Haemonetics Corporation (HAE) Q3 2013 Earnings Report, Transcript and Summary

Good morning. My name is Keena, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter Fiscal Year 2013 Earnings Release Conference Call. [Operator Instructions] Gerry Gould, Vice President of Investor Relations, you may begin.

Thank you, Keena. Good morning. Thank you for joining Haemonetics' Fiscal '13 Third 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 actual results may differ materially from anticipated results. Additional information concerning factors that could cause actual results to differ materially is available in the Form 8-K we filed this morning, as well as in our 10-K and 10-Qs. On today's call, Brian will review the business and financial highlights of the third quarter. Chris will review our operating performance for the quarter, our annual guidance for fiscal '13 and our 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, conducting significant integration activities and an inventory reserve established upon a recent whole blood product quality issue that Chris will discuss. In total, we have excluded $25 million of costs from our fiscal '13 third quarter adjusted results primarily for the transaction and integration, including $5 million related to the step-up of acquired inventories and $6 million for the whole blood inventory reserve. On a year-to-date basis, we have excluded $55 million of costs from adjusted income, including $15 million of inventory step-up and $6 million for the whole blood inventory reserve. 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. On November 30, we completed a 2-for-1 stock split. Accordingly, all per share amounts and share count figures cited today are stated or have been restated on a post-split basis. With that, I'd like to turn the call over to Brian.

Thank you, Gerry, and good morning, everyone. We reported a third quarter that demonstrated strong profitability, successful integration of the recently acquired whole blood business and continued organic revenue growth across most of our product portfolio. Operating discipline yielded a 100 basis point improvement in operating margin to 16.5% even as we ramped up investments in key growth driver initiatives. As a result, adjusted earnings per share reached $0.50 or $1 on a presplit basis for the first time. Total revenue growth was 29% in the third quarter, including a full quarter of our recently acquired whole blood business. That new business, which represents our initial entry into the $1.2 billion whole blood market, performed well, delivering $55 million of revenue approximately $4.3 million per week and in line with our expectations. On an organic basis, we had 1% revenue growth in the quarter with a number of notable items at the business unit level. Let me briefly mention a few of them. Our commercial plasma business had $68 million of revenue, its third highest quarterly performance ever. Compared with the third quarter of fiscal '12, a record quarter in which our revenues grew 15% to $69 million, in the quarter, revenue was down $1 million or 1%. This reflects the normal ebb and flow in the plasma market. We expect high single-digit percentage growth for plasma in the fourth quarter. Blood Management Solutions continues to drive meaningful growth in our hospital business, which was up 6% in the third quarter and 11% year-to-date. We closed 12 new IMPACT accounts in Q3. We now have 288 IMPACT customers, driving the broader acceptance of Blood Management Solutions, bringing credibility to the value of the solutions implemented. This increased awareness is contributing to the strong growth of our hospital business. We continue to see organic revenue growth in emerging markets, up 11% in the quarter. This included 27% organic growth in China, where our hospital business was up 52% and platelet disposables revenue increased 12%. In Europe, year-to-date disposables revenue at IMPACT accounts grew 12% while non-IMPACT accounts declined 3%. In the North America, our key cell salvage and TEG disposables grew 24% in IMPACT account year-to-date while non-IMPACT accounts had 9% growth in cell salvage and TEG disposables. OrthoPAT disposables declined 9% in the quarter and is down 2% year-to-date. Now clearly, we're disappointed by this performance as it's an indication that customer displeasure following the OrthoPAT device recall is having lingering effects. Our new OrthoPAT Advance device, which recently received 510(k) approval is designed to meet known customer needs and is on track for release in the first half of fiscal '14. We'll launch it using the enhanced new product introduction process that was used successfully with the launch of the Cell Saver Elite last year. Together with an investment and some additional sales resources, we expect growth in our OrthoPAT business in fiscal '14. While we're not happy with the delay, the growth prospects are encouraging as this is a market that demands better blood management solutions. Continuing briefly on the new product front, our entry into the whole blood market with our recent acquisition 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 the fourth fiscal quarter, bringing paperless phlebotomy components for the automation of data capture and management to the point of donation at fixed locations. This will be followed by a full market release, and then shortly thereafter by the communications tower that will enable connectivity of the mobile drives with the center itself. Given the importance of automating whole blood collection to our future and that of the blood collection industry, Phase 1 of our automated whole blood initiative marks an important strategic advance for our company. We remain confident that the strong and established business base that the acquisition of the whole blood business provides will allow us to leverage this and future automation efforts with a greater likelihood of market adoption. Integrating the whole blood business is an ongoing priority. And we made tremendous progress again this quarter. The integration is extremely well organized. Of the original 17 cross-functional integration teams formed, 9 have completed their work and the remaining 8 teams are on track or ahead of schedule. Another 10 value creation and capture teams are pursuing benefits we recognized in evaluating the acquisition. These efforts are exceeding our initial expectations and validating our conclusions reached in the integration planning process. We'll provide more visibility to what this means for incremental growth and profitability at our May investor conference. So I'm very pleased with our performance in the first 9 months of this fiscal year. Our focus has been on integration and serving our customers without interrupting -- without interruption. This proved successful while simultaneously driving organic growth in the base business. Now it's important to understand that we'll continue to ramp spending in the final quarter of the year as we focus on investing in those areas that represent greater growth potential, areas such as emerging markets, TEG clinical trials to accelerate market penetration and incremental resources focused on delivering blood management solutions. This is consistent with our plans and this is important to driving incremental growth in fiscal '14 and beyond. Blood management continues to gain traction, and the proof is evident in the growth rates of our hospital business. In the quarter, disposables revenue was up 9% in surgical and 19% in diagnostics. The Cell Saver Elite is meeting all of 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 11%, and we now expect about 11% revenue growth for the full year. With only 1 quarter remaining in fiscal '13, we feel we're in a great position. And with few exceptions, revenue growth is where we expect it to be and we're slightly ahead of expectations for both operating income and earnings per share. The fundamentals of our business are solid and momentum is evident. With a full contribution from the acquired whole blood business and an expectation to accelerate investments in growth initiatives, we are reaffirming our original post-split earnings per share guidance range of $1.65 to $1.70. Now let me turn the call over to Chris Lindop, who will review the financial highlights of the third quarter and our current thoughts on guidance in more detail. Chris?

Thank you, Brian. First, I'll review revenue performance for the third quarter and year-to-date, 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. In the third quarter of fiscal '13, total revenue was $247 million, up 29% and organic revenue was up 1%. Plasma revenue of $68 million in the quarter was down 1% compared with the third quarter of fiscal '12. In that prior year quarter, we had record revenues and a 15% growth. And so against that comparison, a nearly flat quarter is not concerning. Plasma disposables revenue is up 2% year-to-date, which incorporates a slow start in Japan as a result of the Q4 fiscal '12 buy-in by the Japan Red Cross, as well as lower pricing in the first year of the contract extensions that we put in place. We expect to be at the low end of our previous guidance range of 4% to 6% plasma growth in fiscal '13, and longer-term expect our plasma business to grow consistent with the end market growth rates of the industry. We're very well-positioned with customer contracts covering over 98% of our commercial plasma business through Q3 of fiscal '15. Blood center revenue grew organically by 1% to $57 million with platelets up 2% and red cells down 3%. Platelet growth was strong in emerging markets but partially offset by a decline in Japan, where the impact of a competitor's quality issue benefited the prior year quarter. Remember that we'll have a tough growth comparable in our platelet business in the fourth quarter resulting from the Q4 fiscal '12 buy-in by the Japan Red Cross. Red cell disposables revenue was flat year-to-date in a soft market. Previously characterized as a flat market, recent data suggests that the red cell market is declining in North America as a result of better blood management practices in hospitals. All in, we expect our blood center business to be flat organically for the full fiscal year at the low end of our previous guidance range of 0% to 2%. The whole blood business continued its solid start with $55 million of revenue, 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. So we're reaffirming this revenue guidance. Whole blood revenue included $37 million in North America, $13 million in Europe and the European distribution markets, and $5 million in Asia, including Japan. In our hospital business, revenue increased 6% to $33 million in the quarter and has grown 11% on a year-to-date basis. Our IMPACT selling approach is advancing Blood Management Solutions to hospital customers, who are seeing the benefit inherent in blood management. Surgical disposables revenue was $19 million in the quarter, an increase of $1.6 million or 9%. Our installed base of surgical cell salvage devices increased by nearly 800 in fiscal '12 and by over 900 in the first 3 quarters of fiscal '13, a leading indicator of future disposables revenue growth. Following the Cell Saver Elite launch, we have had 6 consecutive quarters of growth in our surgical business. We're very pleased with the performance of this new product, as well as the success of our new product launch process. OrthoPAT disposables revenue was $7 million in the quarter, down 9%. As Brian indicated, we are disappointed by this decline. Looking across our OrthoPAT business, we continue to see modest growth in non-U.S. markets, as well as in large and medium-sized hospitals here in the United States. These are customers that by virtue of their size benefit from greater attention from our sales force. However, we are seeing significant declines in smaller accounts in the U.S., where such attention is not as prevalent and limited hospital staff are less patient with the demands of the current device. Clearly, this is indicative of a market opportunity for our new OrthoPAT Advance device, which recently received its 510(k) approval and is designed to deliver certain ease-of-use enhancements to meet those known customer needs. We're on track for its release in the first half of fiscal '14 using our proven new product introduction process and a revamped go-to-market strategy designed to increase the level of attention that we can focus on the penetration and growth of this high-touch blood management product. Through these efforts, we expect growth in our OrthoPAT business in fiscal '14. In diagnostics, TEG disposables revenue was $7 million, up 19% in the third quarter with a 74% increase in China, where the use of the TEG analyzer is growing fast in connection with interventional cardiology. We installed 300 TEG devices in the first 3 quarters of fiscal '12 and nearly 60% more, a record 477 devices in the first 3 quarters of fiscal '13. We fully expect the strong TEG disposables growth to continue. We now expect about 11% growth in our hospital business in fiscal '13, down slightly from our previous 12% to 15% guidance range in light of the slower OrthoPAT revenue growth. Software solutions revenue was $16 million, up 1%. Increased sales of BloodTrack, driven by the placement of HaemoSafe products in Europe, more than offset lower plasma software sales in North America. We have adjusted our previous 5% to 7% growth range for fiscal '13 software revenue, and we now expect approximately 2% growth in fiscal '13. Equipment revenue was $19 million in the quarter, down 1%, reflecting the timing of orders. Year-to-date, equipment revenue was up 4%, and we continue to see strength in our hospital business, led by TEG analyzers and surgical products in North America and emerging markets. Our overall installed base of equipment, meaning equipment that is both purchased and placed, has increased 5% year-to-date in fiscal '13 and 7% in the trailing 12 months. These are good indicators of future growth and right in line with our stated disposables revenue growth expectations. Geographically, organic revenue was down 1% in North America, down 2% in Japan, up 11% in Asia and up 2% in Europe in the quarter. Third quarter fiscal '13 adjusted gross profit was $125 million, up $29 million or 30%. Adjusted gross margin was 50.4%, up 20 basis points year-over-year. Operating efficiencies more than offset the impact of lower margins from the addition of the whole blood business. We continue to make progress towards achieving our objectives of long-term gross margin expansion after the drop in margins that we've experienced in fiscal '12. Operating expenses were $84 million in the quarter, up $18 million or 26%. Whole blood business expenditures were $14 million of the increase, including deal amortization of $4 million. Most of the remaining increase was planned ramp-up in growth and infrastructure expenditures. Please see the guidance scenarios in our website for clarity regarding expected expense levels. Operating income was $40.8 million in the quarter, up $11.2 million. Operating margin was 16.5%, up 100 basis points over the third quarter of fiscal '12, and reflects both the improved gross margin and operating discipline you've come to expect. Interest expense associated with our loans was $2.2 million. We entered into an interest rate swap arrangement with 2 U.S. banks to mitigate the impact of possible future increases in interest rates. This swap hedges LIBOR rate changes on $250 million of our total indebtedness. And the swap is expected to be effective at mitigating the risk of interest rate fluctuations. Our tax rate was 31% in the quarter compared with 26.2% in the third quarter of fiscal '12, reflecting an unfavorable geographic distribution of worldwide income. And for the full year, we anticipate an effective tax rate of approximately 29%. Adjusted earnings per share in the quarter were $0.50 versus $0.43 in fiscal '12, up 16%. For the year-to-date period, adjusted earnings per share were $1.23 versus $1.12 in fiscal '12, up 11%. We ended the third quarter of fiscal '13 with $193 million of cash on hand, up $6 million during the quarter. We generated $24 million of free cash flow in the quarter after making net investments of $14 million in net capital expenditures and before funding $14 million of cash, integration, transformation and deal costs. Our inventories have grown by $63 million from $117 million to $180 million during the first 3 quarters of fiscal '13. The single largest distributor is whole blood inventory, which includes both $41 million of inventory acquired and $12 million of subsequent increases related to preparation for product registration and license transitions in various markets and a move from a build-to-order to a build-to-stock model for the whole blood business. The remaining $10 million increase in base business inventory primarily reflects replenishment of inventories depleted by the fourth quarter fiscal '12 Japan buy-in and increased inventory to support higher demand for hospital and plasma devices and plasma disposables. Consistent with prior year's experience, we expect strong cash generation in the fourth quarter, resulting in approximately $80 million of adjusted free cash flow for fiscal '13. In late July, our Board of Directors authorized the use of up to $50 million of cash for the repurchase of shares. We repurchased 393,000 shares in the quarter at an average price of $40.24. So far this fiscal year, we have repurchased 542,000 shares at an average price of $39.07, returning $21.2 million to our shareholders. Continued acquisitions, additional share repurchase activity and loan repayments continue to be our priorities for cash deployment going forward. In summary, our organic revenue exceeded third quarter fiscal '12 levels, a quarter in which we grew an impressive 8%. We knew this quarter would represent tough comparisons to the prior year quarter, especially in plasma. For the full year, we expect plasma growth to finish at approximately 4% and blood center to finish flat at the low end of our previous guidance ranges of 4% to 6% for plasma and 0% to 2% for blood center. We now believe that growth in our OrthoPAT and software businesses will be muted in the near term and accordingly have lowered our expectations for the year. We expect hospital products to grow approximately 11% and software solutions to grow approximately 2% in fiscal '13. Strength in our growth drivers has partially offset this weakness, so we now expect organic revenue growth of approximately 4% in fiscal '13, at the low end of our previous guidance range of 4% to 6%. Whole blood revenue is still expected to finish between $135 million and $145 million in the 8 months of fiscal '13 following the acquisition, resulting in total revenue finishing in a range of between $888 million to $898 million, up between 22% and 23% for the year. Gross profit is expected to finish at about $450 million, approximately 50% to 51% of revenue. We demonstrated good operating discipline while continuing to fund investments in the growth drivers of our business. Operating income is expected to grow 19% to 22%, and we are reaffirming our adjusted earnings per share guidance of between $1.65 and $1.70, up between 9% and 12% for fiscal '13. This full year guidance range implies earnings per share of between $0.42 and $0.47 in the fourth quarter. Now we have previously expected that adjusted earnings per share to be greater in the fourth quarter than in the third. However, based on the timing of specific spending initiatives, we now expect the pace of incremental investments to continue to ramp up in the fourth quarter of this fiscal year. 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 previously provided insight into our outlook for fiscal '14. We are pleased with the progress we are making. For fiscal '14, our outlook is for 5% to 7% organic revenue growth plus about 8% growth from a full year's whole blood revenue. Thus, total revenue is expected to surpass $1 billion. Our preliminary outlook for fiscal '14 adjusted earnings per share is between $1.95 and $2.05, approximately 20% above the fiscal '13 expected finish and consistent with our previous expectations. As Brian said earlier, we are pleased with the integration of the acquisition and with the flexibility it provides us in funding the growth drivers, which we have identified. As we did last quarter in order to facilitate comparison with other companies, we have posted a supplemental table to our website showing adjusted results in a basis that excludes the tax-affected, deal-related amortization expense for all periods. Given the significant impact of deal-related amortization on our EPS, we believe that such a calculation is merit. It provides a view of our results that reflects our company's strong cash-generating capability. I'll briefly recap those results. We reported adjusted net income of $26.4 million or $0.50 per share, up 16% in the third quarter of fiscal '13. Had we excluded deal-related amortization, we would have reported adjusted net income of $30.5 million, up -- or $0.58 per share, up 25% over last year's third quarter. Similarly, we reported adjusted net income of $64.3 million or $1.23 per share, up 11% in the first 3 quarters of fiscal '13. Had we excluded deal-related amortization, we would have reported adjusted net income of $74.4 million or $1.42 per share, up 18% over last year's first 9 months. And lastly, we provided guidance for adjusted net income of between $1.65 and $1.70 per share for fiscal '13 and a preliminary outlook of EPS in the range of between $1.95 and $2.05 for fiscal '14. Included in these guidance ranges are approximately $22 million in fiscal '13 and $27 million in fiscal '14 of deal-related amortization representing roughly $0.29 per share in fiscal '13 and $0.35 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'll continue to provide this information going forward. Now before I turn the call back over to Brian, I want to provide a brief update on the Y connector issue we noted in our press release. In December, we issued a field action letter to customers and the U.S. FDA to inform them of the very low potential of finding a leak in the flexible Y connector in certain whole blood collection sets. We determined that the root cause of the potential leak was isolated to 1 mold at a contract manufacturer and that there was minimal health risk and no reported adverse events. We have recorded inventory reserves in our GAAP results of $6.1 million for cost of inventory that may not be used. While we will pursue all available avenues of rework or recovery, the reserves assume no salvage or recovery value. We have excluded the impact of the inventory reserves and will similarly exclude any subsequent recovery benefits from our reported financial results. And this is consistent with our reporting of claims associated with the HS Core plasma quality issue during fiscal '12 and similar large or unusual events in prior years. So with that, I'll turn the call back over to Brian.

Thanks, Chris. These continue to be exciting times here at Haemonetics, and each quarter is event-filled. The acquisition of the whole blood business 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 on track. We had a product quality challenge in that business, one that would have been very difficult for our team to handle several years ago. But the capabilities of our quality organization are far advanced in recent years and the problem was addressed quickly with donor and patient safety, regulatory communications and customer needs rightfully in the forefront of our efforts. The whole blood integration is ahead of schedule and our 10 value creation and capture teams are striving to ensure that we realize the full potential of the combined business in the years ahead. They are validating both identified and new benefits, and we continue to be pleased with the earnings power of the combined business. We're planning our next investor day for Thursday, May 16, here in our Braintree, Massachusetts headquarters, and we plan to elaborate further on our value creation and capture initiatives at that time. The planned acquisition of Hemerus Medical is still pending the receipt of required FDA approvals of the SOLX enhanced red cell storage solution. We previously announced that the FDA had requested more information from Hemerus. We currently anticipate FDA approval to occur early in fiscal '14. We made the first $1 million payment, and upon receipt of acquired FDA approvals, we will pay the remaining $26 million. Our contract with Hemerus expires on April 30 and the FDA approval is expected prior to that date. However, any delays could necessitate a negotiation of an extension. Strong revenue and profits are driving solid cash flows and increasing our ability to invest in growth. While pursuing the acquisition and integration activities, as well as the Y connector resolution described, our employees once again remain focused on customers' needs and delivered another quarter of solid performance. We were especially encouraged with the strength in demand for the Cell Saver Elite and TEG disposables and growth in emerging markets and IMPACT accounts, which are areas of strategic importance for us. The upcoming launches of OrthoPAT Advance and the whole blood paperless phlebotomy offering, using our advanced new product integration introduction process, will bring important advances to these new product lines as well. With solid profitable organic growth, we will continue to fund our internal product development and whole blood automation initiatives. These are enablers to accelerating our growth to levels consistent with our stated aspirational growth goals. They will allow us to generate incremental cash flow for investments, to advance automation, develop new products and fund incremental growth initiatives. This is intended to be a growth cycle we will repeat. We completed a 2-for-1 stock split in the quarter, confirming our confidence in our company's strength and its long-term growth and financial prospects. We also expect this split to make our shares more accessible, increase our shareholder base and improve our market liquidity. Again, I thank our employees for their dedication and focus on our customers during this important time in the history of our company. They are leading the pursuit of organic and acquisitive growth and bringing 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 Steve Crowley, Craig-Hallum.

A couple of questions for you. First of all, on OrthoPAT Advance and your product release schedule. Given the difficulties that you're experiencing in the marketplace, the lag time to the release of the product is -- we're still talking maybe 6 months. Any thoughts to having sped that up, given that you've received FDA approval? What are the impediments to accelerating that maneuver?

Steve, this is Brian. I'll take that question. No impediments. What we're doing is we're moving cautiously and carefully. This is an area of focus for us. This is an area that we have unfortunately, stumbled in the past. And I want to make sure that we do this the right way. We're looking at additional resources on how to focus. We're looking at additional partnerships on how to bring this to market, partnerships different than what we had enjoyed in the past but that bring a greater touch to the customer, especially in smaller accounts. So we want to move cautiously here to make sure we do this right. This is a customer base that has clearly set an expectation for us going forward. So again, we're being a bit cautious. We'll accelerate that once we gain confidence that we're meeting those initial customer needs.

What are those customers who are not using OrthoPAT, have gone away from using the legacy OrthoPAT doing? Have they changed workflow? Have they gone to competitive products?

Well, there is no competitive product to the OrthoPAT. So these are customers that have gone to use an allogeneic blood and things of that nature. But they're smaller accounts, Steve. It's a lot of them. It's your community hospitals. It's hospitals where you have less staff dedicated to the focus on a device that clearly has represented a challenge for them. That's why we delayed bringing OrthoPAT Advance out. If you recall, we had originally planned to bring the Advance out sooner. But through the recall of our existing device, we learned that there was really 10 areas of focus that our customers wanted us to address. And the initial launch of Advance only hit 3 of those. This next one will address at least 7 of those. And so that was important for us to get at that again, so we do this right.

Your next question comes from Larry Keusch, Raymond James. Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division: Just two for you guys, if you could. Brian, I'm wondering if you could review again the timelines for auto whole blood. You kind of started with the initial paperless phlebotomy. But if you could walk us through kind of how you're thinking about the next couple of years. And then on OrthoPAT, I understand obviously the challenges with the older device. But could you also talk a little bit about the changes in protocols that are being made in the market, whether it be more preoperative focus on EPO or iron and changing the thresholds for hemoglobin levels, et cetera? That would be great.

Okay. Let me start with automated whole blood. And again, we'll launch the paperless phlebotomy later this quarter. We're doing it with 1 blood center. We're doing it at the fixed site location to bring this up. And then we'll go to a full market release on that product, followed later in the fiscal year with the wireless tower, which will then allow us to expand in the mobile drives. We'll do that initially at that 1 blood center, which was the pilot. And that will take us in a range of 20 to 30 mobile drives. We'll expand that and really drive the connectivity of the mobile drive back to the base system in the blood center, so really focused on the automation of blood collection. We will, hopefully with the acquisition of Hemerus, go through the process of then qualifying the Pall filters on the SOLX solution. That will take the better part of the year, we expect. And then Hemerus, which isn't necessary in the automated whole blood launch but it is an additive opportunity, this could then allow us to accelerate adoption. But this is year 2 and beyond with Hemerus. And then in the third fiscal year, we'll launch the actual collector device and the disposable that goes with that. So that's no change to what we've told you before, but hopefully it provides that clarification you're looking for. Relative to OrthoPAT, what's changing? There are a number of things changing, not only in orthopedic surgeries, but let's face it, in cardiovascular surgeries as well. Cell salvage is standard of care in the cardiovascular space. It is not yet in the orthopedic space, and that's our focus. As much as there are a number of technologies that affect blood loss, not the least of which is what we're bringing to market, which is a focus on blood management solutions, the opportunity to drive better cost in clinical outcomes in the orthopedic space are still there, still significant. Our IMPACT analysis shows that. We need to bring a device to that market that our customers find easier to use in that space and allows us to grow adoption in that space more rapidly. That's our focus.

Your next question comes from Larry Solow, CJS Securities.

Just two questions. I'll just lay them out and you could respond. Just on the first, obviously, you guys are doing a nice job in controlling costs and not accelerating as much as I think most expected. Is there any way to sort of parse that out where you're seeing most of the benefit? Is it from less-than-expected cost on the whole blood side? Or are you getting more leverage on your legacy business? And then the second question is just response to one of the comments you made about sort of you're seeing some better blood management in hospitals and if you could just explain that dynamic a little more, give us a little more color. Is that, I mean, hopefully due to partially your efforts? But what's going on? Is that something that's accelerating recently that would impact red blood cell demand?

Larry, let me take the cost question. We're seeing -- of course, what we're seeing is obviously costs are increasing. They're not increasing as rapidly as some folks expected. And where we had sort of identified the areas that we would invest, it was really in the legacy business. So we're focused on channeling profitability of the whole blood business into growth drivers in the legacy business. And that has moved a little more slowly than we expected initially at the beginning of the year. And so that's really what's happening. The whole blood business is tending to be a little more profitable than we had expected so that the surprises there are a positive surprises.

And let me talk about the better blood management, Larry. And there's a mixed bag of information that we're getting depending upon who you're talking with. We're still not seeing any significant ramp-up relative to surgeries in that marketplace, especially elective surgeries. But that said, we are getting anecdotal information from our blood center customers who, by the way, are partnering now on bringing blood management solutions to our hospital customers, that they're seeing that impact in overall blood demand. Again, it's not significant, but it is certainly muting the growth in that space. That's a good thing. We expected that. It's just a matter of when that would start to happen. And so it seems to be logical. You're seeing our hospital business up double-digits. You're seeing that impact. And if you relate that growth to better blood management practices in the hospitals, which we do, then you're seeing that corresponding impact in your blood center business. But that's something that the industry can take pride in because that clearly in this day and age of health care reform is going to result in lower cost of blood products and better clinical outcomes in the hospital environment.

Your next question comes from David Lewis, Morgan Stanley.

This is actually James in for David. I just wanted to talk about organic growth trends through to the past couple of years and into '14. I think the message for investors in 2013 was largely that you had put the pieces in place for growth and you'd have a little bit of an acceleration on the top line. Now you're lowering guidance to your 4% organic from 4% to 6%, but you still expect things to get materially better into next year and have about 200 basis point uptick in growth. What can you point to in terms of what gives you the confidence and the visibility in what's driving that growth inflection?

Yes. And I would start out by saying that we're not lowering our guidance, we're narrowing our guidance well within the range of the 4% to 6%. And I think that's an important distinction. As we have 1 quarter left, we can look to a finer point of finish. But your point is still a valid point, which is what's going on with organic growth. I mean, you look at a 1% organic growth this quarter, 6% last quarter, overall 4%, 5% to 7% next year. Give us confidence, fair question. And what you're seeing this quarter and it starts really -- what was a bit of a drag in this quarter? Clearly, plasma, but you've got to tear it apart to understand it. At $68 million in the quarter, our third highest quarter ever in plasma, we're up again $69 million in the quarter of fiscal '12, our best quarter ever. So we're seeing that positive benefit there look at somewhat of a drag in the quarter. The other pieces, and we talked about this last quarter, what's behind some of that is that you've seen a shift from our European market in plasma collection to the U.S. And this is from a higher-cost product in Europe to a lower-cost product in the U.S. So as we talked about the new contracts, we've got this business secured 98% through Q3 of fiscal '15, we're seeing a little bit more cost pressure not just from the contract negotiations but because of that shift. But we feel good that we're still within the range. We feel good that this is an end market that's still growing. We feel good that as we look forward into the future, we're going to grow with where that end market is growing at. The bigger issue in the quarter beyond plasma is just the impact of OrthoPAT. And we called that out. I'm disappointed in this. This is a team that's gotten a lot of attention, a lot of focus from us and really understanding what do we need to do. I'm glad that first question asked such detail because I want to be clear that we're looking at this very carefully, and we're going to move cautiously to ensure we understand what our customers' needs, we meet those expectations. Why? Because this is so critical to blood management, the cost of blood and the clinical outcomes in that space. It's educational. It's a bit challenging. It will move slow. But once we do this right, I do feel confident in our ability to grow that business. And that will contribute to organic growth as we go forward.

Perfect. It's very helpful. And then I did just want to push a little bit on plasma growth. I know that you had a very tough comp. But again, you ended up guiding towards of the lower end of your prior range on guidance. And if you look back at this business historically, it's actually -- it's fairly unusual for plasma to decline from the second quarter to the third quarter. So it does feel like things changed a little bit there. I mean, are you hearing anything different from your customers in terms of what they're expecting than you were before?

Yes. And again, that's the one we talked about earlier. That is that distinct shift you're seeing from our European customers collecting plasma and now buying it from U.S. collectors. And so you're seeing it with a different price point. And so that's that shift that's occurring in that space.

[Operator Instructions] Your next question comes from Jim Sidoti, Sidoti & Company. James Sidoti - Sidoti & Company, LLC: A couple of questions. On the expenses going forward, you indicated that you're going to see those start to pick up again. Can you just give us a little detail? You mentioned infrastructure. Is that people? Is that equipment? Or what's driving that increase in expenses in the fourth quarter?

Jim, most of what's going to -- you'll see in the fourth quarter are R&D projects, episodic R&D projects that we're going to move forward. So you'll see a ramp-up in R&D spending in the fourth quarter.

And you're also seeing, Jim, a continuation of investments we've made, primarily in emerging markets. I think we told you we finished last fiscal year with roughly about 70 employees in China with our focus there. You're seeing some outstanding results coming out of that market. We'll have about 120, maybe 125 employees by the end of this fiscal year in that market alone. James Sidoti - Sidoti & Company, LLC: All right. And then my second question is regarding the whole blood paperless launch. Can you just give us a sense what is a blood center have to do to adopt this technology? Is it rewriting their standard operating procedure? Is there any kind of approvals they need to get? Or how easy is it for them to adopt the whole blood paperless?

Yes. I mean, what you're talking about, the answer to your question is do they have to have new procedures, the answer to that is absolutely yes. They're going to change the way in which they gather that data today versus the way that they will be gathering it tomorrow. Remember, we're talking about a customer in an industry that is highly regulated. And we're talking about a process today that is very manual. This is not something our customers have done wrong at all. This is an example of where industry has not responded as rapidly as we maybe could've and should've. But that's our process. We're focusing on that. We're catching up. So this is a very significant change for our blood center customers and does require them to completely rewrite their procedures and what they do and how they do it. That's why we will have teams of people that not only are in those blood centers in the fixed locations in the weeks during that implementation, but teams that will then ultimately go out on every mobile drive as they convert those mobile drives with the wireless tower when we launch that later in fiscal '14.

And there are no further questions at this time. I'll turn the call back over to Mr. Concannon for closing remarks.

Thank you, Keena. With 1 quarter remaining, we're well-positioned to achieve our objectives for this fiscal year. The investments in our growth drivers are paying off with organic growth in emerging markets up 12%, diagnostics up 19% and our hospital business up 11% year-to-date. The integration of our most recent acquisition is going well with all integration activities either completed or tracking on or ahead of schedule. Our whole blood business is exactly where we expected it to be, and we'll begin the launch of the first phase of our automated whole blood product later this quarter. We've been able to make great progress with our value creation and capture teams, teams that are focused on unleashing the earnings power of the combined business. We believe this focus will allow us to continue making prudent investments driving top line growth, while improving the overall profitability of the business longer term. Our outlook for fiscal '14 with 5% to 7% organic revenue growth and earnings per share growing approximately 20% should give confidence in the potential of this business. We believe our best years are still to come. We'll share more details of the work being done by our value creation and capture teams at our investor conference here in our Braintree headquarters on May 16. We hope you'll make plans to join us. Thank you for your time this morning.

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