Haemonetics Corporation (HAE) Q2 2013 Earnings Report, Transcript and Summary

Good morning. My name is Tina, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Haemonetics Second Quarter Fiscal Year 2013 Earnings Release Conference Call. [Operator Instructions] After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Gerry Gould, Vice President of Investor Relations, you may begin your conference.

Thank you, Tina. Good morning. Thank you for joining Haemonetics' Fiscal '13 Second Quarter Conference Call and Webcast. 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 results -- 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 the Form 8-K we filed this morning, as well as in our 10-K and 10-Qs. On today's call, Brian will review the business and financial highlights of the second quarter. Chris will review our operating performance for the quarter, annual guidance for fiscal '13 and outlook for fiscal '14 in more detail. 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. These include costs associated with the recent Whole Blood business acquisition and conducting significant integration activities. In total, we've excluded $24 million of net cost from our fiscal '13 second quarter adjusted results primarily for the transaction and integration, including $10 million related to the step-up of acquired inventories. Further details, including comparison with fiscal '12 amounts excluded, were 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. We reported a solid second quarter, one that saw continued organic revenue growth across our entire product portfolio, in line with our full year expectations. Our second quarter results also included for the first time the recently acquired Whole Blood business, formerly known as Pall Transfusion Medicine. The acquisition marks our initial entry into the $1.2 billion whole blood collection market. This business also performed well in the quarter, with revenue and earnings in line with expectations. Our first half performance positions us very well to achieve our operating and financial objectives for the full year. Our entry into the whole blood market was made in advance of the planned launch of our automated whole blood product beginning later this fiscal year. The first phase of that launch is on track and we expect to begin a limited market release in our fourth fiscal quarter, which is just a few months away, followed by a full market release shortly thereafter. Given the importance of automating whole blood collection to our future, this marks an important strategic advance for our company. But before we launch our automated whole blood product, we need to first complete some critical steps in integrating the Pall Transfusion Medicine business, and we made tremendous progress in the quarter. At this point in time, I'd characterize the integration as extremely well organized and progressing on schedule and in some cases, ahead of schedule. We formed and empowered 17 cross-functional teams, each responsible for defined integration objectives and another 10 value-creation and capture teams, pursuing benefits that we recognized in evaluating the acquisition. These efforts have exceeded our initial expectations and serve as a validation of the thorough integration planning process we completed in advance of the acquisition. So I'm very pleased with our performance in the first half of the year. Our focus was on integration and serving our customers without interruption from Day 1. This proved successful. But we did not accelerate spending on our growth initiatives as fast as expected. As a result, operating income and earnings per share benefited in the quarter. Therefore it's important to understand that we will spend more aggressively in the back half of the year as we provide greater focus on investing in those areas of the business that represent greater growth potential in the near term. This is consistent with what we told you previously, and this is important to driving incremental growth in fiscal '14 and beyond. In short, with 2 quarters behind us, we feel we're in a great position. Revenue growth is right where we expected it to be, and we're slightly ahead of expectations for both operating income and earnings per share. We feel very confident about the fundamentals of our business and the momentum being built. With a full contribution from the acquired whole blood business in the second half of the year, we expect to accelerate investments in growth initiatives and accordingly, we are reaffirming our original earnings per share guidance of $3.30 to $3.40. Let me provide you with some highlights from the quarter. We continue to see strong revenue growth in emerging markets, up 27% in the quarter to $38 million. This included 21% organic growth in China, where our Hospital business was up 45%, and platelet disposables revenue increased 14%. Blood Management Solutions continue to drive meaningful growth as our Hospital business was up 14% in the second quarter. We also closed 10 new IMPACT accounts. We now have 276 IMPACT customers, driving the broader acceptance of Blood Management Solutions in our marketplace, bringing credibility to the value of the solutions implemented. This increased awareness is contributing to the accelerating growth of our Hospital business around the world, in many cases without the detailed analysis that we have been required to perform in the past. In Europe, year-to-date disposables revenue at IMPACT blood center accounts grew 10%, while non-IMPACT blood center accounts declined 6%. And in our North America blood center business, revenue grew 5% in IMPACT accounts year-to-date, while non-IMPACT accounts had 2% growth. This is driving red cell growth in a flat market. While these examples give us confidence that Blood Management is gaining traction, the real proof is evident in the growth rates of our business. In the quarter, disposables revenue was up 16% in surgical, 5% in OrthoPAT and 23% in diagnostics. The Cell Saver Elite is meeting all our expectations, and TEG is benefiting from new applications in an ever-expanding market. On a year-to-date basis, our Hospital business is up 13%, and we're able to reaffirm our previous guidance of 12% to 15% revenue growth in fiscal '13. And in blood centers, we are confident that the strong and established business base and the whole blood marketplace that the acquisition of the Pall Transfusion Medicine business provides will allow us to leverage our future automation efforts with a greater likelihood of market adoption. These efforts are on track for a fourth quarter launch of our paperless phlebotomy components, bringing the automation of data capture and management to the point of donation for our blood center customers. This is Phase I of our automated whole blood initiative. As we said, we'll take the opportunity to accelerate funding of identified growth initiatives during the remainder of fiscal '13, such as our emerging market presence, TEG clinical trials to support new claims to accelerate market penetration and incremental resources focused on delivering blood management solutions for our customers. This is opportunistic and expected to drive incremental growth in fiscal '14 and importantly to drive revenue back to high-single-digit growth within the next 3 years. Acceleration of this investment spending took a backseat to integration progress in the second quarter, so we will place greater emphasis here for the remainder of fiscal '13. Now let me turn the call over to Chris Lindop, who'll review the financial highlights of the second quarter and the financial aspects of the acquisition in more detail. Chris?

Thank you, Brian. First, I'll review the revenue growth that was realized in the second quarter then highlights of our quarterly financial results, our revenue, earnings and cash flow guidance for fiscal '13 and finally, our preliminary outlook for fiscal '14. I will also discuss financial disclosures we added, highlighting our strong cash earnings. In the second quarter of fiscal '13, total revenue was $219 million, up 22%, and organic revenue growth was 6%. Every product category had organic growth. Plasma revenue grew 7% to $69 million in the quarter, consistent with our expectations of the long-term and market growth rates of the industry. Growth in the U.S. was higher than average, while our European plasma business declined due to a shift in collections to North America. Plasma disposables revenue was up 4% year-to-date, which incorporates a slow start in Japan as a result of Japan Red Cross' Q4 fiscal '12 buy-in, and we are reaffirming our previous guidance of 4% to 6% growth in fiscal '13. We are very well positioned with customer contracts covering over 98% of our plasma business through Q3 of fiscal '15. Blood center revenue grew organically by 2% to $55 million, with platelets and red cells each up 2% in a flat market as we are succeeding in demonstrating value to our customers. We are reaffirming guidance of 0% to 2% organic blood center growth for fiscal '13. Now remember that we will have a tough growth comparable in our platelet business later this year, resulting from the Q4 fiscal '12 buy-in by the Japan Red Cross. The Whole Blood business got off to a solid start, satisfying our primary objective of no customer disruption throughout the transition. Whole Blood revenue was $29 million, right in line with the run rate needed to realize the $135 million to $145 million of fiscal '13 whole blood revenue that we expected, and we are reaffirming this revenue guidance as well. Whole blood revenue included $20 million in North America, $6 million in Europe and European distribution markets and just under $3 million in Asia. In our Hospital business, revenue increased 14% to $33 million in the quarter, an encouraging progression following 11% growth in the first quarter. Surgical disposables revenue was $19 million in the quarter, an increase of $2.6 million or 16%. Our installed base of surgical cell salvage devices increased by nearly 800 in fiscal '12 and by over 800 in the first half of fiscal '13, a leading indicator of future disposables revenue growth. Following the Cell Saver Elite launch, we have had 5 consecutive quarters of growth in our Surgical business. OrthoPAT disposables revenue was $8 million in the quarter, up 5%. We are on track to launch OrthoPAT Advance, our next-generation OrthoPAT device, in early fiscal '14 and expect to have OrthoPAT revenue growth for the remainder of fiscal '13. In diagnostics, TEG disposals revenue was $7 million, growing 23% in the second quarter, with a similar 23% increase in China, where use of the TEG analyzer is growing fast in connection with interventional cardiology. We installed 230 TEG devices in the second half of fiscal '12 and a record 321 in the first half of fiscal '13. We fully expect the strong TEG disposables revenue growth to continue. So we are reaffirming our 12% to 15% fiscal '13 revenue growth guidance for our Hospital business. Software solutions revenue was $18 million, up 5%. Sales of BloodTrack were up 19%, driven by the placement of HaemoSafe products in North America. We are reaffirming our 5% to 7% fiscal '13 revenue growth guidance for the software solutions business. Equipment revenue was $14 million in the quarter, down 3%, reflecting the timing of shipments. Year-to-date equipment revenue was up 7%, and we continue to see strength in our Hospital business, led by TEG analyzers and surgical products in North America and emerging markets. Geographically organic revenue was up 8% in North America, 10% in Asia, 6% in Japan, but down 2% in Europe. With the shift to plasma collections to North America, which I mentioned earlier, we expect European revenue growth to continue to be muted in the second half of fiscal '13 but expect the offsetting benefit will be seen in the North American growth rates. Second quarter fiscal '13 gross profit was $112 million, up $20 million or 22%. Adjusted gross margin was 51%, up 10 basis points from the second quarter in fiscal '12, and organic gross margin also improved by more than 60 basis points year-over-year. Operating efficiencies more than offset the impact of lower margins from the addition of the Whole Blood business. We are making progress towards achieving our objective of long-term gross margin expansion after the drop in margins we experienced in fiscal '12. Operating expenses were $78 million in the quarter, up $12 million or 18%. A partial quarter's Whole Blood expenditures were $8 million of the increase, including deal amortization. Operating expenses also included a full accrual of variable compensation. Now as Brian noted, the planned ramp-up in growth and infrastructure expenditures will accelerate over the remainder of the year. Please see the guidance scenarios in our website for clarity regarding expected expense levels. Operating income was $33.6 million in the quarter, up $8.1 million. And the operating margin was 15.4%, up 120 basis points versus the second quarter of fiscal '12 and reflects both the improved gross margin and well-controlled operating expenses. Interest expense associated with our loans was $1.4 million. Our tax rate was 27.1% in the quarter, compared with 28.1% in the second quarter of fiscal '12. Our second quarter tax rate was favorably impacted by the geographic distribution of income and increased R&D tax credits. Adjusted earnings per share in the quarter were $0.90 versus $0.72 in fiscal '12, up 25%. Now we ended the second quarter of fiscal '13 with $187 million of cash on hand, down $49 million during the quarter, as we utilized $60 million of cash towards the Whole Blood business acquisition in August, $5 million of -- for open market share repurchases and $12 million for integration, deal costs and other transformation activities. We generated $19 million of free cash flow in the quarter after making net investments of $26 million in capital expenditures but before funding the cash integration transformation and deal costs. Additionally, it includes the build-up of working capital not acquired with the Whole Blood business, which approximated $20 million. We continue to expect strong second half cash generation, and we are reaffirming our expectations for approximately $85 million of full year fiscal '13 free cash flow. In late July, our Board of Directors authorized the use of up to $50 million of cash towards the repurchase of shares. We repurchased 74,300 shares in the quarter at an average price of $71.91, returning $5.3 million to our shareholders, and we see continued acquisitions and share repurchase activities along with loan repayments as our priorities for cash going forward. In summary, we delivered continued broad-based revenue growth in Q2 and continued investing in the growth drivers of our business. So we are very well positioned for full year performance. With that, we are reaffirming full year fiscal '13 revenue and EPS guidance. We expect the pace of incremental investments to deliver a gradual, sequential improvement in earnings per share over the remainder of this fiscal year. In other words, in reaffirming our stated annual guidance, we expect adjusted earnings per share will be greater in the third quarter than in the second and greater in the fourth quarter than in the third. I'll provide you with a brief summary of guidance for fiscal '13, unchanged from our previous guidance. As in the past, our website includes revenue and income statement scenarios which are based on the elements of guidance provided in my comments for the full year. We continue to believe fiscal '13 will be a year in which organic revenue growth will be 4% to 6%, in line with our previously indicated mid-single-digit growth expectations. Plasma is still expected to grow 4% to 6%; blood centers, 0% to 2%; hospital products, 12% to 15%; and software solutions, 5% to 7%. Whole blood revenue is expected to approximate between $135 million and $145 million in the 8 months of fiscal '13 following its acquisition, bringing our total revenue into an estimated range of $890 million to $915 million, up between 23% and 26%. Gross profit is expected to approximate $450 million to $465 million. And operating income is expected to grow 19% to 22%. And adjusted earnings per share are expected to grow between 9% and 12%, to a range of $3.30 to $3.40 per share. Last quarter, we provided our initial insight into our outlook for fiscal '14. We are pleased with the progress we are making towards this goal. For fiscal '14, our outlook is 5% to 7% organic revenue growth and a full year's revenue from the acquired business contributing incremental revenue growth of about 8%. Thus total revenue is expected to surpass $1 billion. Our preliminary outlook for fiscal '14 adjusted earnings per share of $3.90 to $4.10, approximately 20% above the fiscal '13 expected earnings per share finish, remain unchanged. As I've said earlier, I'm pleased with the completion of the acquisition and with the flexibility it provides to help us fund the growth priorities which we have identified. Over the past 6 years, we've been a systematic acquirer, having completed 12 deals and assembling our portfolio of blood management products and services. This culminated with the recent Whole Blood acquisition, which at $550 million is our largest ever. As we completed this transaction, a number of you suggested that we exclude deal-related amortization expense from our adjusted net earnings and from adjusted earnings per share to facilitate comparison with other companies. Given the significant impact of deal-related amortization on our EPS, we believe that such calculation has merit. It provides a view into our results that reflect our company's strong cash-generating capability. And accordingly, we have posted a supplemental table to our website showing adjusted rate results on a basis that excludes the tax-affected, deal-related amortization expense for all periods. I'll briefly recap those results. We reported adjusted net income of $23.5 million or $0.90 per share, up 26% in the second quarter of fiscal '13. Had we excluded deal-related amortization in this year's and last year's second quarter, we would have reported adjusted net income of $27.3 million or $1.04 per share, up 33% over last year's second quarter. Similarly, we reported adjusted net income of $37.9 million or $1.45 per share, up 6% in the first half of fiscal '13. Had we excluded deal-related amortization in this year's and last year's first 6-month periods, we would have reported adjusted net income of $43.5 million or $1.67 per share, up 12% over the last year's first half. And lastly, we provided guidance for adjusted net income of $3.30 to $3.40 per share for fiscal '13 and the preliminary outlook for earnings per share in the range of $3.90 to $4.10 in fiscal '14. Included in these guidance ranges are approximately $22 million in fiscal '13 and $29 million in fiscal '14 of deal-related amortization, representing roughly $0.60 per share in fiscal '13 and $0.75 per share in fiscal '14, which we have not excluded. We are providing these supplemental disclosures in order to assist you in analyzing and understanding our company's strong cash-generating capability. We will continue to provide this information going forward. Also I emphasize that we will remain disciplined in our approach to acquisitions and seek transactions that provide meaningful strategic value. These supplemental EPS disclosures are meant for enhanced transparency and not to imply any planned or imminent acquisitions. Acquisitions remain one of our stated priorities for the deployment of our cash. Now before turning the call back over to Brian, I want to provide a brief update on our blood typing initiative. You will recall that we successfully proved the concept we sought to advance, namely the ability to type blood in just over 10 minutes with accuracy consistent with current market standards. To bring that concept to market would require both a partner and considerable expenditure. We continue to believe in the long-term value which will be delivered to blood management by this innovative approach to blood typing. However, we have decided to focus our resources at this time on the growth drivers that will help accelerate our vision of blood management in the near term. We are redirecting our spending away from blood typing to other growth initiatives with shorter and less risky investment cycles and more immediate benefits. We expect to turn our attention back to blood typing at an appropriate point in the future. Now with that, I'll turn the call back over to Brian.

Thanks, Chris. These continue to be exciting times at Haemonetics, and this was certainly an event-filled quarter. The acquisition of the Pall Transfusion Medicine business, which we call our Whole Blood business, was completed with extremely attractive financing on August 1. This strategic acquisition is providing a meaningful presence in the $1.2-billion whole blood market, where our own internal plans to launch new technology and automation beginning later this fiscal year, are right on track. We now have expanded manufacturing capabilities, differentiated products, key customer relationships and control of the production of filters that go into the majority of our disposable products. We will collaborate closely with our customers to introduce products that will enhance the whole blood collection process, bringing process improvements to our customers that lower their whole blood collection cost and improve their donors' experience. Our integration continues to go well, and the value creation and capture teams are well on their way to ensuring that we realize the full potential of the combined business. We are validating that the benefits identified are real, and our teams are executing on or ahead of schedule. And we're finding the acquired business to be more profitable than we originally anticipated. This is a testament to the thoroughness of our integration plans and it enables us to do several important things: First, we can accelerate investments on our growth initiatives in the back half of the year. Second, we can continue to accelerate our value creation and capture initiatives, identifying and pursuing benefits earlier than expected. And third, it bolsters our confidence in our outlook for fiscal '14 and beyond. We will elaborate further on our value creation and capture initiatives at our Investor Day in May. The planned acquisition of Hemerus Medical remains a priority for us. We made the first $1-million payment, and we're awaiting FDA approvals of the SOLX enhanced red cell storage solution. Upon receipt of the required approvals, we will pay the remaining $26 million. In September, we announced that the FDA has requested more information from Hemerus, and we anticipate these approvals to occur early in fiscal '14. We expect to be able to bring exciting new storage and filtration capabilities to our customers, using a new medical advance not currently available today to penetrate this market faster and accelerate market adoption of our new automated whole blood collector. Strong revenue growth and increasing profits are driving solid cash flows, increasing our ability to reinvest in the business. While acquisition and integration activities proceeded as I've described, our employees remain focused on our customers needs and delivered another quarter of solid organic growth. We were especially encouraged with 10% growth in our North America Plasma business and 14% growth in our global Hospital business this quarter. Strength in surgical and diagnostics disposables, strong demand for the Cell Saver Elite and TEG disposables and the return of OrthoPAT to growth all served to demonstrate that hospital customers are embracing the value of our Blood Management Solutions. Our plasma and blood center businesses are contributing growth, and we are generating growth in areas of strategic importance to us such as TEG, emerging markets and IMPACT accounts. I'd like to mention several examples of recent successes in bringing about organic growth. Fu Wai Hospital in downtown Beijing, China, specializes in the treatment, prevention and research of cardiovascular diseases. This hospital was recently established as the National Center of Excellence in applying TEG as the standard of care in platelet mapping for identifying patients with high thrombotic or bleeding risk. Peking Union Medical College Hospital, a renowned general hospital in Beijing, China, recently purchased 15 Cell Saver 5+ devices, doubling the existing cell salvage fleet. Disposable usage is now expected to drive more than $1 million in revenue annually. Our Irish distributor, Accu-Science Ireland Limited, recently entered into an agreement with the Health Service Executive, the organization that oversees all public health services in Ireland, to equip all hospitals with our BloodTrack suite of remote blood inventory and bedside transfusion management software. Beginning late in fiscal '13, BloodTrack will be deployed at 51 sites throughout Ireland to integrate hospitals' blood inventory capabilities. Phases 2 and 3, the use of BloodTrack AutoFate and BloodTrack Tx are planned for subsequent implementation to provide a complete bedside transfusion management solution. On the strength of solid profitable organic growth, we will continue to fund further scaling and internal product development in whole blood collection automation. By doing so, we plan to accelerate our growth at levels consistent with our stated aspirational growth goals. This will allow us to generate incremental cash flow that we will invest to advance automation, develop new products and fund incremental growth during our 5-year strategic planning period. This is a growth cycle that we expect will repeat. Today we announced a 2-for-1 stock split. Our growth profile, long-term shareholder value creation and the recent successful completion of our most significant acquisition continue to give us confidence in the company's strength and ability to generate long-term growth and financial performance. We expect that this split will make our shares more accessible, increase our shareholder base and improve our market liquidity. I want to take this opportunity to take thank all of our employees, including those who recently joined our company with the Whole Blood business, for believing in our blood management vision and for their dedication and focus on our customers. We're all working hard to continue organic and acquisitive growth and to bring real value to customers with products and services that help lower costs and improve clinical care around the world. With that, we're happy to take your questions.

[Operator Instructions] Your first question comes from Larry Solow, CJS Securities.

Let me just -- one more -- a general question just on Pall. It sounds like -- because basically the quarter seems like everything is pretty much in line, if I look across the legacy businesses. Is there seasonality in that Pall business at all on a quarterly basis? Did things jump up and down a little bit? Or is it pretty even flow on a quarterly basis?

There is a shutdown, Larry, in the first 2 weeks of August the way that, that business was set up. And that actually benefited us for a ramp-down, ramp-up. The way that the business was set and its cadence, I think, oriented itself to Pall's year end. And so we tend to see a bit of a buy-in at the end of Pall's year-end and then in advance of the shutdown and then the shut-down.

Got you, okay. So that was sort of -- so the difference in my estimates was from Pall, but I obviously did not build that in for the first couple of weeks. And then second, a more general question, obviously, it has only been a couple of months, 3 months I guess, since you've been -- you've had the company. But now that you're a little bit more under that hood, it sounds like things are definitely -- maybe even a little bit better than expected. But how about one positive surprise thing that -- something that really fueled your energy more about the company and then something that's maybe more of a challenge than you thought originally might be?

Larry, this is Brian. What surprised us is really nothing other than I think we've seen a stronger customer response around the globe than we maybe might have expected. As we said earlier, the business is a little more profitable than we expected it would be. The whole blood employees that have come over with this business are as passionate about this industry as we are. Combined we're a stronger business, focused on our customers, able to provide them with all of their transfusion medicine needs from one supplier now. So across the board, I'd say we're in a very, very solid position. And again, you ask what surprised us on the negative side? Again, it'd be -- I struggle to find that. Maybe that the integration has gone as well as it has gone. I give a lot of credibility to the teams and the planning process. Anybody that's been through one of these before -- and as Chris mentioned this is our 12th. We've had a great deal of experience in this, and we've had surprises. And in this one, there's not been very many surprises at all. Those that we found have been extremely minor and we continue to move forward. So we're excited about where we are. We feel we're in a very good position after about 3 months.

Your next question comes from Larry Keusch, Raymond James.

So I guess, Brian, just following on that, if I could get your thoughts about where you think you can take the whole blood collection business in the context of that $1.2-billion market. What do you think is a share that is reasonable for you guys to get? Let's talk over sort of a 3- to 5-year period? And what -- how do we think about that cadence? Does it begin to accelerate as you get the auto whole blood system out there? So just any thoughts on that would be helpful.

Yes, we've not put any numbers out there. I guess I'd answer the question this way, Larry. Look at what we did with the plasma business. We came into this slowly when we first introduced the automation, the software. We'll do the same here. We're going to be in a limited market release in our fourth quarter -- I'm sorry, an initial release in our fourth quarter followed by a limited market release after that. We'll come into this slowly as we talked about. We want to be able to prove the benefits that we feel pretty certain that this new product will generate for our customers, but we want to be able to prove that out with these customers. And we'll be able to accelerate from that position moving forward. It's not going to be easy changes. You're talking about 150 -- roughly 150 blood centers in North America -- or in the U.S., but each one of those runs 20 to 30 mobile drives a day, and we must convert every single one of those mobile drives individually. So this is an undertaking that will take some time, but we do believe that if we're right about the value it represents, that will accelerate as we move further into the implementation.

Okay. That is helpful. And then just for Chris, the -- I'm wondering if you could just help us understand the inventory levels for the base business and how should we be thinking about the trajectory on the base inventory levels going forward? And then just on the share repurchase, you've historically completed that $50 million early in the fiscal year. You've done [Audio Gap]

Larry? Tina, do we still have you on?

[Operator Instructions]

Okay, let's go ahead and answer Larry's question to the best of our ability based on that. He's here in Boston and I think we all know that, in the northeast, we're faced with Hurricane Sandy's wrath as it emerges. So let's go ahead and answer the inventory question first, and then we'll talk about the share buyback.

Sure. So inventories in the quarter are at $172 million. In terms of contribution from the whole blood inventory, that's about $41 million, overall increase in inventory of about $56 million in the quarter, spread over plasma, hospital products, related to the reintroduction of the HS Core and a rebuild of inventory in Japan since the end of the year. So if you remember, there was an inventory buy-in by the Japan Red Cross right at the end of the year. So a number of factors contributing to the growth, all of which are understood. Our long-term and medium-term objectives are to bring our inventory levels down from where they are today, and we will continue to work diligently on that. With regard to the share repurchase, the short answer is we got after about $5 million of it. The authorization remains out there from the Board and we will continue to execute on it as the market opportunities present.

Your next question comes from Steve Crowley, Craig-Hallum.

In terms of the Whole Blood business, you mentioned it performed consistent with where you needed it to perform for your guidance to still make sense. Can you give us some sense, for that business, either for the stub period or the pro forma quarter, how it performed versus year-prior periods like organic growth for that business?

It's hard to get at those numbers, as you can imagine, Steve, because it represents sort of a part of a quarter of a part of a public company. But generally, it looks to be about in line with the growth rates that we saw in Pall's disclosure of that business in advance of the acquisition. So I think mid-single digits.

Okay. And then as we look forward, I mean, to get to that $135 million, $145 million this year, it's got to pop up to a $50 million-plus run rate here for the next 2 quarters. Is there anything in the seasonality or the maturation curve of that business that we should think about as we model the back half of the year?

Yes. We look at the performance in this quarter, including essentially a buy-in with -- in advance of the transition. It looks like about a week a product. And then we had a week when we were shut down, which we call the ramp-down, ramp-up period, where we were basically not able to service customers. So we think of this as not being a 9-week period as much as a 7-week period, and we look at the run rate as being a little over $4 million per week. And we believe that we can hit the target for the full year with that run rate.

And as we look at the balance of the year, is there anything with seasonality or schedule or just as you get your arms fully around the business that we should think? For example, the March quarter is customarily much bigger than December or like anything like that since we haven't been through it once with you?

Nothing that stands out. I mean, you should expect that as we get beyond this Day 1 integration full and the reorganization activities that go with that, that we'll become even more focused on this business and hopefully drive the performance up from that $4.1 million level. But nothing seasonal, per se.

The way I'd say that, Steve, is that this is -- these are customers that we serve today and we expect that business to trend as our business has trended with those customers in the past. But remember what we said: From an earnings per share standpoint, we expect Q3 to be higher than Q2 and Q4 to be higher than Q3.

Your next question comes from Jim Sidoti, Sidoti & Company.

A quick question. OrthoPAT, I think you said in the quarter, was about $7.6 million, which is up from last year but still not back to where you had been prior to the recall. What's going on there?

I think what you're seeing is a rebound in the market, as we talked about. But I also think you're seeing our customers waiting for the OrthoPAT Advance, the next-generation product, that will have some fairly significant upgrades based on customer feedback that we see throughout the recall. So the good news is it's back to growth as we expected it to be. I think we'll see that growth accelerate past these levels once we launch the OrthoPAT Advance.

All right. And then my follow-up question is related to the comments you said about some of the operating expenses that you would anticipate this year didn't occur in the first half of the year. There was -- and that you expect those to ramp up in the back of the year. Was that by design? Or is that due to the Hemerus delay? Or why did that occur?

That was by design, Jim. And most of it, think about Day 1 integration. Our focus was on ensuring that we integrated this business into our business without any interruption. And I'll tell you, I'm really pleased to say that we had no customer interruptions. We transitioned 1,300 employees to our platforms, and this business is seamlessly performing now within the realm of Haemonetics Corporation. And so we're very, very pleased with that. So that's where our focus was. It wasn't anything more strategic than that, but it was just really the capabilities of our people to do what we needed them to do and prioritizing that way.

Your next question comes from Raymond Myers, Benchmark.

I wanted to see if you could elaborate a little more on the integration activities and the investments that you plan on expanding later this fiscal year. Can you expand on what exactly those activities are and specifically what benefits are expected in the future from them?

Well the integration activities that we focused on over the course of the initial 2 months in the quarter are those which you would expect, which is moving employees to our benefits platform, ensuring that their pay was consistent with what they were being paid previously. It was ensuring that all customer contracts were loaded. Our customers were serviced as you would expect them to be, moving them to our quality platform. Just go across the board. What we did, as I said, we identified 17 teams that focused on critical tasks. Many of these teams are closed out. For instance, payroll and benefits were done pretty quickly. Many of those teams are closed out, and we're moving on with the general business. Others will continue as we move forward in the integration. For instance, information technology. The Pall business was on a SAP platform. We have an independent instance that's been established for us for the integration. But ultimately, we need to move that business over to the Oracle platform, which is our platform. So those are some examples of the integration activities that have either occurred or will continue to occur. But this will all step down throughout the remainder of the fiscal year. In terms of investments that we want to make as we go forward, I mean, these are investments that we've talked about in the past, areas such as the TEG clinicals, to really get into growing areas of TEG applications around the world like interventional cardiology in our emerging markets, particularly China, investments in our sales resources as we continue to focus on blood management, et cetera. So those are some examples of investments we'll continue to make as we go forward.

Okay. And then I wanted to touch upon the SOLX a bit more. In the end of September, you announced that the FDA had asked for further information on SOLX. Has that been produced? And does that appear to satisfy the agency's issues?

Well let me remind you, Ray, that we don't own Hemerus. Hemerus is still independent. We simply bought the rights to acquire them. So they are still an independent company. But to the best of our ability, we're assisting Hemerus in that response, and that continues to progress forward on the schedule that we've laid out.

Your next question comes from Gregory Macosko, Lord, Abbett.

Just with regard to the growth initiatives. Could you sort of give us a feeling for the rate at which it -- they progressed in the first couple of quarters and what you -- you expect it to be accelerating going forward?

Well, when -- I want to make sure I understand your question, Greg. When you're saying what do we focus on or what did we spend?

Well, it sounds like you didn't -- they didn't go quite as quickly as you had expected. Or am I wrong on that?

No. The investment -- the spending was not as rapidly ramped up as maybe we would have liked to have done, and that will continue to ramp throughout the fiscal year. It's not -- the points that we're making there is not to signal any alarm or concern or any pullback on our part on any of those. It's merely the priorities that we had in the business and what we focused on in the quarter. But we feel very good and we have a better feel for the financials of this business today than we did even 2 months ago, 3 months ago. We know what dollars we have available, we know what initiatives we'll spend those on and we have the teams poised to prepare to move that process forward and manage it as we go throughout the fiscal year. So think about integration activities ramping down, think about investments and our growth initiatives ramping up.

But you were speaking primarily of the acquisition as opposed to other growth initiatives within the company?

No. We're speaking about other growth -- we're speaking about both, but when I talk about growth initiatives beyond that, I'm talking about areas that we've identified before: TEG, Blood Management Solutions, investments in the selling organization and the methods by which we approach those customers, the things that we've talked about in the past.

Okay. And then with regard to the blood typing, which you pulled back on, which there seems to make some sense. Was that -- did that -- how did that affect the R&D and the R&D spend, which was up 4.6%?

Yes, within that R&D spend, we're reallocating resources from what was being spent on blood typing to the other initiatives that are priorities for us, some of which we've talked to you about and are public about, some of which we're not so public about.

And to be -- the way I'd answer that, Gregory, to be clear, we're not taking R&D spending down. We're simply redirecting it into those areas of our business that we deem to be more important as we focus on blood management going forward.

And we do have a follow-up question from Steve Crowley, Craig-Hallum.

Just picking up on the blood-typing thing. Did you hit a technical hurdle that was going to require some significant extra investment beyond original plans? And what are you going to do with the operation in downtown Chicago there?

So let me answer the first piece, and I'll have Chris answer the second piece. The answer about the technical hurdle is no. Frankly we achieved the technical benefits that we were seeking to achieve. This is all about, again, you've heard me say it, priorities. As we look at the business and what we need to spend and where we need to spend it, like any business, we got to be prudent about that approach. This is a part of the business that we continue to be excited about, but we want to be able to ensure that we de-risk the focus that we have in our base business and what we're doing to drive that business today and we'll decide how we approach this element of blood management as we go forward.

And then in terms of the software business, how should we think about that long, longer term in terms of the normalized growth rate that you're striving for? It was more growthy. It's kind of ebbed back. How do you reinvigorate that? And is that your plan strategically?

Yes. I mean, software is a very strategic element of our blood management solution and therefore core to it. The growth rates, I think, that we can anticipate there as we think of software as being an enabler as it was in the plasma business, certainly, in the high-single digits is our objective for that business. To some extent, recently, we've been impacted by software spending priorities in hospitals. Just now they're focused on other things and that has slowed that business a little bit.

But I -- I'd come at it just a little more along these lines, Steve, is if you think about that business and the 3 segments we've talked about before, the 2 biggest being the hospital blood center market, the second one being the plasma market and the third, smaller piece being Department of Defense. Remember what we said, you've got the plasma market, where we did penetration before, a number of customers choosing their own solutions. That business is for the most part flat, maybe even a little declining at different times. The DOD business, flat. It's stationary as it goes forward. And the hospital blood center business growing as the hospitals adopt these solutions going forward. But as you know, that can be a bit lumpy in software sales at times. So I'd probably give it a little more of a breakdown that way.

And there are no further questions this time. Are there any closing remarks?

Yes. Tina, thank you. Last quarter, I closed by saying 2 things: one, that we were seeing sales momentum building across the business; and two, following the closing of our largest acquisition in our history, it was now time to execute. Today that's exactly what we're seeing. Revenue growth in the second quarter was broad-based with organic growth across our entire product portfolio. Plasma revenue was up 7%. Blood center revenue was up 2%. Software solutions revenue was up 5%, and hospital revenue was up 14%, marking the second quarter of double-digit revenue growth in this segment of our business, giving confidence to the traction of our Blood Management Solutions. The integration of the Pall Transfusion Medicine business continues to go well, and each of the integration teams is either on schedule or ahead of schedule. And this business also had a good quarter with revenue of $29 million, right where we would expect to be to generate revenue of $135 million to $145 million this fiscal year. Our value creation and capture teams have been able to accelerate their efforts as we strive to realize the full benefit of the combined business. As we said, we'll provide you with more details about these efforts at our May Investor Conference. Halfway through the year we are in very good shape and we have affirmed our guidance across the board. We look forward to sharing our progress in the future quarters. Thank you for your time this morning.

This concludes today's Haemonetics Second Quarter Fiscal Year 2013 Earnings Release Conference Call. You may now disconnect.