Haemonetics Corp (HAE) 2016 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Haemonetics Corporation first-quarter fiscal year 2016 earnings release call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Gerry Gould, Vice President Investor Relations. Sir, you may begin.

Thank you. Good morning. Thank you for joining us for Haemonetics first-quarter fiscal 2016 conference call and webcast. I am joined today by Brian Concannon, President and CEO; Kent Davies, Chief Operating Officer; 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 today as well as in our recent 10-K filing.

On today's call Brian will discuss key elements of our strategy that will influence our performance going forward. Kent will review important trends in our commercial operations and Chris will cover first-quarter performance and our fiscal 2016 guidance in more detail. Then Brian will close with 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 first quarters of fiscal 2015 and 2016, we excluded pretax transformation and restructuring costs associated with our value creation and capture or VCC initiatives and related tax effects. Additionally, the earnings information discussed for all periods excludes deal-related amortization expense. Further details of first-quarter fiscal 2016 excluded amounts including comparisons with the first quarter of fiscal 2015 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 and a summary statement of cash flows 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 first quarter of fiscal 2016 and we reaffirmed our full-year guidance. First-quarter revenue was $213 million, down 5% as reported and down 2% in constant currency. Approximately 25% of our revenue is denominated in the yen and the euro contributing to 300 basis points of currency headwind in our revenue growth rates in the first quarter consistent with our expectations for the full year.

Our growth drivers of plasma, TEG and emerging markets, account for about 60% of our Disposables revenue. In constant currency, these three business elements had combined growth of 5% in the first quarter. The weak economy in Russia impacted our emerging markets growth as we expected it would with greater impact in the first half versus the back half of the year. Disposables revenue in our growth drivers excluding Russia grew 10% in the first quarter with plasma up 8%, TEG up 20%, and emerging markets up 18%.

The Russian economic trends we saw emerge in the back half of fiscal 2015 continued as anticipated in the first quarter. Kent and Chris will discuss Russia's impact on our revenue and earnings in more detail.

The anniversary of the American Red Cross share loss in the US whole blood market passed at the end of June and that headwind is now behind us. We expect a positive trajectory in revenue growth over the course of fiscal 2016. This will be driven by the moderation of the two headwinds I just discussed, Russia and the ARC share loss, plus four new product launches, shipments of saline and sodium citrate under our agreement with CSL Plasma and the 53rd week.

Our profitability was encouraging. On a constant currency basis, gross margin improved 40 basis points over the first quarter of fiscal 2015 driven by the benefits of our VCC initiatives. Spending on the VCC initiatives will be completed this fiscal year and incremental cost savings realized from these initiatives totaling $4 million in the first quarter are expected to approximate $14 million in fiscal 2016.

Our first-quarter operating earnings were as expected and in line with our guidance range for the year as operating expenses were well-controlled in the quarter. We plan to spend evenly throughout fiscal 2016. This operating discipline together was second half revenue growth provides confidence in our outlook for improving margin performance throughout the year.

We have reaffirmed our fiscal 2016 guidance for reported revenue growth in the range of 4% to 6% and 7% to 9% on a constant currency basis. We also reaffirmed our guidance for adjusted earnings per share of $1.98 to $2.08 representing earnings growth of 7% to 12% as reported and 15% to 20% in constant currency.

We are making good progress with the four new products we introduced in fiscal 2015. Notably the TEG Success diagnostics device and its single use disposable cartridges received final clearance by the FDA for marketing in the US for cardiology and cardiovascular applications. We are optimistic about the potential for TEG growth as we pursue both additional clinical applications and new geographies. The US commercial launch has begun following earlier launches in Europe, Australia and Japan.

A second important milestone in the quarter was the initial launch in key markets of our BloodTrack software with our HaemoBank storage device which continue to generate considerable customer interest.

I will now turn the call over to Kent who will review the elements of our first-quarter revenue performance and the expectations we have for growth. Kent?

Thank you, Brian, and good morning, everyone. As Brian noted, we realize 5% constant currency growth in our identified growth drivers in the first quarter and excluding Russia, this growth was 10%. This first-quarter compares with a prior year quarter in which we had roughly $5 million of whole blood disposables business with the American Red Cross. This loss accounted for much of the decline in our US whole blood business. Importantly, the US whole blood market began to show signs of moderating decline in the quarter.

We continue to expect many of the headwinds faced in fiscal 2015 to be behind us by the midpoint of this fiscal year. This moderation of headwinds combined with continued strong performance in our growth drivers will be the main contributors to our return to growth in fiscal 2016.

Additionally, we will benefit from several new product advances and traction with our comprehensive blood management solutions or CBMS initiative.

In the first quarter, plasma disposables revenue was $81 million, an increase of approximately $2 million or 2% as reported and 5% in constant currency. North America plasma disposables grew 10% while global plasma growth continued to be impacted by softness in the Russian market.

Our commercial plasma business is well-positioned with 80% of its current business under contract through the first quarter of fiscal 2019. We expect strong disposables growth to continue as our customers keep pace with robust end market for plasma derived biopharmaceuticals.

We installed over 4000 plasma collection devices in the past three fiscal years, another 600 devices in the first quarter of fiscal 2016, and this trend in our installed base of equipment is accelerating. This year we expect our plasma business to surpass end market growth rates on the strength of North America demand and the recent CSL Plasma contract for the supply of saline and sodium citrate solutions.

Over our strategic horizon, we expect the combination of the recently launched NextGen DMS plasma collection software and our smart collection device to deliver differentiated value to our customers in every collection event permitting us to continue to grow faster than the end market.

In the first quarter, Blood center disposables revenue declined $12 million or 14% to $74 million. Excluding the impact of currency, blood center disposables declined $9 million or 11%. Platelet disposables revenue was $31 million in the quarter, down $7 million or 19% as reported and down $5 million or 14% in constant currency. The majority of the constant currency decline was in Russia where our largest distributor is making good progress selling through inventory on hand.

Red cell disposables revenue which was $11 million in the quarter was up 4% as reported end up 5% in constant currency over last year's first quarter. Sequentially, this follows a flat fourth quarter and a flat fiscal year 2015. In an environment of declining transfusions, customers are favoring automated red cell collection strategies to optimize donation efficiency. Also certain US blood collection customers are pursuing new agreements for red cell disposables. We are seeing increasing competition for this business which will likely affect future red cell market share and pricing primarily in fiscal 2017 and beyond.

Whole blood revenue was $32 million in the first quarter, declining $6 million or 15%. Whole blood revenue was $20 million in North America, $9 million in Europe and European distribution markets and $3 million in Asia-Pacific and Japan markets. North America whole blood revenue declined by $6 million reflecting the lost American Red Cross volume and more moderate declines in the end market demand for red cells.

The ARC whole blood business was fully transitioned to our competitor late in the first quarter of fiscal 2015 so the final impact of this on our revenue growth rate was felt in the first quarter of fiscal 2016.

After declines in the US red cell transfusion rate of approximately 10% in each fiscal year of 2014 and 2015, our US whole blood business now represents less than 8% of our consolidated revenue and we are encouraged by the moderating market decline we noted in the first quarter.

Hospital revenue was $31 million, essentially flat with the prior year first quarter. Excluding the impact of currency, hospital revenue grew 3% in Q1 following 1% growth in fiscal 2015.

Continued strong TEG momentum offset declines in orthopedic cell salvage. In diagnostics, we had record TEG disposables revenue of $12 million in the first quarter, up 23% as reported and up 21% in constant currency. Globally, customers continue to recognize the value of this innovative technology. Over the past three fiscal years, we sold nearly 1900 TEG devices and over 200 in the first quarter of fiscal 2016.

Importantly 29 of the new TEG Success devices were installed in Q1. The US commercial launch of TEG Success is currently commencing following the previously announced approvals for sale in Europe, Australia and Japan. We expect our TEG diagnostics business to deliver accelerated growth with existing and new customers on the strength of the launch of TEG Success in fiscal 2016 facilitating our ongoing global growth and market penetration.

Surgical disposables revenue was $15 million in the first quarter, down 5% as reported and flat in constant currency, consistent with market dynamics. A major cell salvage platform enhancement is anticipated to launch later in fiscal 2016 bringing new clinical benefits and significantly enhanced data connectivity.

Software Solutions revenue was $17 million in the first quarter, down $1 million or 5% as reported and down 1% to constant currency. Customer interest in our new BloodTrack HaemoBank system is encouraging and we have now launched this product in numerous global markets.

BloodTrack HaemoBank along with SafeTrace Tx, our transfusion services software for hospital customers and a building pipeline of CBMS engagements represent the drivers of software growth that we expect to be 10% to 15% in fiscal 2016.

Equipment revenue was $11 million in the quarter. Our installed base of equipment which is the combination of purchased and placed devices increased 5% over the last 12 months. The installed bases of plasma and TEG, two of our growth drivers, had increases of 11% and 15% respectively over the same trailing 12-month period.

Before I turn the call over to Chris, I would like to point out several other leading indicators of positive momentum as fiscal 2016 unfolds. We see initial signs of our Russia business stabilizing. Our largest distributor is selling through inventory and is better positioned to match supply with recovering market demand but expecting year-over-year improvement in Russia over the course of fiscal 2016, continued success in China, a solid foundation for commercial plasma and accelerating TEG revenue, our combined growth drivers are expected to produce double-digit revenue growth in fiscal 2016.

At the same time, we have passed the anniversary dates of our market share loss and price concessions in our US Blood Center business and we see early signs that the whole blood market declines are beginning to moderate. For all of these reasons we are confident in returning to revenue growth in fiscal 2016 and I am pleased with these indicators of positive momentum in the commercial and operational elements of our business.

Finally, we continue to make progress on initiatives that are important to our longer-term growth. Our CBMS initiative continues to be received positively by our customers and our ongoing findings reinforce a compelling value proposition that includes substantial cost savings for our customers and meaningful revenue opportunities for Haemonetics. We are encouraged by these early results and will update you as this new selling method scales.

In addition to the 29 TEG Success devices I mentioned, the first TEG Manager software system was recently installed in a UK site. We also fulfilled our first TEG Success order in Japan and we are now launching TEG Success in the US following receipt of our final 510(k) clearance in June.

Twelve BloodTrack HaemoBank storage devices have been shipped to customers in the US, the UK and the United Arab Emirates. Early customer reactions to these new products and technology solutions are certainly encouraging and they validate our strategy of smart connected devices driving a stream of disposables revenue.

Now I will turn the call over to Chris Lindop. Chris?

Thanks, Kent. In the first quarter, total revenue was $213 million, a decrease of 5% as reported and 2% on a constant currency basis. Currency is expected to continue to similarly impact revenue by about 300 basis points in fiscal 2016.

Disposables revenue in Russia and in US whole blood products sold to the American Red Cross combined were roughly $9 million lower than in the first quarter of fiscal 2015 so the combined impact on our consolidated revenue growth of these known headwinds was approximately 4% in the first quarter.

As Kent noted, we expect to see the Russia impact continue in the second quarter of fiscal 2016 but the lost ARC business is now behind us.

Adjusted gross profit was $104 million, down 5% or $5 million year on year of which $4 million was attributable to currency. First-quarter adjusted gross margin was 48.5%, up 10 basis points as reported and up 40 basis points in constant currency as benefits from our growth drivers and VCC initiatives were offset by currency headwinds and product mix. Adjusted operating expenses were $78 million as reported, down $2 million or 3% as compared with the prior year's first quarter but up $600,000 or 1% in constant currency. Planned benefits from organizationally corporate cost reductions permitted ongoing investments in the business.

Adjusted operating income was $26 million in the first quarter, down $3 million including $1 million attributed to currency as the pressures upon gross profit outpaced the benefits from our growth drivers, VCC and other cost savings initiatives. Adjusted operating margin which was 12% in the quarter, down 70 basis points is expected to improve sequentially over the course of the year as revenue growth drives operating margin improvement.

Adjusted interest expense associated with our loans was $2 million in the first quarter. Our tax rate was 24.5% compared with 25.5% in the first quarter a year ago. We continue to benefit from the implementation of our global tax strategy.

Adjusted earnings per share were $0.35, down $0.03 or 9%. Declines in our Russia and ARC business adversely impacted earnings per share by $0.07 in the quarter. As noted, the Russian trend is expected to continue through the second quarter before beginning to recover in the second half of fiscal 2016.

We ended the first quarter with $112 million of cash on hand, down $48 million from our fiscal 2015 year end. We used $16 million of cash net of tax benefits for VCC and other restructuring 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 1.2 million shares in fiscal 2015 and 1 million shares in the first quarter of fiscal 2016. In total, we spent $80 million to acquire shares at an average price of just over $37 per share. We intend to complete this program with $20 million of additional share repurchases in fiscal 2016.

Turning to the full year, we reaffirmed our fiscal 2016 guidance on a reported basis for plasma disposables revenue 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 reaffirmed our guidance for revenue to be up 4% to 6% on a reported basis including the benefit from a 53rd week. With about 300 basis points of headwind attributable to currency trends, revenue growth is reaffirmed in the 7% to 9% range on a constant currency basis.

Our full-year guidance is for adjusted gross margin to average between 48% and 49% adversely affected by mix and currency and positively affected by VCC and other structural cost improvements. Adjusted operating margin is expected to average between 15% to 16%. Our adjusted earnings guidance range of $1.98 to $2.08 per share is reaffirmed representing 7% to 12% earnings growth over fiscal 2015. Anticipated currency headwinds of about 800 basis points reflects the rates at which we have hedged our fiscal 2016 foreign earnings. In constant currency, we are reaffirming our fiscal 2016 earnings growth rate of 15% to 20%.

At the outset of this fiscal year, I provided some additional color on the expected phasing of our revenue and earnings. While 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 second, this year we expect revenue to be split roughly 46% in the first half and 54% in the back half. This is the result of a 53rd week in the back half of fiscal 2016.

The planned ramp of our solutions sales to CSL Plasma and revenue of our Russia business which we expect to be roughly $10 million higher in the second half than in the first half of the year. We still expect gross profit to increase gradually over the course of the year and operating expenses to be spread fairly evenly across the four quarters. Accordingly, we remain confident in our previously stated expectations for 35% of earnings to be realized in the first half and 65% in the back half of fiscal 2016. 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 the fiscal 2016 guidance that we provided. We reaffirmed our fiscal 2016 free cash flow guidance of $105 million to $110 million before funding $27 million related to our VCC initiatives. We continue to expect about one-quarter of our free cash flow to be committed to VCC activities and three-quarters to be available for other corporate priorities.

We plan to complete the remaining $20 million of share repurchases authorized under our current program in fiscal 2016. We realized $4 million of the planned $14 million of expected fiscal 2016 incremental VCC savings in the first quarter. The VCC and restructuring investments are expected to wind down in fiscal 2016 and we remain on track to realize the incremental VCC savings needed to bring us to our target of $65 million of annual savings by fiscal 2018.

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

Thanks, Chris. Let me now highlight a few of the milestones we reached that give me confidence in our growth prospects. Excluding Russia, our identified growth drivers generated 10% growth in constant currency. Importantly, the positive impact of a full market release of TEG Success, increased solution sales to CSL Plasma, the expected second half recovery in our Russia business and the 53rd week all lie ahead of us as fiscal 2016 unfolds.

Early customer reaction to the TEG Success platform and international markets is very encouraging and the recent US approval and limited market release gives us reasons for optimism. We are on track to reach the $25 million annual run rate of saline and sodium citrate shipments to CSL Plasma by the end of fiscal 2016 and we continue to evaluate emerging opportunities with our other plasma customers.

Early indications suggest that normal ordering patterns in Russia and moderating declines in the US whole blood, two elements of our fiscal 2016 revenue assumptions, are starting to appear.

Our CBMS initiatives continue to gain traction with our hospital customers demonstrating the real value of our comprehensive product offering.

Our BloodTrack DonorSpace and other software offerings are increasingly gaining attention with our customers and we anticipate that our pipeline will expand accordingly. DonorSpace will also have the capability to be offered to our plasma customers as they implement NextGen DMS software as we head into fiscal 2017.

We are on track to deliver the four new products we identified at our May 2015 investor conference bringing us to nine new products in fiscal years 2015 and 2016 combined. We are also on track to finish the VCC spending in fiscal 2016 and to realize our targeted savings of $65 million by fiscal 2018.

We remain well-positioned to return to top- and bottom-line growth in fiscal 2016 and to withstand the pressure of currency headwinds. We reaffirmed our guidance for fiscal 2016. Importantly, our adjusted operating income and earnings per share guidance reflect on double-digit growth in constant currency, further reflecting the true earnings power of this business.

Before closing, I would like to once again thank our employees and recognize their dedication to meeting and surpassing the needs of our customers. With that, we are happy to take your questions.

(Operator Instructions). Lawrence Keusch, Raymond James.

Good morning. This is [John Hsu] in for Lawrence. Good morning. Just a couple of questions. First, on capital allocation, would VCC spending tailing this year, you obviously mentioned the $20 million remaining in share repurchase. Could you just remind us your overall capital allocation priorities?

Sure. As we have said many times before, it is acquisitions and then return of capital to our shareholders primarily in the past through share repurchases and then of course debt service to the extent necessary.

Okay, great. And then it looks like with the updated guidance that it looks like the ranges were widened a bit on the gross and operating margin line. Can you kind of just walk us through the bridge for the prior guidance versus why the ranges are kind of wide now? Thank you.

I think what you are referring to is scenarios that we build on on the web which are within our original guidance ranges. I think if you go back to the script last quarter is exactly what we said 48% to 49% and 15% to 16%.

James Francescone, Morgan Stanley.

Good morning. Thanks for taking the question. First, I just wanted to drill down on Russia a little bit given the importance of that expected recovery to the back half growth and earnings. Why are you confident that that gets better and to what extent has the decline in that business that you have seen been a reduction in inventory versus a decline in end markets sales? And conversely how much of the improvement that you are expecting through the year is a reduction of that inventory draw down versus a real improvement in end markets sales?

Let me ask Kent to answer that question for you, James, as he just came back from Russia just last month.

James, it is Kent. Yes, as Brian mentioned, I was in Russia earlier this month obviously very interested in seeing for myself what is going on on the ground there and came away feeling quite good about our business. We are starting to see a recovery in tender activity. As we have mentioned, our primary distributor is selling through inventory and has done a very nice job of doing that over the last few months, that represents the beginning signs of recovery in end market demand. We are expecting to see that supply-demand balance reached with that distributor sometime in Q2.

Meanwhile our hospital business is doing very well across the region and new and existing distributors across the region are performing very well. So obviously it is a situation we have got our eyes on but I came away from that visit and from all of the time and analysis we do on this piece of business feeling quite encouraged about what is ahead.

I would remind all of us that this is a business that had declined from $34 million to $26 million last year and our plan for this business this year is $26 million so flat to last year but with more revenue in the back half versus the front half as we knew the distributor was going to be working down some inventory that had increased as a result of the slowing market.

So we think we have a pretty good idea of what is taking place there, we have a good team of people on the ground in Russia and we have had very, very good and open discussions with our primary distributors.

Okay, thank you. And then second, on red cells, clearly far from shocking that competition has come to red cells after what has happened in whole blood. Maybe to provide us some context in that business what would you say your market share and profitability there is today? How do you think of the potential risk to competition? Is there some reason that the impact of competition on red cells would be different than what we saw in whole blood?

It is substantially a North American business for us, the double red cell technology. We have I'm guessing around 60% market share there, well-positioned with our technology and it is a -- has a profitability profile that is similar to or slightly better than our corporate averages and of course we take the defense of this business very seriously.

I would add as well on top of that, James, that this is a market, unlike whole blood, we had only entered the whole blood market in fiscal 2012. We invented double red cell separation technology. This is something we continue to invest in. The automation part of our business is an area where we continue to invest. You have seen now what we have done with plasma automation. We have certainly indicated we are making some very significant investments in the remainder of our automation platform. We will continue to do that going forward but this is a part of our business that we have greater confidence in as we come to the markets.

There is going to be an impact both in terms of pricing and in terms of share. We recognize that so we will make those decisions. But we remain confident. The biggest player in that space is the American Red Cross. We feel good about the discussions that we are having with them today.

David Roman, Goldman Sachs.

Thank you. Good morning, everybody. Brian or Kent, I was hoping you could go into just a little bit more detail on the BloodTrack launch. You talked about some initial positive conversations with your customers but maybe you could help us translate that into some detail as it relates to the financial projections. I think you are saying 10% to 15% growth in software for the year versus minus 2% in Q1. Could you just maybe walk through some specifics on that bridge?

David, it is Kent. We are quite pleased with the launch of HaemoBank thus far. As we mentioned in our materials, we have shipped 12 to date and we are building the pipeline. I think that is incredibly important to the economic story that you are asking up out. The response from customers has been very good as they continue to think about safety, economics, speed and traceability of blood products.

As it relates to our software business overall, we are incredibly excited and as I think as you probably picked up at our annual investor day, you saw the influence of software right across the business. So we are rolling through the product line bringing product line enhancements and entirely new products to the market and a lot of that is driven by and significantly influenced by our software capabilities.

Our major new product launches are the BloodTrack HaemoBank as well as our NextGen system for the plasma's business are receiving rave reviews from customers and so now with HaemoBank particularly in the market, it is about building that pipeline, getting our sales people who have just come off of a major launch meeting in mid-June out into the market and selling this significant new device.

So we feel great about it and hope to be able to bring you much better results in the quarters ahead.

Two things I would add to that, David, is it doesn't take a lot to move the needle in selling HaemoBank. This is an expensive device with software that our customers have to buy but significantly reduces cost well beyond that expense and our pipeline in that respect is growing. There is a significant amount of interest in this new product.

That is helpful. And then maybe just a follow-up on the P&L, I believe in the prepared remarks you made a comment to the effect that the current level of discretionary spending was sort of at the level that you thought were appropriate and that leverage in the model would come to the balance of the year as revenue grew. Did I hear that correctly? Because (inaudible) million SG&A type number and then really the percentage of revenue goes down as the revenue scales from now through the balance of the year?

Yes, correct.

Thank you.

Anthony Petrone, Jefferies.

Thanks and good morning. Maybe to jump in on TEG for a moment there, you mentioned the 510(k) clearance in the US. Can we maybe get an update on just what the installed base of the 5000 is in the US and maybe how quickly those can turn over with the 510(k) clearance in hand? And then one follow-up? Thanks.

So the installed base is around 4800 for TEG and that is primarily obviously it is 5000

-- and that is a worldwide number.

Worldwide number, yes.

About 2000 in the US. I think you asked a US number.

But our strategy is not one of necessarily replacing 5000s in every case. It is a strategy that is driven by the relatively low penetration of the product against its market opportunity and the opportunities for growth in places that haven't yet even tried TEG.

Where we expect to see that change out, Anthony, of a TEG 5000 to a TEG Success is where the clinicians need flexibility in the location of the testing. In other words, an operating theater, a clinical area where rapid results and turnarounds are critical. The TEG Success allows that testing to move from the laboratory environment to that clinical environment. But where that doesn't need to happen, we don't expect those customers to change those out, we expect them to continue to move forward as they are with the TEG 5000 at least for the time being.

That is helpful. And then just a follow-up would be on SOLX. Any updates on that? And I will hop back into queue. Thanks.

No update. As we have said, we submitted the data to the FDA. Expectation is toward the end of this calendar year for a response on that and we are going to just have to wait and see how that goes but we have submitted the data.

Brian Weinstein, William Blair.

Good morning. This is Matt Larew in for Brian, can you hear me okay? So just wanted to follow up on Anthony's question about TEG. You mentioned development in the EU and Japan and obviously received 510(K) clearance here in the US. Could you maybe help us understand how much of our expectations for the accelerating impact of TEG Success are in the US versus Japan versus the EU?

Well, the majority of our businesses is in the US and China and if you recall last year, that business grew 27%. For us to achieve the targets we have outlined this year we have to have a growth rate of approximately 30%, a little over 30%. So not a huge jump that needs to take place. In fact with this impending launch, we are encouraged with growth rates at 23% in the quarter.

So when you think about you've got two very, very well established markets growing rapidly, US and China, with a number of new geographies coming on that are beginning to accelerate interest in the technology, we are pretty excited about with this represents. Jumping from 27 to 30 isn't a big jump so we feel very, very optimistic about the outlooks for this product.

Okay. Thanks, Brian. Then an additional one here on TEG. Could you maybe discuss the road to additional clinical applications, potential timelines there? I think you mentioned you had clearance for cardiology and cardiovascular here in the US. Just maybe the road and timelines for additional applications.

Let me just jump in on that one and then ask Kent for any additional color he might add. But you will recall at our May investor conference, I thought Jonathan did a really nice job and that material still lies on our website about the explaining where we would go next with the expansion of the clinical applications of the testing. Trauma being the first one up that we would see clearance for next. But let me ask Kent to provide any additional color there.

I agree with Brian. I think the notes from the May Investor Day are a great source and some of the specific targets we talked about in those materials and in the script and some we left out there for future disclosures, I think the big idea is that we see the opportunity first with TEG then in building TEG's applications, building the entire family of TEG's Solution so adding to 5000 the Success device and adding the TEG software manager software to this family. And then beginning to think about the broader space where or blood diagnostics as a company. So we think this is a fruitful space and believe that TEG will continue to march through the growth steps that we have outlined.

One more point that I would emphasize there, Matt, and important for everyone to understand and we talked about this. While the question was asked about our expenses and our spending for expenses, very consistent throughout the year but we continue to reevaluate what we spend and where we spend it and we have been very clear about our expectation that as we make decisions about spending, we are going to continue to accelerate our investments in R&D in the coming years with a focus on TEG clinical spending as well as spending in our apheresis platform. So that focus will continue.

Jan Wald, Benchmark.

Good morning, everyone. I guess just going a little bit deeper into a couple of the question since a lot of the questions I would have had asked have already been answered. But Brian, I guess in your script you talked about the whole blood market decline as moderating and I guess it would be nice to know how much it is moderating to a certain extent. When do you expect it to kind of stabilize or maybe even begin to grow again? Not your business but the market itself?

Jan, it is a question that I think many people are seeking answers on. What I would tell you, what do I first mean by moderating? We are looking at two years of decline of double digits around 10% fiscal 2014, fiscal 2015. Our customers guided us this year to a decline of about 5% to 8%. We are seeing a decline, we are seeing growth in other markets, international markets which are moderating our US declines. But we are seeing declines in the US that are moderating closer to the low end of the range than the upper end of the range. It is one quarter.

This is a market that I think has a better understanding of what is taking place but still it is a pretty fragmented market and so fully understanding that market is somewhat of a backwards look than a forward look. But I think we are starting to understand it a little better than maybe we have in the past but that is what I mean by moderating.

In terms of growth, I think this is a global market with about half of the world's population lying in geographies where demand for blood is still yet to be met. When the world catches up to that is anyone's guess but you are starting to see economies emerge and trying to address these healthcare needs. We typically see that in platelets first before whole blood. And the good news is that our focus with our technology which is a cheaper technology and an easier to use technology we typically get a first glimpse of that. I think it is something that will happen slowly and is probably not anything that is imminent in the near term.

Okay. I guess my next question is on the red cell market. You said that competition was coming. Do you expect it to be the same kind of competition as you saw in whole blood where it is going to be kit versus solutions where people are going to be much more sensitive to price and things like that than they have been?

What I think we saw in the whole blood scenario is that price was far more sensitive than anything else. There is still the need for solutions but that is really being driven by hospital decision-making versus blood center decision-making. Our blood center customer numbers remain very, very focused on price and technology. We like where we are. We like what we are doing to invest in the future, both near-term and longer-term and we are encouraged by what we are seeing. But it is going to be a market that will see price declines and share shifts like we saw in whole blood.

Jim Sidoti, Sidoti & Company.

Good morning. So you have a lot going on on the hospital side with the BloodTrack, the new TEG Success, the new Cell Saver, have you added salespeople or have you trained salespeople for specific products or will they be selling everything?

It is Kent Davies here. We are certainly adding sales representation by number in our emerging markets. We are absolutely training our team to sell in a very different way and I think you have seen that in what we had talked about in comprehensive blood management solutions, the need to approach customers in a very different and consultative way and that new skill set is going to be vitally important all over the world as we have changed up the org structure here a little bit, folks like Byron Selman coming on board.

It is really part of that plan to take those CBMS skills that have been forged here in North America and translate that way of selling all over the world and he is actively doing that and we are doing that with our team.

And then can you update us on the status of the plant in Penang?

The plant is complete, it is up and running and we are assembling product in that location as we speak. We continue to shift production. The plan is to shift production from our Bothwell, Scotland facility to the Penang facility is what is up next.

Larry Solow, CJS Securities.

Great, thanks. Good morning, guys. Just a couple of follow-ups, most of my questions were also answered. In terms of the gross margin outlook, you did like -- you are about middle of the range in the quarter relative to the full-year range. Is the fact that you should expect much higher revenue on a sequential basis as we go on, is that really mix that is going to keep that gross margin from rising higher as the year progresses or is there any other issues in there?

The currency headwinds are a little stronger in the back half of the year and we will continue to see strength from plasma which is obviously a very large number and it has relatively lower gross margins.

Especially, Larry, when you consider the Solutions contract in the back half that will really start to accelerate. As we have talked about, that is a lower margin product.

Right. Just on currency I guess essentially you are 12 months forward-looking so you have sort of an idea at least today what the impact of currency would be at least on the early part of fiscal 2017. Is that right?

Yes, we have a view of it in fiscal 2017, yes.

And I assume it would be there is still I just answered it, do you have a number you could share with us in terms of expectations?

Yes, I think we did at the Investor Day. It is -- if you think about the headwind to growth rates in operating income that we disclosed at our Investor Day range, it will be up out the same nominal amount in fiscal 2017 and obviously a lower percentage because we will be coming off of a higher base.

Thank you. I'm showing no further questions at this time. I would like to turn the call back over to Brian Concannon for closing remarks.

Thanks. We see continued progress with our identified growth drivers. At the same time, most of the headwinds that caused declines in our US whole blood business will be behind us by midyear. And early signs are indicating that the US whole blood market declines are moderating and Russia orders are beginning to rebound. Our US plasma franchise continues to enjoy above market growth leveraging software advances and sodium citrate and saline solutions capabilities. And our CBMS offering is demonstrating real value to our customers based on the foundation of new software products and connected devices. Our VCC initiatives are providing expected savings and our investment in VCC is approaching completion.

Our business fundamentals remain strong with an expanding global footprint, a very strong customer base, a steady flow of differentiating new software and devices, a solid R&D pipeline, an improving cost structure and the broadest array of products and services in the blood industry.

We believe we have an increasing demand for our comprehensive blood management solutions offering throughout fiscal 2016 and CBMS will become much more meaningful in fiscal 2017 and beyond.

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. Everyone have a wonderful day.