Haemonetics Corp (HAE) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Haemonetics Corporation fourth-quarter fiscal year 2015 earnings release. (Operator Instructions). As a reminder, today's call is being recorded.

I would now like to turn the conference over to Gerry Gould, Vice President Investor Relations. Sir, you may begin.

Thank you. Good morning. Thank you for joining Haemonetics fourth-quarter fiscal 2015 conference call and webcast. I am joined by Brian Concannon, President and CEO, and Chris Lindop, CFO and Executive Vice President of Business Development.

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

On today's call Brian will review the highlights of fiscal 2015 and key elements of our strategy which will influence our performance going forward. Chris will cover fourth-quarter and full-year operating performance in more detail as well as guidance for fiscal 2016. 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 will talk about today. In the fourth quarters of fiscal 2014 and 2015 and in both fiscal years we have excluded pretax transformation, integration and restructuring costs associated with our value creation and capture initiatives and the associated tax effects. Additionally the earnings information discussed for all periods excludes steel related amortization expense.

Further details of excluded amounts including comparisons with the applicable periods of fiscal 2014 are provided in our Form 8-K and have been posted to our investor relations website. Our press release and website also include a complete P&L and balance sheet as well as reconciliation of our GAAP and adjusted results.

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

Thank you, Gerry, and good morning, everyone. This morning we reported results for our fourth-quarter and fiscal 2015 and we provided guidance for fiscal 2016. In the quarter, revenue was $226 million, down 6% as reported and 4% in constant currency. For the full year, revenue was $910 million, a decline of 3% as reported and 1% in constant currency. Approximately 25% of our revenue was denominated in the yen and the euro. Our goal is to minimize the impact of foreign currency fluctuations, making our earnings performance more predictable over a rolling 12-month period.

Certain of our costs are also denominated in foreign currencies so we hedge only a portion of our foreign currency denominated revenue. Therefore the increasing dollar strength dilutes revenue growth and we saw that in our performance in each quarter of fiscal 2015 and the currency headwind accelerated as the year progressed.

In constant currency, our growth drivers of plasma, TEG in emerging markets accounted for about 60% of our disposables revenue in the fourth quarter. These three elements of our business had combined growth of 8% in the fourth quarter and 9% in the full year. Plasma was up 11%, TEG up 24%, and emerging markets up 2% in fiscal 2015.

The weakening economy in Russia which represents about 3% of our revenue, impacted emerging markets growth. Disposables revenue in emerging markets excluding Russia grew 23% in the fourth quarter and 9% in fiscal 2015. The Russian economic trends we saw emerge in the back of fiscal 2015 were not anticipated in our original guidance and represent the key element of variability from our original expectations for the year. Chris will discuss Russia's impact on our revenue and earnings in more detail.

Headwinds which were anticipated in our original guidance included reduced pricing, market share loss, the end of an OEM supply contract, and overall market declines in the demand for red cell and whole blood collections, all affecting our US Blood Center business. Together with the currency and Russian market headwinds, these more than offset the performance of our growth drivers in the fourth quarter and the full fiscal year.

Fiscal 2015 was a year of transition and we expect that many of the headwinds faced in fiscal 2015 will be behind us by the midpoint of fiscal 2016. This moderation of headwinds combined with continued growth in our identified growth drivers will be the main contributors to our return to growth in fiscal 2016. Additionally, we are seeing progress with key new product advances and traction being gained with our Comprehensive Blood Management Solutions or CBMS.

In product development, we committed to delivering four new products and we delivered five. We advanced our value creation and capture initiatives achieving all milestones and saving $30 million of the total $65 million that we have targeted by fiscal 2018. In short, we made great progress during this year of transition.

Turning to fiscal 2016, we established our guidance for revenue with growth in the range of 4% to 6% consistent with our previous outlook of a mid-single digit growth rate. This includes 300 basis points of currency headwind so our guidance is for 7% to 9% revenue growth on a constant currency basis. We established our guidance range for fiscal 2016 adjusted earnings per share at $1.98 to $2.08 representing earnings growth of 7% to 12%. This too is consistent with our previous outlook of high single- to low double-digit earnings growth.

In constant currency, our fiscal 2016 earnings growth will approximate 15% to 20%. We also provided guidance for free cash flow of $105 million to $110 million. Importantly with only one-quarter of our free cash flow committed to complete remaining spending on the VCC initiatives and three-quarters truly free, we plan to complete the remaining $61 million of share repurchases authorized under our current program.

Chris Lindop will provide more detail about our fiscal 2015 results and our fiscal 2016 guidance. But before I turn the call over to Chris, I would like to point out several important elements that we see as indications we are at a positive turning point as fiscal 2016 begins.

Our commercial plasma business enters fiscal 2016 well-positioned with 80% of its current business under contract through the first quarter of fiscal 2019, a robust end market for plasma drive biopharmaceuticals, and a growing installed base of equipment. We expect this business to achieve growth that exceeds end market growth rates on the strength of recent customer contracts for our next gen DMS software and for the saline and sodium citrate solutions we will provide to CSL Plasma.

Our software and solutions capabilities will enable us to participate in a larger share of each collection event driving revenue that will be incremental to our plasma collection disposables. We expect our TEG Diagnostics business to deliver accelerated growth beyond the 24% it achieved in constant currency in fiscal 2015 on the strength of a growing installed base of equipment and the launch of the new TEG 6s device and consumables in fiscal 2016.

We see our Russia business stabilizing over the course of the year enabling our emerging markets to grow by high single digits in fiscal 2016. So our combined growth drivers representing about 60% of our disposables revenue, plasma, TEG and emerging markets, will continue to produce double-digit revenue growth and early successes of our new plasma next gen DMS and BloodTrack HaemoBank software offerings indicate that software is well-positioned to contribute meaningfully to growth in fiscal 2016 as well.

We also enter fiscal 2016 nearing or having passed the anniversary dates of market share loss and price concessions in our US Blood Center business with market declines moderating. For all of these reasons, we are confident in returning to revenue growth in fiscal 2016. At the same time, our VCC initiatives are moving forward on plan with our new production facility in Penang, Malaysia and our expanded facility in Tijuana, Mexico allowing us to consolidate the manufacturing of products formerly produced in the US, Italy and Scotland. Spending on VCC initiatives will be completed and incremental cost savings realized from these initiatives are expected to approximate $14 million in fiscal 2016.

Despite the currency trends we are experiencing, I am pleased with the positive momentum in the commercial and operational elements of our business. Chris will expand further on this after he reviews the reported results and guidance. Chris?

Thank you, Brian. In the fourth quarter total revenue was $226 million, a decrease of 6% as reported and 4% on a constant currency basis. For fiscal 2015, total revenue was $910 million, down 3% as reported and down 1% in constant currency. In fiscal 2015, revenue in Russia was $8 million lower than in fiscal 2014. The impact on our consolidated revenue growth of this Russia weakness was 2% in the fourth quarter and 1% in the full year. Early indications are that we will see the impact continue in the first half of fiscal 2016 before recovering later in the year.

In the quarter, plasma disposables revenue was $76 million, an increase of $2.3 million or 3% as reported and 5% in constant currency. In fiscal 2015, plasma disposables revenue was $319 million, up $27 million or 9%. North American plasma disposables revenue grew 10% in the quarter and 14% in the full year. Global plasma growth in the quarter was impacted by softness in the Russian market and a flu outbreak in Western Europe which affected donor availability in Germany.

We installed over 4000 plasma collection devices in the past three years and we fully expect strong disposables growth to continue as our customers keep pace with the growth in the end market demand for plasma derived biopharmaceuticals. In the fourth quarter, Blood Center disposables revenue declined $10 million or 10% to $86 million. In the full-year Blood Center disposables revenue was $339 million, down $51 million or 13%. Excluding the impact of currency, Blood Center disposables declined $41 million or 11% for the year.

Plasma disposables revenue was $37 million in the quarter -- excuse me -- platelet disposables revenue was $37 million in the quarter and $153 million in the year. Our largest platelet market is Japan and so the growth of this franchise was disproportionately impacted by the devaluation of the yen. In fiscal 2015, our platelet business declined 3% on a reported basis but was up 3% on a constant currency basis.

Red cell disposables revenue which was $11 million in the quarter and $43 million in the year was down 7% in the fourth quarter but up 1% in the year. Adjusted for some order timing, red cell disposables revenue was essentially flat in the quarter as well as in the year. In an environment of declining transfusions, customers are employing collection strategies that leverage our apheresis technology to optimize red cell collections.

Whole blood revenue was $38 million in the quarter and $144 million in the year declining $7 million or 15% for the fourth quarter and $47 million or 25% for the year. In the quarter, whole blood revenue was $23 million in North America, $11 million in Europe and European distribution markets, and $4 million in the Asia-Pacific and Japan market. The $7 million decline in the fourth quarter occurred in North America reflecting the lower American Red Cross volumes and trends in the demand for red cells.

The lost American Red Cross whole blood business was fully transitioned to our competitor late in the first quarter of fiscal 2015. So the $25 million annual run rate of the lost business or the $6 million quarterly revenue impact was felt in each of the second, third and fourth quarters and will continue to affect our comparable growth rate for one more quarter going into fiscal 2016.

The decline in the US red cell transfusion rate was approximately 10% in fiscal 2014 and roughly another 10% in fiscal 2015. 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 expected to moderate in fiscal 2016. We will anniversary most of the headwinds in our North American whole blood business by mid-fiscal 2016.

As a result we expect our Blood Center revenue to be down between 4% to 6% in fiscal 2016 which is largely attributable to currency and this is much less than the decline reported in fiscal 2015.

Hospital revenue was $32 million in the fourth quarter and $125 million in fiscal 2015, essentially flat with the prior year. Excluding the impact of currency, hospital revenue grew 1% in both the fourth quarter and the year. Continued strong TEG momentum offset declines in surgical and orthopedic cell salvage as well as the impact of weaker foreign currency rates in both the fourth quarter and the full year.

Surgical disposables revenue was $16 million in the quarter and $63 million in the year, down 11% as reported and 8% in constant currency in the quarter and down 6% as reported and 4% in constant currency for the year. In diagnostics, we had record TEG disposables revenue of $12 million in the quarter, up 27% and $42 million in the year, up 27%, both as reported.

Customers are discovering the value of this innovative technology. Constant currency growth was 26% in the fourth quarter and 24% in the year driven by increases in North America and China. We sold nearly 1900 TEG devices in the past three years and we fully expect strong disposables growth to continue.

Software solutions revenue was $18 million in the quarter and $72 million in the year, a full-year increase of 2%. We continue to see a steady pipeline of software opportunities.

The equipment revenue was $14 million in the quarter and $55 million in fiscal 2015. Our installed base of equipment which is a combination of purchased and placed devices increased 7% in fiscal 2014 and another 7% in fiscal 2015. The installed base of plasma and TEG, two of our growth drivers, had average annual increases of 10% and 16% respectively, over the same two-year period of fiscal 2014 and 2015. These are leading indicators for future growth in disposable revenue.

Fourth-quarter fiscal 2015 adjusted gross profit was $110 million, down $7 million from the prior year fourth quarter. Fourth-quarter adjusted gross margin was 48.7% in fiscal 2015 and 48.8% in fiscal 2014. In fiscal 2015, adjusted gross profit was $444 million, down $35 million or 7% and down 6% in constant currency. Adjusted gross margin was 48.8%, down 230 basis points as pricing and volume pressures in the US whole blood business and unfavorable product mix outpaced the benefits from our growth drivers and VCC savings initiatives.

Adjusted operating expenses were $75 million, down $8 million or 10% as compared with the prior year's fourth quarter due to the timing of expenses incurred within the two fiscal years 2014 and 2015 and the benefit from the planned organizational cost reductions which ramped up during fiscal 2015. For the year, adjusted operating expenses were $307 million, down $13 million or 4%. Adjusted operating income was $35 million in the quarter, up $1 million. Adjusted operating margin in the fourth quarter was 15.5%, up 130 basis points.

In fiscal 2015, adjusted operating income was $138 million, down $22 million or 14% and down 11% in constant currency. Full-year adjusted operating margin was 15.1%, down 190 basis points as the pressure upon gross margin of the pricing, volume and product mix which I mentioned outpaced the benefits from our growth drivers, VCC and other cost savings initiatives.

Adjusted interest expense associated with our loans was $2 million in the fourth quarter. Our tax rate was 25% compared with 23.5% in the fourth quarter a year ago. Our full-year tax rate was 24.9% in fiscal 2015 and 23.3% in fiscal 2014 as certain tax statutes expired benefiting the prior year. We continue to benefit from the implementation of our global tax strategy.

In the quarter adjusted earnings per share were $0.47, up 2% attributed primary to the increased operating income in the quarter. Declines in our Russia business adversely impacted earnings by $0.07 in fiscal 2015. As noted previously, this trend is expected to continue through the first half of fiscal 2016 before beginning to recover in the second half of the year.

We ended fiscal 2015 with $161 million of cash on hand, down $32 million from our fiscal 2014 year end. We used $92 million net of cash tax benefits for VCC and other restructuring, $10 million for net debt repayment and $39 million for the repurchase of shares in the open market.

As we announced previously, our Board of Directors approved the repurchase of up to $100 million of Haemonetics shares. We repurchased 1,174,000 shares at an average price of $33.25 in fiscal 2015. We intend to complete this program in fiscal 2016.

Turning to fiscal 2016, our revenue guidance on a reported basis includes plasma disposables growth of 10% to 12%; a decline in Blood Center disposables including whole blood of 4% to 6%; hospital disposables growth of 4% to 6%; and software growth of 10% to 15%. Overall we expect revenue to be up 4% to 6% on a reported basis.

Fiscal 2016 will benefit from the inclusion of a 53rd week. With about 300 basis points of headwind attributable to currency trends, revenue growth is projected to be in the 7% to 9% range on a constant currency basis.

For the full year, our expectation is that adjusted gross margin, which well average between 48% and 49%, will increase gradually over the course of the year. Factors impacting year-over-year comparisons of gross margin include mix and currency offset by VCC and other structural cost improvements. Currency will represent a 100 basis point headwind to gross margin improvement year-over-year.

For the full-year adjusted operating margin is expected to average between 15% and 16%. Our adjusted earnings guidance range is $1.98 to $2.08 per share. This represents 7% to 12% earnings growth over fiscal 2015. As previously indicated, we anticipate a significant currency headwind reflecting the rates at which we have hedged our fiscal 2016 for in earnings. In constant currency, our fiscal 2016 earnings growth will approximate 15% to 20%.

Now beyond the elements of guidance I have already provided, I think it is important to provide some additional color on the expected phasing of our revenues and earnings. In fiscal 2015, 49% of the year's revenue was generated in the first half with some order timing and the inclusion of the ARC whole blood business in the first quarter benefiting the first half and the decline in Russia revenue arising in the second half. It is normal for our Company to generate approximately 48% of its revenue in the first half of its fiscal year and 52% in the back half. In fiscal 2016, revenue related to our Russia business will be roughly $10 million lower in the first half than in the second half of the year reflecting an adjustment of inventory levels in the channel due to revised near-term expectations for that market.

With this trend in the Russia business and the 53rd week being part of the second half, we expect revenue to be split 46% in the first half and 54% in the back half of fiscal 2016.

Along with these expected revenue trends we expect gross margins to increase gradually over the course of the year and operating expenses to be spread fairly evenly across the four quarters. Accordingly, the first half of fiscal 2016 is expected to deliver less than its proportionate share of full-year earnings. As you build your models for the year, a reasonable expectation would be for 35% of earnings in the first half and 65% in the back half as revenue and earnings are expected to accelerate as the year progresses.

As in the past, our website includes revenue and income statement scenarios which are based on the elements of fiscal 2016 guidance we provided. We provided fiscal 2016 free cash flow guidance of between $105 million to $110 million before funding $27 million related to our VCC initiatives. This means we expect only about one-quarter of our free cash flow to be committed to VCC activities and three-quarters to be available for other corporate priorities.

The VCC and restructuring investments are expected to come to a conclusion in fiscal 2016 and we remain on track to realize the incremental VCC savings needed to bring us to our target of $65 million in annual savings by fiscal 2018.

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

Thank you, Christ. Our year of transition has ended and we feel very good about the progress we have made. Let me mention a few of the milestones we reached in fiscal 2015 that give me confidence in our guidance for fiscal 2016.

Our identified growth drivers generated 9% growth in constant currency despite the Russia headwind. This result demonstrates the value of investments we made in fiscal years 2013 through 2015.

Our Comprehensive Blood Management Solutions initiative continues to gain traction with our hospital customers demonstrating the real value of our product offering. We expanded our strong plasma franchise with a saline and citrate contract and our next-generation software product gained immediate customer acceptance by KEDPlasma and CSL plasma. In addition to the plasma and BloodTrack software launches I mentioned, DonorSpace, our donor recruitment and management software, is currently being installed at our first Blood Center customer. It will also have the flexibility and capability to offered to our plasma customers as they implement next gen DMS software.

Software is having an increasing impact upon our strategy of building connected devices and integrated solutions. With 10% to 15% growth expected in fiscal 2016, software is emerging as both a core competency for Haemonetics and a future growth driver. We delivered on our commitments with the four new products we identified at our May 2014 investor conference and a fifth new product has also been introduced and commercialized, the BloodTrack HaemoBank. We have shipped nine units to date to customers in the US, the UK and the United Arab Emirates. These innovations demonstrate that we are building out 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. Our hospital customers are recognizing the benefits.

We also made considerable advances with our VCC initiatives. The Tijuana, Mexico facility expansion and the new Penang, Malaysia facility construction were both completed. Product transfers, distribution system upgrades and vendor optimization initiatives were implemented without any interruption to our customers' needs. Our new manufacturing and distribution footprint is key to the continued profitability improvement and operating margin expansion we expect going forward.

The VCC initiatives are especially noteworthy as they were bold, transformative and timely. The profit and cash generating capabilities of our Company have been considerably enhanced by the benefit of these programs. We remain on track to finish the VCC spending in fiscal 2016 and to realize our targeted savings by fiscal 2018.

We emerged from fiscal 2015 well-positioned to return to top- and bottom-line growth and to withstand the increased pressure of currency headwinds. Our adjusted operating income and earnings per share are expected to grow 15% to 20% in constant currency demonstrating the strong earnings potential of the business.

This morning we also announced a couple of important management changes designed to accelerate the execution of our Comprehensive Blood Management Solution strategy. Kent Davies, our President of Global Markets for the past 12 months, has been promoted to the position of Chief Operating Officer with overall responsibility for our global commercial focus as well as our product management and new product development capabilities. In addition, Byron Selman, who joined us in August 2012 and who since that time has served as the President of our North America business, has been promoted to the position of President of Global Markets, which was previously held by Kent.

In this role, Byron will assume the responsibility of leading our commercial operations serving blood collectors and hospitals around the world and the delivery of our Comprehensive Blood Management Solutions.

Pete Allen, our President of Global Plasma, will also report to Kent and will remain responsible for our commercial plasma business worldwide.

Our business fundamentals remain strong, an expanding global footprint, a steady flow of differentiating new software and devices, a solid R&D pipeline, and ever-improving cost structure and the broadest array of products and services in the blood industry. We believe the positive momentum will manifest itself in increased demand for our CBMS offering, demand that will ramp up throughout fiscal 2016 and become much more meaningful to fiscal 2017 and beyond. We will give more visibility to this initiative and so much more at our investor conference on May 19.

I would like to thank our employees and convey my appreciation for their constant attention to the needs of our customers. They have remained very committed throughout these times of change.

With that, we are happy to take your questions.

(Operator Instructions). Larry Keusch, Raymond James.

Thanks. Good morning, everyone. Brian, could you I guess just talk a little bit about blood management? You obviously indicated I think nine systems shipped in the fourth quarter. And I am talking for the HaemoSafe. But could you talk a little bit about how you are thinking about that opportunity and how we should be thinking about it for 2016?

Yes, Larry, we are intentionally being very careful about how we view that opportunity right now. We are seeing some very significant success, we have conveyed that to you in the last call. We have made very solid progress since that time with an increased number of hospitals in the pipeline. We are going to give more visibility to this at the May investor conference but it is still a very low end, I would say less than 20 accounts at this point that we are actively engaged in.

And so we are being careful in how we represent it until we know really what we have there. What I expect is that we will see greater visibility to this throughout fiscal 2016 as we indicated. We are optimistic about it. We have not had any accounts that we have looked at, not want to proceed with the exception of one that was involved in a merger. So our progress here has been very solid and we are very excited about that.

As you mentioned, one of the key product lines that is necessary to the success of that program is the HaemoBank and we are already starting to see that accelerate in its growth. But that growth I would tell you, Larry, is for the most part outside the United States at this point so you will see that continue to accelerate domestically as well as CBMS takes hold.

Okay, that is helpful. And just as a follow on, I mean you obviously indicated that the transfusion rates in the US declined by about 10% both in 2014 and 2015, I think very consistent with what you guys had been thinking and you are also indicating that you would anticipate that to moderate in 2016. Maybe just again remind us and help us think about why and what tangible evidence there is that that will moderate and sort of when you say moderate, what are you thinking?

I think this is one that really deserves some additional attention because what gives us confidence is going to moderate if you think about a transfusion rate that was roughly about 42 years ago, two years of 10% decline takes us down into the low 30s, consistent with practices around the world and this is practices that are really being driven by transfusion triggers.

But what gives me further confidence, you have heard me say this, is that we have dialed in what our customers tell us they believe is going to happen in this market which is lesser declines than 10% but something of the magnitude of 5% to 8%. But you have heard me give my opinion that I personally believe it is going to be less than that just simply because the math holds that out. But there is nothing that would indicate that we should do different than what our customers have told us although we are starting to see that.

What did we see? So we saw this year quarters of whole blood that was $38 million in Q1, $34 million in Q2, $34 million in Q3, and $38 million in Q4. Interestingly our $38 million in Q4 equal with our Q1, does not include the American Red Cross business, roughly about $6 million in sales which was in the $38 million in Q1. So this is something that we are continuing to look at and monitor. What I would tell you is we have planned responsibly. If we are wrong, there is upside here.

Brian Weinstein, William Blair.

Thanks for taking the question. A question on the saline citrate opportunity. Can you just again quantify what that is for next year? And then you had talked about some additional opportunities with additional potential partners there. Can you just update if those are ongoing and if those are baked into any assumptions for next year as well?

When you say next year, Brian, let me clarify your point, when you say next year you are talking fiscal 2016 which we are just starting or 2017?

Yes, I'm sorry, 2016.

Okay. So it is dialed into fiscal 2016. This is a contract with CSL Plasma that when it hits its full potential at current collection rates is worth about $25 million to us. It will ramp throughout the year that we will get to that annualized run rate. We have dialed in high teens in terms of revenue for that this year.

And are there other partners that you are -- you had expressed previously there were other partners you were potentially looking to expand that business and work with. Is there anything for other partners that is baked into the guidance?

There is nothing that is baked into that guidance for fiscal 2016.

James Francescone, Morgan Stanley.

Thanks for taking the question. I was wondering if you could clarify a little bit your assumptions on Russia through the year. It sounded to me the way that you described it that you are assuming that there is a continued year-over-year impact in the first half of the year but I wasn't clear on what you are assuming in the back half. And in particular, are you assuming that Russian revenue actually grows and comes back in the second half of the year and if so what gives you the confidence that that will be the way things play out?

James, it is Chris here. Year-over-year because the back half of this year was severely depressed, we believe that there will be growth but we see the order rates that we experienced in the back half continuing into the first half and year-over-year overall where we had a decent front half, a weak back half in 2015, we are seeing a weak front half and a decent back half in 2016 which gives us generally a flat outlook for Russia year-over-year.

To be clear, we have not dialed anything incremental in Russia but as they use down inventories that they had built up, we will see less in the front half than we will see in the back half. That is what we are seeing.

And the macro factors are moderating a little bit, certainly currency makes it a lot easier now for our distributor.

If I got that right, it is inventory draw down and the first half is kind of artificially depressing those numbers and that is why you get better results in the back half. Is that right?

Yes, that is correct.

And usually the back half is when a lot of tenders go out in Russia, it is just the pattern of their buying.

Larry Solow, CJS Securities.

Just discuss just a little bit more on the gross margin outlook for 2016. I realize you mentioned it is about 100 basis points from currency and I know that plasma obviously is a little bit less of that impact just on mix. But certainly excluding just the currency on guidance, it is about flat so maybe slightly up so are there other pricing pressures and maybe additional pricing pressures maybe in Blood Center or what is it that is not giving you much lift despite the increased VCC savings?

It is absolutely three things, mix -- we have said that we have got high teens dialed in in our growth for solutions which have lower gross margins but attractive operating margins. Plasma is a big part of our growth and as you alluded to, the plasma is part of our growth and has lower gross margins. Currency is a big headwind and 100 basis points of currency headwind year-over-year is overwhelming the benefits generated from VCC that we are seeing and expecting in the year.

Just switching gears for a second question, just on the hospital market or just more particularly the surgical Cell Saver, OrthoPAT, I assume hard to say when the downfall stops or the bleeding if you will, no pun intended. But just on Cell Saver, is this also getting sort of caught in hospital improved efficiencies at hospitals? I know you lapped a competitor back in the market earlier in the year so what is sort of your outlook going forward?

We don't give guidance by product line, Larry, but I will expect -- we will expect to see the OrthoPAT declines continue as tranexamic acid is expanding use not only domestically but internationally. Our Cell Salvage business we expect to grow in the emerging markets as those markets still don't meet demand for blood today so Cell Salvage becomes a normal path to take within those markets.

As well we will see that stabilize domestically. We have launched our new software on that device earlier this fiscal year so we are excited about that launch. We will launch a next-generation software for that device towards the end of this fiscal year. So we are seeing improvements of the new platform which is gaining customer acceptance.

David Roman, Goldman Sachs.

Thank you and good morning, everybody. I wanted to start with two specific elements of the guidance. As I look at how things ended the year specifically in hospital and software, those appear to be the two categories where you are contemplating the most significant acceleration in growth in FY16. Could you maybe go into a little bit more detail what the underlying factors are supporting the sharp change in the growth rate in FY16?

In software, it is primarily the BloodTrack HaemoSafe which as you know a new product, it is one that is very deeply integrated and implicated let's say in the CBMS strategy that we are implementing in North America. It has good traction outside the United States as we alluded to even just in the fourth quarter orders. So that is the biggest single element of software but of course we are rolling out as we have mentioned already next gen DMS for a plasma customer at this point. So these are the elements of the software's story.

And in hospital, we are expecting strength in TEG as you would expect with the new product launch and even in advance of a new product launch, we have very attractive growth rates in fiscal 2015 and the improvements or enhancements that we are making to the Cell Saver Elite we think will give us some traction primarily o-US initially or in the Cell Salvage arena.

Okay, got it. And then maybe just a follow-up on currency. I think you said in the prepared remarks, Brian, that 25% of your revenue is exposed to the euro and the yen but obviously your ex-US exposure is bigger than that. Can you maybe help us understand the impact of foreign currency hedging gains or losses through the P&L and how we should think about forward periods as those hedges roll off? Is there any type of impact if FX rates stay where they are and how much is the net impact of FX this year, the translation impact I guess net of the hedges?

Just to recap on the hedging strategy or how we approach the hedging, we are really taking a portion of our revenues which are the net naked exposure to the currency and selling them forward in increments every month over a rolling 12-month period using forward contracts. So a portion of our revenues are unhedged by virtue of the fact that we are choosing only to hedge a portion of them because we have natural hedges further down the P&L in our expense structure.

We have locked in hedges for fiscal 2016 and as we have said, there is 300 basis points of headwind known, embedded in the hedges that we have locked in related to the strength of the dollar and that cascades down the P&L to a very significant impact at the net income line.

So what we know is that the net income exposure will be hedged with great precision. There is still a little bit of variability on the top line for that portion of the revenues that are not hedged. All the hedging strategy does for us is gives us visibility over 12 months. So as rates progress during fiscal 2016, we will be stepping into those rates into our hedges and that is what we will experience in fiscal 2017 and I don't really have a crystal ball yet about what that will be.

Anthony Petrone, Jefferies.

Thanks, gentlemen. Just an update on VCC, maybe specifically at the operating margin level. What level of I guess aggregate savings is baked in from VCC initiatives in the operating margin guidance?

And then a follow-up just on margins generally how margin accretive is software revenues relative to the corporate average?

Yes, VCC, we have realized in the P&L -- I presume you are asking now about fiscal 2016 and realized in the P&L, we've got about $13 million, $14 million of incremental benefit coming through from VCC and that will drop down but will be as I said earlier, will be offset by some fairly significant currency headwinds in the gross margin line.

One thing before Chris goes on and talks about the software margin component, Anthony, I think it is really important for us all to understand just what VCC has meant to us in terms of the profitability of this business. So much of this is offsetting some very significant headwinds, headwinds that every company is facing in this space to some degree or another.

I wish that I could say we were so clairvoyant we saw this and we were responsible in what we did. We saw the opportunity to improve the profitability of this business and we took it. It was very bold. We did something that companies much larger than us maybe wouldn't do. So I'm really proud of what the team did here and how we have accomplished that. We are on track. We have completed the second of three years and arguably the heavier lifting is behind us.

Had we not done this, this P&L would be a very, very different looking P&L. We saved $30 million to date, returned $30 million of profitability to date. That is a very, very significant impact overall. So it is important for us all to understand and appreciate just what that has meant.

The software?

Yes, accretive to our gross margins, our average gross margins.

Jim Sidoti, Sidoti & Company.

Can you just give us some more color on the status with the FDA regarding the TEG approval and the SOLX approval?

Sure, so taking TEG first. There are three clearances that we were looking for and we have two of the three. One relates to the analyzer and one relates to the platelet mapping cartridge and the general hemostasis cartridge is pending. And really, Jim, the reason that is happening is the order in which the original submissions were made and the insights we gained from the back and forth with the FDA during the approval process. And so we remain optimistic about the outlook for approval sometime in the first quarter for that.

With regard to the SOLX submission, the data is in hand. We have submitted it to the FDA. It will be reviewed, it is hard to predict exactly when but certainly not sooner than six months. So start to think about that as a mid-year event when we will have an update on that, mid-fiscal year.

So are you having dialogue with the FDA over the past quarter or are you waiting for a response from them?

Dialogue certainly on the TEG success but not so much on SOLX at this point and that is not unusual. You really can't engage in a dialogue until they give you their feedback.

Jan Wald, Benchmark Company.

I guess most of my questions were already asked but one of the things I did want to ask about was the management changes that you have made, sort of the rationale you had for making those changes and what you hope to get from them?

Really two things, Jan. First and foremost and the primary reasons for making any change is to improve the focus that you are trying to have on the business and that is both from a commercial execution standpoint as our Comprehensive Blood Management Solutions offering matures and starts to come into a better light, how do we execute on that? Not only domestically where we are starting to gain traction but what does that mean internationally?

And secondly, to be able to drive that faster, how do we better align our product management product development focus at the same time. So commercial people asking for certain things, the development people delivering on them based off of the commitments of sales and revenue as well as the cost to do it and that determines the priorities. Grossly oversimplifying but that is the biggest reason and that is all now aligned under one person. That is call it 80%, 90% of the reasons why we are doing it.

Secondarily, it is certainly a signal as we look at succession planning and the responsibilities that I have to prepare this organization for the future. When I say that, I don't want anybody to take that as a signal that my departure is imminent. My departure will be measured in years not months I promise you that. There is a number of things that I want to get done but this is nothing more than a mature approach by me, by the corporation, by our Board as we look to the future.

Thank you and I guess one last one. Software has become as you said is becoming more important for you and probably could be a growth driver in the future and you have said you had some success. What is the environment out there that you are dealing with? There are others that are probably competing with you in that space and how do you see yourself fitting in and where do you see yourself being in terms of the competition?

We compete with device and disposable companies and we compete with software companies. We are not competing with anybody that is connecting devices and disposables with their software and that is the biggest difference you are seeing here. Never again will we develop a product that isn't connected into our software that can upload into the electronic health records of a hospital or the mainframe systems of our collection customers. And that is a very significant difference between what our competitors do.

Brian Weinstein, William Blair.

Thanks for taking the follow-up. I just want to clarify something, was there an incremental investment that is being made in VCC? I thought I remembered something like $160 million and now I think you are saying $175 million. I just want to clarify that.

Absolutely, yes, that is correct and we are looking at the high-end of our range now in terms of savings.

Was there anything that was driving that in particular or was there additional investments that you needed to make that were different than what you thought or were they just running a little bit -- the investments running a little bit more than you thought? In other words, was there a different project that you started or was it just costing more to do the stuff?

No, there's a number of things, Brian, that we informed as we went along that we were going to do that was incremental. Some of it is in vertical integration. But if you recall the original estimates of our savings were in the $60 million range, we have taken them now to $65 million. So you are seeing a relative rounding in terms of what we are spending as well as what we are saving.

Dave Turkaly, JMP Securities.

Good morning, just a quick one for Chris. This $13 million non-cash valuation allowance, I was wondering if you could just give us a little detail on that and then tell us will we see that or see anything like that again moving forward? Thanks.

No, it is a one-time event. That is why we have carved it out. It relates to a somewhat esoteric tax issue, tax accounting issue and it relates to the value of deferred tax assets in the jurisdiction. And because of the VCC activities that we have had and the concentration of spending in the United States and in fact our strategy in many cases to bring foreign restructuring spending back to the United States using different techniques, we have got losses within the United States. And when you do that on a cumulative basis for three years which is essentially what the look back gives us, we are required to in a non-cash charge, required to revalue those deferred tax assets. Those deferred tax assets will inevitably be reinstated onto the books in a non-cash event sometime in the future, I don't think in 2017 but maybe after fiscal 2017. And so we know that the core profitability of our US business is very strong but we are not allowed to make that assumption under the accounting rules so hopefully that helps.

Yes, it does. Thanks a lot.

Thank you. There are no further questions at this time. I would like to turn this call back over to Brian Concannon for closing remarks.

Thanks Shannon. Fiscal 2015 is behind us and our attention is fully focused on fiscal 2016 and beyond. We have positive momentum in the business both strategically and financially. We continue to make great progress with our identified growth drivers and we are beginning to see growth emerge in other areas as well such as in our software business.

Most of the headwinds that caused declines in our US whole blood business will be behind us by mid-fiscal 2016. Our plasma franchise is enjoying above market growth leveraging software advances and sodium citrate and saline solutions capabilities. And our Comprehensive Blood Management Solutions offering is demonstrating real value to our customers based on the foundation of new software products and connected devices. Our VCC initiatives are providing the savings we expected and our investment in VCC is nearly complete.

Our investor day is rapidly approaching. The event will be held on Tuesday, May 19 in Boston at the same venue we utilized last year. We look forward to demonstrating our new technologies with an expanded product display and highlighting the capabilities of our value stream mapping CBMS programs. Also we will include breakout sessions to provide the opportunity to meet our management team. We hope you will be able to join us.

Thank you for your attention this morning.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day.