Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Haemonetics Corporation Earnings Conference Call. My name is Connie, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the call over to your host for today, Mr. Gerry Gould, Vice President of Investor Relations. Please proceed.

Okay, thank you. Good morning. Thank you for joining Haemonetics' Third Quarter Fiscal '12 Earnings Conference Call and Webcast. Today, I'm joined by Brian Concannon, President and CEO; and Chris Lindop, CFO and Vice President of Business Development. Please note that our remarks today include statements that could be characterized as forward-looking. Our actual results may differ materially from the anticipated results. Additional information concerning factors that could cause actual results to differ materially is available in our 10-K and 10-Qs. On today's call, Brian will review the business and financial highlights of the quarter. Chris will review our operating performance and annual guidance in more detail. And then Brian will close with summary comments. Before I turn the call over to Brian, I would like to mention the treatment in our adjusted results of certain items which by their nature and size, affect the comparability of our financial results. Consistent with our past practice, we have excluded certain charges from the adjusted financial results we'll talk about today. Restructuring and transformation costs are incurred for transformational activities focused on the infrastructure supporting our research, manufacturing, supply chain and software organizations. We also excluded from adjusted results European customer claims for HS Core plasma inventory, totaling $1.7 million in the quarter and $4.1 million year-to-date. These costs are net of partial insurance recoveries, and we expect additional insurance recoveries to offset these costs in Q4. In our fiscal '12 third quarter, adjusted results exclude $4.3 million in pretax restructuring costs and HS Core bowl claims. In our fiscal '11 third quarter, adjusted results exclude $3.7 million in pretax restructuring and deal integration costs associated with our Global Med acquisition. In the year-to-date fiscal '12, adjusted results exclude $13.2 million in pretax restructuring costs and HS Core bowl claims. These were partially offset by $1.6 million of contingent consideration income related to the resolution of a previously estimated contingent purchase price for an acquired business. Thus, we have excluded $11.6 million net. We expect to exclude approximately $13 million to $14 million in total, offset by $1.6 million of contingent consideration from our fiscal '12 adjusted results. Year-to-date fiscal '11 adjusted results exclude $6.6 million in pretax restructuring and deal integration costs associated with our Global Med acquisition, which were offset by $1.9 million of contingent consideration income, which was also excluded from adjusted results. Finally, as is our normal practice, our press release and website include a complete P&L and balance sheet, as well as reconciliations between our GAAP results and our adjusted results. With that, I will turn the call over to Brian.

Thanks, Gerry, and good morning, everyone. We had a very good quarter at Haemonetics, one that suggests we've turned the corner on a number of fronts. The revenue growth we realized in the first half of the year continued. Our IMPACT selling in blood centers has helped to accelerate red cell growth in a flat market, and we had encouraging sales of our blood management solutions to prestigious hospital and health system customers. We continue to drive growth in emerging markets. We signed important contract extensions with our major plasma customers. We completed most of the remediation required by the OrthoPAT and HS Core bowl quality issues. And the revised estimates we provided last quarter for fiscal '12 revenue growth, cost of quality and earnings remain intact today. So we're able to affirm that guidance. We will touch on all of these topics, so let me start with quality. We've completed building all of the OrthoPAT devices needed to replace the pre-2002 devices that we voluntary recalled earlier this fiscal year. Our focus is now on completing the recall process and recapturing lost sales. The IMPACT sales process will help as we're able to show our customers the economic and clinical benefits of orthopedic cell salvage. We expect OrthoPAT declines to moderate in Q4 and return to growth in fiscal '13. We also continue to receive strong input from our customers about additional enhancements they would like to see on the OrthoPAT device. After significant consideration, we've made the decision to incorporate this feedback into one singular launch of a significantly improved OrthoPAT device. The reasons for this are to ensure we are meeting our customers' growing list of requirements, to complete one clinical trial for all enhancements and to manage the complex regulatory and filing process with one submission.…

Thanks, Brian. Well, as Brian said, I'll start by providing more background on the broad-based revenue growth we are seeing, and I will talk in more detail about our current revenue, earnings and cash flow guidance for the full year. The important point to note is that year-to-date, every product category of our business, excluding hospital, is growing. And when we look at hospital, aside from OrthoPAT, its growth is 3% year-to-date. Given the challenges we have overcome during the year, this top line strength is encouraging. Through 9 months of fiscal '12, we're well on our way to realizing our full year revenue guidance of 6% to 7% growth. With 8% top line growth in the quarter and 7% year-to-date, frankly, we expect full year revenue growth to be at the top end of that 6% to 7% range. Plasma revenue growth will continue to put pressure on margins, leaving us right where we expect it to be on the bottom line for the full year. Some product categories are outpacing our expectations a bit while others are slightly behind. So let me talk about these in more detail. Plasma revenue grew 15% to $69 million for the quarter. We saw some improvements in our Japan plasma business, which was flat after declining in each of the first 2 quarters. The anniversary of the Japanese change in collection practices that caused the decline has passed. Additionally, collection volumes in the commercial plasma business in the United States remain robust again in the third quarter. Plasma revenue grew 14% in the first 9 months of fiscal '12. In October, we guided to plasma growth of 11% to 12% for fiscal '12, and we are now confident we will exceed that target. We now believe that we will have 13% to…

Thanks, Chris. Haemonetics is a stronger company today than the one that began fiscal '12. The lessons learned have been difficult, but we're making the right investments, implementing tough decisions and doing the right things. We are learning that being the global leader in blood management solutions for our customers comes with a responsibility far greater than the words themselves. But I believe we are acting appropriately and our customers are responding in turn. This is why we're growing 8% in a market that is challenged to grow. So let me take a moment to speak about the positive response we're seeing from our customers. The revenue growth was again led by our Plasma business, with another solid quarter of double-digit growth of 15%, as plasma collections continue to be robust. We expect this business to return closer to a mid-single-digit percentage growth in fiscal '13, consistent with the market. We're also pleased to report that we have signed multiyear extensions of our supply agreements with several of our major plasma collection customers, providing for continued use of our collection devices and disposables. This places 75% of our current commercial plasma business under contract through Q3 of fiscal '17 and over 90% through Q3 of fiscal '15. This is important when you consider the potential catalyst this industry faces with new indications for the plasma-derived biopharmaceuticals in the next several years. TEG, the product with the highest demand among all IMPACT accounts, is having another strong year. TEG disposable growth is in the 15% to 20% range for the fourth consecutive year and is an important blood management tool for our customers. The TEG Analyzer is also gaining adoption in our global markets as well. Third quarter TEG disposables growth in China was 194%. This growth is off of a…

[Operator Instructions] The first question comes from the line of Scott Gleason from Stephens.

Brian, I guess, to start off, congratulations on extending out the contracts with your plasma partners through 2017. Can you talk a little bit about kind of what pricing was entailed in those contracts? Are you guys seeing, I guess, an increase there? Or is there step-up functions in terms of -- over time there? Can you maybe give us a little more granularity there?

Yes, Scott, these contracts as you might expect, are confidential agreements between us and our customers. So let me just kind of give you high level. And what you've seen us do with our plasma business in the past, and I think it's safe to say you can continue to see us do as we go forward. What I'm really pleased about here is that when you consider the uncertainty that this industry faces, and I'm talking uncertainty in a positive way, with upsides that could generate based on the current clinical trials that are ongoing, we've been able to secure this business and really allow us the opportunity, for us and our customers, to focus on the larger market. At the same time, we've also built out our manufacturing production. With the opening of our Salt Lake facility, we not only have addressed a business continuity concern, but we've clearly doubled the ability of our production capacity at the same time. So what I'd say there, Scott, is that look to the business being secured and look for us to continue to do what we've done with our plasma business, continue to leverage our manufacturing capacity as we go forward.

Okay, great. And then Brian, can you maybe give us a bit more detail -- I know you guys said the platelet piece was up on -- in terms of emerging markets. Where are you guys seeing kind of most of the success there? Is it coming from like China? Or which regions are you seeing success? And then is there any update, I guess, in terms of kind of the second-generation platelet device that you guys have talked about a little bit in terms of when we could start learning more about that?

Yes. The platelet growth is coming from our emerging markets. And also in Japan, as Chris indicated, a little bit of upside there as a result of a quality issue with one of our competitors there. But emerging markets continues to be a real catalyst for us, and it's pretty broad-based. Certainly, China is a leader with its size, but we're seeing it in other elements of our emerging markets, to include Russia and India. Although India, we didn't see the upside that we have typically seen in the past with the dengue fever season, which is certainly a good thing for the Indian population, of course. But that's how I would tell you we've seen the growth. In terms of the platelet device, we've not given a whole lot visibility on this, Scott. We'll give you a little bit of an indication of that at our May investor conference directionally, but we'll continue to keep that one a little bit more under wraps. What we've told you in the past, we remain on track relative to our plans there.

Okay, great. And then just one last question. Brian, I guess, when we look at the red cell piece starting to come back a little bit, typically it seems like that device really starts to do well when you start to see shortages of red cells. Are you guys starting to see that all in terms of kind of elective [ph] procedure tick-up, where there's supply-demand imbalances that are driving customers to start using that device more?

No, we've seen a bit of lumpiness in the red cell market, but we've not seen surgical procedures rebound very much at all, Scott. Where you're seeing that growth come is with our IMPACT efforts, working with blood centers to really understand their economics in how they collect blood. In other words, recognizing that the overhead of a mobile drive that collects 20 units of blood versus one that collects 200 units of blood are not the same. So they're really changing their collection practices, not necessarily going to the smaller drives as frequently but using our red cell technology in the larger drives to ensure that they're collecting the same amount of blood to meet their current demand.

And the next question comes from the line of Jim Sidoti from Sidoti & Company.

Do you have any insight on what plasma inventory levels are like?

Yes. And Jim, we've talked about this in the past. It's the one part of the industry that we don't have visibility to. This is one of the closer-kept secrets of the plasma industry. What I will tell you is with Pete Allen taking over responsibility for the plasma business, and Pete working with Steve Swenson, really deserves the credit for the work done with our plasma customers in securing these contracts going forward. Pete is also now focused on working with the plasma customers to really understand a better forecasting process as we go forward and really try to drive them to a little bit more accuracy. We understand the volatility that exists from a collection standpoint, and it's that piece that kind of swings a little bit. But we're going to continue to work with our customers to try to refine that to a more narrow range.

All right. And then just as a follow-up to that, I'm sure you listened to Baxter's call or read the transcript, and they talked about adding capacity for their fractionation business. What do you expect -- or how do you expect that to impact you timing-wise?

Well, when you look at what Baxter's doing, I think if you talk with all of the plasma fractionators, every one of them is considering what they do from a fractionation standpoint. I think the entire industry is looking to the future and understanding how to position themselves responsibly, considering what's taking place in the industry today. What I'm excited about is that these contracts position us extremely well. Baxter is included in this bevy of contracts that we've spoken about in terms of looking at our business as we go forward. And we're pleased about that. But there's no material change there either relative to our agreement with Baxter. I think we are extremely well-positioned, not only with Baxter but with every single one of our plasma collection customers as we look to the needs of the future.

And our next question comes from the line of David Lewis from Morgan Stanley.

Brian, you touched a lot about the IMPACT business and strength in blood management. Just over the last 4 to 6 quarters, we've actually seen a number of added accounts, IMPACT added accounts slip sequentially. I'm assuming this has something to do with distraction related to the quality remittance issues. But maybe just sort of walk us through how you see those IMPACT customer adds trending over the next several quarters. When can we sort of see that trough and head back in the other direction?

Yes, I'd answer that 2 ways, David. Yes, you're absolutely right. We have clearly been distracted in our IMPACT selling efforts with the OrthoPAT recall. I see that subsiding as we go forward, and I see that continuing to get better as we go into fiscal '13. But I would also tell you, you're not going to see the increases be what they were in the early days. I think that we'll take it up from levels where we are today, but it won't go back up to levels where it was before. But I think you'll see us securing more prestigious, larger accounts that in the aggregate, capture more surgical procedures in total. And you'll see that going to influence the growth rates. And I think you've seen that influence the growth rates. Even though these numbers are smaller, you're seeing that influence the growth rates today.

Okay. Maybe just a follow-up, Brian, on plasma. Obviously, you talked about the contract extensions. Baxter has not historically been a significant customer for Haemonetics, but perhaps that changed sort of incrementally. I'm just trying to get a sense of your guidance right now, which is sort of double-digit plasma growth going to sort of mid-single digits next year, which is more of the market rate. I mean, is there anything underpinning your expectations today other than market rate growth rates for plasma is about as good of an estimate you can come up with in '13? And the other piece, Brian, I'm trying to get at is as you're probably aware, Baxter will look to take down their Glendale facility back half of '12, which means they'll likely build inventory in the earlier part of this year. So I'm just wondering if that dynamic has have any material or appreciable impact in your results.

Yes, we typically don't talk about the individual contracts, as I referenced already. But let me answer the question this way. Our current growth rates nor our intended growth rates for fiscal '13 contemplate any significant share shifts.

And the next question comes from the line of Larry Solow from CJ.

I was wondering if you guys could just remind us of the -- you mentioned about half of the installed base has been recalled on OrthoPAT, and then you also said you've built about 900 new machines. Can you just remind us about what the installed base is today and how many machines have been replaced of the original half that was recalled?

I'll let Chris speak about what the current installed base is. But we've replaced about 900 devices. We've built all 1,200 that we had indicated that we would build to replace. So we're continuing to address that recall. If you remember, what drives that? The majority of the devices in the U.S. have been replaced. These are devices we own. The devices outside the U.S., primarily Europe and Japan, many of these are owned, and we're now going through that process of replacing those devices. As I said in the script, we expect to have the recall process substantially completed in the fourth quarter of the fiscal year. Chris, can you comment on the installed base?

Sure. We're sitting at about 3,100 devices today.

Okay. And then just a quick follow-up, just switching directions. I realize your guidance is very preliminary, and I don't expect you to comment on line item-type of questions. Just in terms of -- I would think that if you obtain mid-single-digit growth -- and I would imagine some of the gross margin pressure, I would imagine at least the initial 150 or 170, most of that you'd recoup pretty quickly next year. I would imagine -- I would have assumed if you get mid-single digit growth, then maybe your profit growth could be higher than sort of 10%, 12% or whatever that may be. Are your gross margin assumptions -- do you include a rebound in that line item?

Yes, we'll give the guidance on these lines as we get to the end of this quarter. But let me say this, 2 things, and I'll ask Chris to add any color that he might have here. But 2 things that I would really like to emphasize. The first is we're going to continue to -- we've got some solid revenue growth. Our strategies are working. We're going to continue to invest and work to accelerate that, primarily when we look at emerging markets as well. But the second thing that I would tell you there, when you think about expenses for next year, one thing that you have to remember is that we pay our bonuses based off of results. For us this year, that means there's $9 million, roughly $9 million in bonus that we will not pay. So when we plan for next year, that means that there's $9 million incremental OpEx that we must plan for as we fill that bonus target pool for next fiscal year. Add onto that the merit increases that we contemplate and you're looking at something that's a $13 million to $14 million increase from a planning perspective in OpEx just before you start the fiscal year. So as you consider that, remember to dial that into your models as we go to the next fiscal year. Again, we'll give more color. Chris, would you add anything to that?

No, that was very complete.

[Operator Instructions] And the next question comes from the line of Steven Crowley from Craig-Hallum Capital Group.

Couple of follow-up questions. You were nice enough to give us a little bit of granularity on plasma and say that your initial guidance for 2013 didn't include any assumptions for market share shifts. In terms of price, should we also think that it doesn't include much of anything for price? Or is there some modest pressure there?

Yes. Again, we'll give you more guidance relative to these particulars at the end of the fiscal year. But as I said earlier, recognize that we're going to continue to leverage our plasma business, working with our plasma customers to improve the efficiencies in this market. That will continue. So as we've talked about our margin improvement in the past 6, 7, 8 years, as we've gone from 46% to where we are today, we'll continue to leverage that as we go forward. But again, we're giving no visibility into the contracts. These are confidential agreements with our customers and they've asked us to really be respectful of that.

Okay. But your guidance overall, you've tended to give us a flavor for the growth rate as representative of volume, with market share as a component and then price.

The growth rate would be all in.

Okay. In terms of the software business, there was some verbiage in the press release that you acknowledged even in your prepared commentary that there was some lumpiness in the software business. In the press release, it talks about not having the scale in Europe right now to be as consistent as you'd like. But I'm wondering what the long-term growth rate for that business is. When you made the Global Med acquisition, we were talking 10-ish percent. You've obviously come off that short term. What do you think the longer-term growth rate for software is?

Yes. We're still looking at a high single-digit growth rate. We're going through some shifts in our business. The thing that I find very encouraging is where we have our newer products, the Global Med products that we acquired in North America, we're seeing very strong double-digit growth both in blood bank and in hospital.

Yes. And I think what I'd add there, Steve, is when you look at the comment that Chris made, and it should not be lost, when you see that the business we acquired, the Global Med business we acquired in the quarter, up over 25% for our hospital and blood center customers, that's very significant. And I personally look at that much like equipment as a leading indicator of the effectiveness of what we're doing relative to blood management. If we talk about it being the data and how our systems capture data, turn it into information, use that information to change the way in which our customers practice what they do, I think that's very significant.

And the next question comes from the line of Larry Keusch from Morgan Keegan.

First question is you mentioned, Brian, in somewhere along the way that Pete Allen has taken over the Global Plasma operations. And so I'm wondering sort of what's behind the shift in his responsibility and how's he -- what's happening with his old responsibilities. And also on that plasma, what are we seeing with the EXPRESS protocol, given again that it feels like demand has been pretty solid in the end market for plasma and at least some companies certainly have some inventory challenges?

All right. Let me talk first about the shift. And I think that this is something that we've covered. There's really 2 pieces here. We wanted to ensure that we had greater focus and visibility on blood management. And so as you recall that we shifted all responsibilities of blood management for North America to really get after this and understand how we take this to our customers and execute to include effective implementation. We put all that underneath Mike Kelly as the President of North America. So Mike has the responsibility for the blood centers, the blood bank business in North America, the patient business in North America, software solutions business, as well as marketing to be able to drive this in that fashion. We shifted Pete over into the plasma business and Steve Swenson moved into our North American blood center business as we contemplate the launch of the automated whole blood. So we're looking to really beef up a couple of critical areas, as Steve has indicated for us the timing that he wants to remain in the business, as well as the need for us to ensure we have the right leadership driving our plasma business for the longer term, especially considering what we just accomplished, the contracts, as well as the catalyst that exists. So that is the reasoning behind those shifts. I think that we've talked about that. So to be clear, that's the reasoning behind that. In terms of EXPRESS, it's certainly something that's going to be a discussion with our customers as we go forward. They're looking to really address, from a future standpoint, certain catalysts. I think this will help them manage that growth effectively. But that still remains an opportunity for us as we go forward.

Okay. And then just thinking a little bit longer-term here, obviously the operating margins are going to be in and around 15% in 2012. They were closer to 17% in 2011. And I'm just thinking about, again, given the potential for growth in the plasma disposables over time, is this a business -- and taking into account that the longer-term contracts, is this a business that can move to a 20% operating margin? And if so, kind of how should we in broad brushstrokes think about when that might occur?

Well, as we look at our strategic plan, which includes a very detailed 5-year financial model, we see ourselves trending towards that target in that time frame. And it's really very much about leveraging the infrastructure advancements we've made in the plasma business over the next 5 years through growth. Because in a sense, we took a step back by doubling our capacity and separating into 2 separate plans. It certainly includes increased mix from hospital products, which are highly profitable, and from software products, which are highly profitable. So all of those things, the mix and the growth and returning to that operating discipline that got away from us this year as we had to deal with our quality issues, give us confidence that we'll be at or close to that target in 5 years.

The next question comes from the line of Gregory Macosko from Lord, Abbett.

Japan, that growth was really quite nice. I'm assuming that's against a pretty easy comp. And was that driven primarily by plasma? Talk a little bit about that strong growth there.

Well, there's 2 pieces that'll come into this. And I'll let Chris comment here in a minute. But it is primarily driven by platelets, as we'd indicated in the script, which we're growing as a result of a quality issue with one of our competitors there. But we also have, when you see the strength in foreign currency, it's being driven out of Japan. Let me let Chris provide a little more color here.

Yes. So we do get a benefit from currency. We get a benefit from hitting the bottom on that negative plasma trend. And as Brian said, we've benefited from a competitor's quality issues.

And with regard to the platelets, I mean, just looking out -- I mean, excuse me, plasma. Just looking forward, is your sense that you mentioned but you're suggesting that the whole blood situation there has kind of peaked and that you expect the pure platelet collections to sort of improve incrementally going forward?

I think you're speaking plasma collections to improve going forward. Right now, we're giving you that opinion based on the trends that we're seeing. The Japan Red Cross has a fiscal year that matches our fiscal year. They'll provide the guidance and their collection goals at the end of the fiscal year. But right now, we're basing that based off of what we're seeing today, and our plasma collections or the losses or declines we were seeing as a result of their increased red cell collections certainly moderating this quarter, and we expect that going forward. We'll be able to know that definitively within the next 60 days.

And we have no further questions at this time. I would now like to turn the call back over to Mr. Brian Concannon. Please proceed.

Thank you, operator. Let me close right where I started. We had a very good quarter at Haemonetics. Revenue growth continued, up 8% in Q3. Plasma contributed double-digit growth once again, and IMPACT selling is driving gains in red cells, platelets and surgical products. Equipment growth was impressive at 18%, giving confidence that the revenue gains we're seeing are sustainable. The recently signed multiyear extensions with several of our major plasma collection customers are another significant milestone. With these key contract extensions in place, 75% of our current commercial business is under contract through Q3 of fiscal '17 and over 90% is under contract through Q3 of fiscal '15. We thank you for your support and confidence in us as we work through some very significant challenges. We've completed most of the remediation required by the OrthoPAT and HS Core bowl quality issues, and we have strengthened our company in the process. As I said earlier, Haemonetics is a stronger company today than the one that began fiscal '12. This strength positions as well for the future as blood management continues to gain the attention of our customers. We look forward to sharing the specifics of our plans with you at our Annual Investor Day Conference here in our corporate headquarters in Braintree, which is scheduled for May 10. We'll provide you with the details for the conference over the next several weeks. Thank you for your time this morning.

This concludes the presentation for today, ladies and gentlemen. You may now disconnect. Have a wonderful day.