Haemonetics Corp (HAE) 2012 Q3 法說會逐字稿

(Technical difficulty). Mr. Gould, you may proceed.

Okay, thank you. Good morning. Thank you for joining Haemonetics' third-quarter fiscal 2012 earnings conference call and webcast.

Today, I'm joined by Brian Concannon, President and CEO, and Chris Lindop, CFO and Vice President of Business Development.

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

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

Before I turn the call over to Brian, I would like to mention the treatment in our adjusted results of certain items which, by their nature and size, affect the comparability of our financial results. Consistent with our past practice, we have excluded certain charges from the adjusted financial results we'll talk about today. Restructuring and transformation costs are incurred for transformational activities focused on the infrastructure supporting our research, manufacturing, supply chain, and software organizations.

We also excluded from adjusted results European customer claims for HS core plasma inventory totaling $1.7 million in the quarter and $4.1 million year to date. These costs are net of partial insurance recoveries, and we expect additional insurance recoveries to offset these costs in Q4.

In our fiscal 2012 third quarter, adjusted results exclude $4.3 million in pretax restructuring costs and HS Core Bowl claims. In our fiscal 2011 third quarter, adjusted results exclude $3.7 million in pretax restructuring and deal integration costs associated with our Global Med acquisition.

In the year-to-date fiscal 2012, adjusted results exclude $13.2 million in pretax restructuring costs and HS Core Bowl claims. These were partially offset by $1.6 million of contingent consideration income related to the resolution of a previously estimated contingent purchase price for an acquired business. Thus, we have excluded $11.6 million net.

We expect to exclude approximately $13 million to $14 million in total, offset by $1.6 million of contingent consideration from our fiscal 2012 adjusted results.

Year-to-date fiscal 2011 adjusted results exclude $6.6 million in pretax restructuring and deal integration costs associated with our Global Med acquisition, which were offset by $1.9 million of contingent consideration income, which was also excluded from adjusted results.

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, I will turn the call over to Brian.

Thanks, Gerry, and good morning, everyone.

We had a very good quarter at Haemonetics, one that suggests we've turned the quarter on a number of fronts. The revenue growth we realized in the first half of the year continued. Our IMPACT selling in blood centers has helped to accelerate red cell growth in a flat market, and we had encouraging sales of our blood management solutions to prestigious hospital and health system customers.

We continued to drive growth in emerging markets. We signed important contract extensions with our major plasma customers. We completed most of the remediation required by the OrthoPAT and HS Core Bowl quality issues, and the revised estimates we provided last quarter for fiscal 2012 revenue growth, costs of quality, and earnings remain intact today, so we're able to affirm that guidance. We will touch on all of these topics, so let me start with quality.

We've completed building all of the OrthoPAT devices needed to replace the pre-2002 devices that we voluntarily recalled earlier this fiscal year. Our focus is now on completing the recall process and recapturing lost sales. The IMPACT sales process will help as we're able to show our customers the economic and clinical benefits of orthopedic cell salvage. We expect OrthoPAT declines to moderate in Q4 and return to growth in fiscal 2013.

We also continue to receive strong input from our customers about additional enhancements they would like to see on the OrthoPAT device. After significant consideration, we've made the decision to incorporate this feedback into one singular launch of a significantly improved OrthoPAT device. The reasons for this are to ensure we are meeting our customers' growing list of requirements, to complete one clinical trial for all enhancements, and to manage the complex regulatory and filing process with one submission.

This means we now expect to see this new OrthoPAT advanced device launch late in the second quarter of fiscal 2014. We feel this is the best path to take to ensure success as the fleet of OrthoPAT devices in the field today is newer and more reliable, giving us the time to develop the product as our customers suggest. We'll provide greater visibility to these enhancements and the timeline at our investor conference in May.

We also made good progress with the HS Core Bowl in Europe. You'll recall that we had to substitute our HS, or High Separation, Core Bowl with a more costly and, consequently, less profitable product. The HS Bowl is a differentiated product used in Europe to collect plasma for transfusion.

All remediation actions have been completed, and plans to relaunch the product into the market are now being finalized. We expect to be back in the market in the first quarter of fiscal 2013.

This has been a challenging year, to say the least, as we dealt with these two serious quality issues. The good news is that by the end of this fiscal year, roughly 60 days from now, these two disruptive quality issues will be behind us and we will be a stronger Company for the experience.

Our quality and regulatory functions have been restructured to ensure quality and compliance throughout the Company. Why do I have such high confidence? Since September, three of our five manufacturing facilities have had FDA audits, to include our Braintree facility where our Companywide quality system was tested. These audits resulted in one 483 notice. That 483 notice has already been resolved, and all audits have been closed.

Quality improvement is a continuous journey. While I'm pleased with this progress, know that we've learned a valuable lesson which we're resolved to not repeat. Now we can focus on blood management solutions full time once again. I'm proud that we continued to grow the business despite these quality headwinds, but there is no doubt that it was a distraction to our IMPACT selling efforts and the launch of the Cell Saver Elite.

Despite these challenges, we grew revenue 8% in the quarter, so this gives us something to build upon going forward.

While benefiting from solid growth in each of the past three quarters, we remain diligent in resolving all quality challenges and pressing blood management opportunities, so we have additional investments planned for Q4 consistent with our current guidance. Chris Lindop will speak about these investments, the trends in each of our product lines, and he'll review in more detail the results of the third quarter and our guidance for the full year. I will then close with some additional summary comments and what you can expect as we look into fiscal 2013. Chris?

Thanks, Brian. As Brian said, I'll start by providing more background on the broad-based revenue growth we are seeing, and I will talk in more detail about our current revenue, earnings, and cash flow guidance for the full year.

The important point to note is that, year to date, every product category of our business, excluding hospital, is growing. And when we look at hospital, aside from OrthoPAT, its growth is 3% year to date.

Given the challenges we have overcome during the year, this topline strength is encouraging.

Through nine months of fiscal 2012, we are well on our way to realizing our full-year revenue guidance of 6% to 7% growth. With 8% topline growth in the quarter and 7% year to date, frankly we expect full-year revenue growth to be at the top end of that 6% to 7% range.

Plasma revenue growth will continue to put pressure on margins, leaving us right where we expected to be on the bottom line for the full year. Some product categories are outpacing our expectations a bit, while others are slightly behind. So let me talk about these in more detail.

Plasma revenue grew 15% to $69 million for the quarter. We saw some improvements in our Japan plasma business, which was flat after declining in each of the first two quarters. The anniversary of the Japanese change in collection practices that caused the decline has passed.

Additionally, collection volumes in the commercial plasma business in the United States remained robust again in the third quarter.

Plasma revenue grew 14% in the first nine months of fiscal 2012. In October, we guided it to plasma growth of 11% to 12% for fiscal 2012 and we are now confident we will exceed that target. We now believe that we will have 13% to 14% growth in plasma this year.

We continue to believe that our plasma growth will return to a more normal mid single-digit growth rate in fiscal 2013, consistent with the long-term and market growth rates of the industry.

As Brian noted, during the quarter there were some encouraging developments in our commercial plasma business. We have been able to extend contracts covering 75% of this business through Q3 of fiscal 2017 and over 90% through Q3 of fiscal 2015. This provides both our customers and Haemonetics the stability required to permit us to respond to any potential catalyst in the plasma market that may fall in this time period.

Blood center revenue was up 7% at $57 million for the quarter and 5% for the first nine months of fiscal 2012, as we are succeeding in demonstrating value to those customers utilizing our IMPACT sales tool. The platelet business with revenues of $44 million increased 8% in the quarter, reflecting growth in emerging markets and in Japan, where we are benefiting from a competitor's quality issue.

Red cells delivered $12 million in revenue for the quarter, an increase of 4% year over year. On the strength of IMPACT selling, our red cell business is growing in a flat market.

We are increasing our fiscal 2012 blood center guidance to 3% to 4% growth from a previous range of 1% to 2%, reflecting strength in both red cells and platelets.

In our hospital business, revenue declined 3% to $31 million in the quarter. Aside from OrthoPAT, our hospital revenue was actually up 3% in the quarter.

Following the Cell Saver Elite launch, we had a second consecutive quarter of growth in our surgical business, and at the same time, we had continued growth in diagnostics.

OrthoPAT disposals' revenue was $8 million in the quarter, down 16%, or $1.5 million. This was much the same as in the first half with the ramp down in our active installed base. As Brian mentioned, the OrthoPAT recall is having a negative impact on disposals' revenue growth rates.

However, although approximately half of our fleet has been recalled, our OrthoPAT revenue is down only 14% year to date. The team continues to do a good job managing the recall and retaining our customers, and we expect OrthoPAT revenue declines to moderate in Q4 and return to growth in fiscal 2013.

Surgical disposals' revenue was $17 million in the quarter, a 1% increase year over year, marking the second quarter with growth after eight consecutive quarters of decline. More importantly, perhaps, our installed base of surgical cell salvage devices increased by over 300 in the quarter. This growth is nearly three times the number of device placements in the same quarter last year.

As we've said many times, device placements are a leading indicator of disposables' revenue. Therefore, we expect these equipment placements to positively impact growth rates going forward, building on this competitive momentum as our sales force continues to focus on the advantages which blood management provides for our customers.

In diagnostics, TEG disposable revenue was $6 million, growing 9% in the third quarter, bringing year-to-date growth to 16%. This growth came primarily from continued penetration at key IMPACT accounts in North America.

TEG revenue growth has exceeded 15% in the last three fiscal years and now in the first nine months of fiscal 2012. Revenue in the quarter nearly tripled in China where the TEG analyzer is growing fast in cardiovascular treatment. While disposables' growth was slower in the quarter than in previous quarters, we installed 105 TEG devices in the quarter, up from 66 in the comparative quarter last year, and this strength in TEG equipment sales bodes well for the disposables' growth in the fourth quarter and beyond.

We continue to expect hospital disposables' revenue will be flat to 2% growth for fiscal 2012, unchanged from our previous guidance provided in October.

Software solutions revenue was $16 million, down 4% this quarter. Sales in this business can vary among quarters, due to the timing of customer implementations. Revenue is up 4% year to date and, based on deals in the pipeline, we expect that our software solutions business will finish the year strong.

Our fiscal 2012 software solutions revenue guidance is revised to 5% to 7% growth from a previous range of 9% to 11%, reflecting possible quarter-to-quarter volatility. Software for hospital and blood centers in North America is up over 25%, continuing to be a very key enabler of blood management.

Equipment revenue was $19 million in the quarter, up 18% on strength in our hospital business led by TEG and surgical products. Year to date, equipment revenue is up 4%, and we continue to expect mid single-digit growth for the full year, which is reflected in our revenue guidance. So we anticipate fiscal 2012 revenue growth at the top end of our previously-stated guidance range of 6% to 7% growth.

Now I'll review the rest of the P&L results, and please note that these numbers are adjusted, as Gerry said. Third-quarter fiscal 2012 gross profit was $96 million, up $2 million, or 3%. Gross margin was 50.2%, down 270 basis points from a gross margin of 52.9% in the third quarter of fiscal 2011. The cost of quality accounted for more than $3.2 million, or 170 basis points of that gross margin decline, and we had $1.4 million, or 70 basis points, of higher freight costs related to the rapid increase in plasma demand.

Year-to-date gross margin is 51%, down 180 basis points from the same period last year. As we communicated to you last quarter, margin has been under pressure from the cost of quality that we've disclosed in the past. Our previous estimates for these costs of quality are unchanged.

We currently expect gross margin for the full year of approximately 51% to 52%, slightly below the 52% we last estimated, as plasma growth continues to accelerate, affecting our overall mix.

Operating expenses were $66 million in the quarter, up $5 million, or 8%. Incremental expense relates to investments in quality, sales and marketing resources, and R&D funding. In Q4, we expect spending to step up sequentially by between $1 million and $2 million as we continue to invest to maintain revenue growth and to accelerate our strategic initiatives.

Operating income was $29.7 million in the quarter, down $2.6 million. Operating margin was 15.5%, down 280 basis points year over year, but improved by 130 basis points compared with the second quarter of fiscal 2012. Operating margin in the quarter reflects $4 million of costs and loss margin related to the quality issues, which is consistent with the guidance we previously provided.

Year-to-date operating margin was 14.7%, down 230 basis points from last year. For fiscal 2012, we previously guided to an operating-margin decline of approximately 180 to 200 basis points. We now expect operating margins to be down roughly 220 basis points as a result of accelerating plasma revenue growth and its impact on mix.

Our tax rate was 26.2% in the quarter, down from 28.7% in the prior year, reflecting benefits of additional research and development credits realized in the quarter. And our year-to-date tax rate is 27.6%, compared with 28.4% in the first nine months of fiscal 2011. Our fiscal 2012 outlook for the tax rate is approximately 28%, slightly improved from our previous estimate, which was 28.5%.

Adjusted earnings per share in the quarter were 66 -- $0.86, excuse me, down 2% from $0.89 in fiscal 2011, reflecting the impact of the quality issues in the third quarter. Adjusted earnings per share year to date were $2.24, down 8%. Cost of quality is estimated to have impacted our results by about $0.11 in the third quarter and $0.31 year to date, tracking with our previous expectations.

In the first nine months of fiscal 2012, we generated $54 million of free cash flow after making net investments of $36 million in capital expenditures and before funding the cash transformation costs of $9 million. We have $205 million of cash on hand after completing a $50 million share repurchase in the second quarter. We continue to have a strong cash generation model and believe we will achieve and likely surpass our stated free cash flow guidance of approximately $70 million for fiscal 2012 before funding up to $14 million of cash transformation costs.

In summary, in Q3 we delivered strong revenue growth once again, and we believe we will have revenue growth at the upper end of our estimated 6% to 7% range this fiscal year.

Our gross margin was negatively impacted by the costs of quality, including the inability to capture targeted cost savings while giving full attention to the quality issues.

We are affirming our EPS guidance for fiscal 2012 in the range of $3.00 to $3.10. The planned fourth-quarter investments that I mentioned earlier, which are focused on revenue growth momentum and on accelerating our strategic goals, continue to give us confidence that we will hit our targeted earnings range for the full year. As in the past, our website includes revenue and income statements in areas which are based on elements of guidance provided in my comments for the full year.

Regarding fiscal 2013, with plasma revenue likely to return to normalized mid single-digit percentage growth rates, we believe fiscal 2013 will be a year in which revenue will grow by a mid-single digit percentage and operating income and earnings per share will grow at low double-digit percentages. We look forward to providing richer visibility to our fiscal 2013 guidance during our earnings conference call at the end of Q4.

Our business fundamentals remain very strong, and we are rapidly putting the challenges of fiscal 2012 behind us. Our strong cash flow model and ample cash on hand provide us with flexibility with regard to growth options going forward, at a time when the M&A activity level continues to be fairly robust.

With that, I'll turn the call back to Brian for his closing comments, and then we'll take your questions.

Thanks, Chris. Haemonetics is a stronger company today than the one that began fiscal 2012. The lessons learned have been difficult, but we are making the right investments, implementing tough decisions, and doing the right things.

We are learning that being the global leader in blood management solutions for our customers comes with a responsibility far greater than the words themselves, but I believe we are acting appropriately and our customers are responding in turn. This is why we are growing 8% in a market that is challenged to grow.

So let me take a moment to speak about the positive response we are seeing from our customers. The revenue growth was again led by our plasma business with another solid quarter of double-digit growth of 15%, as plasma collections continue to be robust. We expect this business to return closer to a mid single-digit percentage growth in fiscal 2013, consistent with the market.

We're also pleased to report that we have signed multiyear extensions of our supply agreements with several of our major plasma collection customers, providing for continued use of our collection devices and disposables. This places 75% of our current commercial plasma business under contract through Q3 of fiscal 2017 and over 90% through Q3 of fiscal 2015. This is important when you consider the potential catalysts this industry faces with new indications for the plasma-derived biopharmaceuticals in the next several years.

TEG, the product with the highest demand among all IMPACT accounts, is having another strong year. TEG disposable growth is in the 15% to 20% range for the fourth consecutive year and is an important blood management tool for our customers.

The TEG analyzer is also gaining adoption in our global markets as well. Third-quarter TEG disposables' growth in China was 194%. This growth is off of a small base, but certainly shows the growing demand for this technology around the world.

Using IMPACT selling, we continue to make good progress implementing blood management solutions with key customers. We have focused increasingly on large, prestigious institutions with significant surgical practices, and again this quarter that effort has been successful. Let me mention a few of these.

We've installed 14 new Cell Saver Elite devices, our newest advance in Cell Saver technology, at Duke Medical Center in North Carolina. The Johns Hopkins Hospital in Maryland, which became a BloodTrack customer in the first quarter, recently signed an additional contract for IMPACT online.

We entered into a blood management agreement with the Greater New York Hospital Association, a group purchasing organization for over 250 member hospitals and continuous care facilities, including such prestigious institutions as the Mount Sinai Hospital, the North Shore-Long Island Jewish Health System, and Continuum Health Partners. They will soon launch an IMPACT online-based blood management program customized to meet the unique needs of their member hospitals.

Using the IMPACT sales tool, we were able to displace a competitor's nonwash postoperative system and we entered into a new contract for OrthoPAT with Sant'Antonio Abate Hospital near Milan, Italy.

Since launching our new Cell Saver Elite early in fiscal 2012, we have leveraged this new technology, along with our blood management solutions, to capture competitive accounts. In Q3, we added over 100 Cell Saver Elite devices globally, more than doubling our previous installed base. What is even more encouraging is that in the U.S. where cardiovascular surgical procedures are flat, Cell Saver revenue increased 5% in the quarter, another indication of the growing acceptance of blood management.

We continue to see success in our IMPACT selling as well. 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 237.

Our TEG product is used in nearly 50% of all hospital IMPACT accounts today. TEG disposables grew 16% year to date and TEG disposables were up 32% in IMPACT accounts.

IMPACT selling with our blood center customers also saw progress as year-to-date red cell disposables grew 12% in IMPACT accounts, compared to being down 2% in non-IMPACT accounts. So with the benefit of IMPACT selling, our blood management solutions continued to attract the attention of our customers and momentum continues to build with larger, more prestigious institutions included.

We are successfully delivering revenue growth despite the challenges of the broader market. We are gaining traction, increasing our confidence, and remain very optimistic for the future. As I stated earlier, the fundamentals of this business remain strong and we have much to build upon as healthcare reform pressures mount for our customers.

Again, I thank all our employees for their continued commitment. This team believes in our blood management vision and what it means for the customers we serve. They faced the challenges of fiscal 2012 and emerged stronger and more determined than ever. This is just one more reason why we feel our best days are still ahead of us.

And now, we'd be happy to take your questions.

(Operator Instructions). Scott Gleason, Stephens.

Hey, Brian, Chris, thanks for taking my questions. Brian, I guess I'll start off congratulations on extending out the contracts with your plasma partners through 2017. Can you talk a little bit about kind of what pricing was entailed in those contracts? Are you guys seeing an increase there or is there a step-up functions in terms of over time there? Can you give me -- maybe give us a little more granularity there?

Yes, Scott, these contracts, as you might expect, are confidential agreements between us and our customers. So let me kind of just give you high level.

What you've seen us do with our plasma business in the past, and I think it's safe to say, you can continue to see us do as we go forward. What I'm really pleased about here is that when you consider the uncertainty that this industry faces, and I'm talking uncertainty in a positive way with upsides that could generate based on the current clinical trials that are ongoing, we've been able to secure this business and really allow us the opportunity for us and our customers to focus on the larger market.

You know, at the same time, we've also built out our manufacturing production. With the opening of our Salt Lake facility, we not only have addressed a business continuity concern, but we've clearly doubled the ability of our production capacity at the same time.

So, what I'd say there, Scott, is that look to the business being secured and look for us to continue to do what we've done with our plasma business, continue to leverage our manufacturing capacity as we go forward.

Okay, great. And then, Brian, can you maybe give us a little bit more detail? I know you guys said the platelet piece was up in terms of emerging markets. Where are you guys seeing most of the success there? Is it coming from, like, China or which regions are you seeing success?

And then, is there any update, I guess, in terms of the second-generation platelet device that you guys have talked about a little bit in terms of when we could start learning more about that?

Yes. The platelet growth is coming from our emerging markets and also in Japan, as Chris indicated, a little bit of upside there as a result of a quality issue with one of our competitors there.

But emerging markets continues to be a real catalyst for us, and it's pretty broad-based. Certainly China is the leader with its size, but we're seeing it in other elements of our emerging markets to include Russia and India, although India, we didn't see the upside that we typically have seen in the past with the dengue fever season, which is certainly a good thing for the Indian population, of course. But that's how I'd tell you we're seeing the growth.

In terms of the platelet device, we've not given a whole lot of visibility on this, Scott. We'll give you a little bit of an indication of that at our May investor conference, directionally, but we'll continue to keep that one a little bit more under wraps. What we've told you in the past, we remain on track relative to our plans there.

Okay, great. And then, just one last question. Brian, when we look at the red cell piece starting to come back a little bit, typically it seems like that device really starts to do well when you start to see shortages of red cells. Are you guys starting to see that at all in terms of an elective procedure tickup where there is supply/demand imbalances that are driving customers to start using that device more?

No. We've seen a bit of lumpiness in the red cell market, but we've not seen surgical procedures rebound very much at all, Scott.

Where you're seeing that growth come is with our IMPACT efforts, working with blood centers to really understand their economics and how they collect blood. In other words, recognizing that the overhead of a mobile drive that collects 20 units of blood versus one that collects 200 units of blood are not the same.

So they're really changing their collection practices, not necessarily going to the smaller drives as frequently, but using our red cell technology in the larger drives to ensure that they're collecting the same amount of blood to meet their current demand.

Jim Sidoti, Sidoti & Company.

Can you -- do you have any insight on what plasma inventory levels are like?

Yes. And Jim, we've talked about this in the past. It's the one part of the industry that we don't have visibility to. This is one of the closer-kept secrets of the plasma industry.

What I will tell you is with Pete Allen taking over responsibility for the plasma business, and Pete working with Steve Swenson really deserve the credit for the work done with our plasma customers in securing these contracts going forward. Pete is also now focused on working with the plasma customers to really understand a better forecasting process as we go forward and really try to drive them to a little bit more accuracy.

We understand the volatility that exists from a collections' standpoint and it's that piece that kind of swings a little bit, but we're going to continue to work with our customers to try to refine that to a more narrow range.

And then, just as a follow-up to that, I'm sure you've listened to Baxter's call or read the transcript, and they talked about adding capacity for their fractionation business. What do you expect -- or how do you expect that to impact you, timing-wise?

When you look at what Baxter's doing, I think if you talked with all of the plasma fractionators, every one of them is considering what they do from a fractionation standpoint. I think the entire industry is looking to the future and understanding how to position themselves responsibly, considering what's taking place in the industry today.

What I'm excited about is that these contracts position us extremely well. Baxter is included in this bevy of contracts that we've spoken about in terms of looking at our business as we go forward, and we're pleased about that. But there's no material change there either relative to our agreement with Baxter. I think we're extremely well positioned not only with Baxter, but with every single one of our plasma collection customers as we look to the needs of the future.

David Lewis, Morgan Stanley.

Brian, you talked a lot about the IMPACT business and strength in blood management. Just over the last four to six quarters, we've actually seen a number of added accounts, IMPACT added accounts, slipped sequentially. I'm assuming this has something to do with distraction related to the quality remittance issues, but maybe just walk us through how you see those IMPACT customer adds trending over the next several quarters? When can we sort of see that trough and head back in the other direction?

Yes, I'd answer that two ways, David. Yes, you're absolutely right. We have clearly been distracted in our IMPACT selling efforts with the OrthoPAT recall.

I see that subsiding as we go forward and I see that continuing to get better as we go into fiscal 2013.

But I would also tell you you're not going to see the increases be what they were in the early days. I think that we'll take it up from levels where we are today. But it won't go back up to levels where it was before, but I think you'll see us securing more prestigious, larger accounts that in the aggregate capture more surgical procedures in total, and you'll see that going to influence the growth rates. And I think you're seeing that influence the growth rates -- even though these numbers are smaller, you're seeing that influence the growth rates today.

Okay, thank you. Maybe just a follow-up, Brian, on plasma. Obviously you talked about the contract extensions. Baxter has not historically been a significant customer for Haemonetics, but perhaps that changed sort of incrementally. I'm just trying to get a sense of your guidance right now, which is for double-digit plasma growth going to sort of mid-single digits next year, which is more of the market rate.

Is there anything underpinning your expectations today, other than market-rate growth rates for plasma is about as good of an estimate as you can come up with in 2013? And the other piece, Brian, I'm trying to get at is, as you are probably aware, Baxter will look to take down their Glendale facility back-half of 2012, which means they'll likely build inventory in the early part of this year, so I'm just wondering if that dynamic has had any material or appreciable impact on your results. Thank you.

You know, we typically don't talk about the individual contracts, as I referenced already, but let me answer the question this way. Our current growth rates nor our intended growth rates for fiscal 2013 contemplate any significant share shifts.

Larry Solow, [CJ].

I was wondering if you guys could just remind us of the -- you mentioned about half of the installed base has been recalled on OrthoPAT, and then you also said you've built about 900 new machines. Can you just remind us about what the installed base is today and how many machines have been replaced of those -- of the original half that was recalled?

I'll let Chris speak about what the current installed base is, but we've replaced about 900 devices.

We've built all 1,200 that we had indicated that we would build to replace. So, we're continuing to address that recall.

If you remember, what drives that? The majority of the devices in the U.S. have been replaced. These are devices we own. The devices outside the U.S., primarily Europe and Japan, many of these are owned, and we're now going through that process of replacing those devices. As I said in the script, we expect to have the recall process substantially completed in the fourth quarter of the fiscal year.

Chris? Can you comment on the installed base?

Sure. We're sitting at about 3,100 devices today.

Okay. And then, just a quick follow-up, just switching directions, and I realize your guidance is very preliminary and I don't expect you to comment on line-item type questions. Just in terms of -- I would think that if you obtain mid-single-digit growth, and I would imagine some of the gross-margin pressure, I would imagine at least the initial $150 million or $170 million, most of that you'd recoup pretty quickly next year. I would imagine -- I would've assumed if you've got mid-single-digit growth, that maybe your profit growth could be higher than sort of 10%, 12%, or whatever that may be. Are your gross-margin assumptions -- do you include a rebound in that line item?

We'll give the guidance on these lines as we get to the end of this quarter, but let me say this. Two things, then I'll ask Chris to add any color that he might have here, but two things that I would really like to emphasize.

The first is we're going to continue to invest -- we've got some solid revenue growth. Our strategies are working. We're going to continue to invest in work to accelerate that, primarily when we look at emerging markets as well.

But the second thing that I would tell you there, when you think about expenses for next year, one thing that you have to remember is that we pay our bonuses based off of results. For us this year, that means there is $9 million -- roughly $9 million in bonus that we will not pay. So when we planned for next year, that means that there is $9 million incremental OpEx that we must plan for as we fill that bonus target pool for next fiscal year.

Add onto that the merit increases that we contemplate, and you're looking at something that's a $13 million to $14 million increase from a planning perspective in OpEx just before you start the fiscal year. So as you consider that, remember to dial that into your models as we go to the next fiscal year. Again, we'll give more color. Chris, would you add anything to that?

No, that was very complete.

(Operator Instructions).

Operator, any further questions in the queue?

Steven Crowley, Craig-Hallum Capital Group.

Good morning, gents. I thought I was going to get lost in the woodwork there.

A couple follow-up questions. You were nice enough to give us a little bit of granularity on plasma and say that your initial guidance for 2013 didn't include any assumptions for market-share shifts. In terms of price, should we also think that it doesn't include much of anything for price or is there some modest pressure there?

Again, we'll give you more guidance relative to these particulars at the end of the fiscal year, but as I said earlier, recognize that we're going to continue to leverage our plasma business, working with our plasma customers to improve the efficiencies in this market. That will continue, so as we've talked about our margin improvement in the past six, seven, eight years, as we've gone from 46% to where we are today, we'll continue to leverage that as we go forward.

But again, we're giving no visibility into the contracts. These are confidential agreements with our customers and they've asked us to really be respectful of that.

Okay. But your guidance overall, you've tended to give us a flavor for the growth rate as representative of volume, with market share as a component and then price.

The growth rate would be all-in.

Okay. In terms of the software business, there was some verbiage in the press release that you acknowledged, even in your prepared commentary, that there was some lumpiness in the software business. In the press release, it talks about not having the scale in Europe right now to be as consistent as you'd like, but I'm wondering what the long-term growth rate for that business is. When you made the Global Med acquisition, we were talking 10%-ish. You've obviously come off that, short term. What do you think the longer-term growth rate for software is?

We're still looking at a high single-digit growth rate. We're going through some shifts in our business. The thing that I find very encouraging is where we have our newer products, the Global Med products that we acquired in, North America we're seeing very strong double-digit growth both in blood bank and in hospital.

Yes, and I think what I'd add there, Steve, is when you look at the comment that Chris made, and it should not be lost, when you see that the business we acquired, the Global Med business we acquired, in the quarter up over 25% for our hospital and blood center customers, that's very significant, and I personally look at that much like equipment, as a leading indicator of the effectiveness of what we're doing relative to blood management.

If we talk about it being the data and how our systems capture data, turn it into information, use that information to change the way in which our customers practice what they do, I think that's very significant.

Larry Keusch, Morgan Keegan.

The first question is, you mentioned, Brian, in -- somewhere along the way that Pete Allen has taken over the global plasma operations, so I'm wondering sort of what's behind the shift in his responsibility and has he -- what's happening with his old responsibilities? And also on that plasma, what are we seeing with the EXPRESS protocol, given again that it feels like demand has been pretty solid in the end market for plasma and at least some companies certainly have some inventory challenges?

All right, let me talk first about the shift and I think that this is something that we've covered.

There's really two pieces here. We wanted to ensure that we had greater focus and visibility on blood management, and so you recall that we shifted all responsibilities of blood management for North America to really get after this and understand how we take this to our customers and execute to include effective implementation. We put all that underneath Mike Kelly as the President of North America, so Mike has the responsibility for the blood centers, the blood bank business of North America, the patient business of North America, software solutions business, as well as marketing to be able to drive this in that fashion.

We shifted Pete over into the plasma business, and Steve Swenson moved into our North American blood center business as we contemplate the launch of the automated whole blood. So we're looking to really beef up a couple of critical areas. As Steve has indicated, for us the timing that he wants to remain in the business, as well as the need for us to ensure we have the right leadership driving our plasma business for the longer term, especially considering what we just accomplished, the contracts, as well as the catalysts that exist.

So, that is the reasoning behind those shifts. I think that we've talked about that, so to be clear, that's the reasoning behind that.

In terms of EXPRESS, it's certainly something that's going to be a discussion with our customers as we go forward. They're looking to really address, from a future standpoint, certain catalysts. I think this will help them manage that growth effectively. But that still remains an opportunity for us as we go forward.

Okay. And then, just thinking a little bit longer term here, obviously the operating margins are going to be in and around 15% in 2012. Or closer to 17% in 2011, and I'm just thinking about, again, given the potential for growth in the plasma disposables over time, is this a business -- and taking into account the longer-term contracts, is this a business that can move to a 20% operating margin? And if so, how should we in broad brush strokes think about when that might occur?

As we look at our strategic plan, which includes a very detailed five-year financial model we see ourselves trending towards that target and that timeframe.

And it's really very much about leveraging the infrastructure investments we've made in the plasma business over the next five years through growth because in a sense we took a step back by doubling our capacity and separating it into two separate plants. It certainly includes increased mix from hospital products, which are highly profitable, and from software products, which are highly profitable.

So all of those things, the mix and the growth and returning to that operating discipline that got away from us this year as we had to deal with our quality issues, give us confidence that we'll be at or close to that target in five years.

Gregory Macosko, Lord Abbett.

Japan, that growth was really quite nice. I'm assuming that's against a pretty easy comp. And was that driven primarily by plasma? Talk a little bit about that strong growth there.

There is two pieces that will come into this, and I'll let Chris comment here in a minute, but it is primarily driven by platelets, as we'd indicated in the script, which we're growing as a result of a quality issue with one of our competitors there.

But we also have -- when you see the strength in foreign currency, it's being driven out of Japan. Let me let Chris provide a little more color here.

Yes, so we do get a benefit from currency. We get a benefit from hitting the bottom on that negative plasma trend, and as Brian said, we've benefited from a competitor's quality issues.

And with regard to the platelets, I mean, just looking out -- excuse me, plasma. Just looking forward, is your sense that -- you mentioned, but you're suggesting that the whole blood situation there has kind of peaked and that you expect the pure platelet collections to improve incrementally going forward?

I think you're speaking plasma collections to improve going forward. Right now, we're giving you that opinion based on the trends that we're seeing.

The Japan Red Cross has a fiscal year that matches our fiscal year. They'll provide the guidance and their collection goals at the end of the fiscal year. But right now, we're basing that based off of what we're seeing today, and our plasma collections, or the losses are declines we were seeing as a result of their increased red cell collections, certainly moderating this quarter, and we expect that going forward. We'll be able to know that definitively within the next 60 days.

We have no further questions at this time. I would now like to turn the call back over to Mr. Brian Concannon. Please proceed.

Thank you, operator. Let me close right where I started. We had a very good quarter at Haemonetics.

Revenue growth continued, up 8% in Q3. Plasma contributed double-digit growth once again and IMPACT selling is driving gains in red cells, platelets, and surgical products. Equipment growth was impressive at 18%, giving confidence that the revenue gains we are seeing are sustainable.

The recently-signed multiyear extensions with several of our major plasma collection customers are another significant milestone. With these key contract extensions in place, 75% of our current commercial business is under contract through Q3 of fiscal 2017 and over 90% is under contract through Q3 of fiscal 2015.

We thank you for your support and confidence in us as we worked through some very significant challenges. We've completed most of the remediation required by the OrthoPAT and HS Core Bowl quality issues, and we have strengthened our Company in the process.

As I said earlier, Haemonetics is a stronger company today than the one that began fiscal 2012. This strength positions us well for the future as blood management continues to gain the attention of our customers.

We look forward to sharing the specifics of our plans with you at our annual investor day conference here in our corporate headquarters in Braintree, which is scheduled for May 10. We'll provide you with the details for the conference over the next several weeks. Thank you for your time this morning.

This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful day.