Haemonetics Corporation (HAE) Q4 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 Haemonetics Fourth Quarter Fiscal Year 2013 Earnings Release. [Operator Instructions] Gerry Gould, Vice President of Investor Relations, you may begin your conference.

Thank you, Keena. Good morning. Thank you for joining Haemonetics' Fiscal '13 Fourth Quarter Conference Call and Webcast. I'm joined by Brian Concannon, President and CEO; and Chris Lindop, CFO and Executive 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 highlights of the fourth quarter and the full year. Chris will review operating performance for the quarter and full year and annual guidance 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. In total, we excluded $17 million of costs from our fiscal '13 fourth quarter adjusted results, including $9 million of integration costs related to the whole blood acquisition, a $4 million noncash write-off of acquired intangibles related to the Arryx HOT technology, and $1 million for the Y connector inventory reserve we discussed in detail on our third quarter call in January. In the full year fiscal '13, we excluded $72 million of costs from adjusted income, including $34 million of integration costs, $16 million of inventory step up, $7 million for the Y connector inventory reserve, $8 million of restructuring costs within the base business, a $4 million intangible write-off and $3 million of whole blood acquisition transition costs -- transaction costs. Further details, including comparison with fiscal '12 amounts excluded, are provided in our form 8-K and have been posted to our investor relations website. Our press release and website also include a complete P&L and balance sheet, as well as reconciliation of our GAAP and adjusted results. In November 2012, we completed a 2-for-1 stock split. Accordingly, all price share amounts and share count figures cited today are stated or have been restated on a post-split basis. With that, I will turn the call over to Brian.

Thank you, Gerry, and good morning, everyone. We're pleased to report a fiscal '13 fourth quarter with continued revenue growth across most of our product portfolio. We just completed a fiscal year in which we had organic revenue growth of 4% and 23% revenue growth when you include the whole blood acquisition. We completed the $50 million share repurchase program authorized for fiscal '13. And yesterday, we acquired the assets of Hemerus Medical, including its SOLX solution for red blood cell storage. All in, it was a productive end to a very good year. In the fourth quarter, total revenue growth was 34%, including a full quarter of our recently acquired whole blood business. Acquired business, which represents our initial entry into the $1.2 billion whole blood market, performed well, delivering $55 million of revenue, in line with our original expectations. On an organic basis, we had 4% revenue growth in the quarter, with a number of notable items that I will review briefly. Our commercial plasma business had $68 million of revenue, its third highest quarterly performance ever. Compared with the fourth quarter of fiscal '12, a strong quarter in which revenue grew 13%, revenue in this year's fourth quarter was up $6 million or 10%. Blood Management Solutions continues to drive meaningful growth in our hospital business. We closed 13 new IMPACT accounts in Q4 and now have 301 IMPACT customers driving the broader acceptance of blood management solutions. Growth in IMPACT accounts continue to outpace non-IMPACT accounts. We continue to see strong organic revenue growth in emerging markets, up 29% in the quarter. This included 36% organic growth in China, where our hospital disposables business was up 61% and platelet disposables revenue increased 15%. Our TEG business had 17% growth in the fourth quarter and 18% for the year. Sales of TEG equipment have been consistently strong, especially in emergency markets, and that bodes well for near-term revenue growth. Our TEG business has grown 15% to 20% each year since we acquired it, and we look forward to more of the same in fiscal '14. Of particular note in the quarter is that our organic growth in constant currency was 6% versus 4% reported due to currency headwinds, primarily the recent yen weakness. We expect this phenomenon to continue into fiscal '14, and Chris will provide more details. The acquisition of the Pall Transfusion Medicine business was made in advance of the launch of our automated whole blood product. The first phase of that launch is on track. In March, we placed the paperless phlebotomy offering, our software in the accompanying handheld devices, with a Midwest blood center customer, collected data at the affixed collection site and submitted these data to the FDA. Just yesterday, we received 510(k) approval for this system, clearing the way for us to begin a limited market release with additional identified blood center customers, bringing paperless phlebotomy solutions for the automation of data capture and management to the point of donation at fixed sites. This will be followed by the communications tower that will enable paperless collections on mobile drives. Given the importance of automating home 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 a whole blood business provides will allow us to leverage this in future automation efforts with a greater likelihood of market adoption. As we indicated in our press releases today, we completed the acquisition of Hemerus Medical yesterday. The FDA has approved Hemerus' SOLX solution for 8-hour storage of whole blood. And as we previously indicated, the SOLX solution has received CE marking for use in storage of red blood cells for up to 56 days, the only solution in the marketplace approved for storing red blood cells longer than 42 days. Our plans entering fiscal '14 include continued pursuit of FDA approval of the SOLX storage solution for 24-hour storage of whole blood prior to processing, an FDA qualification of the SOLX solution for use with the filtered technology acquired in last year's whole blood acquisition. While we pursue these approvals, we will finalize commercialization plans to complete the paperless phlebotomy offering with communications tower, and then follow this with the introduction of a complete disposable wet set, qualification of Pall filters with SOLX solution and, finally, our automated whole blood collector. This is a whole blood product offering that will bring new technology and real value to our customers. Integrating the whole blood business has been a key priority in fiscal '13, and we see its completion clearly in sight as we enter fiscal '14. The project was well organized, with 17 cross-functional teams formed to drive an effective integration and a governance structure that provide a close corporate and operational oversight. Just this week, we achieved another important milestone, going live with our conversion of the whole blood business from SAP to our Oracle ERP system. We also identified opportunities to position our post acquisition company for optimal growth and competitiveness. We organized 10 Value Creation and Capture or VCC teams that will pursue identified opportunities -- they will pursue identified opportunities to extend product lines, introduce next generation products, launch new growth platforms and enhance our commercial capabilities by implementing new go-to-market strategies. These strategies include a sales agency model for OrthoPAT in the U.S., increasing our direct presence in Australia and New Zealand to support a high growth plasma business, and a reorientation of the European sales force to focus more clearly on complete customer solutions. These go-to-market strategies are aimed at solidifying sustainable organic growth. In addition, we've identified duplication and inefficiencies in our manufacturing network and supply chain that, on a post-acquisition basis, have us less than optimally suited to deliver our product and services efficiently and profitably. We've commissioned a multi-disciplinary VCC team to lead the transformation of our manufacturing network, exploiting the best capabilities across our supply chain. In fiscal '14, this team will focus on our plan to transition our Braintree operations to a strategic contract manufacturer for equipment and to transfer manufacturing of disposable products from Braintree to expanded operations at our Tijuana, Mexico plant. Additionally, the team will pursue the development of a new manufacturing site close to growing markets in Asia. These activities will be important to sustaining our quality, service and cost commitments for years to come. During this transition, our corporate headquarters will expand to include a state-of-the-art technology center of excellence for product development, bringing together the scientists and engineers who will develop our next generation of products. In addition to providing increased capacity, the Mexican facility expansion and the new Asian facility will provide a competitive cost structure that represent foundational elements of our long-term regional manufacturing strategy. In fiscal '14, we anticipate investing approximately $36 million in additional CapEx expenditures and $52 million in other expenditures for the execution of the manufacturing network transformation, commercial excellence and other VCC endeavors. There is no net impact expected in fiscal '14, as current period advances will principally be capital investments in technology transfers associated with the transformation. However, once complete, we are targeting annual cost savings beginning in fiscal '15 that will ramp up to a full level of approximately $35 million to $40 million per year by fiscal '18. Now, I'll turn the call over to Christ Lindop, who'll review the financial highlights of the fourth quarter and our current thoughts on guidance in more detail. Chris?

Thank you, Brian. First, I'll review revenue performance for the fourth quarter and full year; then highlights of our quarterly financial results; our revenue, earnings and cash flow guidance for fiscal '14; and finally, the financial implications of our VCC initiatives. In the fourth quarter of fiscal '13, total revenue was $250 million, up 34%, and organic revenue grew 4% as reported and 6% on a constant currency basis. The recent weakness of the yen versus the U.S. dollar resulted in 170 basis points of headwind to our revenue growth rate in the quarter. As we've explained in the past, our hedges are designed to protect our operating income over a rolling 12-month period, leaving a portion of our revenue unhedged and, therefore, susceptible to changes in foreign currency rates. This is expected to continue to impact revenue growth rates in fiscal '14. Plasma disposables revenue increased 10% in the fourth quarter. Order timing can impact revenue from quarter-to-quarter. In the current year, both the third and fourth quarter plasma revenue amounts were approximately $68 million. In the third quarter, this resulted in a decrease of 1%, and in the fourth quarter, an increase of 10% compared with the prior year. The net impact was 4% increase year-over-year in the second half of fiscal '13. Plasma disposables revenue was also up 4% in the full year, including a slow start 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 late in fiscal '12. Our guidance range for plasma growth in fiscal '14 is 4% to 6%, consistent with the end market growth rates of the industry. We are well positioned with customer contracts covering over 98% of our commercial plasma business in Q3 of fiscal '15. In the quarter, blood center revenue grew organically by 3% to $58 million, with platelets flat and red cells up 13%. Red cell disposables revenue growth was driven primarily by the timing of orders around the end of the quarter in North America. Platelet growth was strong in emerging markets, but recall that we had a tough growth comparable in our platelet business in the fourth quarter, resulting from the Q4 of fiscal '12 buy-in by the Japan Red Cross. For the full year, platelet revenue was up 1%. All in, we expect our blood center business to be flat organically in fiscal '14. The whole blood business continued its reliable performance with $55 million of revenue in the quarter. We had $138 million of whole blood revenue in 8 months in fiscal '13, right in line with our expectations. Whole blood revenue in the quarter included $37 million in North America, $13 million in Europe and European distribution markets and $5 million in Asia, including Japan. We expect approximately $210 million of whole blood revenue in fiscal '14, our first full year of including the whole blood business. This revenue expectation reflects a combination of factors, both negative and positive. During the fourth quarter, we learned that we had lost certain very low-margin, whole blood business with a European collector, totaling more than $12 million annually. The pricing that would've secured this business would not have been within or even close to the range of profitability we consider reasonable. Offsetting this loss, the planned organic growth elsewhere in our whole blood business is around $12 million or about 6%, resulting primarily from planned share gains. In our hospital business, revenue increased 3% to $33 million in the quarter and grew 8% in the full fiscal year. Our IMPACT selling approaches advancing Blood Management Solutions to hospital customers who are seeing the benefits inherent in blood management. Surgical disposables revenue was $18 million in the quarter, an increase of 1%. And while this quarter's growth is not in line with the rest of the year, we know that currency cost us nearly 200 basis points of growth in the quarter. Our installed base of surgical cell salvage devices increased by nearly 800 in fiscal '12 and by nearly 1,200 in fiscal '13. And this is a leading indicator of the future disposables revenue growth. Following the Cell Saver Elite launch, we have had 7 consecutive quarters of growth in our surgical business. We are very pleased with the performance of this new product, as well as the success of our new product launch process, and we expect surgical disposables to contribute meaningfully to our hospital growth in fiscal '14. OrthoPAT disposables revenue was $8 million in the quarter, down 5%. Our new OrthoPAT Advance device, which has received 510(k) approval, is on track for its release later in the first half of fiscal '14. Using our proven new product introduction process and a revamped go-to-market strategy, we expect to increase the level of attention that we can focus on the penetration and growth of this blood management product. Through these efforts, we expect growth to return to our OrthoPAT business in fiscal '14. In Diagnostics, TEG disposables revenue was $7 million, up 17% in the fourth quarter, with 142% increase in China, where the use of the TEG analyzer is growing fast in connection with interventional cardiology. For the full year, TEG disposables growth was 18% overall and 66% in China. We installed 425 TEG devices in fiscal '12 and nearly 60% more, a record 675 devices in fiscal '13. We fully expect the strong TEG disposables growth to continue. We expect 6% to 9% growth in our hospital disposables business in fiscal '14, with strength in surgical and TEG and a return to growth in OrthoPAT. In the fourth quarter, software solutions revenue was $19 million, down 4% due primarily to weaker plasma software revenues in North America. This weakness was somewhat offset by increased sales of BloodTrack, resulting in a revenue decline of 1% in fiscal '13. We expect the software business to grow approximately 5% to 7% in fiscal '14. Hospital customers are increasingly seeing software play an important role in identifying and implementing blood management solutions. We expect accelerating growth in blood bank -- in BloodTrack, excuse me, and other hospital software solutions, bolstered by the implementation of SafeTrace Tx at numerous locations by a major U.S. hospital system. This is a big win, and Brian will provide more details in his closing comments in a few minutes. Equipment revenue was $18 million in the quarter, up 2%, reflecting the timing of orders, tenders and capital budgets. Full year equipment revenue was up 3%, and we continue to see strength in our hospital business, led by TEG analyzers and surgical products in North America and in emerging markets. Our overall installed base of equipment, meaning equipment that is -- was repurchased and placed, increased 7% in fiscal '13. And these are good indicators of future growth and right in line with our stated disposables revenue growth expectations. Geographically, fourth quarter organic revenue was up 9% in North America, down 13% in Japan, up 28% in Asia and up 1% in Europe. And of the 13 points of decline in Japan, 5 points were the result of the recent weakness in the yen versus the U.S. dollar, with the balance attributable to last year's buy-in. Fourth quarter fiscal '13 adjusted gross profit was $124 million, up $29 million or 31%. Adjusted gross margin was 49.7%, down 110 basis points year-over-year. Operating efficiencies partially offset the impact of lower margins from the addition of the whole blood business and inventory reserves related to the lost whole blood business that I mentioned a moment ago. Operating expenses were $89 million in the quarter, up $22 million or 32%. Whole blood business expenditures were $13 million of the increase, including deal amortization of $3 million. Most of the remaining increase was planned ramp up in growth and infrastructure investments. Operating income was $35 million in the quarter, up $7.9 million or 29%. Continued operating discipline enabled us to ramp up investments in key growth driver initiatives that will be meaningful to our future growth profile. Interest expense associated with our loans was $2.9 million in the quarter and $6.5 million in fiscal '13. Our tax rate was favorable at 21.6% in the quarter, or 320 basis points below last year's fourth quarter, as we had favorable mix of earnings towards foreign jurisdictions where we enjoy lower tax rates. As a result, adjusted earnings per share reached $0.48 and the full year ended with $1.71 per share, above the upper end of our guidance range of $1.65 to $1.70 per share. Adjusted earnings per share increased 19% in the quarter and 13% in the full fiscal year. 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 on a basis that excludes the tax-affected, deal-related amortization expense from all periods. Given the significant impact of deal-related amortization on our earnings per share, we will report our adjusted results exclusive of deal amortization beginning in fiscal '14, as it provides a view into our results that reflect our company's strong cash-generating capability. I'll briefly recap those results. In the fourth quarter, we reported adjusted earnings per share of $0.48, up 19%. Had we excluded deal-related amortization, we would have reported adjusted earnings per share of $0.56, up 30% over last year's fourth quarter. Similarly, for the full year, we reported adjusted earnings per share of $1.71, up 13%. Had we excluded deal-related amortization, we would have reported adjusted earnings per share of $1.99, up 21% over last year. Our Board of Directors authorized the use of up to $50 million of cash for the repurchase of shares in fiscal '13. We repurchased roughly 695,000 shares in the quarter at an average price of $41.52. And in the full fiscal year, we repurchased just over 1.2 million shares at an average price of $40.44. We ended fiscal '13 with $179 million of cash, down $14 million in the quarter after utilizing $32 million to repurchase shares in the open market. We generated $24 million of free cash flow in the quarter after making net investments of $13 million in net capital expenditures and before funding $8 million of cash integration, transformation and deal costs. Now turning to fiscal '14 guidance. I'd like to provide 2 important elements for clarity, and then I will summarize revenue and adjusted earnings guidance. First, the weakness in the yen versus the U.S. dollar, which cost us 2 percentage points of revenue growth on a reported basis in the fourth quarter, is expected to be a similar headwind in fiscal '14. And second, in fiscal '14, we will be reporting earnings before deal amortization and, accordingly, are providing guidance for adjusted earnings that reflect this change. We have posted a table to our website providing quarterly and full year historical deal amortization for fiscal '12 and fiscal '13 for comparative purposes. In fiscal '14, we expect plasma disposables to grow approximately 4% to 6%; blood center disposables to be flat on an organic basis; hospital disposables to grow 6% to 9%, with strength in surgical and TEG supplemented by a return to growth of our OrthoPAT product; and the software business to grow 5% to 7%. Overall, we expect organic revenue growth of 5% to 7% in constant currency and 3% to 5% on a reported basis, which includes the impact of recent yen weakness upon expected Japanese revenue. Adding expected whole blood revenue of approximately $210 million, we expect our range of total revenue growth to approximate 9% to 12% or approximately $1 billion at the upper end of that range. On an adjusted basis, gross margins is expected to approximate 51% to 52%, up between 50 and 100 basis points over fiscal '13. And operating margin is expected to be 15% to 16%, up approximately 100 basis points over fiscal '13. And excluding deal amortization, operating margin is expected to be approximately 18%, also up 100 basis points over fiscal '13. We expect our fiscal '14 tax rate to approximate the same rate we had in fiscal '13, and we are anticipating an adjusted EPS range of between $2.30 and $2.40, excluding $0.35 of deal amortization. And this range is consistent with the preliminary indication we provided earlier last year. Although we provide annual guidance and not quarterly, I want to provide a few comments intended to help you directionally with the first 2 quarters of fiscal '14. First, the timing of certain orders that favorably affected the fourth quarter of fiscal '13 will negatively affect the first quarter of fiscal '14. And this is especially relevant in our plasma and red cell businesses. Second, the weak yen to dollar exchange, currently roughly 100, down from 81 in the first quarter of fiscal '13, is expected to continue through fiscal '14. Third, a planned strategy to go direct, taking over the business of our distributor in Australia and New Zealand, will result in a revenue shortfall in these markets in Q1 as we work through the inventory already in the channel. And finally, the loss of the low-margin, whole blood business in Europe, which I mentioned earlier, will adversely affect the expected revenue run rate. So our revenue performance will be down sequentially, reflecting both the normal seasonality of our core business inherent in the current consensus, expectations and the impact of the factors that I've just mentioned. These factors, plus the seasonality we normally see in the second quarter, lead us to expect about 48% of our total fiscal '14 revenue in the first 6 months of the year. And product mix and ramping gross margins during fiscal '14 will result in an earnings distribution between the first 6 months and the last 6 months, which will align with the patterns we saw in fiscal '13. 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. In fiscal '14, our expected free cash flow generation, before funding, restructuring and capital investments related to our transformation activities, is planned at $125 million or $2.37 per share. And with our adjusted earnings guidance range of $2.30 to $2.40 per share, we expect a conversion rate of adjusted earnings to free cash flow of approximately 1x. And as Brian discussed, we currently plan to utilize $88 million of such free cash flow to fund $36 million of additional capital expenditures and $52 million of transformation activities associated with our manufacturing optimization and other VCC initiatives in fiscal '14. Additionally, we have utilized $23 million for the Hemerus acquisition, with $3 million to follow, and we anticipate that $27 million will be directed to the scheduled repayment of our outstanding debt. At this point, we have not assumed any share repurchase activities in establishing our fiscal '14 adjusted earnings guidance. Finally, we have included no net benefit in our fiscal '14 guidance from the VCC teams and the manufacturing network transformation. As Brian noted, current period advances will principally be capital investments and technology transfers associated with the transformation. Benefits should begin to be realized in fiscal '15 and will ramp up by fiscal '18 to a targeted level of $35 million to $40 million in annual savings. With that, I'll turn the call back over to Brian.

Thanks, Chris. I'm very pleased with our fiscal '13 performance. Our focus was on integration and serving our customers without interruption. This proved successful while simultaneously driving organic growth in the base business and investing for future growth acceleration. For the full year, our plasma business grew 4%; blood center business grew 2%, not including the acquisition; and our hospital business grew 8%. Overall revenue grew 4% organically and 23% when including the acquisition of the Pall Transfusion Medicine business. We had a solid fiscal '13, and we feel we're in a great position to embark upon our VCC initiatives in fiscal '14. With few exceptions, we're enjoying solid revenue growth, and we're confident with our expectations for both the operating income and earnings per share. In the category of business highlights, I'd like to mention just a few. The completion of the Hemerus Medical acquisition is an encouraging step as it helps us bring real value to our whole blood customers. We look forward to bringing this differentiating new science for red blood cell storage to market to help them lower the costs of collecting blood and blood components. Chris mentioned confidence in our software growth for fiscal '14. We recently entered into a contract with Nashville-based Hospital Corporation of America, whereby HCA intends to implement our SafeTrace Tx transfusion management software system at over 100 of their largest hospitals and surgery centers. Additionally, HCA has selected BloodTrack as its preferred remote inventory and point-of-care transfusion management solution and will encourage its facility network to consider adoption as a part of their blood management programs. HCA also utilizes our cell salvage and TEG products in many of its facilities, and the SafeTrace Tx, BloodTrack additions will complement existing blood management initiatives. The fundamentals of our business remain strong. With a full contribution from the acquired whole blood business and benefiting from investments in growth initiatives, we're establishing an adjusted earnings guidance range of $2.30 to $2.40 per share, excluding $0.35 of deal amortization expense. In fiscal '13, we set out to complete an important integration without interruption to customers. Our employees at all levels remained focused and accomplished that objective while delivering mid single-digit revenue growth. In fiscal '14, we'll be similarly focused on realizing the benefits of our VCC initiatives, including transforming our manufacturing network. Now this is a big undertaking, but it is necessary and I'm confident in our plans to execute. I'm proud to reflect on the results achieved over the last 10 years by your company and this management team. We've grown revenue at a CAGR of 10% and adjusted earnings per share at a CAGR of 15% through the disciplined execution of a strategy focused on delivering the value of Blood Management Solutions to our customers. This performance grows stock price appreciation at a CAGR of 18% over that same period. We firmly believe that the VCC initiatives which we've outlined today will solidify the foundation of our business and position us for continued growth. This is why I say with confidence that as pleased as I am with our performance over the last 10 years, I believe our best years still are ahead of us. We're planning our Investor Day for Thursday, May 16, in Boston; and we plan to elaborate further on our future plans at that time. I want to close by once again thanking our employees for their dedication and focus on our customers. With their help, we're achieving organic and acquisitive growth and bringing real value to our customers and their efforts to 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 Keusch, Raymond James. Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division: A couple of questions for you guys. I guess the first one is, how do investors get comfortable, with your move to cash EPS, that you won't pursue deals that are considered to be expensive since you essentially have a free pass on amortization now? And can you remind us about management compensation metrics and whether it's aligned with a return on invested capital?

Sure, Larry. Let me take the first question. I think we've got a good track record of having bought smart over the years, and we will continue to do that, focusing on objective measures of economic return without regard to the earnings, necessarily, or the -- with or without amortization, if you understand what I mean. In terms of our management compensation, it's aligned with base compensation plus incentives, which are aligned with sales growth and operating income growth, which are very traditional measures. And then, ultimately, long-term incentive compensation aligned with shareholder value creation, which is our ultimate objective.

And Larry, this is Brian. And I would just jump in here to say we also enjoy the benefits of what I call an outstanding Board of Directors, who, on an annual basis, continues to evaluate each of the acquisitions we've made. The Hemerus acquisition is our 13th acquisition in the last 6 years, and we continue to look at every single one of those acquisitions against the metrics by which we originally acquired them. I'm pleased to say that in most cases, we have achieved or exceeded the metrics we set. Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division: Okay, great. That's helpful. And then just 2 others that are related. I guess, when I look at your 2014 guidance, I look at the cash flow, and when I include your transformation and restructuring costs, that's been significantly lower than net -- or is projected to be lower than net income. And it has actually been that way, I think, at least over the last 3 years. It looks like cash flow generation is sort of $37 million when I consider those transformation costs. So I guess the real question here is when do we start to see these expenses go away and better reflect your net income? And as part of that question, how do we think about the ramp on your expected savings on the value creation and capture activities, kind of from '15 towards 2018?

Yes, Larry. Let me take that and then I'll ask Chris to add any additional comments. I think it's very fair to say that we're spending a fair amount of money to transform our company. Let's remind ourselves that this is a company that over the last decade has gone from a $300 million medical device manufacturer to the leading blood management company in the world. And if we hit the upper end of our range next year, it'll be $1 billion. In that sense, I had mentioned earlier, we've acquired, now with the Hemerus acquisition, 13 companies. So we've assembled a lot of pieces. Many of these, as you know, we slapped on the side of the business. It's now time to take what we've assembled and really focus it in a meaningful way, not only putting ourselves in a cost position to compete, but putting ourselves in a position to drive go-to-market strategies that will accelerate our growth as we go forward. These are not just any new products that we're bringing to market. I'm very pleased with the OrthoPAT Advance and what's happening with that relative to the limited market release. I'm very pleased with where we stand right now on the launch of the first phase of our automated whole blood product and what that looks like. I'm pleased that we received 510(k) approval, as we just recently did. So this puts us in a position to continue to move this into the market. In all of this, we have to establish a manufacturing structure that allows us to compete internationally. And that's what this focus is. This is not unlike what many large companies go forward with. I would say we're being bold. But when you look at, directionally, where we're going, I would say that it's going to drive some very significant savings that will improve the profitability of this company over the longer term. And just in terms of timing, you'll start to see that come in fiscal '15, and that will begin to ramp pretty rapidly up to that $35 million to $40 million of savings that we identified by fiscal '18. We'll give more visibility to that as we move into that transformation throughout this fiscal year, get to the end of the year as we look to fiscal '15.

Your next question comes from David Lewis.

Chris, I wonder if you could talk a little about growth visibility. You did a very nice job of getting us through the fourth quarter and into the first quarter. If I think about your segment guidance in the '14, it looks like the segments themselves add more up to the low end of that 5% to 7% versus sort of the midpoint. I'm wondering if there's anything in equipment that could be making up that difference. But specifically, you lose the blood contract you specified, and Brian, obviously, talked about HCA contract. I'm wondering if those 2 businesses sort of cancel each other out because with the low blood banking number in fiscal '14, you do need a fair amount of acceleration in the other business segments to get to your guidance. And I'm just wondering if you can give us some more visibility on that, and then I had a follow-up.

Well, we continue to feel good about the opportunity in the hospital business. We're bringing OrthoPAT Advance out. We now have a completely refreshed hospital product set under the umbrella of IMPACT, and we saw good growth there this year. We continue to feel ambitious about that segment. We feel good about acceleration in our software business based on the contracts that we have visibility to and the momentum that we see there. And plasma, it has got a really strong momentum trend based on end market demand for the drugs. We're focusing on market share gains in the blood center business, which is challenged by underlying slow demand for red cells, and we believe we're well positioned to do that, both with the product suite that we have today and more so with the advances that we're bringing to market. One of the drivers that's going to help move that blood center business forward in North America is the Acrodose product set, which is an opportunity to really change or influence how blood centers collect platelets as a recovered product out of a whole blood collection. And Acrodose is a differentiated product offering that helps them to do that, so we're delivering significant value to our customers as we accelerate that. And that gets counted as whole blood revenue market share gains because every time you sell an Acrodose kit, you sell 6 whole blood kits.

And David, this is Brian. I'd add just a couple of points of clarification. Our guidance for sales is 3% to 5%. And so I don't know that our growth guidance in our product categories, Plasma, 4% to 6%; blood center, flat; hospital, 6% to 9%; software, 5% to 7%, would put us at the low end of that range. I think it puts us right dead in that range. And in terms of offsetting that, the loss of the whole blood business, I'd tell you that the share gains that we're going to gain elsewhere within whole bloods will really offset that, bringing us to the -- where we guide to, about $210 million for our whole blood business next year.

Okay, very helpful. And then Brian, maybe just 2 quick ones here. First, on Hemerus. You said in the past, you want to transition to the Pall filter to maximize the commercialization plan. Is that still sort of the expectation, we should assume that, even post approval, you'll work to get integration with the Pall filter, maybe in '15 and beyond? And then Brian, just the EPS spread from first half to second half, still more second half weighted, as was last year. Is that tied to some of the upfront investment spending, which begins to sort of anniversary into the back half of the year?

Okay. David, I'll take the first question and I'll let Chris answer the second one. But the answer to your first question is, yes, absolutely. We talked about that in the script. So we will immediately begin to work to qualify the Pall filter technology with the SOLX solution and bring that to market with that filter.

With regard to the front half, back half, it's -- I think if I were to single out one factor, it's gross margin improvement as we move through the year. And a part of that is mix and part of that is to do with cost savings initiatives unrelated to our VCCs that are ramping through the year.

Your next question comes from Jim Sidoti from Sidoti & Company. James Sidoti - Sidoti & Company, LLC: With regards to the integration of the whole blood business, you said it's ahead of schedule. When did you originally expect that to be complete?

So we looked at that as being a sort of 18- to 24-month activity. At the, I would say, the end of it, that was our, I'd say, our conservative estimate to deal with all eventualities. We hit a big milestone and we had moved that business onto an instance of SAP that was sort of the exact same system it had been running on in a way to make the initial transition smoother. And the sort of final step in the IT integration was moving that SAP instance to Oracle, so that we're dealing with one manufacturing system end-to-end. And that just happened yesterday. Not coordinated for this conference call but, nonetheless, a happy event. So what's left is really around labeling. When you take a business like this and pull it out of another business, you end up licensing the use of labels, and the whole manufacturing plan has to be very finely tuned as you move forward because it's really driven by different countries giving different approvals at difference times for the transition of labels. And we're working through that. But we have an excellent plan, and we anticipate that we'll be substantially weaned off those labels and through all of our transitions by the end of this calendar year.

So, and Jim, I'd add, it's gone very well in all of these that I've done. I'm very pleased with the performance of the team. And not to be lost, this has positioned us to move more rapidly with the rest of these VCC initiatives. We've been introducing that concept to you, but I'm pleased to say that we're able to move a little faster than we had originally expected when we began thinking about this some time ago. So we're in a good place. James Sidoti - Sidoti & Company, LLC: Okay. And then my second question, with regard to SOLX. The initial approval now is for 8 hours prior to processing. And I think the big selling point of SOLX is to get to that 24-hour processing time. What are the steps involved to get that approval?

Yes, Jim. There's -- basically, our plan is to use the data we have already from the clinical trial that was done by Hemerus and to run through an incremental protocol that's been agreed by Hemerus with the FDA to get 24-hour hold on the Hemerus filters. So that's the next step, and we'll move forward to do that aggressively now that we own the company. James Sidoti - Sidoti & Company, LLC: Okay. And do you think that takes another year or so? Or could you give any rough estimate?

I hope it's inside the year, but I hate to speak for my clinical brethren and the regulator. But I'm hopeful it's going to be faster than that.

Your next question comes from Larry Solow, CJS Securities.

I missed some of the call, in balance [ph] and a couple others. Could you just discuss maybe sort of more -- like I don't know, a 50,000-foot look. You sort of gave your whole blood outlook for, I guess, about $210 million in sales and that's about, I guess, flat, give or take, year-over-year. Do you expect Hemerus to -- then I realize it's not going to happen overnight, but the contribution from Hemerus, I guess, to be anything this year? Or does that sort of grow over time? And when do you start -- and I realize you have a lot of plans for -- in the product expansions or what not. But when do you start to see growth in whole blood above this sort of this run -- this $200 million, slightly above run rate as we look out?

Yes. So when we talk about the whole blood business, Larry, it is $210 million. And what you see is the loss of a European collector business, about $12 million, and share gains of about 6%, which is about $12 million. So you kind of see that offset. So the good news is, is that we're losing very low margin business and continuing to gain as we take our solutions to the market elsewhere. Now as it relates to SOLX, all along we said we expect that to be a fiscal '15 event, as we acquire it this year, take us about a year to go through the approvals of the Pall filter and everything associated with that. To Chris's point, we're at the mercy of the FDA approval of the 24-hour hold, but that's defined now. I mean, the good news is we know what that's going to take. We know what we need to do to provide the FDA with the information and the data that they want. So we'll begin that process immediately. And at the same time, we'll begin the process of qualifying the filter technology we acquired last year. So we own this now, and we have the control of it. So when do you expect to see this happen? Recognize, we're not sitting still in whole blood. Disappointed in the loss of that business, but recognizing that's part of what we're doing to position ourselves from a cost position as we go forward, the manufacturing infrastructure changes that we have spoken about. But we continue to make strides elsewhere with this business, and we'll do that. The launch of automated whole blood, which the milestones we've achieved are right on track. I'm really pleased that we're now going to be able to go into limited market release on paperless phlebotomy. That will follow later this year with the communications tower. So when you think about it, we look to be in, call it, maybe 3, maybe 4 blood centers this year, which doesn't sound like a lot. But that'll be well over 100 mobile drives. I've said all along, we want to move slowly here. This is a not-for-profit customer, risk-averse, change-averse in many respects. We need to walk them through that the right way and help them gain confidence in this solution. So I'm very pleased with where we are. I think you can start to see some benefits in fiscal '15. We've said all along, the real benefits to our automated whole blood product, you'll start to see in fiscal '16 and beyond.

Okay. And just a quick follow-up on -- just on OrthoPAT. I think the quarter and the year shaped up -- it was slower than expected, but I guess the back half of the year sort of -- inevitably came in sort of in line. What are your expectations as we look out? I noticed -- do you see some growth in '14? Is that sort of a back-end loaded number? And how do you look at it over the next few years at OrthoPAT?

Yes. OrthoPAT is a back end-loaded number. But there's a couple of things that we're doing here. The first is, is that we're launching a new product, that will be in the second half of this year, that addresses a number of concerns raised by our customers. The limited market release of that is going very well. But again, as I said before, we're guilty of moving more cautiously here. Why? Because we've screwed this up in the past. I want to make sure that this is done right and that our customers are very involved in making sure we do it right. But what else are we doing? We're coming to the market a little bit differently. We're involving a distributor model, different than the one that we used to enjoy from an orthopedic standpoint, that will broaden our touch of this product and, more importantly, the follow-up of this product in the clinical care setting. So I think we're doing a number of things that give us confidence that we will see this accelerate. It is going to be a front half, back half story, with the back half recognizing the higher growth profile.

Your next question comes from Raymond Myers, Benchmark.

Brian, I was hoping you might be able to give us a little bit more detail in the $35 million to $40 million of manufacturing savings that you're anticipating by fiscal '18? Can you describe how much of that is from tax savings due to offshoring some manufacturing? As well as describe how much of that savings we might anticipate starting by next year?

Well, first of all, this is all -- the $35 million to $40 million is all pretax, so understand that. But we're going to begin these initiatives this year, Ray, and really be prudent about how we take this transfer across our manufacturing network. Why not, then, this year? Because we're going to build redundancy as we go through this. This has to be done without customer interruption. We've built a very good business here. We're transforming an industry. We have to be extremely responsible in our approach to that. So that's why you're not going to see any significant impact from those savings this year. It'll begin in fiscal '15. We'll give you those numbers as we get closer to fiscal '15. Certainly, the progress we make this year will inform that. But we're not trying to be coy, though we're trying to be responsible, so we tell you something that you can hang your hat on.

But one other thought, Ray, to add to that, is that not included in the $35 million to $40 million is a trend we anticipate in our tax rate, which would be down about 200 basis points over this period. And that's really just driven by the fact that we'll be moving more o U.S. business manufacturing that is currently being done in Braintree, yes, at 2 other locations.

Chris, did you say that there's an additional 200 basis points decline beyond the decline that you were experiencing this year?

Yes. Our rate this year will end up, all in on an adjusted basis, 26.8%, 26.9%, something like that. And we'll see, over the next 2 -- over the next 3 or 4 years as we execute on this plan, targeted savings of about 200 basis points.

And that's above the 35% to $40 million. That's all pretax.

That's great. And then you really intrigued us with the announcement of this HCA win for SafeTrace and BloodTrack. Could you give us a little more detail as to how much revenue impact or revenue contribution that would provide? And how soon does that convert to revenue recognition?

Well, I think it's safe to say that a fair amount of the 5% to 7% guidance upside that you see in our software business is being driven by this. This is 100 hospitals or larger blood centers. HCA has not been shy about their focus on blood management. And many of you have queried us at times as to our work with HCA. We have not talked publicly about this. We're pleased to be able to speak to this today. They are being very aggressive in their approach to blood management, and we're pleased to be a part of it. So I think it's safe to say that a fair amount of that 5% to 7% upside -- or growth, I should say, in the software business is being driven by that. BloodTrack is -- we have the opportunity now to supplement what we've done. They have chosen us as the partner of choice. We now need to go in and improve the value of that system, not unlike we've done in a number of other large institutions thus far. So this is a real significant opportunity for us with a customer that's focused on blood management. Remember what we said. They're already using a number of our other blood management products, our cell salvage, our TEG products. And we believe that the addition of the software will only continue to provide greater visibility on the solutions we can offer. So I think the upside is possible there elsewhere.

Your final question comes from Steven Crowley from Craig-Hallum.

Just a couple of things. In terms of the hospital business and your guidance for 6% to 9% growth. I'm thinking to some of the comments you've given us about the growth in installed base of TEG and Cell Saver. And I'm quite frankly having a tough time getting the math to only work down in that range. I mean, at some point, you should see faster growth in TEG, given all the seeds you're planting. And with the Cell Saver installed base going up, how is it only 6% to 9%? Help me understand what's working against you.

Well, we obviously are dealing with some headwinds in OrthoPAT in the early part of the year that we believe will reverse with the launch of Advance in the back half of the year. So you're seeing a year of transition there. We continue to feel bullish about TEG growth around the world. It's been a very consistent product. They have -- it's probably the product with my highest confidence level. And we had good strength, if you remember, in our surgical business this year in part due to the headwinds suffered by a competitor who had earthquake damage. And we're going to have to lap that strength as we move forward.

If you think -- Steven, just to add there, is if you look at our overall growth in hospital, up 8% this year, 10% in the surgical product line that Chris talked about, that's the one where you'll see that come back just a little bit because a part of that 10% growth was not only the launch of Elite, which we feel really good about, but it is that competitor who suffered as a result of an earthquake in Italy in May of last year.

And then on the whole blood business, where you saw the weakness or the loss of a contract, how intense -- and with the intensity of those competitive pressures, are you concerned about more instances there? And how quickly do you need to change your manufacturing structure to respond if that becomes a broader initiative? So really, 2 questions there.

Steve, great question. We find this market to be very localized. And it's really quite diverse around the world. There are some great pockets of opportunity in some geographies where cost is clearly not the issue and it's all about quality. There are other markets where cost becomes more of an issue, and therefore, in order for us to be well positioned to compete everywhere, we're taking these steps. But it's not something that we're worried about in a major way. It's something that we have to deal with in a surgical way in certain markets. Our strategy is still to differentiate through value add through a new product offering, and that's what we're going to do.

And there are no further questions at this time. I will now turn it back over to Brian Concannon for closing remarks.

Thanks, Keena. Look, one year ago, we told you about our bold plans for fiscal '13, plans that included acquiring and integrating the largest acquisition in the history of the company; introducing the first phase of our automated whole blood product paperless phlebotomy; accelerating key growth drivers of Blood Management Solutions, diagnostics and emerging markets; and doing this while delivering mid single-digit organic revenue growth and double-digit operating income and earnings per share growth. I'm pleased to say that we accomplished all of this and more. Today, we're introducing equally bold plans for fiscal '14, plans that include: integrating the acquisition of Hemerus Medical and pursuing FDA approval of the SOLX solution 24-hour hold claim; successful launch of the first phase of our new automated whole blood product and OrthoPAT Advance; execution of manufacturing network transformation, commercial excellence and other VCC endeavors that will drive substantial cost savings, savings of $35 million to $40 million per year by fiscal '15; and doing all -- I'm sorry, fiscal '18, and doing all of this while continuing to deliver mid single-digit organic revenue growth and double-digit operating income and earnings per share growth once again. This team has proven it can execute and will put in place the necessary resources and structure to ensure success. We look forward to sharing more details with you at our Investor Conference here in Boston on May 16. We'd hope you'll make plans to join us then. Thanks for your time this morning.

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