Haemonetics Corp (HAE) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2012 Haemonetics Corporation earnings conference call. My name is Fab and I will be your operator for today. At this time, all participants are in 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 Susan Hanlon, Vice President of Finance. Please proceed.

Thank you. Good morning. Thank you for joining Haemonetics first quarter fiscal '12 earnings webcast. Today I am joined by Brian Concannon, President and CEO, and Chris Lindop, CFO and Vice President of Business Development.

Please note that our remarks today include statements that could be characterized as forward-looking. Our actual results may differ materially from the anticipated results. Additional information concerning factors that could cause actual results to differ materially is available in our 10-K and 10-Qs.

On today's call, Brian Concannon will review highlights of the quarter, Chris Lindop will review our operating performance and annual guidance in more detail and Brian will close with summary comments.

Before I turn the call over to Brian, let me mention the treatment in our adjusted results of certain items which by their nature and size affect the comparability of our financial results. Consistent with our past practice, we have excluded certain charges from the adjusted financial results we will talk about today.

In fiscal '12, our first quarter adjusted results exclude $300,000 in pretax costs related to certain transformation activities which were outlined in our fourth-quarter conference call in May of this year. In fiscal '11, our first-quarter adjusted results exclude $1.7 million in pretax costs related to certain transformation and integration activities associated with our Global Med acquisition.

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.

Thanks, Sue, and good morning, everyone. I am pleased to report a return to mid-single digit organic growth for our business in the first quarter. Plasma, our largest business, grew at 12%, while software was up 10% and our TEG business continued with strong positive growth, up 19% in the quarter. Additionally, our double red cell business returned to growth, up 5% year-over-year, aided by success in our impact accounts and platelet revenue grew 3%.

Foreign-exchange accounted for just over half of our growth in the quarter. This currency effect is expected to moderate for the remainder of fiscal '12. I am particularly pleased that growth was spread across multiple products, which speaks to the broader strength of our revenue growth profile. Momentum continues to build and revenue growth will be in the 4% to 6% range for the full year.

We said last quarter that you could expect to see a return to revenue growth in fiscal '12 and this is happening. Even more encouraging is that this growth came in spite of the impact of the voluntary recall of our pre-2002 OrthoPAT devices that we announced in May.

To put this into perspective, this recall cost us more than 1 percentage point of growth in Q1. So you can see the overall strength of our revenue growth.

Now let me turn my attention to the recall and update you on our progress. As a reminder, this decision was made after a review of the product's service and repair history. While this recall was voluntary, we felt the need to act decisively to solve a problem which was giving rise to unacceptable levels of fleet maintenance, maintenance which resulted in excessive downtime and dissatisfaction for our customers, and lost revenue and increased costs for Haemonetics.

We expected that this decision was going to put pressure on business performance in the early part of the year. This has happened and we have seen a 13% decline in OrthoPAT disposable sales in the first quarter. Our recovery plans anticipated manufacturing up to 1200 devices with the majority of these devices being available in the second and third quarters of fiscal '12. As we began to order the components for these devices, we experienced supply-chain constraints on certain key subcomponents. As a result, the build has proceeded more slowly than we originally expected, so we will see this impact sales and gross profit more than originally planned.

I am happy to report that we began the build early in the second quarter and our current expectations are that we will complete building the new devices in Q4, which represents about a three-month delay from what we originally planned. Bottom line is that by the end of this fiscal year, we will have a more reliable and robust orthopedic blood management product.

In addition to the OrthoPAT issue in the quarter, we also had to substitute our HS core bowl with a more costly and consequently less profitable product. HS stands for high separation and this bowl is a differentiated product used in Europe to collect plasma for transfusion. These actions were taken in response to customer complaints received about isolated incidents -- instances of particulate found in plasma collected on the HS bowl.

While our medical and R&D teams have concluded that the particulate is benign, we want to ensure that we understand and can correct what is causing these isolated instances. We are close to completing our root cause analysis and hope to be able the transition our customers back to the HS bowl shortly.

However, until this is complete, it represents a slight headwind to revenue growth but a more significant headwind to our margin improvement plan as the substitute product has a higher cost.

At the end of last year, we made estimates of what the OrthoPAT recall would cost us in terms of lost revenue and gross profit. Admittedly we were early in the process. We now know that the impact of the recall is about double our original estimate with the largest impact coming from the temporary loss of sales and gross profit. We have been able to compensate for most of the revenue loss with strength in other parts of our business. However, the impact to gross profit and earnings is more significant.

So what does all of this mean? When we consider the impact of lost revenue in gross profit combined with the extraordinary expenses associated with these challenges, we estimate that it has cost us more than 100 basis points of revenue growth and $3 million of operating profit or $0.08 per share in the first quarter.

From an earnings perspective, we simply could not overcome the headwind that these quality issues represented despite the relative strength of our other businesses. For the full year, we estimate that the total impact will be closer to $10 million or $0.25 per share with all but $1 million of that amount being nonrecurring.

Said another way, of the $10 million impact of fiscal '12, $9 million are one-time sales, margin, and cost headwinds that we will not face in fiscal '13.

Now, we have a well-earned reputation for knowing how to manage a P&L, so some of you may ask why not stop something else to save your way back to plan? You can be sure that we are taking measures to control our spending throughout the remainder of fiscal '12. However, we have worked very hard to return the overall business to mid-single digit growth. We do not want to put the longer term prospects for growth at risk by implementing purely short-term spending reductions today.

As a result, most of the cost of quality which I have identified will live through in our income statement as revised expectations for the full year. The important point is that the vast majority of what we expect to incur, about 90%, will be one-time impacts to the P&L rather than recurring concerns that we will need to overcome in other ways. Chris will provide more details in a moment.

Now let me briefly describe some of the other highlights of the quarter. We've made tremendous progress with our Blood Management Solutions strategy. A number of world-renowned institutions have signed contracts with Haemonetics to implement our solutions including the Johns Hopkins Hospital for BloodTrack. Englewood Hospital, one of the premier blood management institutions in the country will be implementing IMPACT Online.

Our strategy of approaching blood collectors has also paid dividends. Life Serve Blood Center, the US Blood Center we highlighted at our investor conference in May, is now working more closely with a three-hospital system that recently implemented IMPACT Online, thereby solidifying the blood center, hospital, and Haemonetics relationship.

Furthermore, we are piloting IMPACT Online in our first hospital system outside of North America at the world-renowned John Radcliffe Hospital in Oxford, United Kingdom, which first developed and then fully implemented BloodTrack and remote allocation throughout its centralized transfusion service. To date, we have 17 hospitals under contract with IMPACT Online and an expanding pipeline of opportunities.

We continue to see success in our and IMPACT selling. In the quarter, 11 new accounts entered the program, taking advantage of our Blood Management Solutions. This brings our total number of IMPACT accounts to 208.

Our TEG product continues to attract the attention of our customers as well. This is especially true with IMPACT selling as TEG is used in over 28% of all hospital IMPACT accounts today. In the quarter, TEG disposables grow 19%. Clearly we are continuing to gain traction.

The prototype for blood typing is now complete and we are conducting forward and reverse typing and antibody screening preclinical studies. To date, we have conducted several hundred type and screens on distinct blood samples. All expected benchmarks for quality and speed are being met and there have been no unexpected issues. The full study results will be delivered in November, as previously committed.

We continue to make good progress on the key development milestones of our automated whole blood project and expect to provide further updates next quarter.

We have much work to do as we accelerate our Blood Management vision. Clearly the voluntary recall of our pre-2002 OrthoPAT has consumed our hospital sales resources and kept them from expanding our IMPACT selling as much as we would have liked. But all other product lines are growing and we have quantified the quality problems and we have plans to address them, plans that will resolve these specific quality issues and further strengthen our business for the future.

With that, let me turn the call over to Chris Lindop, our CFO. Chris will cover the underlying trends in each of our product lines both in the quarter and for the remainder of the year, and he will review in more detail the results of the first quarter.

Thanks, Brian. As Brian commented, in Q1 we are off to a good start to achieving our revenue goals for fiscal '12 with 5% topline growth and more than half of our revenues growing in double digits. So let me start by the reviewing the revenue results, then I will walk down the income statement providing some color on the quarter.

Plasma revenues grew organically 12% to $62.8 million for the quarter even as we continued to face headwinds in our Japan plasma business, which declined 5% in the quarter. As a reminder, Japan plasma revenues declined in fiscal '11 due to a change in the collection practices, and that continues today.

As Brian indicated, the impact from the HS core substitution on plasma revenues is nominal. Clearly the steps being taken by our commercial plasma customers to accelerate collection volumes are impacting the performance of this important part of our business.

Our plasma growth was driven by increased collections in the commercial plasma business. Remember, we told you that last year we were able to negotiate contract extensions until fiscal '14 for any contracts that were expiring in the near term, providing further stability for our plasma business. There were no material market share changes impacting growth in the quarter.

In May, we guided to plasma growth of 3% to 5% for the year and we continue to be highly confident in our ability to meet that target. Last year's growth rates for our plasma business reflected a decline of roughly 5% in the first half of the year, returning to low single-digit growth in the back half of the year. As such, the comparative collection trends against the weak first-half last year should result in higher than average growth in the first two quarters of fiscal '12.

The Software Solutions business also had a good quarter. Sales were up 10% organically to $18.2 million in the quarter. We remain confident about the outlook for our Software Solutions business, and we are confirming our previous guidance of 9% to 11% growth for the full year.

Our blood sensor revenues were up 3% at $49.2 million for the quarter, ahead of our annual fiscal '12 guidance of between 1% and 2% growth for the full year. The platelet business with revenues of $37.3 million increased 3% in the quarter, reflecting growth in emerging markets offsetting declines in Western Europe related to the changing platelet collection practices of certain customers.

Red cells delivered $11.9 million of revenue in the quarter, an increase of 5% year-over-year. And as we said during fiscal '11, we expect this market to return to modest growth in fiscal '12 after eight quarters of declining performance.

We are confirming our annual blood center guidance of between 1% and 2% growth over last year, reflecting red cell growth offset by lower growth in our platelet business. Now you may recall that on a comparative basis we enjoyed particularly strong platelet revenues last year as a result of the severity of the dengue fever outbreak in our Asian markets.

Moving to the hospital business, our hospital products decline 3% to $29.1 million in the quarter, well behind our full-year growth guidance of 7% to 10%. Excluding the Q1 decline in OrthoPAT related to our voluntary recall, our hospital products were flat in the quarter.

TEG disposables revenue was $5.6 million, growing 19% in the first quarter. The TEG disposables revenue growth came from continued penetration at key impact accounts in North America and significant growth in China where the relative scarcity of blood components has focused healthcare providers on the value of the targeted transfusion medicine, which TEG enables.

OrthoPAT disposables revenue was $7.8 million in the quarter, down 13% or $1.2 million. As Brian mentioned, the impact of the voluntary recall of the pre-2002 OrthoPAT fleet is having a negative impact on disposables growth rates in the first half of the year as we ramp up manufacturing to replace this important installed base with newer and more reliable equipment.

We anticipate further declines in the second quarter and then gradual improvements in momentum for the OrthoPAT driven by new machine placements in the back half of the year.

Surgical disposables revenue was $15.7 million in the quarter, a 4% decline year-over-year. We have launched our new Elite Cell Salvage device in North America and in Europe. Strong initial interest in this device will not positively impact growth rates until later in the year as we gain momentum with this important improvement to our Cell Salvage offering.

Our expectations for hospital disposables for the year is for 7% to 10% growth resulting from replacement of the recalled portion of the OrthoPAT fleet in the back half of the year and the acceleration of Elite.

Equipment revenues were $11.4 million in the quarter, down 13%. As we've noted in the past, equipment sales can be lumpy relative to our disposables business based on the timing of orders, year-over-year declines primarily related to the timing of orders in our distribution business under tenders, which we have already been awarded. For the full year we are confirming our original equipment revenue growth guidance of mid-single digits.

For the full year, currency is expected to benefit revenues by approximately 1% as yen and euro rates are expected to remain relatively strong through the fiscal year. Due to our hedging program, this strength will not impact the bottom line.

So in summary, we are off to a very good start against our plans for the full year. Topline growth of 5% with underlying recurring disposables growth of 6% and we continue to anticipate revenue growth between 4% and 6% for the full year.

Now let me review the rest of the P&L results and again these numbers are adjusted, as Sue said.

First-quarter fiscal '12 gross profits were $88.8 million, up $2.3 million or 3%. Gross margin was 52%, down 50 basis points from a gross margin of 52.5% for the full year in fiscal '11. In the quarter, we are starting to see the impact of our gross margin improvements initiatives for fiscal '12, offset by mix related to the relative strength of plasma, our lowest gross margin consumable, and the relative weakness of OrthoPAT, which is one of our highest gross margins.

The quality issues that Brian described cost us more than $2 million or 130 basis points of gross margin in the quarter. For the full year, we guided to gross margin improvements in access of 200 basis points based on a combination of leveraging our growth and structural cost savings. Cost savings programs were identified and resourced and remain on track. However, the quality issues described by Brian have put pressure on our margin. Therefore, our expectation is for gross margin growth of more than 100 basis points.

Operating expenses were $65 million in the quarter, up $4 million or 7%. Incremental expenses related to investments in quality, sales and marketing resources, and R&D funding. We are planning to maintain spending at approximately this level for the rest of the year with the benefit of ongoing cost savings initiatives being reinvested to continue acceleration of topline growth.

Operating income was $24 in the quarter, down $2 million. As Brian mentioned, the combined impact of quality-related issues in the quarter was $3 million. Operating margin was 14.2% in the quarter, reflecting $3 million of costs and lost margin related to the quality challenges during the quarter. And for the year, we guided to operating margin improvements of approximately 70 basis points, but now expect to be in the range of 10 to 20 basis points of improvement.

Our tax rate was 28.9% in the quarter, in line with the guidance scenarios previously provided. As I said before, our Swiss subsidiary is the principal party for most of our non-US business and our corporate tax rate is positively impacted by a lower than average Swiss tax rate. Last year's Q1 effective rate of 27% benefited from a favorable ruling which reduced our Swiss tax rate retroactive to fiscal '09. Our full-year outlook for tax rate continues to be approximately 28%.

Adjusted earnings per share were $0.65, down 12%, reflecting the impact of the investments in quality we made in the first quarter while dealing with the near-term challenges of the OrthoPAT recall and the HS bowl substitution.

As in the past, our website includes revenue and income statement growth scenarios which are based on the elements of guidance provided in my comments for the full year. While we don't provide quarterly guidance, I would remind you of two recurring seasonal trends in our business.

The first is that the second quarter is traditionally slow in both our donor and patient businesses. And the second is that revenues tend to be spread 48% in the first half of the year and 52% in the second half of the year. This historic trend will be accentuated in fiscal '12 by the effects of the OrthoPAT recall which will tend to impact us more in the first half.

Moving to the balance sheet, in the quarter we generated $17 million in free cash flow after making net investments of $12 million in capital expenditures and before funding cash transformation costs of $2 million.

We have $217 million of cash on hand and an open mandate of $50 million for share repurchases. We continue to have a strong cash generation model and we are confirming our annual free cash flow guidance to generate approximately $85 million before funding $9 million of cash transformation costs.

So to close, in Q1 we delivered revenue growth in line with our expectations and we are confident in meeting our growth guidance of 4% to 6% for the full year. Our gross margin growth was impacted by the quality issues which Brian described, and that will be an ongoing pressure as we move through the year, mitigating some of the improvements we are driving in our ongoing cost savings plans.

Earnings and EPS declined year-over-year as product mix and the cost of quality adversely impacted our plans. As Brian said, we anticipate some of this slipping through to the full-year results with a $0.15 to $0.17 decline in our expected earnings per share. We are revising our EPS guidance for the full year from a range of $3.50 to $3.62 to a range of $3.35 to $3.45.

We feel we have fully accounted for the impact of the OrthoPAT recall and the HS bowl substitution and we are very confident in our plans to deliver EPS growth in line with our revised expectations for the full year. Our business fundamentals remain very strong and we continue to make good progress against our Blood Management Solutions goals.

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

Thanks, Chris. There is no question that quality issues hurt our performance in the first quarter but we understand what needs to be done and we have solid plans in place to execute. We have made the conscious decision to manage expenses prudently in fiscal '12 but to not make short-term decisions that will have long-term consequences.

Our business is growing again. We want to protect what we have achieved and position ourselves to expand on this success further with the investments we are making. These are not decisions we take lightly, but we believe these are the best decisions for our customers and our shareholders.

At our investor conference last May, we told you that you should expect 4% to 6% revenue growth. Frankly this is where we received the greatest push back. We understood excluding acquisitions our revenue growth was flat in fiscal '11. We have worked very hard to drive revenue growth, bringing Blood Management Solutions to our customers through [IMPACT] selling, expanding in emerging markets, growing through acquisitions that strengthen our leadership position in blood management, and investing in R&D to enhance and strengthen our existing portfolio of products and developing new products that help to transform the way transfusion medicine is practiced.

We are doing all of this. The result is a return to mid single-digit growth in fiscal '12 and a future that promises more. We continue to make good progress with IMPACT selling, though our progress was slowed by our necessary focus on the OrthoPAT quality issues.

The number of IMPACT accounts grew by 11 in Q1 to 2008 in total. TEG led the way once again, with TEG disposables up 68% in IMPACT accounts. IMPACT selling with our blood center customers also saw progress as red cell disposables grew three times faster in IMPACT accounts versus our non-IMPACT customers. IMPACT Online customers increased by three in the quarter, bringing our total number to 17, a number that has more than doubled in the last six months alone.

We said we would focus on larger, more prestigious hospital customers in fiscal '12 and we are proud to add the Johns Hopkins Hospital, Englewood Hospital, and John Radcliffe Hospital to our list of blood management customers.

Our pipeline continues to grow. We have not wavered from our focus on blood management. In fact, we are more committed than ever because our customers are telling us that this is the right thing at the right time with healthcare reform motivating all to consider every opportunity to reduce costs and improve clinical outcomes.

We have accomplished much in bringing blood management to the forefront of practice over these past five years. The activity that exists today is testimony to these efforts. Our pipelines have never been stronger and blood management is a discussion that most hospital and blood center customers are seeking to have.

And recent M&A activity in our space only provides further reinforcement to the importance of blood management for the future of health care.

We have completed the build of our Arryx blood typing prototype and we are on track to provide the full study results in November, as previously committed. This is a very significant development as we expect to prove our ability to type blood in significantly less time than current standards and potentially type with greater sensitivity than current technology allows.

We continue to make good progress with our automated whole blood system. As I said previously, we will provide a more substantive update on our progress here at the end of Q1.

Let me pause to thank all of our employees for their continued commitment. Our business is returning to solid organic growth and this team has worked very hard in understanding our customers' needs and delivering on our commitments. It is working and this is just the beginning.

Finally, I want to take this opportunity to welcome Rich Meelia back to our Board in the role of Chairman. As I said before, Rich's exceptional leadership, proven record of driving transformational change in healthcare, and his past experience at Haemonetics makes him the ideal person to lead our Board during this important time in our history. I look forward to working with Rich and our entire Board as we continue to focus on our leadership role in bringing Blood Management Solutions to our customers.

And now we would be happy to take your questions.

(Operator Instructions). Dave Turkaly, SIG.

Thanks. Just for a little more clarity on the recall, I know it said pre-2002 units. Could you tell us what -- how many of those there are out there? And I think with IMPACT, we would have maybe thought there would be kind of some newer ones in, so the impact wouldn't have been maybe as large.

Over half of our fleet, Dave, was pre-2002 and it's coming -- it's not being recalled at the same rate around the world because of different regulatory regimes. But it's moving back in.

Dave, let me say this and maybe ask Chris to provide a little more color on the impact overall relative to what I will call the cost of quality here, because I think it's important that you have that detail. But we have about 3000 IMPACT -- I'm sorry, 3000 OrthoPAT devices in service around the world prior to the recall. Over half of those were the pre-2002 device and if you recall, those didn't have the fluid ingress bag.

And so we have recalled those. The vast majority of the recall is complete in the US. And as Chris said, a little bit slower around the world. We expected that we would be able to increase the usage of the devices that remain. You may recall last quarter we said on average those devices used about a half a disk per week. We wanted to get that to about one to two disks per week. We have improved pretty dramatically but we are still at right about one disk, maybe a little bit less per week of use and so we are recognizing that we are probably going to be closer to the one than the two.

So that's what we see with respect to the devices that were out there. We have got to build about 1200 devices, a little slow in the start but now we are starting to gain speed there and we expect about a three-month delay in total.

Why don't I have Chris cover just what that means from a financial perspective, not only in OrthoPAT but also the HS core piece because I think it is important for people to understand.

Yes, so when we look at the impact of OrthoPAT and HS core in the quarter, it's about a negative impact on the top line of $2.3 million, which reflects about a 1.3% headwind to our growth rate. Our gross margin was about $2.2 million. That's a combination of the impact of taking back devices within HS core, which was -- essentially drops through to the bottom line and the fact that the OrthoPAT itself is a very high-margin product. So losing that hurts us.

We have about $800,000 of incremental OpEx. So all in, it's about a $3 million net income impact, about 170 bps on the operating margin for the quarter. When we look out to the full year, the all-in effect on revenues is about almost $7 million gross margin about $7.5 million; OpEx, about $1.8 million. Total impact around $9.5 million to $10 million. $0.08 in the quarter, $0.25 for the full year and obviously the vast majority of that we believe will resolve itself next year, will convert customers throughout the course of this year back onto the HS core and we will replace the OrthoPAT fleet and regain momentum with that very important Cell Salvage device for blood management.

Thanks, a lot of detail. When we look at your guidance, your updated guidance as well, the question that I would just have is if I looked at kind of where the Street sat for the remaining three quarters of the fiscal year and what you put up in the first quarter, I could be in your range without changing the rest of the year. So I know that you said something like a $10 million impact for the year from the recall. Does not imply that other areas or your margin improvement is coming in ahead of plan or other areas of the business are doing a little better in terms of your --?

We had baked in about $0.09 into our original estimates for what we knew about the quality issue, which was primarily related to OrthoPAT and essentially for the full year, it's now looking about $0.16 worse than that. You can see that we are re-guiding on our earnings range between $0.15 and $0.17.

And that includes the HS core piece as well, not just OrthoPAT but also the HS core substitution as well.

But what you are getting at there, Dave, is that when you take that out, and the thing that I wanted to point out is the relative strength of the rest of the business and the broad base of growth that we are experiencing across that business. So yes, you are seeing that particularly in plasma, which is starting out the year a bit stronger than we expected, of course.

Thanks a lot.

Larry Keusch, Morgan Keegan.

Good morning. It's obviously pretty clear that when you strip out the expenses associated with the recall and the HS core issue that you are really back where you thought you would be for the year. But I guess the one thing, Brian, that I wanted to touch on and you went through it pretty quickly, so I would love it if you had some further thoughts as why was this worse than you had anticipated 2 1/2 months ago? What exactly went differently than you were expecting?

A fair question. The first thing is that as we began to order the components, we had components in stock, as you might expect, and so we were able to begin this build in Q2 with what we had in stock. From the supply chain, we found that there were certain subcomponents that were going to have a greater lead time than we originally had anticipated and we originally knew and understood at the time that we gave guidance at the beginning of the fiscal year.

So that's slowing the build. We have plans to accelerate the build in the latter part of the third quarter, but it's going to represent about a three-month delay and on this product line, that's fairly significant in sales and gross margin. That's where the biggest impact occurs.

Now we also offset, we also thought, Larry, that we would be able to offset that a little more than we've been able to. We were seeing about a half a disk used per device. We wanted to try to get that up to about one to two disks per week in terms of use. We have improved it by about 60% but it's up to about 8/10, maybe 9/10 of a disk per week use in the devices that remain. So we've made good progress but we are recognizing that we're going to be in the lower end of that goal than we originally expected we would be.

And so those are really the bigger headwinds that we see there.

Let me just add, Larry, that about half of the impact that we are revising relates HS core, and HS core is truly a quality issue that emerged in the quarter and is something that we have dealt with proactively with our customers, with the replacement product, and they have been aggressively focusing on root cause analysis so that we can get this valuable product back into the market. That is truly an in the quarter issue.

Okay, then just two other quick ones for you guys. Number one, if I recall correctly, you have tended to do your share repurchases early in the fiscal year, sometimes in that first quarter. If I look at the numbers and I think I heard you correctly, you actually didn't really do any share repurchase yet. So number one, could you sort of give us some sense of how you would anticipate that progressing through the year?

And then along with that is again, you've got a very, very strong balance sheet. Would you even consider perhaps going back for a broader or greater authorization?

And then the second question, Chris, is again why -- my understanding is on adjusted earnings per share companies generally have pretty broad leeway in how they look at their expenses and why were these sort of nonrecurring items that are clearly associated with a recall or having to bring the HS bowl back and reengineer it? Why are those not being excluded from if you will the continuing ops numbers? I know you are helping us understand it, but again, why are those not excluded specifically?

Larry, let me take a share repurchase first. We do have a mandate for a $50 million share repurchase. That has not changed and you are right, we have typically done that earlier than later. We do have a 10b5-1 plan in place. As we have always said, our priorities for cash are first acquisitions, M&A, and secondly, share repurchase. And we signaled as we came out of last fiscal year that we are really back in the market looking at how we continue to expand with Blood Management Solutions that makes sense.

And so we are just simply managing our cash prudently based off of directionally where we think we're going to go throughout the fiscal year. So nothing has changed relative to that, nor will anything change going forward to the $50 mandate. I think that's sufficient for the fiscal year and again, it's consistent with our priorities in use of cash.

With regard to the adjusted EPS question, it's a good question. It is a question of judgment, Larry. We have not traditionally carved out quality issues that have emerged in the normal course of our business. You are correct in recognizing this is an unusual confluence of quality issues and it's really just a judgment to provide the transparency. But because it wasn't part of what we anticipated for one-time events and communicated to you at the beginning of the year, it is a deviation from our plans in that sense and we are breaking it out now. So it was our decision.

Larry, I think I would just add to that, certainly to emphasize the point that Chris said around transparency, it's something that we believe in. It's something we have been rewarded for and it is something that we are going to continue. Frankly, we want to hold ourselves accountable to this performance. We have worked very hard to get the revenue growth back in the business.

And you heard me say that we want to be very, very careful about how we manage our operating expenses. We don't want to be shortsighted in this respect. So I think this is the right way to do it so that we provide the transparency not only in fiscal '12 but frankly as we go into fiscal '13 so you have a full appreciation for what this means.

Judgment, but I guess we are erring to the side of transparency.

Steven Crowley, Craig-Hallum Capital Group.

Good morning, folks. A couple of questions about the revenue guidance, the granular revenue guidance. If I look at the plasma guidance that you are using coming out of this quarter after a 12% year-over-year up quarter, to get to the high end of your range, it really implies like 3% year-over-year growth over the balance of the year. That seems awfully modest relative to what you just delivered. And what is behind that number?

Let me come at this. To look at plasma, I think we have to look at everything. Don't disagree with a thing that you have said. In the past, we have come out of the first quarter rather strong in plasma and we have changed that guidance. Then what we have ended up doing is kind of doing a herky-jerky thing throughout the fiscal year.

We really want to see where this one settles down. As Chris said, we have a front half, back half comparison with respect to plasma and we really want to understand and see directionally where the plasma collectors go and I want to see what that looks like in the second quarter. Clearly there is strength there. Clearly we expect to be in the high side of this. If you go to the surgical business, you could argue the exact opposite.

I was going to do that next, Brian, because that's a different story there.

Yes. And so all we are doing is we are saying our overall guidance is solid, 4% to 6%. We feel very, very good about that. I want to see what we are able to do in the second quarter. We've got some plans embedded within surgical to accelerate some things relative to TEG. We've got some plans in surgical relative to accelerate with the launch of Elite in the Surgical Cell Salvage side of things.

So before we make any additional movements within our product line guidance, I wanted to wait a quarter. Your questions are very fair and very appropriate, but I wanted to just simply understand that so I could provide something that was clearer as we went into the back half of the year.

What we feel very good about is 4% to 6% topline, $3.35 to $3.45 in earnings per share. That is what we feel very good about.

In terms of the plasma business, the visibility that you have been able to garner from collections customers, how has that -- has that gotten more volatile? What's the color and tone of that visibility?

Well, what we've seen in particularly in one case is a real acceleration and as we try to understand that, it's what we said last quarter is that the need for the plasma was there. We said that in Q4. You heard us say that, but the collections just weren't keeping pace with the need. We have seen that really accelerate in Q1 particularly with one customer.

Okay, and then in terms of the surgical business, you addressed the fact that your segment guidance there has a pretty ambitious almost double-digit gain for the balance of the year for that business coming off a tough quarter. But when we add it all up together, that's really where your confidence lies.

Your OrthoPAT guidance within that or at least color within that, you talked about ongoing decreases in second quarter. Are you talking year-over-year or sequentially? And the efforts you are doing to drive utilization, could you help us better understand which units you are trying to drive utilization and where it's been a little slower and why you think it's been a little slower?

Yes, let me just take the question on the slowing in Q2. It is sequentially ends year-over-year, obviously, and the key elements of the acceleration strategy are to do with the replacement of these more robust, reliable devices, the newer devices. And we have a manufacturing plan which now that the supply-chain issues have been worked out, we have a high degree of confidence in our ability to get product out and get them in the hands of customers and model that as to what it means in terms of usage and bowl usage.

So the number of disk discussion from half a disk to something greater than one is for a customer who had a pre-2002 unit going to a brand-new unit and how quickly you can get that number up. What are post-2002 OrthoPAT healthy OrthoPAT users utilizing?

To be clear, what we said was in our total fleet over 3000 devices, average use was about a half a disk per week. We believe that, as I said last quarter, that that could be one to two disks per week. Now we have recalled the pre-2002 OrthoPAT. That's over half the fleet. So our focus is on the post-2002 devices. Those are the devices that have the fluid ingress bag.

And what it is is really as we said, we're going to touch every customer in the quarter. We have been very successful in getting to that and retraining them on the use of the device. Where the device remains, we have gone from about a half a disk use per week up to about 8/10 of a disk use per week, about a 60% improvement but still recognizing that we are probably going to ultimately be closer to the one disk per week goal than the two disk per week goal that we were originally contemplating.

Scott Gleason, Stephens.

Hey, Brian and Chris, thanks for taking my questions. Brian, can you talk a little about the impact of Octapharma and the inventory rebuild in the quarter and kind of where that shook out on the plasma side from a positive impact standpoint?

Well, Octapharma is back in the market in Europe. They are not back in the market in the US. So we continue to see them collect and it was a contributor to our growth like anything else because before there was -- they were certainly doing less.

We are anxious to see them back in the market in total, but I think overall, Scott, the important thing to see is that there is an end market demand for drugs. The market is going to meet that end market demand for drugs with respect to collections and I think the collections are probably consistent with what that needs independent of whether it's Octapharma or someone else right now. When they get back in the market, we will see that shift. We'll see that shake out again.

Great, and then, Brian, when we look at the validation study on the Arryx technology that we should be getting later this year, can you talk a little bit about what we'll see from a data standpoint there?

Yes, what we are going to do is we are going to give you really two things is what we want to get at. One is first of all, can we meet the same quality standards that exist out there today in terms of typing of blood? And how does that look in terms of time, our time for doing it versus the existing technology?

And the second question will be whether or not we are successful in being able to type at a greater level of sensitivity. In other words, can we get at the incremental types that maybe we can't get at with existing technologies that are out there today? So that's what we are going to be looking at.

We're looking at about roughly 2000 samples that we will do between now and the end of the analysis. So that's what we hope to be able to show you in November when we give you the full results.

Great. Then, Brian, just one last question. If you look at where kind of interest rates are now and you look at the cash flow generation in Haemonetics, the leveraged buyout scenario model seems to work. I guess on the heels of the Immucor transaction and then also Caridian getting taken out by Terumo, is there any consideration I guess by the company to maybe look at those types of alternatives or options?

Scott, we were a public company just like anybody else. What I am most comfortable here is that we can feel very good about bringing blood management to the forefront of thinking in healthcare. It is a discussion that virtually every hospital wants to have and every blood center wants to have. So I think we've made very significant progress there.

What we are seeing in the industry is the recognition of the importance of blood management. So yes, are we thinking about these things as a Company and as a Board? Absolutely. Are we focused on that? No. We are focused on continuing to do what we have been doing all along, and that is increasing shareholder value.

We are not proud of the impact that these quality issues have had for us in the quarter, but it doesn't change the fundamental strength of this business. It doesn't change the fundamental direction that this business is going in and we believe that we will continue to lead this industry to that transformational change of recognizing the importance of blood management well into the future.

Larry Solow, CJS Securities.

Good morning. Could you -- the breakouts of the $0.25, is there any way to sort of quantify or ballpark how much of it is just coming from the HS core bowl?

And then the other question I have -- not questioning your transparency, because I know you guys are always as transparent as you can possibly be. But sort of the magnitude of the surprise being that you did at your Analyst Day in mid-May so you already were halfway through the quarter, so did this kind of creep up on you or how did that play out?

Fair questions. HS core represents about $0.08 or about half the incremental effect if you will that we are looking at here, because our preliminary estimate, which was baked into our numbers was around $0.09 for the full year. And the piece -- and that truly is an issue that arose quickly. It came to a head and actions were being taken in early June. And most of the impact in Q1, about $800,000, is taking back and switching out consumables and replacing them with newer, more expensive consumables. And the impact for the remainder of the year is the fact that we are anticipating having to supply those more expensive, more costly consumables until we have resolved the root cause analysis.

So the real surprise was in our overall estimate of the impact of OrthoPAT, which all in, the incremental effect is about $2.5 million and it doesn't take much in terms of OrthoPAT sales in order to hit that level. And it really comes from the two points that Brian highlighted, that we had plans to accelerate the usage, essentially the productivity of the remaining devices, which we were partially successful with, not fully successful. And then the delay in the build, the realization that we are going to be slower getting products back into the market. So that was our miss, really.

Really driven, Larry, by of course when you take those pre-2002 devices away from your customers, they are not burning any disks. They are not burning any of the quick connect reservoirs and so it really was the speed at which we thought we would get the replacement devices out there.

We expect that to be a three-month delay, up to a three-month delay. It could be faster. We are working on plans to accelerate that, but we want to be able to arrange this so that there are no further surprises for the rest of the year.

Got you. Then just a follow-up, on the IMPACT accounts, sort of the momentum or the acceleration, how many you added and I don't want to hang my hat on how many you had per quarter, because I know that's probably not the way to keep score, but sort of a slowdown there. At least I think you only added 11 accounts or something. Is there anything behind that? Does this whole OrthoPAT and related stuff impact that at all?

When you think about starting the quarter, 197 IMPACT accounts starting the quarter, 140 of them are hospital accounts. Our hospital selling organization has been focused on this recall issue. It's nothing more than frankly the distraction. In reality, we are seeing the pipeline continue to grow there, Larry. When I tell you that blood management is a discussion that people want to have, I'm not trying to exaggerate at all. It's clearly an expense that hospitals have. They are looking for ways to cut costs and when you can not only help them save money but improve clinical outcomes, there is an audience there.

And so we are anxious to get this quality issue resolved with the OrthoPAT. When you look at the OrthoPAT in general, and this really speaks to the quality issues, the quality resources that we have added, it really brought to light that the big -- the elephant in the room, the big issue that we had with blood management was in orthopedic cell salvage. We were growing in our IMPACT accounts and losing in our base accounts. And why is that? T

his is the first place that our new quality resources went and lo and behold, we had some cracks in our armor there that really addressed -- really required us to address this very aggressively.

That's the point, when you think about our product portfolio, that's the biggest hole that we've got to address and we are being very aggressive in addressing that this year.

James Sidoti, Sidoti & Company.

Good morning. Two questions. On the HS core recall or quality improvement, can you just give us a little more color on the timeline from that and when you think you will be back to normal on that front?

Sure, we're getting close to root cause analysis. The complexity here, Jim, is it appears to be a confluence of two -- at least two factors and narrowing them down requires experimentation. We don't want to rush back to the market. Our customers are stabilized with a product that works well. It's just not -- it's not quite as good from a quality perspective from them and it's a little more expensive for us to make.

Certainly I would hope that in the second half of the year we would be starting to transition customers back to HS core, but that is until we are completely finished with the science and the experimentation, which is very far advanced, I don't want to give a complete conclusion on that question.

But I would say, Jim, two things. When Chris talks about the quality, he's talking about the quality of the plasma, not the quality of our product that they are able to get off of the replacement product. So the HS core is a better product for our customers to be collecting plasma for transfusion use in Europe.

The way we've built the financial scenarios here, Jim, is that we will get back into selling the HS core much later in the fiscal year, so we have given ourselves some room here. If we get back in the market faster, then we will return to selling the more profitable products sooner, but we want to give ourselves the time to get that done right. We don't have exact root cause yet and we do not want to put this product back into the market until we fully understand that and fully appreciate what it means to correct the problem that our customers are seeing.

Okay, but you are assuming at this point you will have this resolved by the end of the fiscal year?

Yes, we are.

Okay, and then the second question is in the past you've broken out some of the sales growth of different items at the IMPACT accounts compared to the non-IMPACT accounts. Can you give us any color on that for this quarter?

Yes, let me come at it in two ways. We are seeing some really nice growth relative to TEG. I provided the detail in the script. Off the top of my head, if my memory serves me right, I think it was 68% growth in our IMPACT accounts for TEG versus 19% growth overall for the TEG product line. We are seeing red cells grow at a rate three times faster in our IMPACT accounts.

Now we are seeing the red cell market rebound but we believe that we are seeing a little more growth than the market rebound of course based off of our work with our blood center customers as they focus on being more productive in what they do.

Our surgical products are affected more in IMPACT accounts as a result of the recall and what's happening there. And our business being down overall, we are seeing -- where most of our OrthoPAT was concentrated in our IMPACT accounts -- we are seeing that impact in our IMPACT accounts overall. We will see that shake out as we go through the rest of the fiscal year.

Joshua Zable, WJB Capital.

Good morning, guys. Thanks for taking my questions. I still have a couple of questions here. Just kind of housekeeping, I guess. I'm just trying to understand, you guys reiterated your revenue growth. I understand that, but obviously OrthoPAT with what's going on -- which I know you've discussed sort of ad nausea here, is going to give you a revenue headwind, which means if you are reiterating, you're making it up somewhere. It sounds like FX might be the cause. I'm just wondering if there is nothing else or if I just missed it?

We've talked about FX being a tail wind, but for the most part, we guided to that. It was a little stronger in the quarter and it will moderate throughout the fiscal year. So I think FX is about where we thought it would be maybe slightly stronger, but not material. What you are seeing is the strength in plasma offsetting the declines that we see elsewhere. And I should -- it's not just the strength in plasma but just the strength overall, but particularly plasma is the biggest element there.

But just to be clear, on the revenue guidance side now that you are looking at OrthoPAT, I think, Chris, you said there is a 1% headwind to revenue growth or I may be wrong.

There's a 1% tailwind compared to a 2% tailwind in Q1. So full year is 1% tailwind.

No, but on OrthoPAT, with the recall, sort of the new impact of the up-to-date impact.

I'm sorry, it wasn't currency. It was a 1% headwind, yes. That's right.

So 1% headwind to total revenue, correct?

Yes.

So if you guided 4% to 6% and you have a 1% headwind now, I'm just trying to understand is it sort of everywhere else you're making up that 1% or is it --?

Yes. Absolutely.

Okay, so it's sort of like the high-end of sort of everything else, I guess.

Are you talking in the quarter, Josh?

I'm saying for the year. For the year, if there is --

We have scenarios on the website, Josh, so take a look --

Right, so it's not one place in particular, sort of everything, just to be clear?

Then as I think about -- as you guys talked about sort of how the year shakes out, the typical 48%, 52% kind of revenue breakout, even if I go to sort of 48% given the guidance, it would seem like Q2 would be down negative growth so to speak. And I just want to make sure my math is correct there. So you are sort of expecting a weak Q2 and then things to pick up in the back half of the year. Is that clear, too?

Actually no. Q2 will be sequentially up, but as I am looking at it, Q2 will be sequentially up over Q1 and up over the prior year.

Okay, great. Helpful. Then Brian, you touched on red blood cell kind of turned to some good news here. You turn to -- you touched on red blood cells kind of improving. I was pretty surprised. I know it's kind of been a tough market. I know it's obviously been a long time coming, so obviously hopefully it's turning now.

I am just wondering -- you alluded to it. Is there really a rebound going on or is that you guys take a share of the IMPACT? I'm just trying to understand surprisingly positive there.

Yes, two factors. I think we are seeing a rebound here. Even if you travel around, you are seeing more calls for blood from the blood collectors. There is a shortage and that's being driven by the fact that hospitals are starting to rebound. It's not huge but it's starting to rebound and that's encouraging.

But I have to give the team credit here. We are seeing red cells up at a rate 3 times faster in our IMPACT accounts. Clearly we are having success in helping our customers understand how to be more productive, how to reduce the overall cost of blood collection, and that is certainly providing focus on our double red cell technology, and that's a good thing for our customers and it's certainly translating to be very good thing for us. So it's really a combination of the two that is driving that.

David Lewis, Morgan Stanley.

This is actually James in for David. Thanks for taking the question.

First, I know that you have given quite a bit of detail on the financial impact of the quality issues this year, but I wonder if you could be just a little bit more specific on timing and how those expenses might fall over the next couple of quarters? So if you are expecting to see around $10 million in total impact and it looks like you had around $3 million in the first quarter, when do you expect to feel the impact of those remaining costs?

Progressively over the year, James, spread out over the quarters with more in Q2 and Q3 than in Q4 as we get beyond them. Because our expectation is that we will -- the middle part of the year will be where we resolve the HS core and get back on track. And during the middle part of the year, we will be building a large number of OrthoPATs and getting them back in the field.

So you're going to expect a sort of bulge of that negative effect moderating in the fourth quarter. But remember, we do not give quarterly guidance.

No, I understand that, but is it around $7 million left, because I think of that as roughly like in 3-3-1 through the rest of the year? Or is that cutting things too finely?

It may be cutting things a little fine.

All right. And then just on the HS core, is that device used only in Europe? How does it compare to the device that's used in the US collections business?

It is only used in Europe right now. It's a new product and I shouldn't say -- not only in Europe, it's used in certain Asian markets as well. But it is what's called a high separation bowl and it collects higher quality plasma that is used for transfusion to patients. So it's used in the hospital market. So think about the bulk of our business being our commercial plasma business. The HS bowl is not used there today. So that's the distinction between the two products.

Okay, and I know that the cost improvements in the plasma business have been a big driver of margin. Was the HS core something that you were ever thinking of adapting to the commercial plasma market?

There's lots of things that we're looking at relative to our plasma business. The HS core is merely one of them, yes.

All right, great. Thank you.

There are no further questions at this time. I would now like to turn the call back over to management for closing comments.

Thank you, Fab. We have made tremendous progress transforming our industry and in bringing Blood Management Solutions to our customers, solutions that reduce costs and improve clinical outcomes. Your company is growing revenues again and based on our current pipeline, we expect momentum to continue to build throughout the fiscal year.

With respect to the quality issues we are currently facing, we understand what needs to be done and we have solid plans and leadership in place to execute. These issues will be resolved and our business will be stronger for this experience. Importantly, 90% of the impact we will see a fiscal '12 will be one-time impacts to the P&L rather than recurring concerns that we will need to overcome in the future.

We continue to make progress with IMPACT selling in spite of our focus on quality issues. More prestigious institutions like the Johns Hopkins Hospital, Englewood Hospital, and John Radcliffe Hospital have been added to our list of blood management accounts and you can expect this to continue to grow throughout fiscal '12. Our efforts with blood center customers are really paying off as red cells have returned to growth. Sales momentum is building and we will see this continue to build throughout fiscal '12.

Thank you for your time this morning.

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