Haemonetics Corp (HAE) 2015 Q1 法說會逐字稿

Welcome to the Haemonetics Corporation first quarter FY15 earnings release.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now turn the call over to your host, Gerry Gould, Vice President - Investor Relations. Please, go ahead.

Thank you. Good morning, everyone.

Thank you for joining Haemonetics first quarter FY15 conference call and webcast. I'm 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 from anticipated results. 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.

On today's call, Brian will review the highlights of the quarter and the outlook for our performance going forward. Chris will cover operating performance, as well as guidance for the full fiscal year in more detail. Then Brian will close with the review of our strategic initiatives and some 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 adjusted financial results we'll talk about today.

In the first quarters of FY14 and FY15, we've excluded pretax transformation, integration and restructuring costs associated with our value creation and capture program and other productivity initiatives. Additionally, the earnings information discussed for all periods excludes deal-related amortization expense. Further details of excluded amounts including comparison with the first quarter of FY14 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'll turn the call over to Brian.

Thank you, Gerry. Good morning, everyone.

This morning, we reported results for our first quarter of FY15, which I characterize as a good start to the year and in line with our expectations. Total revenue in both revenue segments came in about where we expected. We saw a robust growth in our identified growth drivers. Our whole blood business had declines that were consistent with known trends.

There are three revenue elements I'd like to highlight for clarity. First, there was no impact on total revenue from currency in the quarter. Revenue increased 2%, both as reported and in constant currency. However, we still anticipate an ongoing impact from the devaluation of the yen later in the year. Second, our growth drivers, plasma, TEG and emerging markets, which represented 58% of our disposables revenue in the first quarter, grew in constant currency a combined 19%, with plasma up 22%, TEG up 24% and emerging markets growing 11%.

Now, plasma growth in the quarter benefited from the Australia and New Zealand distribution change during Q1 of FY14, which contributed 7 percentage points to the 22% plasma growth that we realized. Adjusted for the impact of this change, our combined growth drivers grew 14%. It's important to note that over half of our disposable business continues to deliver solid double-digit growth. The third revenue element I'd like to highlight is the anticipated headwinds, which partially offset the performance of our growth drivers in the quarter.

For the full fiscal year, we guided that these headwinds, reduced pricing, market share shifts and overall market declines in the demand for reds cells in our US blood center business together with currency pressure would overwhelm the real growth of our growth drivers. We still believe that's going to happen; however, we also still believe that these headwinds will abate.

We expect the anniversary of the impact of the US blood center pricing and market share shifts early in FY16. We also expect the declines in US transfusion rates, which are impacting the market demand for red cells and therefore, whole blood, to abate in FY16 trending to levels in the low 30s per 1,000 of population. So, as we look forward to FY16, we believe that the ongoing momentum of our growth drivers will become more evident. We expect to return to revenue growth in the mid-single-digits.

Moving on to earnings, in the quarter, $0.38 per share approximated 20% of our full-year EPS guidance. That's what we expected going into the year. Our value creation and capture or VCC programs advanced as planned in the quarter and should provide the acceleration and earnings expected in the second half of the fiscal year. Altogether, this means improved gross margins in the second half and accelerating earnings later in the year.

Now, I'll turn the call over to Chris Lindop, who will review the financial highlights of the quarter and our current thoughts on guidance. Chris?

Thank you, Brian.

In the first quarter, total revenue was $224 million, an increase of 2,% both as reported and on a constant currency basis. On a company-wide basis, revenue from disposables grew 3% in the quarter. For this quarter, there was no net currency impact on our revenue growth rate. Our full-year expectations contemplated a topline currency headwind of 1% to 2%. During the quarter, both the prevailing yen and euro spot rates were somewhat stronger than expected, benefiting the topline.

Plasma disposables revenue was $79 million in the quarter, an increase of $14 million, or 21% as reported and 22% in constant currency, benefiting from the Australian and New Zealand distributor change of a year ago which Brian mentioned. North American plasma disposables revenue grew 14%. Our customers continue to be optimistic about end market demand. Our guidance range for plasma growth in FY15 is 7% to 9%, reflecting some tougher comps as the year progresses.

Blood center disposables revenue declined 10% to $86 million, with red cells up 2%, platelets up 11% and whole blood down 26%. The red cell disposables revenue was $10 million in the quarter. Its growth included 5% in North America, where it was driven by order timing and by seasonality. The market trends we discussed previously, declining demand, continues. Our guidance takes that into account.

Platelet disposables revenue was $38 million in the quarter and increased principally in the emerging markets, where growth was 22%, in part due to order timing. Whole blood revenue declined 26% to $38 million, with $25 million in North America, $9 million in Europe and European distribution markets and $4 million in the Asia Pacific and Japan markets.

North American whole blood revenue declined by $10 million, reflecting the trends in demand for red cells, the impact of a transitional OEM supply contract with Pall Corporation that recently expired, the lower pricing in the HemeXcel contract and lower American Red Cross volume. Regarding the loss of ARC whole blood tender, this was fully transitioned to our competitor late in the first quarter.

So the $25 million annual run rate of the lost business, or the $6 million quarterly revenue impact will be felt in each of the remaining quarters of FY15. We continue to expect our blood center business to be down between 10% to 12% in FY15. Hospital revenue grew 2% to $31 million in the quarter. Surgical disposables revenue was $16 million in the quarter, down 3%, both as reported and in constant currency. Strength in the emerging markets was offset by weakness in mature markets.

In diagnostics, record TEG disposals revenue of $10 million, up 26% as reported and 24% in constant currency in the first quarter, driven by increases in North America and China. We installed nearly 1,800 TEG devices in the last three fiscal years. We fully expect strong disposables growth to continue.

Taking into account current and anticipated trends in surgical, ongoing OrthoPAT market headwinds and continued strong growth in TEG, we are confirming expected revenue growth of 4% to 6% in our hospital disposables business for FY15, consistent with prior guidance. Software solutions revenue was $18 million, up 6% driven by BloodTrack orders in the US and the UK. We continued to see a steady pipeline of software opportunities, as hospital customers increasingly recognized software's importance in identifying and implementing blood management solutions. We continue to expect 2% to 4% software growth in FY15.

Equipment revenue was $11 million in the quarter, down $1 million or 10%. Our installed base of equipment, which is the combination of purchased and placed devices, increased 7% in FY14. This bodes well for future growth in disposables revenue.

First quarter FY15 adjusted gross profit was $109 million, down $5 million from the prior-year quarter. Adjusted gross margin was 48.4%, down 330 basis points year-over-year. 70 basis points of this decline related to currency. The remainder is attributable to lower pricing and volume in the US whole blood business and mix towards lower gross margin plasma revenue. These headwinds more than offset productivity gains achieved in operations in the quarter.

Adjusted operating expenses were $80 million, unchanged from the prior year's first quarter. However, we increased R&D in emerging markets commercial investments, enabling critical product and market development to continue, and we accrued variable compensation at a full level.

Offsetting these increases, we implemented cost reductions during the quarter. Importantly, 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, continued in the quarter. Adjusted operating income was $28.8 million in the quarter, down $4.7 million. Adjusted operating income reflects currency headwinds of $2 million in the first quarter related to the devaluation of yen-denominated revenues.

Now, let me remind you how currency and hedges impact our results. We place foreign currency hedges 12 months in advance to facilitate planning. These hedges are designed to lock in the US dollar value over foreign currency earnings. Our topline results reflect both the prevailing spot rates and actual settling hedge rates. Our earnings are influenced principally by the settling hedge rates. The settling yen hedge rates in the quarter were 22% weaker than the prior year's rates.

Adjusted operating margin in the first quarter was 12.8%, down 250 basis points, as the pricing and volume pressures in the US whole blood business far outpaced the ramp of benefits from VCC and other cost savings initiatives. Interest expense associated with our loans was $2.2 million in the quarter. Our tax rate was approximately 25% compared with 23% in the first quarter a year ago, when we had some one-time catch-up items.

We continue to benefit from the ongoing implementation of our global tax strategy. In FY15, we expect our tax rate to return to around 26%, reflecting our relative profitability in certain tax efficient jurisdictions in the near-term. Adjusted earnings per share were $0.38, down 17%, attributed primarily to the immediacy of the whole blood pricing and volume declines versus the steady ramp in VCC and other cost benefits that I mentioned earlier.

Turning to guidance, we still see FY15 as a year of transition, with profitable growth in plasma, TEG and emerging markets, being offset by previously disclosed earnings headwinds in three areas: first, the US blood collection market; second, currency; and, third, full bonus funding. Our FY15 revenue guidance on a reported basis includes plasma disposables growth of 7% to 9%; a decline in blood center disposables including whole blood of 10% to 12%; hospital disposables growth of 4% to 6%; and software growth of 2% to 4%.

Overall, we expect revenue to be flat to down 2% on a reported basis. On an adjusted basis, we expect gross margin to approximate 50% and operating margin to finish at roughly 16%, each down 100 basis points versus FY14. We are affirming these elements as well as the adjusted EPS range of between $1.85 and $1.95 per share.

For those of you maintaining quarterly models, I want to provide some color with respect to revenue and earnings trends for Q2 and for the front and back half of the year. Our expectation for the second quarter revenue reflects only modest sequential growth.

In the second quarter, this growth will be net of $5 million decline related to the previously disclosed loss of the ARC whole blood tender, which as I noted earlier was fully transitioned to our competitor late in the first quarter. Also in the second quarter, operating margin will trend up modestly from Q1 levels driven by revenue mix and sequential declines in operating expenses, reflecting both seasonality and the impact of cost savings actions implemented in the first quarter.

In the past, we've told you that seasonality tends to distribute our revenue roughly 48.5% to the first half of the fiscal year and 51.5% to the second half. This year, the presence of $5 million of ARC whole blood revenue in the first quarter is skewing this to roughly 49% in the front half and 51% in the back half.

Accelerating gross margins related to both mix and the planned realization of our VCC initiatives will increase gross margins in the second half. Steady operating expense spending between the first and second half will result in accelerated earnings later in the year. As in the past, our website includes revenue and income statement scenarios which are based on the elements of guidance provided in my comments for the full year.

We ended the first quarter of FY15 with $140 million of cash on hand, down $53 million from the prior quarter. We used $24 million net of tax benefits for VCC and other restructuring, $7 million for net debt repayment and $26 million for the repurchase of approximately 834,000 shares in the open market under the current $100 million share repurchase authorization. We amended our credit facilities, extending the maturities and repayment dates by about two years. In doing so, we were able to gain operating flexibility and enhance our liquidity.

For the full fiscal year, we still expect free cash flow generation of between $120 million and $130 million, before funding $80 million of restructuring and capital investments related to our VCC activities. By FY18, incremental annual VCC savings over and above the $30 million planned to be realized and reflected in our guidance for FY15 are expected to approximate $30 million to $35 million for a total of $60 million to $65 million in annual savings. In FY16, we expect to return to mid-single-digit revenue growth and double-digit adjusted operating income and earnings per share growth.

The VCC and restructuring investment should be coming to a conclusion in FY16, helping to drive margin expansion and a more competitive cost position for our products around the world. All this will occur as the cull in our free cash for investment in these programs declines in FY16.

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

Thank you, Chris.

I said it before and it deserves repeating, there is no change to our strategy. Our vision, that patient blood management would drive economics that in turn, create an intense demand for automation and innovation in collecting, processing and supplying blood was reinforced by recent market developments and is being played out quite similar to what we saw in our commercial plasma business years ago. One quarter ago and at our annual Investor Day in May, we told you that we planned to bring four new products to market in FY15, positioning our Company for accelerated growth in subsequent years.

Our plans include: a next-generation software product for commercial plasma collection; a major upgrade of our BloodTrack software offering; a next-generation TEG 6S device with enhanced features; and in the important whole blood space, a comprehensive software product for donor recruitment and retention that will complement the donor/doc phlebotomy product already in the market. 90 days into the year, we remain on track in our pursuit of these advances. Additionally, we continue to work with the FDA toward approval of the SOLX red cell storage solution with our own filtration.

Our strategy continues to be focused on delivering solutions that help our customers impact the $1,100 cost of a red cell transfusion. We are uniquely positioned in our industry with the capabilities to do this. We remain focused on working with our customers to prove these capabilities for both our existing and new products, to deliver on this value proposition.

We expect to enter FY16 well-positioned to help our blood center customers provide meaningful value to our hospital customers, as our blood management strategy delivers the expected value in both cost savings and patient outcomes. We continue to do the work needed to bring value engineering to our whole blood kits, reducing their costs allowing us to better compete in markets throughout the world, markets that are embracing leukoreduced technology and markets that are three times larger than the US market. Our customers in the international markets share the same passion for blood management improvements.

Our value creation and capture initiatives will streamline our operations, improve quality and deliver annual savings of $60 million to $65 million by FY18. These important initiatives remain on track. We made the decision to retain and renovate our Corporate facility here in Braintree, Massachusetts. We're proceeding with the previously announced state-of-the-art technology center to house our research and development activities, a facility that will enhance our ability to attract and retain the best and brightest scientists and engineers, focused on transfusion medicine, further enhancing our commitment of innovation to bring the next generation of devices, disposables and services to our industry.

We continue to position Haemonetics for even greater success in the future. Many of the current headwinds will abate early in FY16 and the real strength of this business will emerge. Strength that we expect will translate into a return to mid-single-digit revenue growth and double-digit adjusted operating income and earnings per share growth in FY16.

Our business fundamentals remain strong as we focus on bringing solutions to market that reduce costs and improve patient care. We have a strong and expanding global footprint, differentiating new products in the R&D pipeline, an increasingly advantageous cost structure, and the broadest array of products and services in the blood industry. We are well-positioned to meet the needs of our customers, capture global market share and drive sustainable, profitable growth.

The steps we've taken in recent years have put us in a good position to react to current US market dynamics and international opportunities on the horizon. With confidence in our strategy, earlier this year, our Board of Directors authorized the repurchase of up to $100 million of Haemonetics shares. We completed $26 million of that program in May and June at an average price of $32.21 per share. This program continues. We'll provide an update at the end of the next quarter.

We recently announced some changes to our Board of Directors. The first being that Larry Best decided not to stand for reelection. Larry served our Board well over 11 years. We wish him continued success.

Second, we announced the election of Chuck Dockendorff, CFO of Covidien, to our Board of Directors. Chuck is a seasoned healthcare executive with a wealth of financial, operational and strategic experience, and will be a great addition to our Board. We look forward to his contributions.

Finally, we announced that Paul Black has resigned from our Board to focus on his current company's needs. We thank Paul for his considerable help while a member of our Board and wish him continued success.

I'll finish, as I always do, by thanking our employees. It's hard for the casual observer to fully understand the challenges of integrating multiple acquisitions and completely transforming the manufacturing and distribution foundation of the business, while continuing to maintain a constant focus on the current and longer-term needs of our customers. Yet, this is what our people have done and still do today. They continue to earn my respect and appreciation.

With that, we're happy to take your questions.

(Operator Instructions)

David Roman, Goldman Sachs.

I wanted just to start with the gross margin. Chris, certainly, your commentary around the progression of earnings throughout the year is very helpful. But maybe if you could just go into a little bit more detail about the ramp in gross margin from the 48.5% level that you generated in Q1, up toward the 50% level. I guess what I'm trying to get at there, is understanding the ARC tender headwinds that start to affect growth in the subsequent three quarters of the year. Just maybe helping us think about the bridge of 48% to something over 50% by the end of the year to average out to the guidance. Then, I have one follow-up.

Sure. There's really two principal elements, David. One of course is VCC and the ramp of VCC, the progression of cost savings and manufacturing begins by being realized and then caught up in inventory and positive variances and then bleeds into the P&L over the course of the year. So, we have relatively good visibility into where we think that will end for the year.

The second element is really -- it relates to the acceleration of our hospital business. That's a story about emerging markets, where we've got a number of initiatives designed to focus on acceleration of that business, where we have an installed base of devices that we're working aggressively. Both of those, that mix and VCC realization lead to higher than average -- for the year, average gross margins in the second half compared to the first half. You should see progressive improvement Q1 to Q2 and so on.

That's really helpful. Brian, as you start to look toward FY16, you've given us a teaser now, two quarters in a row on the mid-single-digit top line growth and then the double-digit earnings growth. If you think about the inflection from this year to next year, besides the abating headwinds in whole blood, is there anything else that changes in your assumptions regarding the business as we move into FY16? Any parameters you might want to put around double-digit growth at this point?

Yes. The mid-single-digit revenue growth is really driven by the bad things not being -- either not happening or not being as bad. We know that we are going to anniversary of the loss of the American Red Cross business in Q1. We know that we're going to anniversary the pricing concessions we gave on the HemeXcel contract. So, those are known and the economy of those are known. We have pretty good visibility as to what's taking place in the decline in demand in the whole blood market, but in fairness, that's something that continues to move a little bit. We think we've appropriately guided with that in mind.

So, we've been pretty responsible, I would say, in terms of our view of that. So, if you think of this one half of our business growing double-digits very strong, and the other half flattening out, you start to see the recognition of a mid-single-digit growth rate emerging from that. Our emerging markets or TEG business, our plasma business continues to be strong. We're going to be launching four new products which will bolster that. So, we feel pretty good about that mid-single-digit revenue growth number, even with some potential unknowns of the exact bottoming out of the demand in whole blood.

As it relates to operating income, it's really a couple of things. It's much like Chris talked about. Our VCC initiatives really starting to gain the momentum that we've expected. We've got good visibility to what's taking place there. The leverage that we enjoy in our P&L with positive drop through and how we reinvest in our business as we go forward, investing $0.65 to $0.70 of every incremental gross margin dollar as we look to the future. So, the way I'd like to say it is, after a very challenging year in FY14, we have more positives happening in FY16 than we did negatives in FY14.

Got it. Okay. Thank you very much.

You're welcome. Thank you, David.

Jim Sidoti, Sidoti & Company.

Can you give us a little more color on the status of the new TEG system? Exactly what steps are left to get that into the market? Also for the new SOLX solution?

Sure, Jim. With regard to the TEG 6S, we are going through a process of responding to questions from the FDA on the original clinical trial. We've made two filings, one with regard to the core system and the second with regard to the platelets mapping assay. We continue to be on track. We're working through our CAT trials, Customer Acceptance Trials, where we work with customers. We have a series of eight of those planned, of which I think three have happened or are underway at the moment.

That's, I'd say, pretty much as we spoke about at the last update, which was really on May 20. With regard to SOLX, you know that there is a clinical trial ongoing. The latest update I have, which is within with the last week, is that recruitment is almost complete. As you know, this is a trial which involves tracking the blood for a 42 days' storage. So, we believe we're still in track for the original schedule, which is to be done with the trial in the September/October timeframe and get the data to the FDA before the end of the calendar year.

So, do think it's feasible to have both these products in the revenue mix by the end of FY16? Which one do think would come in first?

I would say TEG would be more impactful, more noticeable. Just because there is a franchise there. There's a pent-up demand for that product. Customers love it. It's more about the new product doing what they love more easily for them. With, of course, SOLX, we're talking about a revolution, a brand-new solution into the whole blood market, which is obviously a market that is slower to move. So, I would just naturally anticipate TEG to move faster than SOLX.

The answer to your question, Jim, is yes. We will -- as we get closer to that year and as we have more visibility to the approval of those products, we'll be able to guide better in terms of what we expect those to do in the fiscal year.

All right. But, you think that it's reasonable to think that by the end of 2016, you'll have both those products in the market?

Yes. I would -- if I'm answering the question today, yes, I think that's reasonable.

Okay. Thank you.

Anthony Petrone, Jefferies Group.

Maybe to start, a little bit on the blood bank disposables, as a whole. Specifically, with platelets and red cells. Platelets had the benefit of an emerging market order, I guess, reversing this quarter. How much of the performance in the quarter was exclusively related to that emerging market order? Or was there some rebasing in that performance in the quarter? Then the same on red cells, how much of the improvement in the quarter was just seasonal? If you back that out, was there any indication of rebasing in that business?

When you say rebasing, Anthony, could you just clarify what you mean by that for my benefit?

Sort of getting to a point of, where those businesses will be on a normalized run rate once we've bypassed all of the headwinds that these businesses are experiencing.

No, the biggest and dominant effect in the quarter was order timing. If you go back to a year ago at this time, you'll see that we had order timing as a reason for a poor performance; therefore, we've got the comparably stronger performance this quarter. The fundamentals of those markets haven't really changed. For platelets, for us the growth is about emerging markets. So, if you want -- the positive there is that emerging markets gets bigger and bigger every day; therefore, the ability to influence overall corporate growth rates is more and platelets because of the size of the emerging markets opportunity. We continue to exploit that. Certainly, it's not an 11% growth business in emerging markets.

On the red cell piece, Anthony, the way I'd say that is, is that being up is a little bit of a surprise. But, as we contemplated it, really, shouldn't be. You have your seasonal demand that occurs in the summertime. In a declining market, the need to react double red cells is a logical way to get at that to address the bump that's not going to be a new trend. So, that made sense to us. But that's why we really try to caution that, to recognize that's not a return to growth in that product line as that market continues to rebase.

No, that's helpful. Then, maybe over to whole blood, your comments we're helpful on American Red Cross. But also, maybe on HemeXcel, that contract gradually comes into the fold. So, where is HemeXcel in terms of fully adopting the Haemonetics whole blood collection capabilities at this point? Are there still sites within the HemeXcel network that have to still fully adopt?

No, it's completely transitioned.

Okay. Great. Then, just lastly on SOLX and I will hop back in. You mentioned analyst day, Brian, several studies where potentially those could be published before year-end. I'm just wondering if there's any update there?

I think Chris provided some color on that. We remain on track with everything that we had laid out for you at the Investor Day. We continue to feel positive about that. Getting the studies done is certainly the step ahead of filing with the FDA for approval of these products. So, important milestones for us, but we remain on track.

Thanks.

Brian Weinstein, William Blair.

This is Matt in for Brian this morning. I just wanted to follow-up on HemeXcel here. I saw a couple days ago that OneBlood and ITxM in Pittsburgh announced that they were looking to merge. Would that fall within the HemeXcel contract given that OneBlood is a part of HemeXcel? If so, how quickly would you think that might come into fold?

Well, Matt, OneBlood is part of HemeXcel. ITxM is part of HemeXcel. So, they both are customers of ours today. So, that would have no impact in terms of incremental revenue. But the important piece here is that each one of them approached their markets somewhat uniquely. If you think about what we're advocating relative to blood management, at least in a -- part of the ITxM business, they practice that type of blood management with key customers in the Pittsburgh market today.

When you look at customers today of ours that are aggressively pursuing blood management, OneBlood would fall into the category of one those customers -- those top customers doing that. So, this is a very strategic move on their part, an important move on their part. I would say without having had the benefit of speaking with them about this myself, that it just reinforces their commitment to becoming more relevant for their hospital customers relative to blood management.

Okay. Thanks, Brian. Then, you've mentioned in the past that acquisitions will be part of the capital allocation policy moving forward. Just wondering, what you are seeing out there? Anything of particular interest in terms of market adjacencies or geographies that look really interesting right now? Thanks.

Well, there's always things that interest us. When you have the ability to buy, there's always things that interest you. But it has to fit our strategic needs. We've been pretty clear about that. I think, as we get through this fiscal year -- you often hear me say that acquisitions are as much planful as they are opportunistic. But as we get through this fiscal year, with the bulk of the VCC initiatives behind us, we will continue to look aggressively at acquisitions and what they could mean.

I don't mean to say that's not happening today, but our appetite will only continue to increase as we go forward. But again, they have to fit very, very well strategically with the direction that we're taking with respect to blood management. We often said to focus what are we doing to automate our OUS markets much like we've done in the US with our software business. So, that's a point that we continue to stay focused on and expanding.

Thanks, Brian.

You're welcome, Matt.

James Francescone, Morgan Stanley.

First, I wanted to talk about hospital, up 2% in the quarter, obviously, full-year guidance for 4% to 6% growth. So, you're certainly assuming some acceleration there, even as the comps get tougher, particularly in the back half. Can you talk a little bit about -- particularly given how important that line seems to be for your expectations on gross margin improvement. Can you talk about what drives your confidence that line continues to get better through the year?

Yes. It's very much about cell salvage in emerging markets. Part of the pattern that happens there is, you seed the market with equipment. Then, in many of those markets, you are really trying to demonstrate the value through a clinical cell, so that the equipment is more aggressively utilized. We noted in all of those markets, there's a relative shortage of blood components, relatively low rates of transfusion per 1,000.

So, this is a perfect solution for those markets. It's a very targeted program across many different countries with a lot of management focus and monitoring going on. So, as much as we can feel confident about it, we do. We've made the investments in terms of feet on the street. We know we are going to sell the product, so we are going to very much focus on that.

That's helpful. Then on plasma, should we start to get a sense that your guidance for the year there is a bit conservative? Obviously, the growth rates in the first-quarter were a little bit distorted. But, even if I look at just the dollar figures, 1Q is usually the weakest quarter. If I just annualize the $79 million, I'm already getting something that's at the high-end of the guidance range.

Yes, it certainly -- we benefited in Q1 from this comparison. Essentially, there was really no -- serious, big plasma market for us relatively speaking because of their strategy towards plasma-- because of our market share. Having no revenue in that quarter then not only having revenue but having the margin on the revenue that previously went to our distributor gives us a extraordinary growth in the quarter. We tried to emphasize that. When you look at the growth rates in reported last year in 2014, going quarter-by-quarter, because I did the same analysis, James.

Because, I was scratching my head. They are up 10% Q2, 13% Q3, 9% Q4. If you average that with our expectations for each of the last three quarters, and think about that as a two-year CAGR, we are certainly in the high-single-digit range in each of those quarters on a two-year CAGR. I think that's the pattern that we've seen they may over-collect a little bit. As they open centers or as the cadence of centers opening changes, but on the average, over time, we'll see that 7% to 9%, perhaps 8% to 10% growth rate. But we're comfortable with the 7% to 9% growth that we've guided for the year, at the moment.

All right. Got it. Thank you.

Raymond Myers, Alere Financial.

Brian, I hoped you might clarify for me the guidance that calls for $50 million to $55 million of revenue headwinds from volume and pricing as well as yen weakness this year? Chris stated in the call that about $5 million sequential impact should be expected in fiscal, too, from the ARC's loss. If I look $5 million for the next three quarters as $15 million, it's hard to square that with $50 million to $55 million total headwinds.

There were other elements in those headwinds. Of course, we identified with regard to revenue, it was ARC tender loss which was a run rate of $20 million to $25 million, we said. $15 million of US donor market declines. So, remember that we're dealing with a market -- the background against which we are operating is declining at about 10%. Then lastly, yen headwinds which were estimated for the full-year around $15 million.

Now, what happened in the quarter, was that euro spot rates offset yen headwinds. But, the yen headwinds are real. The euro spot rates we can't predict. Of course, our hedging program is focused on guiding -- essentially, giving us clarity on the bottom line rather than on the top line. So, what you're not seeing is that in the guidance I gave -- the $5 million was really about a sequential decline related to a specific item. The backdrop for the year, is certainly-- it has the market declines that we talked about. It will have the currency headwinds from the yen.

Okay. That's very helpful. You mentioned the euro. What euro rate are you pegged at now? So that we can understand how future changes will affect future [expense]?

It's really euro spot rate, it's not a pegged rate. It's a spot rate. Just look at the euro rates out there. You'll see that there's relatively year-over-year, I think, about 6% strengthening in the euro in the quarter. It bumps around, I think, in the quarter.

Strengthening of the euro is positive for your results?

Positive for our top line. We essentially hedge the bottom line. So, the top line is never fully hedged because there's a natural hedge in our euro expenses, as well. But on the top line, there is a 6% strength in euro affecting from a spot rate, which is neutralizing the effect of the yen.

Perfect. Then, my follow-up question is about gross margin. With the very strong first-quarter revenue, gross margin still came in 48% range lower than in the past. Is that primarily the HemeXcel price concession? Or are there other factors affecting that?

It's very much about the price concessions and a bit of mix --

Okay. Thank you very much.

-- and currency.

Jan Wald, Benchmark Company.

Congratulations on the quarter. It looks like you are making good progress, given the difficult environment. I have some questions, I guess. The plasma business seemed particularly strong to us. What do you think is driving the strength you're seeing there?

Well, I think, Chris, has given some pretty good color on that. If you think about an increasing constant currency of 22%, 7 points is really being driven by the fact that in Q1 of last year, we had a transition from a distribution market in Australia and New Zealand to a direct market. So, a year ago, Q1, as that was happening, the distributor was using up their inventory. We had virtually no sales in plasma. So, we went from a -- not only did we go from no sales for a quarter, but this year, we went to a full quarter of sales without a distributor market. So, you have the benefit of both. That's what you're seeing there.

I think you're seeing, as well, is a weaker comparison in the Q1 of the previous fiscal year due to strength in the Q4 of FY13. So, those two things combined. Bottom line, Jan, the plasma market continues to be a good, strong, solid, robust market for us. Demand for the plasma derived biopharmaceuticals continues to remain healthy. We continue to benefit as our customers expand their collection capacities to address that. So, it's artificially high in the quarter, but we continue to feel this is a good, solid market for us with high-single-digit growth guided for the year.

Thanks. Would you be able to remind us what tenders are going to be offered over the next 12 months that you might be able to participate in for the whole blood business?

Well we've not been public about any tenders that are out there. Some of them are opportunistic. We find out about those. But, we've not been public about any tenders that our customers have not been public about, as you might expect. So, there's not a whole lot of color we can give you in that respect. What I can say -- how I would answer that question, is that we see the greatest opportunity in whole blood to be outside the United States. This was not a strength for Paul as we acquire that business. They did not enjoy a manufacturing position -- I should say a cost position for lower-cost manufacturing to compete in that market.

Some of it had to do with where they manufactured, some of it had to do with how they made their kits, what was in their kits, the componentry of the kits. These are the things that we give you a fair amount of color on at our May, Investor Day. What are we doing to not only focus on the reduction of the cost of those kits, but to make those kits in lower-cost areas. It will take us, still a little bit of time to move to those lower-cost areas, specifically Penang, Malaysia, Tijuana, Mexico. But the work is being done to take out components and reduce costs with those kits to allow us to compete in those markets. As that comes into visibility, we will continue to give that to you as our customers allow that to happen.

Okay. One last question. In the software business, do you see an uptick in growth in that business? It seems to me that would imply that your business model for the hospitals is actually taking off and being accepted. So, am I right about that? Secondly, do you see an uptick?

The way I'd answer that question, Jan, is the growth that we saw in the quarter of software up 2% to 4% is encouraging. You'll recall that we said that this is really driven by strength in BloodTrack orders. That was a product that we spent a fair amount of time focused on at our May, Investor Day. We do see that as being a product and it gets at a healthy portion of that $1,100 cost of transfusion. So, you're right about the focus.

I wouldn't break out the marching bands on 2% to 4% increase. I don't mean to minimize the success that our teams are having there. The good work that they are doing. How they've turned this around to growth. But, we expect that to accelerate in the out-years. That's an important product for us. So, yes, you're seeing the initial steps of that. That's encouraging.

Thank you very much.

You're welcome.

I'm currently showing no further questions. At this time, I will now turn the call back over to Brian Concannon for closing remarks.

Thank you, Stephanie. With the first-quarter behind us, we're off to a good start in FY15. Our identified growth drivers, plasma, TEG, and emerging markets representing 58% of our disposables revenue, continue to drive strong double-digit growth which is being offset in the near-term by declines in our US whole blood business consistent with known trends. Our VCC initiatives remain on track to provide the acceleration and earnings expected in the second half of the fiscal year. Plans to bring four new products to market in FY15 also remain on track. We continue to work with the FDA toward the approval of the SOLX red cell storage solution with our own filtration. We affirmed our guidance, but importantly, we remain focused on execution. Thank you for your attention this morning.

Thank you, ladies and gentlemen. That does conclude today's conference. You may all disconnect. Everyone, have a great day.