Haemonetics Corp (HAE) 2014 Q3 法說會逐字稿

Good morning, my name is Felicia and I will be your conference operator today. At this time I would like to welcome everyone to the third-quarter fiscal year 2014 earnings release conference call. (Operator Instructions).

I would now like to hand the conference over to Mr. Gerry Gould, Vice President Investor Relations. Please go ahead, sir.

Thank you. Good morning. Thank you for joining Haemonetics third-quarter fiscal 2014 conference call and webcast. I am joined by Brian Concannon, President and CEO, and Chris Lindop, CFO and Executive Vice President of Business Development.

Please note that our remarks today will include forward-looking statements. Our actual results may differ materially. Additional information concerning factors that could cause actual results to differ materially is available in the Form 8-K we filed this morning as well as in our recent 10-K and 10-Qs.

On today's call Brian will review the business highlights of the third quarter. Chris will review operating performance for the quarter and guidance for fiscal 2014 in more detail. 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 costs from the adjusted financial results we will talk about today. In total we excluded $18 million of pretax transformation, integration and restructuring cost from our third-quarter fiscal 2014 adjusted results and $25 million from the third quarter of fiscal 2013.

Additionally the earnings information discussed within excludes deal related amortization expense. Prior period amounts have been similarly presented to permit comparison. Deal related amortization expense excluded from adjusted earnings totaled $7 million in the third quarter of fiscal 2014 and -- of $7 million -- and $6 million in our third quarter of fiscal 2013.

Further details including comparison with fiscal 2013 amounts excluded are provided in our Form 8-K and have been posted to our investor relations website. Our press release and website also include a complete P&L and balance sheet as well as reconciliation of our GAAP and adjusted results.

With that, I will turn the call over to Brian.

Thank you, Gerry, and good morning everyone. This morning we released our third-quarter results that showed a modest return to growth in our base business and we updated guidance for the rest of fiscal 2014. We said that revenue would remain challenged in international markets affected by currency weakness and in the US where blood usage continues to decline at rates that exceed anything that was expected.

However, I was pleased with the strong performance in the areas we have identified is growth drivers. Organic or base revenue which we define as (technical difficulty) on our whole blood business increased 1% as reported in 4% on a constant currency basis. Profitability in the quarter included an adjusted operating margin of 17.5% and adjusted earnings per share of $0.61, up 5% over the prior year third quarter.

While recent blood collection declines continue to negatively affect some parts of our business, there was strong growth in the third quarter and other parts of our business particularly plasma, TEG diagnostics and emerging markets led by China and Russia.

Our plasma business grew $9 million or 13% as reported and 15% in constant currency. Strong end market demand for plasma derived biopharmaceuticals continues to fuel collections and we also continue to benefit from a distribution change in Australia and New Zealand.

TEG continued its impressive growth trajectory up $2 million or 27% in the quarter with double-digit growth expected again in the fourth quarter. In the emerging markets of China and Russia, we had $4 million of disposables revenue growth. China and Russia continue to represent the largest growth potential of all emerging markets with 16% and 42% disposable growth respectively in the third quarter.

Three parts of our business, plasma, TEG, and the emerging markets, represented 55% of our base business revenue in the third quarter again defined as revenue other than from whole blood. That 55% of our base business enjoyed 13% growth in the quarter. These opportunities were identified as growth drivers over a year ago and we invested in these areas to drive this growth. It is important to recognize that again this quarter a substantial portion of our business portfolio is delivering solid growth and we remain encouraged with the prospects for continued growth there.

The other 45% of our base business is cell salvage and blood component collection and declines in these parts of our business continue to be driven by protocol changes with our hospital customers and the corresponding impact on blood collections primarily in the US market.

Hospitals are increasingly implementing blood management techniques that reduce blood shed during surgical procedures and changing protocols in order to decrease the frequency of transfusions. As a result, blood center revenue in the US continues to be under pressure due to the rapid decline in demand for blood products. The prices hospitals pay for blood components are also under pressure resulting in increased competition among blood centers. This is causing changes for our blood center customers that weren't even contemplated as little as one year ago.

Transfusions in the US continued their downward trend pressuring both our whole blood and double red cell products. The US still compares unfavorably with best practice nations where red cell transfusion rates are in the low 30s per 1000 of population. Average red cell transfusions in the US population are likely to drop from approximately 40 per 1000 at the beginning of fiscal 2014 to about 33 per 1000 by the end of our fiscal 2015. This decline particularly affects our whole blood and double red cell businesses which derives 65% and 85% of revenues from North American customers, respectively.

Transfusion reductions that we previously expected to occur over a five- to eight-year period are now expected over a two-year period, fiscal years 2014 and 2015. We are nearly through the first of these two years and the rate of decline in blood center collections has accelerated to the 8% to 10% decline rate that we identified previously. As a result, we are seeing dramatic changes in the US blood collection market to include rapid consolidation and the formation of affiliations as well as an increased focus on operational efficiency and direct supplier cost.

Two large customers, the American Red Cross and HemeXcel represent approximately 60% of all US collections. They have both opted to pursue competitive single source supplier strategies for whole blood collection sets utilizing tenders aimed at minimizing disposable costs. Pricing has become one of the key drivers. Our value creation and capture initiatives position us well to compete in this new environment and planned value engineering initiatives will allow us to further reduce manufacturing costs over the next three years.

These customers recognize the growing importance of reducing the total cost of collection, improving the quality of the blood components collected, ensuring compliance and working with their hospital customers to improve logistics and enhance their patient blood management initiatives. This is their path to becoming more relevant in this rapidly changing blood management environment. We are very well positioned to support our customers in each of these areas with our blood management solutions.

We recently announced that HemeXcel completed its tender process and selected Haemonetics to supply its whole blood collection disposables for three years and the implementation is already well underway.

In the surgical business, our 10% growth last year was influenced by the impact of a natural disaster on a competitor that later returned to the market with aggressive pricing. This resulted in the loss of much of the business that was gained in Europe and Japan as customers resumed using the competitive device. These comparisons will soon be behind us as we reach the anniversary of that event.

Our total organic revenue guidance is reaffirmed in the range of 0% to 2% reflecting our continued expectation for 2 percentage points of currency headwinds. This represents an organic constant currency growth rate of 2% to 4%, consistent with prior guidance. The mix will be a bit different with strength in our commercial plasma business offsetting continued weakness in our hospital business both to somewhat greater extent than previously anticipated.

In summary, overall revenue growth continues to be muted by US blood collection and hospital market dynamics but our projection for organic constant currency growth of 2% to 4% in a soft market reflects the progress we are making in our identified growth drivers. Our $2.30 to $2.40 adjusted earnings per share guidance is unchanged. However, pricing declines, currency headwinds and some variable compensation funding are expected and thus we note a bias toward the lower end of that range.

I will now turn the call over to Chris Lindop to review the financial highlights of the quarter and our current thoughts on guidance and then I will wrap up with some closing comments. Chris?

Thank you, Brian. In the third quarter, total revenue was $242 million, down 2% while our base business revenue, in other words our legacy business aside from whole blood, increased 1% as reported and 4% on a constant currency basis.

The weakness of the yen versus the US dollar resulted in 170 basis points of headwind to our overall revenue growth rate in the quarter. Our hedges which are designed to protect our operating income over a rolling 12-month period leave a portion of our revenue unhedged and therefore susceptible to changes in foreign currency rates. This currency trend which relates primarily to a major shift in the yen which began in our third fiscal quarter last year is expected to impact growth rates in the fourth quarter of fiscal 2014 and into fiscal 2015 as we have already locked in hedge rates for the majority of next fiscal year.

Plasma disposables revenue which was $76.7 million in the quarter increased by over $9 million or 13% as reported and 15% in constant currency. Importantly North America plasma disposables revenue grew $7 million or 15% and our customers continue to be optimistic about end market demand.

In Australia and New Zealand, we benefited from the recent transition to a new direct selling approach which contributed 4% to our overall revenue plasma growth in the quarter.

Our guidance range for plasma growth in fiscal 2014 is raised to 8% to 10% from the previous 7% to 9% and given the recent plasma extensions we reported in today's press release, we are well-positioned with customer agreements covering approximately 80% of our commercial plasma business for five years through Q3 of fiscal 2019.

Blood center disposables revenue not including whole blood declined 6% to $53 million with red cells down 16% and platelets down 4% in reported currency but flat in constant currency. The red cells disposables revenue decline was driven primarily by the US market decline which Brian noted. Strong platelet growth in Russia was more than offset by a $1.5 million currency impact from the weakening yen. We expect our base blood center business to be down between 5% and 8% organically in fiscal 2014.

Our Acrodose product which helps customers recover a clinically equivalent platelet product from whole blood and our universal platelet protocol product which improves the effectiveness of our existing platelet apheresis platform both represent opportunities to achieve near-term blood center disposables growth.

Whole blood revenue declined 14% to $47 million with $32 million in North America, $10 million in Europe and European distribution markets and $5 million in the Asia Pacific and Japan markets.

North America whole blood revenue declined by $5 million reflecting the trends and demand for red cells which Brian described and the impact of a transitional OEM supply contract which recently expired.

Whole blood revenue declined in Europe by $4 million due to the previously noted loss in the low margin tender. We are encouraged that whole blood revenue grew by $2 million in emerging markets with strength in all four BRIC countries. We continue to expect approximately $190 million of whole blood revenue in fiscal 2014.

Hospital revenue declined 3% to $32 million in the quarter and surgical disposables revenue was $17 million in the quarter, a decrease of 11%. We know that currency cost is nearly 200 basis points of growth again this quarter. Additionally, as Brian mentioned, a competitor returned to the market with aggressive pricing and this resulted in weak revenue performance in our surgical business. Soon we will anniversary the tough comparable relative to last year's share gains.

OrthoPAT disposables revenue of $6 million was down 10% in the quarter. The increased use of tranexamic acid and lower transfusion triggers by hospital customers are the market challenges for OrthoPAT. We expect benefits from introducing the OrthoPAT Advance will be more than offset by these market declines and our expectations reflect this trend.

In diagnostics, TEG disposables revenue was $9 million, up 27% in the third quarter driven by increases in North America and emerging markets. We installed 506 TEG devices in the first nine months of fiscal 2014, 675 devices in fiscal 2013, and 425 devices in fiscal 2012. We fully expect the strong TEG disposables growth to continue.

Taking into account the current surgical weakness and OrthoPAT market headwinds, we are adjusting revenue guidance to a range of 0% to 4% decline in our hospital disposables business for fiscal 2014. Our prior guidance was 0% to 3% growth with a bias towards the lower end of that range.

Software solutions revenue was $18 million, up 10% and we previously referenced a strong pipeline of software opportunities that we expect would drive revenue growth for the remainder of this fiscal year and that remains the case. Hospital customers increasingly recognize software's importance in identifying and implementing blood management solutions.

Equipment revenue was $15 million in the quarter, down $3 million or 18%. This reflects the timing of orders, tenders and capital budgets with certain recurring orders known to have been received in last year's third quarter which are expected instead in the fourth quarter of the current fiscal year.

Our installed base of equipment which is the combination of purchased and placed devices increased 5% in the first nine months of fiscal 2014 and this bodes well for growth in disposables in our base business.

Third-quarter fiscal 2014 adjusted gross profit was $124 million, flat with the prior year quarter. Adjusted gross margin was 51.3%, up 90 basis points year-over-year. Productivity improvements in the base business accounted for this improvement.

Adjusted operating expenses were $82 million in the third quarter, up $4 million or 5%. We continue our commitment to funding planned growth and infrastructure investments in emerging markets as well as in R&D to support the development and introduction of new products.

Adjusted operating income was $42.5 million in the quarter, down $4.5 million. Operating margin of 17.5% was down 150 basis points. In addition to planned spending, the weak yen emerged as a headwind to profitability. As we began to anniversary the major devaluation of the yen which began a year ago, we felt a headwind in our operating income growth rates of 6% or $3 million in the third quarter of fiscal 2014 and this headwind is expected to continue to impact results into fiscal 2015.

Interest expense associated with our loans was $2.4 million in the quarter and our tax rate was quite favorable at 19.6% in the quarter.

While we are benefiting from the ongoing implementation of our global tax strategy, the overriding cost for the decrease was the expiration of tax statutes and the resulting required reversal of reserves established for tax periods that they covered. For the full fiscal year 2014, we now expect our tax rate to normalize at around 24%.

Adjusted earnings per share reached $0.61, an increase of 5%. Summarizing our revenue guidance we expect plasma disposables to grow approximately 8% to 10%; blood center disposables to decline 5% to 8% on an ex whole blood basis; hospital disposables to decline 0% to 4%; and software to grow 2 to 5%. Overall we affirm base revenue growth of 2% to 4% in constant currency and 0% to 2% on a reported basis. And adding expected whole blood revenue of approximately $190 million, we affirm total revenue growth guidance of 5% to 7%. On an adjusted basis, our gross margin is expected to approximate 51%, up 100 basis points over fiscal 2013 and operating margin excluding deal amortization is expected to be roughly 18%, also up approximately 100 basis points.

We are reaffirming our previously provided adjusted EPS range of between $2.30 and $2.40 excluding $0.38 of deal amortization but with a bias towards the low end of that range. As in the past, our website includes revenue and income statements scenarios which are based on the elements of guidance provided in my comments for the full year.

We ended the third quarter of fiscal 2014 with $178 million of cash, up $19 million in the quarter and down $1 million in the first nine months of the year. This reflects an investment of $23 million for the acquisition of the assets of Hemerus Medical and $29 million for debt repayment. We generated $47 million of free cash flow before transformation costs in the third quarter after making net investments of $16 million in capital expenditures and before funding $13 million of cash restructuring and transformation costs and $4 million of VCC capital expenditures.

Year to date, we generated $95 million of free cash flow before transformation costs, up $49 million more than double the same period last year in part due to working capital requirements in the prior year following the whole blood acquisition.

In fiscal 2014, we continued to expect free cash flow generation of $120 million or $2.30 per share before funding, restructuring and capital investments related to our transformation activities. As detailed in the schedule on our website, we plan to utilize $100 million of free cash flow to fund $28 million of capital expenditures and $72 million of expenditures associated with our manufacturing transformation and other VCC initiatives in fiscal 2014. Again, we have included no net benefit in our fiscal 2014 guidance for our VCC initiatives and the manufacturing network transformation.

Current period activities will principally being capital investments and technology transfers associated with the transformation. We expect to realize $21 million of benefit in fiscal 2015 which will ramp up by fiscal 2018 to a targeted level of $40 million to $45 million in annual savings.

Finally regarding the incremental business volume from HemeXcel, we indicated this will not have a material impact on fiscal 2014 revenue or earnings for the corporation as a whole. There are some implementation costs that will be among the headwinds creating the bias towards the low end of the guidance range. Margin headwinds from lower pricing will more than offset any benefit related to this share gain in fiscal 2015. As a result, this will pressure margins and earnings per share in fiscal 2015.

In fiscal years beyond 2015, benefits of product value engineering and other internal initiatives are expected to offset these margin headwinds.

With that, I will turn the call back over to Brian.

Thank you, Chris. We had encouraging growth in our commercial plasma business, TEG diagnostics and emerging markets, areas that we identified as growth drivers over a year ago. Funding those growth initiatives was important then and remains a priority for us going forward. Partially offsetting this growth were declines in the collection market primarily in the US and the impact of currency on our overall results.

The collection markets will stabilize and the work we are doing in both cost reductions and the development of blood management solutions allows us to compete more effectively in this new environment. We remain optimistic in our ability to capture share and better help our collection customers become more relevant with their hospital customers in the future.

We also had a number of important business developments in the third quarter that are especially noteworthy. First, we are pleased to report the multiyear extensions of supply agreements with several plasma customers providing for continued use of our collection devices and disposables. This places nearly 80% of our current commercial plasma business under agreement for the next five years through the third-quarter fiscal of 2019.

This is an important validation of the value our products and services bring to these customers in assuring quality, automation and operational efficiency.

Second, we were selected by HemeXcel to supply the whole blood collection disposables covered by their single source tender for the next three years on an exclusive basis. This too is important validation and this case of our ability and willingness to respond to their immediate needs for aggressive pricing while demonstrating business continuity capabilities, assuring continued best-in-class quality processes and committing to product advances which have the very real potential to provide value and competitive advantage for our customers.

As Chris mentioned, our aggressive pricing will pressure margins in earnings per share in fiscal 2015 but in fiscal 2016 and beyond benefits of product value engineering and other internal initiatives are expected to offset these margin headwinds. We have identified specific product engineering and manufacturing changes that when implemented, will lower the cost of our whole blood kit and return margins to their prior level. In this manner we expect to continuously improve the profitability of this product line.

There is another important benefit that will accrue from this strategy, reducing the cost of manufacturing for our whole blood product will enable us to be more competitive on tenders outside the US where the market size is much larger and where our blood business -- where our whole blood business has been challenged to effectively compete up into this point. We intend to bring the elements of our in process whole blood automation offering to market as previously discussed and I'm pleased to provide the following updates on this and other key projects.

Three important independent US blood center customers recently became partners for our automated whole blood strategy purchasing Donor Doc Phlebotomy, our paperless phlebotomy product that received 510(k) clearance last spring.

We continue to make good progress with our BloodTrack software adding three large North American hospital customers in the quarter. Our communication tower that will enable the use of Donor Doc Phlebotomy, the donor floor tablet, and other devices that mobile drives is now ready for commercialization.

And plans for pursuing FDA approval of the SOLX Solution for 24-hour storage of whole blood have been combined with work to qualify the SOLX Solution for use with the filter technology acquired in last year's whole blood acquisition. This is on track for submission to the FDA in fiscal 2015.

We previously expected to leverage our new automated whole blood offering in SOLX Solution to gain share in the US market. However, rapid changes in this market are driving share shifts based on pricing and these new solutions will now allow us to demonstrate added value to a growing portion of the US whole blood market and to gain share elsewhere.

Blood collectors must address their total cost structures to remain financially strong in the wake of declining prices paid by hospitals for blood components but they must also become more relevant in helping their hospital customers reduce the total cost of transfusions as well. Haemonetics suite of products, services and software are the logical choices to bring them the differentiation they need to compete successfully.

We remain focused on realizing the benefits of our VCC initiatives including transformation of our manufacturing network. These activities are important to sustaining our quality, service and cost competitiveness for years to come. These VCC initiatives are separate from the whole blood value engineering process I discussed previously. In fact, it is important to remember that our VCC initiatives will benefit our entire manufacturing network and not just our whole blood business. They are keys to enhancing our business capabilities, rationalizing our costs and in doing so, positioning us to pursue market share and growth.

We expect fiscal 2015 will be a year of transition, one in which we continue to advance VCC initiatives while transforming our manufacturing network, commence value engineering projects, complete R&D advances and secure important approvals in the whole blood arena all while ensuring that customers continue to benefit from best-in-class service and the highest quality products in the industry.

However beginning in fiscal 2016, we will benefit from a lower cost structure allowing us to improve profitability and also grow in markets where we had challenges competing previously. Fiscal 2016 will also see the full suite of whole blood automation come to market and the continued growth in plasma, TEG and emerging markets.

Our suite of blood management products and services increasingly will meet the needs of both our hospital and blood center customers. These product opportunities include utilization of our TEG products to monitor Hemostasis, our SafeTrace TX and BloodTrack products to manage blood inventory and reduce waste, our self-salvage products to provide autologous auto transfusions, and our IMPACT Online software to measure blood usage and results from patient blood management programs. These are solutions our hospitals need and solutions our blood center customers are seeking as they better position themselves to meet the needs of their end customers.

The steps we've taken over the past several years have put us in a good position to react to the current market dynamics. We have a strong and expanding global footprint, differentiating new products in the R&D pipeline, acquisitions that support and strengthen our blood management solutions, an increasingly advantageous cost structure, and the broadest array of products and services in the blood industry. As such, we are uniquely positioned to meet the needs of our customers in this rapidly changing market, capture market share and drive sustainable profitable growth.

The fundamentals of our business remain strong and we are determined to keep bringing new solutions to market that reduce cost and improve patient care.

Again I will close by thanking our employees and congratulating them on securing the plasma and HemeXcel wins. They remain focused on ensuring that we take care of our customers' needs throughout all of this change. We and our customers are bringing differentiating solutions to the donors and patients we serve and patient care is the ultimate beneficiary.

With that, we are happy to take your questions.

(Operator Instructions). Larry Solow, CJS Securities.

Good morning. Just quickly on the outlook for the gross margin adjustment, is that mostly higher mix or higher plasma reducing the mix with lower hospital sales and also I guess some headwinds with the HemeXcel initiation?

Yes, that is a good summary.

And then as you look out into 2015 just to clarify on whole blood obviously the new HemeXcel deal and lower pricing will certainly be a negative. But overall, that is just not on our overall so that is looking at whole blood. You still expect at least some offset from these VCC initiatives which will sort of kick in and add that $20 million?

Yes, but you also have to consider the currency headwinds which will impact us as well (multiple speakers) on profitability.

Just on the currency, is that -- so I realize you hedge somewhat but obviously the impact is hurting you more than your hedge on the weaker yen?

Yes, there is two elements to that. We don't hedge every yen dollar revenue because we have some yen cost which means that we even while we are hedged, we are exposed on the revenue line to some portion of the shift in the currency and that we have seen in the current year. But we hedge out 12 months essentially selling yen forward in increments each month forward for 12 months which means that we get a visibility in terms of the impact of the yen exchange rate on our earnings out for 12 months. We are not getting to that point where we are moving into the new, if you will, the new yen currency environment which is obviously weaker.

Got it. And then just on the plasma, the distribution change I guess benefiting you guys somewhat. Can you quantify that or just give us a ballpark, what you think that -- how much that affected this quarter?

Yes, it is about a little under $3 million.

Okay. On a positive year-over-year I guess. Okay, great. Thank you very much.

David Roman, Goldman Sachs.

Thank you and good morning. One strategic question and one financial question. Maybe starting on the financial side, you have been realizing quite a bit of SG&A leverage in the first half of the year I think to the tune of a few hundred basis points and this quarter we actually saw negative SG&A leverage. Maybe, Chris, you could just talk about the moving parts on the discretionary expense line and to what extent that is a line over which you have control versus the tighter revenue?

Yes, well, as we pointed out if you think about [operating] leverage, we had a headwind in operating of yen currency around $3 million which cost us about 6% there. We are obviously investing in some R&D projects and we anticipated that these would ramp up in the back half of the year and that has happened as expected.

But we continue to have good control over spending in all areas of the business and that does give us some leverage to pull.

And the other piece that I would add there, David, is our variable compensation which is obviously related to our performance. This is a year in which there is certainly a performance element but a market shift element that has affected our results and I will continue to monitor what I can do there for the variable compensation for our employees lower down in the organization based off of that shift and that is part of the reason why we have guided to the lower end of that earnings range.

Steven Crowley, Craig-Hallum Capital.

Good morning, folks. A couple of questions for you. In terms of trying to get our legs underneath us about next year, there is clearly a bunch of discussion around some of the changes in the marketplace, some of the investments you are making to capitalize on those changes longer-term. But should we be thinking about 2015 as a year in which we are not going to see much if any profit growth out of the Company before things really start to accelerate based on these moves? Is that the right mindset because that is a different mindset than we have had but there have been big changes here?

Yes, we are going to give guidance at the end of the next quarter, Steve. But what we are clearly signaling is a year of transition. We've got a major tender that still is in the wings here. We do expect that to come to a decision as that customer said in the first half of this calendar year. We are hoping it is going to be sooner than that which will give us better visibility but certainly want to see that play out.

But there is a bunch of moving pieces, the first being that we were doing a number of VCC initiatives which really put ourselves in a very, very good cost position in some respects doing this on the front end of where we felt we needed to be in whole blood based on what we learned on the backend of what we did in the plasma world. Think about business continuity and certainly cost quality so we are already moving down that path.

As we have looked at pricing that has played out in this first tender and we believe will play out in the second tender, we have also been successful in negotiating a focus on what we call value engineering to really address cost within this product, an opportunity that exist in whole blood that wasn't necessarily as large in plasma so a given point there.

What else has taken place? Certainly the declines that are taking place in the whole blood market from a collection standpoint, those headwinds, currency declines that exist there. Certainly we have to fuel the compensation pool on variable compensations as we go into fiscal 2015. So yes, we are signaling a lot of moving parts for fiscal 2015. We have signaled that it is going to be growth but I would say very modest growth.

We will give that guidance once all of these pieces have played out and we have better visibility to what that looks like.

Great. In terms of my follow-up, it relates to the new product strategies that you have laid out and been executing for automated whole blood. It sounds like given the changes in the market landscape those enhancements are really geared towards building back the margin, keeping the business at the end of these contracts and maybe some international growth. But given the change in purpose of some of the new capabilities you are bringing to the marketplace like SOLX, did that guide your decision to bundle the development of the 24-hour hold with the new filter technology or was it something with the regulatory process of SOLX that you needed more time anyway? Help us understand that change in strategy.

So a couple of pieces here that you have talked about, Steve. I want to be very, very clear is that SOLX automated whole blood, those are not going to be needed to get our profitability back to levels that we expect to get them back to equal to where we were prior to this shift. That is our value engineering initiatives.

We see SOLX and automated whole blood once as an opportunity to capture share aggressively in a market now to be premium products that will certainly provide for price premiums but importantly not unlike what we did in plasma, be leveraged to retain that business as we go through the next round of tenders that will take place going forward keeping that business.

When we look at SOLX, remember what we said, we had initially wanted to see a 24-hour hold that would have been on the Hemerus filter. That is not going to take place. We found that that was something that is not worth spending our time on, we have moved forward and remember what we said -- even though if we get 24-hour hold on the Hemerus filter, we wouldn't be able to generate revenue with SOLX Solution until it was approved on the Haemonetics filters, the filters we acquired as a part of the acquisition over a year ago. So that remains on track.

We were doing those in parallel. We simply have put our entire focus on the SOLX Solution being approved on the Haemonetics filters and we expect to submit to the FDA before the end of fiscal 2015.

James Francescone, Morgan Stanley.

Good morning and thanks for taking the question. I wanted to talk about a little bit more about the financial profile of the whole blood contracts. As you said, the net impact will be dilutive in 2015 but there is room to improve on that over time. Can you talk a little bit more about the magnitude of transition costs with respect to that initial dilution?

Beyond that, your comments on cost improvement through value engineering mean those contracts become accretive beyond 2015 or simply less dilutive and can you reach the free cash flow targets you previously announced?

So a lot of questions in there. First of all, we are not going to give visibility to the pricing as you might expect for two reasons, A, the confidentiality of those agreements with those customers; but B, we remain in a very competitive environment going forward in this space. We have certainly signaled that we would be aggressive on pricing and we have been aggressive on pricing. But what we have also been able to do as a part of that aggressiveness working with those customers is work with them to target real opportunities to take cost out of the product. That will be something that affects us in fiscal 2015.

But what we are saying is beginning in fiscal 2016, you will see that rebound and we believe that within three years we will have margins that will be back up to the original margins that we enjoyed in this product prior to this market shift. So think 2016 and beyond growth in profitability that we expect will outpace revenue growth.

Okay. On the hospital business or more particularly the surgical line, is there some way you would be able to give us a sense of what underlying growth in that business was if you were to back out the impact of rated competition from the competitor situation there?

Year to date last year I guess we grew 10% so that is sort of a tough comparable that you could isolate that effect and the balance would be our underlying trend.

The answer really there, James, is no, we don't have a tremendous feel for that. What we are trying to understand is what are protocol changes, how are those protocol changes that our customers are making in transfusion triggers, the measurement of hemoglobin, is that affecting transfusions of autologous transfusion rates? In other words, even though they are salvaging blood are they connecting and processing it to transfusion [impacted] patients. We are trying to understand that impact and recognize whether or not that continues to affect that part of our business as well. A little more work to do there. We hope to have some visibility here in the next quarter or two.

Anthony Petrone, Jefferies Group.

A couple on HemeXcel and then maybe some numbers questions for Chris. Brian, first on the HemeXcel contract, my understanding is that it will take some time for that contract to reach critical level in terms of actually getting equipment into all of those blood centers within that network. So maybe a little bit on timing when you will actually begin to see revenue flow out of that contract? And then heading into that, will you be incurring setup costs and the like as you reach critical mass on that contract?

So the first part, let me answer the last part of your question first which is is there a cost to transition? Of course there is, there always is that case. It won't be as significant in the sense of the equipment piece because there is no equipment here. It is a disposable piece but it will be significant in the sense that you have to convert mobile drives not just blood centers. And so we have got our people going out in each of the mobile drives to train people.

These are not challenging trainings but each blood center must train on our products versus the competitive products that they were using to get up to speed quickly. That has already begun. You will see that happen in the HemeXcel transition fairly rapidly just by the nature of where the business was at the time. We had some blood centers that were 100% with Haemonetics, others that had a partial, still others that had zero. So the focus in the transition schedule was set as a part of the contract and that is being executed so you are already starting to see that happen in our results.

That is helpful and then maybe just a little bit on whole blood gross margins and profitability on that. Can you just maybe walk us through timing on key milestones through the end of fiscal 2015? This is a disposable business so as you move along in this transition phase, should we begin to see margins improve incrementally or is it all going to come after fiscal 2015?

It will happen sort of ratably over a three-year period. It will happen -- the first part, the first offsetting effect is just the effect of volume on our absorption. The next phase which happens over an 18-month period is related to what we call value engineering and that is about half of the improvement that we are looking for. And then the last phase which you will start now and will continue is strategic insourcing phase and that will conclude within the three-year period. So you will see a bolus of improvement in 2016 and it will continue into 2017.

I realized again right here -- just jump in -- I realized that I didn't completely answer a question previously. I think it was by James which talked about the cash flow of this business. They way I would answer that which is kind of an extension of what Chris just talked about is that we are putting together what that is going to look like. We believe that the endpoint is not going to change. We believe how we are going to get there is going to change just because of the nature of the decisions we are making in a market that is changing rapidly. That is why at the J.P. Morgan conference we did not have that slide as a part of our presentation. Until we see how this market is going to play out especially with this very large tender that is outstanding, we wanted to be responsible. But that is a question that has been asked before and that is how we have answered that question so to provide that clarity. I realized I had not answered it previously.

Jim Sidoti, Sidoti & Company.

Good morning. I know you have said a couple of times you expect this SOLX to be submitted to the FDA in fiscal 2015. Can you give us a little more color? Is that first part, second part? I guess what I am asking is do you expect that to be approved by fiscal 2016?

Yes, we do. Obviously that is to say subject to any questions the FDA has but we believe that that is a reasonable expectation at this point.

Okay. In the past you have always considered yourself a double digit grower on the bottom. It sounds to me like next year because of all of the transitions going on you may not get there. But do you think by 2016 and 2017 you will be back to that double-digit bottom line growth rate?

The way I would answer that question is really twofold. First of all, I think we look at our growth rates over periods of time and the answer initially to 2016 is yes. But the way I would answer it further is to say recognizing that 2015 is going to be a year of transition, you can probably expect at our May investor conference that we are going to give a little bit more of a peek into the future than we have done in years past. I think that is important.

So again what you hear is my caution in just letting this market play out a little bit. As I said, I hope that we will have that large tender determined by that point in time. That will allow us to give you visibility and it is my expectation that we will give you visibility beyond just fiscal 2015 so we can answer those questions for you.

Larry Keusch, Raymond James.

Hi, good morning. Brian, in the past in some of your SEC disclosures you have given some qualitative comments around some of your plasma contracts as those have been signed. And I know you have mentioned that you have gotten some extensions year but I am wondering if you can again talk a little bit about sort of directionality of pricing on those?

Pricing as we have always said, Larry, it is a part of every negotiation but it is not an overriding element of the plasma contracts. It is not what we are seeing in the whole blood contracts if that is your concern.

Our plasma business is a pretty stable business. The focus with those customers is very stable. We are looking at things well beyond just simply pricing to include collaboration around some of the research and development of how we approach those markets. So things like we have talked about before.

So you can see these contract extensions as being as positive as those we have talked about in the past both in terms of the puts and takes.

Okay, just on the financial side I am wondering, Chris, if you can again remind us which parts of the business specifically are most exposed to the movements in the yen? And also I think I noticed this correctly that you now are looking to invest about $100 million of your free cash flow to fund the CapEx and cash transformation expenditures with the VCC in this quarter's press release and I think that at prior had been $109 million so I was just wondering what the differential was?

Yes, sure. So yen impact for us is obviously our Japanese business which is right around 10% of our total business. And in terms of the VCC spending, Larry, it is really just timing and it hasn't changed our timetable but it is a quarter in which cash will leave the organization and it is primarily related to Malaysia and the rather large capital project we have going on there. We broke ground there in October, we are in this phase of piling, just now the sort of land improvement part of it and we continue to feel good about our endpoint. It is just timing of when the cash leaves the corporation.

Brian Weinstein, William Blair.

This is Matt in for Brian this morning. You mentioned that one of the offsets of some of the lower cost initiatives for whole blood would make you a little more competitive OUS. Could you maybe speak about any tenders that might be coming up or what the timing or lengths of some of those tenders might be? Thanks.

There are no tenders that I would speak about that are of any significance in the OUS market. There is a number of different pieces that are puts and takes unlike the large tenders that you see here in the US which involve about $12 million collections in total, these two tenders representing about 60% of that $12 million collection market.

Most of the tenders outside the US are country driven in quasi-governmental structure that exist around the world. Those will be coming up, we know when those are coming up but there is none in the horizon here in the near term to speak of that would have any meaningful influence.

Then just back here in the US whole blood market, we have seen your commentary about 5% decline, then 8% decline and now 8% to 10% decline. You are still kind of sticking with this anniversarying or ending at the end of fiscal 2015. What is the chance that we see that maybe go to 10% or 15% or do you feel like you have a little better visibility to get you through the end of this downturn in collections?

I think we have a pretty decent understanding and appreciation of this trend at this point in time. I think we're going to see the dramatic decreases take place throughout the remainder of this fiscal year and throughout the remainder of fiscal 2015. The question is whether or not we will see it totally bottom out in fiscal 2016 whether we will continue to see some moderate declines because you see changes happening not only dramatically here in the US but to a lesser extent elsewhere around the world but that is just simply fluctuations.

Our biggest focus is going to be on capturing share. It is a shrinking pie and we want a bigger piece of that and we expect that we can be successful on that focus.

Raymond Myers, Alere Financial.

Thank you for taking the questions. (multiple speakers) I was hoping you might give us some visibility to what market share Haemonetics has currently with the one large blood center that is in the tender process currently?

We have said both for HemeXcel, which we won, we were less than half and for the one that is outstanding, we are less them half.

Great, thanks. That helps. Next, I thought you might touch on the automated blood collection device development. When do we expect that development to be complete and when do you expect to file for FDA approval on that?

Remember we have already received some 510(k) approvals for that so we are in the process. The comments that I made about these three large blood centers that have signed up and purchased Donor Doc Phlebotomy, those are three targeted centers that we are going to be working with to truly understand how to bring that to market rapidly, effectively, efficiently with minimal impact to our customers but importantly understanding what does that mean for them financially and how do we bring on the follow-on elements of that like the tower which is now ready for commercialization and then ultimately the collector.

So that is important milestones and important pieces to understand. I have said before and I say it again, we hope to be able to provide some visibility to that at our May investor conference. That will all be dependent upon how rapidly we can manage the implementation of those three important blood centers.

Jan Wald, Benchmark.

Good morning, everyone. A couple of questions. Back to the European tenders, I guess it is as you said, country specific but it also sounded as if they were very price sensitive and maybe too price-sensitive right now for you to compete in. So how do you see your ability to enter into those tenders? And when do you think you are going to be cost efficient enough really to win them, now or sometime in the future?

Of course that price sensitivity played out in the beginning of this fiscal year when we lost a large European tender that we had the business at and the margins were single digits. So it speaks to that point. But I believe we will be in a cost position to begin competing in those markets increasingly beginning in fiscal 2016 and beyond.

Okay. I guess back to the whole blood market again, it sounds as if you are going to witness this decline in pricing over time. You have a bunch of value initiatives and things like that going on that will help you compete. But are there pieces of -- you lose the tender, but are there other parts of the business that you can still sell into those blood centers or into the hospitals or wherever you're trying to sell? In other words, do you lose 100% of the business or is there some business that remains because you have other products that you could sell into them?

Two answers to your question. First of all going to the front part which talked about the declines, the pricing declines won't be over time, those will be pretty much in the early parts of the implementation of that contract. The recapturing of the profitability through the value engineering will take place over time. That is what I said there. So important to understand that piece there.

But your other question really relates to our broader product portfolio and no, there is a broad number of products that we continue to sell to those collection customers such as Acrodose, such as platelets, such as double red cells, such as SafeTrace TX and BloodTrack on the software side. So there is a number of other products and those were not part of the HemeXcel tender nor are they part of the American Red Cross tender.

Steven Crowley, Craig-Hallum Capital.

Just one quick follow-up. Given the role of a lower tax rate how it helped you make up for some shifts in the sands so far this year, I am wondering where you think that tax rate is in the wake of recapturing those reserves for 2015 and beyond. Maybe you could just update that for us. That is probably something that is more certain relative to these other variables so hopefully you can help us there.

Sure. We are looking at between 26% and 27%. Some of the pressure there is related to the fact that we have a very efficient tax rate under Japanese business by virtue of our tax structure outside the United States and if the profitability is compressed in the Japanese business, it affects our ability to leverage that. But that is a good number for next year, Steve.

Okay. Thank you very much.

At this time there are no further questions. I would like to hand the conference over to Brian Concannon for any closing remarks.

The success we see in our growth driver should not be ignored and the fact that we grew our base business 4% in constant currency in the quarter is proof that these efforts are paying off. Plasma, TEG Diagnostics and emerging markets will remain areas of focus for us in the future.

It is different for the other areas of our business. There is no question that the blood collection industry has seen tremendous change this past year and this change has come more rapidly than anyone expected. Change is inevitable but I believe that we will be judged less at how this change has affected us and more on how we react and help our customers respond going forward.

We saw this less than a decade ago in the plasma industry. It was the success we enjoyed there that helped us appreciate what could be in the blood collection industry. These past several years we took steps to capitalize on this opportunity by extending our product portfolio through acquisitions, innovating through R&D, improving with quality initiatives and becoming more cost competitive through value engineering and transforming our global manufacturing footprint. This latter initiative addressing the important issue of business continuity as well.

Our efforts are paying off as we continue to meet and exceed the needs of our plasma customers as evidenced by these important extensions and the HemeXcel win is a strong indication that we are beginning to do the same for our blood collection customers. Fiscal 2015 will be a year of further transition for our industry and for Haemonetics as well but if we are right and we position ourselves to winning on market share, then 2016 will be the beginning of several years of profitable growth. It is often said that time will tell. I agree and that time is now.

Thank you for your attention this morning.

Thank you. This concludes the third-quarter fiscal year 2014 earnings release conference call. You may now disconnect.