Haemonetics Corp (HAE) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Haemonetics Corporation Q3 2015 earnings conference call.

(Operator Instructions)

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

Good morning. Thank you for joining Haemonetics' third-quarter FY15 conference call and webcast. I'm joined by Brian Concannon, President and CEO, 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 latest 10-K and 10-Q filings.

On today's call, Brian will review the highlights of the quarter and the outlook for our performance going forward. Chris will cover third quarter and year-to-date operating performance, our guidance for FY15 and our outlook for FY16. Then, Brian will close with a 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 the adjusted financial results we'll talk about today.

In the third quarter and year-to-date periods of FY14 and FY15, we have excluded pre-tax transformation, integration, and restructuring costs associated with our value creation and capture and other productivity initiatives. Additionally, the earnings information discussed for all periods excludes deal related amortizations expense. Further details of excluded amounts, including comparisons with the applicable periods 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 and good morning everyone. This morning we reported results for our third quarter of FY15 in line with our expectations. With three quarters now complete in the share of transition, you can clearly see that we're building momentum toward a return to growth in FY16.

We saw continued progress on our identified growth drivers. We made key new product advances, and the headwind represented by the decline of our whole blood business continued to be consistent with expected trends.

This is another solid quarter. Adjusted earned per share finished at $0.53 in the third quarter, and a $1.38 for the first nine months. We are reaffirming revenue, earning per share and free cash flow guidance for FY15 and we remain confident that FY16 will bring a return to mid single digit revenue growth.

Like most companies with significant portions of their revenue outside the United States, we've seen currency headwinds increased over the last several months. Currency now represents a greater than 500 basis point headwind to our expected operating income growth rates of FY16. Therefore, we're revising our FY16 outlook for adjusted operating income and earnings per share to high single digit to low double digit growth to account for this shift in currency. It's important to note that our outlook for adjusted operating income and earnings per share growth remains at double digit levels in constant currency. In other words, excluding the impact represented by the strengthening of the US dollar.

Now, I'd like to provide a bit more color on some important revenue elements. First, in the quarter, revenue decreased 4.3% as reported but only 1.4% in constant currency. Approximately 25% of our revenue is denominated in the yen and the Euro. We hedge a portion of this foreign currency denominated revenue to provide predictability of foreign sourced operating income for a rolling 12 month period. Because only a portion of foreign source revenue is hedged, increasing dollar strength tends to dilute revenue growth and we're seeing that in our performance this year.

Year-to-date revenue was down 2% as reported and 1% in constant currency as currency headwinds accelerated as the year progressed. We still anticipate finishing FY15 with a 0% to 2% revenue decline including the impact of currency.

Second, in constant currency, our growth drivers of plasma, TEG and emerging markets accounted for 60% of our disposables revenue in the third quarter. These three elements of our business had combined growth of 7% in the third quarter and 10% in the first nine months. Plasma was up 13%, TEG was up 24% and emerging markets flat year-to-date.

The weakening economy in Russia, which represents about 3% of our revenue, impacted emerging markets' growth. Disposables revenue in emerging markets, excluding Russia, grew 8% in the third quarter and 4% year-to-date.

Third, anticipated headwinds beyond currency included reduced pricing, market share loss, the end of an OEM supply contract and overall market declines in the demand for red cells in our US blood center business. Together with currency, these more than offset the performance of our growth drivers in the quarter and we expect to see this continue in the fourth quarter as well. Importantly, the anniversary of the impact of US blood center pricing will occur by the beginning of FY16 and the anniversaries of the market share loss and the OEM contract expiration will occur in early to mid FY16. Therefore, the majority of the headwinds we experienced at FY15 will be behind us by the midpoint of FY16.

The US whole blood business represents 10% of our revenue and so any risk of continued decline in transfusions should be minimal. We expect the declines in US transfusion rates to moderate in FY16 trending to levels in the low 30s per 1,000 of population consistent with global best practices.

In summary, as we look forward to FY16, we believe that most of the headwinds in the US blood collection market will be behind us and the ongoing momentum of our growth drivers will more than offset further declines in whole blood collection. Our expectation of returning to a revenue growth rate of mid single digits in FY16 includes both the headwind resulting from continuing strengthening of the US dollar and a partial offset provided by a 53rd week.

We continue to make progress on several of our strategic priorities. Here are a few updates building upon advances we noted last quarter.

We recently received the first two of three required 510-K clearances for the new TEG success diagnostics device. We expect to begin a limited market release in the US in early FY16.

We completed the planned clinical testing of our SOLX storage solution and we have submitted the clinical data to the FDA. Additionally, we filed for Canadian registration. We're currently formulating plans to introduce SOLX, together with our whole blood filter, in a North American limited market release after we receive the required clearances.

Our next generation BloodTrack software incorporated in the new HaemoBank smart refrigerator is gaining considerable customer interest as a key element of our comprehensive blood management solutions offering. We have already received several customer purchase orders and are preparing for an April limited market release. I'll give an example of how CBMS benefits a customer later in this call.

Today, we announced that KEDPlasma USA has signed on as our second customer for our next generation plasma software. KEDPlasma has gone live and is using our software to achieve greater efficiently, improved quality and lower costs. As we move toward our fully integrated plasma center solution where the lines between hardware, software and data are blurred, we're encouraged that our customers are embracing this productivity advance. We're optimistic about the prospects for similar contracts with additional plasma customers.

Our value creation and capture, or VCC initiatives, advanced as planned and drove a sequential growth and earnings in the third quarter of the fiscal year. In short, we're making good progress, both financially and strategically, and we're well positioned to return to growth in FY16 and beyond.

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

Thank you, Brian. In the third quarter, total revenue was $232 million, a decrease of 4.3% as reported and 1.4% on a constant currency basis. For the first nine months of FY15 total revenue was $684 million, down 2% as reported and 1% in constant currency. Our full-year expectations still contemplated top line decline in revenue as reported of 0% to 2%.

Plasma disposables revenue was $83 million, an increase of $6.5 million or 8% as reported and 11% in constant currency. North American plasma disposables revenue grew 13% in both the quarter and the first nine months. Our customers remain optimistic about end market demand. Accordingly, we boosted our guidance for plasma growth in FY15. We are now expecting 9% to 11% growth in plasma disposables versus a previous range of 7% to 9%.

Blood center disposables revenue declined 17% to $83 million with red cells up 10%, platelet's down 12% and whole blood down 28%. Platelet disposables revenue was $38 million in the quarter and $116 million year-to-date. Our largest platelet market is Japan and so the growth of this franchise was disproportionately impacted by the devaluation of the yen.

Year-to-date our platelet business declined 2% on a reported basis but was up 4% on a constant currency basis. Growth in the quarter was impacted by weakness in the Russian market as well.

Red cell disposables revenue which was $11 million in the quarter and $31 million in the fist nine months grew 10% in the third quarter and 4% year-to-date. This largely reflects some market timing. Adjusted for this, red cell disposables revenue was essentially flat in the quarter and year-to-date. In an environment of declining transfusions, customers are employing collection strategies that leverage our apheresis technology to optimize red cell collections.

Whole blood revenue declined 28% to $34 million with $21 million in North America, $9 million in Europe and European distribution markets, and $4 million in the Asia Pacific and Japan markets. North America whole blood revenue declined by $11 million reflecting the trends and demand for red cells. The impact of the transitional OEM supply contract with Pall Corporation that's winding down, lower pricing in the HemeXcel contract and lower American Red Cross volume.

The loss to American Red Cross whole blood business was fully transitioned to our competitor late in the first quarter, so the $25 million annual run rate of the loss business or the $6 million quarterly revenue impact was felt in the second and third quarters and will continue to affect us for the rest of the year. We still expect our blood center business to be down between 10% to 12% in FY15.

As Brian mentioned, we will anniversary the headwinds associated with the American Red Cross loss business volume, the HemeXcel pricing decline and the OEM contract expiration by mid FY16. The decline in the US red cell transfusion rate was approximately 10% in FY14 and is trending down approximately 10% in FY15. The business most impacted by that market decline, which is our US whole blood business, represents a little less than 10% of our consolidated revenue and this market decline is expect to moderate in FY16.

Hospital revenue was $32 million in the third quarter and $93 million year-to-date, essentially flat with the prior year. Continued strong TEG momentum offset declines in surgical and orthopaedic cell salvage and the impact of weaker foreign currency rates in both the third quarter and the first nine months. Surgical disposables revenue was $16 million in the quarter and $47 million in the first nine months, down 7% as reported and 1% in constant currency in the quarter and down 5% as reported and 2% in constant currency year-to-date.

In diagnostics, we had record TEG disposables revenue of $11 million in the quarter, up 27% and $31 million in the first nine months up 26% as reported. Constant currency growth was 25% in the third quarter and 24% year-to-date driven by increases in North America and China. We installed nearly 1900 TEG devices in the last three years and we fully expect strong disposables growth to continue.

Given the increasing currency headwinds in the unhedged portion of our revenue and softness in the Russia market related to macro economic conditions, we have lowered our guidance range for hospital growth in FY15. We're now expecting 0% to 2% growth in hospital disposables where currency has a meaningful impact versus a previous range of up 4% to 6%.

Software Solutions revenue was $18 million in the quarter and $54 million year-to-date. A 3% increase in the quarter and 5% year-to-date. We continue to see a steady pipeline of software opportunities.

Hospital customers in North America are increasingly recognizing and we are increasingly capitalizing upon software's importance in identifying and implementing blood management solutions. We continue to expect 2% to 4% software revenue growth in FY15.

Equipment revenue is $50 million in the quarter and $41 million in the first nine months of FY15. Our installed base of equipment, which is the combination of purchased and placed devices, increased 7% in FY14 and another 5% in the first three quarters of FY15. This is a leading indicator of future growth in disposables revenue.

Third quarter FY15 adjusted gross profit was one $114 million, down $10 million from the prior year third quarter. Adjusted gross margin was 49.2%, down 210 basis points year-over-year.

Importantly, our sequential gross margins are improving as FY15 unfolds. We reported 48.4% in the first quarter, 48.8% in the second quarter and now 49.2% in the third quarter. 40 basis point improvements were realized in each of the second and third quarters indicating that our cost reduction programs are beginning to work and delivered the desired results.

Despite the headwinds from product mix, our gross margin is trending toward 50% once again as a productivity gains achieved with our VCC initiative are coming to fruition. Adjusted operating expenses were $76 million, down 7% as compared with the prior year third quarter, largely the benefit from ongoing organizational cost reductions. Adjusted operating income was $38.4 million in the quarter, down $4.1 million. Adjusted operating margin in the third quarter was 16.6%, down 90 basis points.

Pricing and volume pressures in the US whole blood business outpaced the benefits from our growth drivers and the VCC and other cost savings initiatives. We are encouraged that third quarter FY15 adjusted operating margin was up sequentially 250 basis points over the operating margin in the first half of the fiscal year. This improvement bodes well as we approach the end of this transitional year.

Adjusted interest expense associated with our loans was $2 million in the third quarter. Our tax rate was 24.4% compared with 19.6% in the third quarter a year ago. Certain tax statutes expired in the third quarter of FY14, providing a one time benefit in that quarter. Our year-to-date tax rate is 25% and we expect that to be the tax rate for the full FY15.

We continue to benefit from the implementation of our global tax strategy. Adjusted earnings per share were $0.53, down 14% attributed primarily to a full quarter of the whole blood pricing and volume declines, more than offsetting a steady ramp in VCC and other cost benefits.

Turning to guidance, FY15 is playing out as the year of transition that we expected with profitable growth in our identified growth drivers, plasma, TEG and emerging markets offset by earnings headwinds in the US blood collection market, currency and bonus funding. So in summary, our FY15 revenue guidance on a reported basis includes plasma disposables growth of 9% to 11%, a decline in blood center disposables including whole blood of 10% to 12%, hospital disposables growth of 0% to 2%. And software growth of 2% to 4%. Overall, we continue to expect revenue to be flat to down 2% on a reported basis.

Our full year expectations for adjusted gross margin is that we will end the year at approximately the same 49% level we reported for the first nine months. This is 100 basis points below our prior estimate of 50%. Higher plasma and lower hospital revenue guidance combined to represent an unfavorable gross margin mix.

With a 49% gross margin, continued expansion of our VCC benefits and continued operating expense discipline in the fourth quarter, we are able to reaffirm the full year adjusted EPS guidance range of between $1.85 and $1.95 per share. 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 third quarter of FY15 with $125 million of cash on hand, down $67 million from our FY14 year end. Year-to-date, we've used $81 million net of cash tax benefits for VCC and other restructuring, $10 million for net debt repayments and $39 million for the repurchase of shares in the open market. We repurchased 130,000 shares during the third quarter, bringing the nine-month total to 1.165 million shares at an average price of $33.22.

As we announced previously, our Board of Directors approved the repurchase of up to $100 million of shares. We affirmed FY15 free cash flow guidance of between $100 million and $110 million before funding $89 million of restructuring and capital investments related to our VCC initiatives. Beyond the $30 million reflected in our guidance for FY15, we remain on track to realize the incremental VCC savings needed to bring us to the targeted total of $60 million to $65 million in annual savings by FY18.

The VCC and restructuring investments are on track to come to conclusion in FY16. For FY16 we are confirming our expectation of returning to mid single digit revenue growth. We've evaluated and included the impact of the continued strengthening of the US dollar, which represents a headwind of approximately 200 basis points. FY16 will benefit from inclusion of a 53rd week, which will partially offset this currency headwind.

We have noted emerging challenges related to trends in the Russia market and our current outlook for FY16 also incorporates an estimate of the impact of these headwinds. The situation is fluid and we'll continue to monitor market conditions as we finalize the current fiscal year.

Continuing in FY16, we currently expect to return to double digit adjusted operating income and earnings per share growth rates on a constant currency basis. In fact, that constant currency earnings growth rate is expected to be sufficient to absorb what we currently expect to be greater than 500 basis point currency headwind and to still deliver a high single digit to low double digit adjusted operating income and earnings per share growth rate on a reported basis.

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

Thank you, Chris. The third quarter of FY15, much like the first two quarters, was in line with our expectations and we're well positioned to achieve our full year revenue and earnings guidance.

Advancements of our new product initiatives in the third quarter are also encouraging. Including the first two of three needed five TEG clearances for the TEG success device, submission of SOLX clinical data to the FDA and the successful introduction of our new BloodTrack software with the new HaemoBank device. These innovation advances represent encouraging progress toward building up the suite of products and services we need to achieve our vision.

Our comprehensive blood management solutions, or CBMS offering, incorporates these and other products and our hospital customers are recognizing the benefits. Let me share with you one example that highlights the benefits of our CBMS offering at a 350 bed community hospital.

Through our value stream mapping process, we were able to identify inappropriate or unnecessary use of blood products and the inefficiencies associated with the logistics of delivering these blood products safely to the point of care. By implementing comprehensive blood management solutions, solutions that include BloodTrack and HaemoBank, TEG, self salvage, safe trace TX and other software products and services, we expect the hospital to realize net savings in excess of $2.5 million over the 24 months following full implementation.

And for Haemonetics, we expect incremental revenue of nearly $1 million in the first two years with equipment, disposables, software and services being fully implemented and then a steady disposables revenue stream thereafter. It's becoming increasingly clear that our hospital customers are ready for and, in fact, need the software and the software enabled devices we offer in their efforts to manage the total cost of a blood transfusion. We believe that demand for our CBMS offering will ramp up throughout FY16 and become more meaningful in FY17 and beyond. We'll give you more visibility to this initiative at our investor conference in May.

In the end of our VCC initiatives, I'd like to mention that our Tijuana, Mexico facility expansion is complete. Most of the transfer of the disposable products from our Braintree facility has occurred and the rest is scheduled by the end of this fiscal year. And our new Penang, Malaysia facility is also complete and we'll begin manufacturing in this facility in the fourth quarter of FY15. Our manufacturing and distribution footprints are evolving on schedule and this is key to continued profitability improvement and operating margin expansion.

As the year of transition approaches an end, we feel very good about the progress we've made. Let me mention a few of the highlights.

Our identified growth drivers generated 10% growth in constant currency, the direct result of investments we made in FY13 through FY15. We're on track to deliver the four new products we identified at our May 2014 investor conference and a fifth one with the BloodTrack HaemoBank. We expanded our already strong plasma franchise with a saline and citrate contract and a next generation software product that gained immediate customer acceptance.

Our comprehensive blood management solutions initiative is emerging in importance for hospital customers as we begin to demonstrate the real value of our product offering. Software continues to emerge as a core competency as the use of software helps customers understand better blood management practices. VCC initiatives advanced considerably with the completion of the Tijuana, Mexico expansion and the new Penang, Malaysia facility. Keeping us on track to finish our VCC spending in FY16 and to realize our targeted savings by FY18.

We will emerge from FY15 well positioned to return to mid single digit revenue growth and including the increased pressure of greater than a 500 basis point currency headwind, we expect high single digit to low double digit adjusted operating income and earnings per share growth. Again, I'll stress that our outlook for adjusted operating income and earnings per share growth remains at double digit levels in constant currency excluding the headwind represented by the strengthening of the US dollar.

Our business fundamentals remain strong. We enjoy an expanding global footprint. Differentiating new products advancing through the R&D pipeline and increasing advantageous cost structure and the broadest array of products and services in the blood industry, our customers are taking notice. We are increasingly well positioned to meet the needs of our customers, capture global market share and drive sustainable profitable growth with meaningful domestic and international opportunities on the horizon.

I'd like to convey my thanks and appreciation to our employees for ensuring that the current and longer term needs of our customers are always met and for sharing our passion for improving transfusion medicine practices around the globe. With that, we're happy to take your questions.

(Operator Instructions)

Our first question comes from the line of David Roman with Goldman Sachs; your line is now open. Please proceed with your question.

Thank you, and good morning, Brian and team.

Good morning, David.

I wanted to start with emerging markets. I think if my math is correct that, that growth driver has been decelerating a little bit the past couple of quarters. And I know that Russia is sort of an anomaly right now and it's hard to predict when that market might turn around. Can you just talk to us more broadly about what's going on in the emerging markets? And the reason I ask is, just we've heard from other companies some challenges in the hospital markets outside the US. Maybe if we can just start with those businesses?

Yes. So emerging markets, I'll jump in here and maybe let Chris provide some additional color as necessary.

But you know, the biggest challenge we face there is clearly Russia. If you look at the impact -- you just think about where we were at the time of our October earnings release: the price of a barrel of oil was over $80. Today it's under $50; high $40s. So no secret that the price of oil, barrel of oil, will clearly drive the Russian economy and really affects the healthcare spending. So we're seeing that. And we've got a very good distributor there in Russia -- a solid distributor, a healthy distributor. But we're going to continue to see the Russian economy influenced by that.

We saw the same thing happened in 2009. We saw the price of oil decline. We saw it come back up. I think the same thing will happen here, David, but I think it's going to take a little bit longer. I don't think the rebound -- this is a personal opinion -- I don't think the rebound will occur as rapidly this time around. But I think it will occur, and I think we'll continue to see growth rates. We're five times larger in Russia today than we were in 2009. So that's where the biggest impact is happening.

Elsewhere around our emerging markets, we see strength. We see China continuing to be a very good market for us; other Pacific Rim countries be solid for us. We're seeing Brazil, Latin America emerge for us. We think there's more that we can do there. But the biggest impact is clearly Russia.

The only thing I would add, David, is that the emerging markets' growth rate in the quarter, ex Russia, was 8%.

Okay.

So confirming what Brian said; that was in our comments.

Got it.

And then maybe just to follow up for Chris on the gross margin. Can you maybe help us think about the puts and takes around that line as we go forward? Obviously, you've been doing extraordinarily well in plasma, which I think has a lower than average corporate gross margin, and then VCC as an offset to that. But help us think about the moving parts around that line item.

And if you could also just remind us on your currency hedges as well? How we should think about that as we move into FY16, just given the extreme volatility we've seen?

Yes. In terms of marginal, VCR plans are for improvement from the current level of 49%. One of the headwinds on the gross margin line that actually is a positive on the net is the operating leverage inherit in our plasma business. So when we have stronger plasma business, we tend to have less traction in the gross margin line, but we get good contribution down below. And the offset of that is, when we're weaker in our -- or actually, adding to that effect -- when we're weaker in our hospital products we tend to have higher gross margins; we have pressure on our gross margin. That's really what we're seeing.

Obviously, our goals are to continue to push a balanced growth in the business and to drive the VCC initiative, which still has a fair amount of runway ahead of it in terms of operating leverage on the gross margin line between now and FY18; and another $30 million to $35 million that we're targeting in terms of structural savings in that line item. So, steady improvement. I don't want to say any more than that, but of course, we'll give guidance for next year on our year end call and that will include guidance for gross margin.

In terms of currency and hedges, we have this rolling hedge program that we sell foreign currencies forward on a rolling 12-month basis, with the objective of hedging our operating income so that we have predictability for the next 12 months. We're partially through, but almost completely through the origination of our hedges for next year. So we have reasonable visibility. And it's that visibility that permits us to measure the currency headwind that's evolving in our original outlook for FY16 -- which was, of course, prepared almost a year ago just now, and which we've been updating as we go through the year.

And that demonstrates the continuing strength of the dollar and the hedges that we've locked; and the hedge rates that we've locked in essentially indicates a headwind.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Larry Solow with CJS Securities. Your line is now open. Please proceed with your question.

Good morning, guys.

Just wonder if you can give us just a little more color on the plasma market? Clearly the 11% growth seems like it's above market, and I think you've raised guidance for the second time this year. Is the market growing faster than you expected? Are you taking more share faster? And I think you also cited some recent contract winds. Is that in addition to the next generation plasma software one you cited?

So, a bunch of moving pieces there.

We are continuing to see very solid growth in the end markets. We're seeing those collectors that we have our agreements with growing rapidly -- at least one of the larger ones growing rapidly. What we're also seeing is that the shift last year -- Australia, New Zealand -- that took place. So, that has been a little bit of a lift in that growth rate as we've talked about before.

Software is not in there. Software, we measure separately. But yes, I mean, it is clearly, when you look at the combination of the two of those. And I use that comment, the lines are blurring in there -- they really are relative to our devices and our disposables. We're building next-generation devices that are built in conjunction with our software. And so that is contributing to that strength and certainly the view that our customers have of us.

And then, of course the announcement that we made last quarter as we assist our plasma customers, and one in particular, relative to sodium citrate and saline. That has had no impact to date; but that will be a lift for us as we go into FY16.

Yes, I was actually going to ask you. Is that pretty much progressing? You still expect to ramp to get close to that $25 million, or reach that $25 million by year end FY16?

On an annualized basis, yes. But you won't see $25 million.

That's what I mean. A run rate of $25 million by year end.

Yes, we do expect that we'll hit that run rate by the end of FY16.

You have said that would be at a similar margin to plasma, or corporate average?

No, we haven't given any guidance on that. And once we give guidance at the end of this quarter, we'll give a little more visibility to that.

The key point there is, it's a highly leveraged offering. You really got to think about it relative to the operating margin. This is product that sort of rides along. It's product that leverages existing capacity to some extent and rides along with our other products. So to simplify in the supply chain for the customer.

Got it. And just one real quick follow-up.

So the little bit lower gross profit -- obviously, some moving parts, mix, probably the biggest issue, and some maybe more currency. You've been able to offset that with a little bit lower expenses. Has your other cost cutting initiatives actually accelerated a little bit?

It was always designed to ramp as the year progressed.

Okay, great. Thanks.

Our next question comes from the line of James Francescone with Morgan Stanley; your line is now open. Please proceed with your question.

Hey, good morning, guys. Thanks for taking the question.

Good morning.

First, I just wanted to make sure that I'm clear on exactly what you're saying for FY16 guidance from a top line perspective. If I understand things correctly, you're guiding to mid single-digit revenue growth on a reported basis; and that is net of a 200 basis-point currency headwind and a benefit from a 53rd week. Is that correct?

Yes. Which is about 2% as well.

Yes. And the other thing that, remember in there, is what I just talked about with this new sodium citrate and saline agreement

Okay. If you were to ex out both currency and the 53rd week, you'd still be in mid single digits.

Yes.

Yes.

Okay. Perfect.

So the back half guidance, I mean, you've lowered GMs for the full year by 100 basis points and also SG&A for the full year by 100 basis points. But obviously, considering that there's only two quarters left in the year, that's really for the remainder of the year you're seeing gross margins down by 200 basis points and operating --

One quarter left.

Sorry, relative to when you previously gave guidance -- does that makes sense?

Okay.

It seems like a large magnitude of a move in margins purely on mix. Are there any other changes in your expectations relative to either VCC or other types of operating expense savings? Or is that totally mix?

Yes, it's predominantly mix, James.

Yes, and I guess the additional color I'd give on that, James, is really when you look at where we expected the majority of our hospital products growth to come was in the emerging markets and primarily in Russia and China. And what we had expected to occur in Russia has virtually dried up on those hospital products.

And we do have a fairly decent range in the gross margins of our products from the lowest to the highest, which it can create quite a lot of leverage one way or the other.

Our next question comes from the line of John with Raymond James; your line is now open. Please proceed with your question.

Good morning.

Quick question going into 2016. Could you give us some color around whether you expect the strength of plasma to continue? And again, I know hospital -- the weakness there is mostly due to Russia; but just any color you could give us around 2016 on that?

Okay. I'm not going to give any, John, as you can imagine, any product line guidance for 2016 at this point. We'll give all that as we always do at the end of our FY15 and when we give full year FY16 guidance.

I will say that what the industry expectations are is for continued strength in the plasma market. They're expecting -- that's public information and they're talking about end market demand for plasma drive by pharmaceuticals continuing to grow in the high single-digit range at a minimum. So you continue to see that range there.

Also, I'd just add that in our hospital business we've got two exciting new products out there that are coming to the market in that period: TEG 6S, which is moving through it's regulatory process; and BloodTrack and HaemoBank, which is approved and has a lot of positive energy in the market. So that's really a bit of color on what we expect in the hospital sector.

Okay, great.

And then just on the manufacturing cost reductions -- in whole blood disposables, it's going to be a big component of competitive positioning, right, on the pricing? So today, how are you tracking to plan there with cost reductions? And how should we think about the time frame to get to the optimal cost? And what are some of the drivers there?

Remember what we said: it would take us about a two year period of time to get there. These are our value add, value engineering initiatives and I'd say that we're tracking along. It's not only -- clearly, whole blood is the biggest one we're focused on. Those initiatives are not just focused on our whole blood product, but other products as well, as we typically will look at those from time to time. But we took advantage where we're looking. So focused on whole blood to look at all of our products. I would tell you that, that remains on track. We'll give more color for that at our May investor conference when we give a little deeper dive into some of those strategic initiatives.

Thank you. Our next question comes from the line of Anthony Petrone with Jefferies group. Your line is now open. Please proceed with your question.

Thanks and good morning.

Maybe to begin, Brian, with just some of your comments on blood management solutions. Can you give us a sense, maybe, what the revenue opportunity looks like for, say, a complete suite of blood management solutions? Or if hospitals are looking at some of the individual solutions such as BloodTrack, and certainly TEG as a driver, and HaemoBank? So just trying to get my head around those comments that you made earlier in your prepared remarks.

Well, the example that I gave you certainly was a good one for a mid to upper mid-size community hospital, 350 beds. And that was, in the first two years incrementally $1 million in sales and then an ongoing disposable revenue stream after that. You know, think probably the average is about 3 to 4 times higher than our average hospital sales today. So that would be north of $300,000 to $400,000.

But again, we're learning this as we go through, Anthony. We're understanding it. One thing we're certain of: if you've seen one hospital, you've seen one hospital. And we're excited about what it's finding; and we're really encouraged by the way that the hospitals are embracing this.

The changes that need to be made aren't dramatic practice changes. They're pretty logical changes that value stream mapping points out. In many cases is they stop doing things. Our device, like a HaemoBank, will put blood at the point of care. It will eliminate -- in this case, for this institution -- it will eliminate thousands of unnecessary trips with runners carrying blood in little Igloo coolers with dry ice back and forth to the point of care. It will eliminate thousands of unnecessary types and cross matches every time blood comes out of inventory in the lab and moves to a point of care.

So, these are some very significant changes from a cost standpoint, but not tremendously difficult changes to make from a practice standpoint.

Just one other follow up there would be -- how much easier does this make it for blood banks to institute the consignment model eventually? I mean, they need some of these solutions to be in the hospital. Is that a driver that you see eventually expanding some of the initiatives that HemeXcel has going on?

I'd answer that question this way, Anthony: a year ago, I really expected blood centers to carry these solutions to our hospital customers. That has not transpired as we would have expected. We shifted our focus earlier this year to the hospital in implementing these directly with the hospitals, and selling them directly to the hospitals. And that's accelerating for us.

It will absolutely create an easier path for blood centers at the end of the day to implement those models. But what we're finding is that, again, the demand side of this supply chain is going to dictate to the supply side how that business is done.

Our next question comes from the line of Brian Weinstein with William Blair; your line is now open. Please proceed with your question.

Hello, guys, good morning; and this is Matt Larew in for Brian.

Hey, Matt, how are you?

Just wanting to follow up on the comments of TEG 6S. You mentioned that two of these submissions are complete. Is there anything inherent to the third submission that would make it more challenging? And beyond that, just the expectations for the product with early market release here in FY16 -- is that something that can become meaningful as soon as the end of FY16? Is it something that will demand premium pricing? Just any more color you can provide on the 6S product?

Nothing to be read in on the timing. The FDA will make those decisions as it is necessary and appropriate for the FDA. I would tell you that we view the two clearances that we received as the more involved clearances, if you will; and that this third one is a little less involved. But again, we wait for the timing of the FDA to provide those clearances. So there's nothing that we are concerned about there. We are always at the mercy of the FDA to come back and ask questions. But nothing to date. So that's why you heard us say, we continue to expect that we'll move forward as we're doing.

What you've seen is the investments we've made in the diagnostics product. We were growing mid teens up until last year. You saw us take a meaningful shift in terms of investments. You've seen us grow very solidly with diagnostics through the first three quarters from a constant currency standpoint -- 24%, 23%, 25%, 24%, year to date. You've seen us move that needle dramatically. You also heard us say at our May investor conference, we do expect to drive an incremental $100 million in TEG revenue over the next five years. And so to do that, we needed to move up to these levels; and, in fact, I would tell you we need to move up to growth rates in the low 30%s.

So, I'm encouraged by the movement we've seen already in advance of launching this new product. And yes, we do expect this product will begin to have an impact immediately when its launched. Remember, we're not selling it today in Japan, and now we have clearance; and we are only now starting to accelerate penetration in parts of Europe. So that's why we remain current there.

All right. Thanks, Brian, I really appreciate the detail there.

Then following up on the earlier question about the CBMS offering -- is the focus here selling the portfolio re-packaged in a different way? Is there a certain new product you're emphasizing? What are you keying on here for driving success into the hospitals?

Yes. I come at it and answer the question this way: you remember our old impact program? Our old impact program only allowed us to go in and do an analysis for a customer to help them understand how to implement a solution. TEG was probably the one that was most affected by our impact program.

Think of CBMS as impact on steroids. It looks at blood use in the hospital. From the time a bag of blood breaks the plane of the loading dock at the hospital to the time it goes into the vein of the patient, and how that blood is handled all wait through, and how our solutions can influence that blood both in terms of its use, clinical application, as well as the logistics associated with the movement of that blood inside the four walls of the hospital, to include redundant testing that takes place in these cases.

In one such analysis we did, I mentioned the cross-matching. In one such analysis, in a hospital that we did, they transfused 6,500 units of blood in the operating room every year, but they would do 26,000 types and cross matches for those 6,500 units of blood. That's almost 20,000 tests, roughly $60 a test, fully loaded, with labor, that are totally unnecessary. So it's an example of what we talk about and what we're uncovering for hospitals in terms of blood use.

A lot of people think that our blood management solutions is focused on helping hospitals use less blood. There's clearly that element, but that's happening with the transfusion trigger changes and a number of other things. And that's going to continue to happen. And yes, part of what comprehensive blood management solutions does do is point hospitals to the effective use of blood clinically.

But the waste that occurs relative to the logistics of how blood has been managed before is tremendous. And the positioning of a couple strategic HaemoBanks or even smaller units that we have with our BloodTrack product line allows hospitals to store blood at the point of care. Every unit in that refrigeration unit is typed and cross-matched already. Every patient being treated is typed and cross-matched. It can perform an electronic cross match in 15 seconds. So this is clearly some improved technology for our hospital customers.

Our next question comes from the line of Jim Sidoti with Sidoti & Company. Your line is now open; please proceed with your question.

Good morning. Can you hear me?

Yes, good morning Jim.

You guys all dug out?

It's pretty white outside.

Yes, all right.

Well, Based on the updates you've given so far, it sounds like you're getting closer to regulatory approval for both SOLX and TEG. How long should we model to get production ramped up, to get the sales force trained, and to really gets those products rolled out?

Well, TEG, I'd tell you, you're going to see, as I just mentioned a moment ago, a pretty immediate impact. You've already seen how we've ramped from FY14 to FY15. I expect once we get that product approved, you'll see that start to ramp in FY16. The training for the TEG has already begun. We're not selling organization as you might imagine. It is a far more simple product to use, to train, to teach, to implement. So the TEG we are excited about.

SOLX on the other hand, I can't give you any idea how long that will be in the hands of the FDA. But as we've always said, don't expect any significant impact in revenue for SOLX in FY16. As that visibility comes into play, as that clearance comes through, we'll certainly keep you informed. But we'll show you what that means a little bit at the May investor conference as well.

All right. And any updated guidance this Sunday?

Two points. (Laughter)

I'm not touching that. But I will very quickly, Jim, because you mentioned the snow, and I should have said this in the beginning, and I'll thank everybody for your patience as we took a more prudent course and moved our call a day because of the snowstorm. So thank you for your flexibility in working with us on that.

Well, you're not playing the Giants this year, so I think you've got a chance. (Laughter)

We're not deflated by anything that's taking place.

Yes, I know. It seems like deflation's a big issue in Boston this month, huh?

It's cold up here.

Thank you. Our next question comes from the line of Jan Wald with Benchmark Company; your line is now open. Please proceed with your question.

Good morning, everyone. I guess I have a couple of questions left.

One is, after the TEG approval -- what I'm interested in knowing is, you have a pretty nice base of customers out there. How are you going to approach new customers? You go to approach a new type of customer with the new TEG? And if so, how do we understand the sales process going forward for that?

We're not approaching new customers. We can only use the device for what it's cleared to be used for. And it's going to be focused on the exact same customer base.

Recognize that our growth and the growth you've seen this year is not just from new customers, but from penetration of existing customers. Not uncommon a customer that implements two TEG devices grows to four or five TEG devices, six TEG devices over time in some larger institutions. I was in a very large hospital in China, where I was in the laboratory and they had 12 TEG devices lined up and they were running virtually all day. So it really drives that penetration.

But what's going to drive it further -- remember, when we began this we were entering a $300 million market that's growing to be a $400 million market. And our product's about 85% market share in a market where we're $40 million. So, there's still tremendous penetration opportunity upside as it relates to this market. So that's our focus.

Remember what I said earlier: we're now cleared for Japan. We haven't begun selling there yet. That'll be upside for us. And we're just starting to penetrate a number of markets in Europe where we have not been selling previous to now. And our growth in the US continues to be very strong, very robust.

Yes, just on that point that Brian made -- our market opportunity just based on the current label claims is around $300 million and our expectations for that opportunity in terms of procedure, volume, et cetera, is that it would increase to close to $400 million within five years. So, there's a lot of runway for us from the perspective of penetration and we have a strong market position.

Maybe just as a follow-up to that, I remember hearing that, at least in some parts of the world, intervention of cardiologists were beginning to use TEG. Do you see that as part of your existing customer base or is that a new customer base?

It's not part of our current focus. That's being used in China and we currently have a very large clinical study going on in China for that practice alone. But that is strictly related to China.

Thank you; and with no further questions in the queue, I would like to turn the call over to Brian Concannon for any closing remarks.

Thank you, Nicholas.

As FY15 comes to a close and FY16 is almost upon us, we've established some important positive momentum. We continue to make great progress with our identified growth drivers. Most of the near-term headwinds causing declines in the US whole blood business will pass by mid-FY16. Software advances and sodium citrate and saline solutions capabilities have strengthened our plasma franchise. Our new product initiatives, both in software and devices, are forming the foundation of a comprehensive blood management solutions offering that is catching the attention of our hospital customers.

Our VCC initiatives remain on track to provide the savings we've targeted. We're well positioned. Success is all about execution and we remain laser focused on execution.

I mentioned our May investor day and we've scheduled that for Tuesday, May 19, in Boston at the same venue we utilized last year. We expect to demonstrate our new products, highlight the capabilities of our value stream mapping and CBMS programs, and provide the opportunity to meet our management team. We hope that you'll be able to join us then.

Thank you for your attention this morning.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a good day everyone.