accounts and really focusing on some very large prestigious premier type accounts. I hope to have some things to talk about at the end of Q1 that will reinforce that.

So, we're going to shift from just simply giving you numbers of accounts and we're going to focus on the dollars that drive the P&L. And yes, that's what I said, of the $10 million incrementally planned in our North American hospital business, $9 million of that will come from IMPACT accounts. That compares to $3 million this year. So we see that more than tripling next year. And that's important when you consider - is this really working? We believe it is.

Joshua Zable with WJB Capital. Please proceed.

Thanks for taking my questions.

The first one just goes back to Q4, 2 items. First on the plasma, I know you guys did a good job explaining and I appreciate it. I guess I'm just still trying to understand, from a timing perspective, in middle of the quarter, you guys had said sort of there's a 17% increase in average weekly shipments, 5% increase, so obviously with the business being effectively flat, I'm just wondering sort of intra-quarter, what changed? Because I know now this quarter you're seeing things up and I'm just kind of wondering timing wise.

And then also on Q4, just the TEG business, obviously a key growth driver here was flat, just what's going on there? And then I have a follow up on the outlook. Thanks.

Josh, let me jump in on TEG.

We were disappointed with the results in TEG in the fourth quarter, it's something that we see reversing itself in the first quarter. And the primary issue related to some open sales territories in Europe where we weren't getting as much traction as we anticipated and those have subsequently been filled.

And I'd also, Josh, just a little bit more color on the TEG, is we're up against a very strong comparable in FY 2010 Q4 where we grew 40%, so the combination of those two.

Nothing to be alarmed about with TEG. We feel very, very good about that product and in fact, as I said in my prepared comments, the lifting of the warning letter really allows us to pursue some markets where we couldn't pursue it before and some enhancements that we couldn't pursue before. So this business continues to be a growth driver for us and it clearly will continue to be as we go forward.

Shifting to your question on plasma, it really is a couple of factors. It is one piece that it appears that Baxter was able to cover and get most of, better than half of, the Octapharma share that was lost as a result of the recall. So that was certainly somewhat of a surprise to us. I see that being aggressively attacked as we go into late this quarter when Octapharma comes back on the market.

And then it was mainly a timing piece that we saw with a number of customers. We've really had some challenges with our customers giving us accurate forecasts and we're talking with all of them now, so it's not a matter of something we're not seeing.

They are not collecting at the rates that they are forecasting to collect at, and that is creating some very, very significant pressure on our customers. In fact, one of them increased their rates so significantly at the end of the quarter-- the beginning of this quarter, increased their reimbursement rates. That is something that's a huge hit to their P&L, that's how rapidly they need to accelerate collections for them.

And that's why I gave you color as we came into April on what we're looking at in Q1 of this fiscal year, I want you to have the same confidence I have here in where we are.

That's very helpful, guys. And then just on the outlook, sort of 2 clarity questions. First, Chris, on the operating margin sort of guidance, you said Q1 should be down. I'm just trying to get clarity, down sort of sequentially from Q4 or from the year sort of average?

And then question two, on the growth on the hospital side of the business, 7% to 10%. I know you have a new Cell Saver, you're having some obviously recall on OrthoPAT. I guess I'm just trying to understand sort of how we should think about the business going forward, because when you guys give color next time, sort of how you're doing relative to your expectations? Thank you.

Well let me take the hospital piece first, Josh. And we get a lot of feedback throughout the fiscal year that we really needed to take our guidance and put it more into general blocks of products, and you see us doing that this year.

We're not going to break out Cell salvage from OrthoPAT from TEG as we go forward. We'll certainly provide color where it's relevant, but we're reporting on the entire hospital segment. And the reason for that is frankly because when you break them down, they are so small and shifts and swings can be so significant, that it kind of clouds the real picture. So we're taking that advice seriously and so we've guided into these bigger categories.

But we feel very, very good about the launch of the Cell Saver Elite. It's now in the market. We've had some early successes with it. It's replacing a 14-year-old platform. It's the newest device out there, and it provides a significant number of enhancements, especially when you consider helping our customers with blood management.

TEG continues to be a growth driver. It will continue to be a growth driver. As I've said, we can now move into markets that we couldn't move into before because of the warning letter, and start to build enhancement that we couldn't attack before, so we feel good about that.

And what we're doing with OrthoPAT, while certainly it's going to dampen the initial quarter or two, we're going to touch every single OrthoPAT customer in the world. We're going to retrain them on the device. We're going to improve the reliability and functionality of the device.

And what I didn't say is that we also have a number of R&D projects working where we'll launch further enhancements at the end of this fiscal year that will take our OrthoPAT device from a blood management standpoint to a different level with our customers, addressing some additional customer feedback that we've received.

So I feel very, very good about what we're doing with the hospital business and we are intentionally signaling that impact selling is going to be certainly more accretive to our overall growth rate in fiscal 2012 than they've been in the past.

And just in terms of margin, yes, you'll see it dip down from the annual rate. And that has to do with the investments that we're making.

Charley Jones with Barrington Research. Please proceed.

Good morning. Thanks for taking my questions.

Good morning, Charley.

Hi, Charley.

This first question is on gross margin. I was just hoping you could go a little bit further and be a little bit more specific on the impact to expect, price/mix and manufacturing efficiencies, to have on the 200 basis point improvement?

We'll give more clarity at our investor day.

I mean maybe qualitatively, which one is the biggest impact? How much -- or I guess the major question is around, I guess the one I'm most curious about is manufacturing efficiencies. Can we assume that 50 basis points of that is from there?

You can assume it's even larger than that, Charley. And again, we typically don't break those down, but you're seeing really 2 things.

One of them is that we had expenses in Q4 of this year. We had the $1 million reserve we took for the OrthoPAT to fix some devices that were out there. So you saw that impact on our full year and our Q4 results, that's not going to repeat next year.

And as well, is we made some great improvements in manufacturing cost reductions last year that were kind of hidden a little bit relative to absorption. We didn't hit our organic growth rates that we anticipated. I fully expect that not to repeat this year. So not only will we continue to gain the benefit of that work, but we have other significant reductions planned for this year, as well as the startup of our new plasma facility in Salt Lake City here in late Q1.

So as maybe a quick follow on to that, if we put ourselves out 12 months and, assuming all the businesses are growing at the same rate - which they obviously won't, but - do you still see gross margin improvement possibilities out into the future from there?

And then my second question is on capital allocation. If I'm hearing you correctly, the Company wants to grow double digits and you want to plan for that. So, you've got $85 million in cash flow and $50 million already spoken for. Can we assume the Company is willing to go to a net debt position over the next couple of years to achieve that or do you need to do that and I guess maybe even more importantly, would that even be a consideration that you would contemplate?

Let me take your second question first, Charley. The answer to that is unequivocally, yes. If we find the right opportunities to pursue, we will pursue them. We've got a good cash position. We've got strength. Chris and I meet with a number of different bankers who would be more than willing to lend us cash at any point in time. So, for the right opportunities, you can believe that we would pursue those independent of our cash position.

In terms of margins, we've been candid in saying that our goals are to get north of 20% and we believe that over the strategic planning period and we believe that the fundamentals of our business will permit that to happen.

Remember when you're thinking about gross margins, that the plasma business, which has dominated our growth at least in recent years, is operating at a much lower gross margin. In fact, we took a hit in gross margin trends when we invested in the growth of that business and you can see that in our long-term gross margins.

The other growth drivers that are emerging in the hospital market have much higher gross margins and therefore that's a contributor.

We continue to believe that our extended supply chain is a great opportunity and again, while we've exploited that to a certain extent up until now, there are good opportunities for the future.

Scott Gleason with Stephens. Please proceed.

Hello, Brian and Chris, thanks for taking my questions.

Sure, Scott.

Brain, I guess first to start off with just in terms of the guidance, if we can dig into it a little bit more.

Can you give us a sense of first on the plasma side, does your guidance incorporate any potential share gains from Baxter as that contract comes up? And then secondly, I guess when we look at the hospital business, the 7% to 10% growth that's implied there, can you give us a sense for how much you guys are kind of factoring in, in terms of kind of elective procedure rebounds or just kind of the overall market conditions?

Let me take your first question first, the Baxter piece.

Our guidance does not contemplate any significant share gains relative to the Baxter business. Baxter has not made any decisions, at least they've not told us of any decisions. So, it does not include anything there.

Relative to the hospital business, it's -- we do expect elective surgeries to start to rebound, we started to see that late last fiscal year, but what this is more reflective of is our IMPACT results, Scott. This is really a reflection of pursuing blood management solutions, because this is what really helps hospitals with what is important to them - - reducing costs, improving clinical outcomes.

We know this works. We've gone from a dead stock 2 years ago to 197 accounts. We went from 66 this year to 197 accounts. It's -- the results speak for themselves. It's unfortunate they're being offset by other factors in the marketplace, but we're addressing those as well. And that's why I feel so good about the growth we'll generate in this segment as we go into the new fiscal year.

Thank you. Ladies and gentlemen, there are no further questions at this time. I would now like to turn the call back over to Brian Concannon for any closing remarks.

Thanks, Lacy.

As I said when I began my comments this morning, fiscal 2011 was a challenging year for us. However, we weathered these challenges well and made tremendous progress strategically while growing earnings per share 15%. This is another solid performance for your Company.

It is the progress we made strategically that excites me the most about our future. Our growth in IMPACT accounts proves that we can implement unique blood management solutions that help our customers both economically and clinically. And you will see us build up this success in fiscal 2012, with more of our sales growth being generated in IMPACT accounts; it is no longer a small contributor to our growth.

IMPACT's selling gaining momentum, the plasma market rebounding, and emerging markets continuing to grow double digits will allow us to return to mid single-digit growth in our base business in fiscal 2012.

Importantly, we have approximately $200 million in cash on hand, giving us greater flexibility in pursuing additional acquisitions that will contribute to our unique blood management offering. And our efforts in R&D are beginning to pay dividends. Our progress with automating whole blood collections and our new blood typing products show real promise for the future.

We look forward to telling you more about this at our annual investor day here in our corporate headquarters in Braintree on May 12.

Thank you for your time this morning.

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