Haemonetics Corporation (HAE) Q1 2014 Earnings Report, Transcript and Summary

Good morning. My name is Darla, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Q1 FY '14 earnings release. [Operator Instructions] I would now like to turn the conference over to Mr. Gerry Gould, Vice President, Investor Relations. Please go ahead, sir.

Thank you, and good morning. Thank you for joining Haemonetics' First -- Fiscal '14 First 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 recent 10-K and 10-Qs. On today's call, Brian will review the business highlights of the first quarter. Chris will review operating performance for the quarter 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 costs from the adjusted financial results we'll talk about today. In total, we excluded $33 million of pretax, transformation and integration costs from our first quarter fiscal '14 adjusted results, and $6 million of pretax, restructuring and transformation cost in the first quarter of fiscal '13. Additionally, the earnings information discussed within excludes deal-related amortization expense. Prior period amounts have been similarly presented to permit comparison. Deal-related amortization expense, excluded from the adjusted earnings, totaled $7 million in the first quarter of fiscal '14 and $3 million in our first quarter of fiscal '13. Further details including comparison with fiscal '13 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. With that, I'll turn the call over to Brian.

Thank you, Gerry, and good morning, everyone. The first quarter was an eventful one, with great progress made toward our goal of enhanced profitability, driven by the manufacturing transformation which we announced earlier this year. We accelerated our execution with the announcement of our planned cessation of manufacturing in Ascoli, Italy, the selection of Sanmina as our equipment contract manufacturing partner and Penang, Malaysia as the location of our Asia manufacturing facility. These initiatives will contribute to anticipated annual savings of $40 million to $45 million, an increase of $5 million from our original estimate. Additionally, despite softer-than-expected revenue, our team delivered adjusted earnings per share in line with our expectations and we are reaffirming our annual guidance range for adjusted earnings of $2.30 to $2.40 per share. Now turning to revenue. We anticipated organic revenue would be soft in the first quarter, but it was softer than we expected, down 5% or roughly 3% lower than we had planned. We came into the first quarter aware of a number of revenue headwinds which we identified during our May conference call. Let me address each of these in a bit more detail. First, while our currency hedges are designed to protect our earnings from currency fluctuation, they leave a portion of our revenue unhedged. This exposed us to a 220 basis point or $4 million negative impact on our reported revenue in the quarter. Second, the timing of order sometime shifts between quarters and certain customers had placed orders in the fourth quarter of fiscal '13, that normally would have been placed in the first quarter of this year. This pressed first quarter revenue growth by $3 million in our plasma and red cell businesses. Third, our transition to a new direct-selling approach in Australia and New Zealand, a strategy that will improve our growth and profitability in this market, resulted in no revenue in the first quarter, as the distributor depleted existing inventory. This represented a headwind of $3 million versus the prior year quarter for our plasma and surgical businesses. And finally, the loss of the European tender for whole blood product impacted revenue by $2 million in the quarter. Now these items materialized as we expected. At the same time, however, a number of market developments emerged causing additional revenue headwinds. Let me review some of these items. The decline in red cell collections was greater than we expected, the result of less bloodshed during surgical procedures and better patient blood management. It's becoming more apparent that the success of blood management solutions is having an impact. We recently spoke with blood center customers, representing about 70% of the U.S. blood collection market, and analyzed data that 3 of these customers shared with us. They all reported that current collection volumes are down more than 5% as compared with a year ago. Our customers are indicating no expectation for a return to growth this year, so decline in demand previously believed to be about 3% annually, now appears to have accelerated to at least 5%. In the surgical business, our growth last year was aided by the impact of a natural disaster on a competitor, who has since returned to the market with aggressive pricing. This has resulted in the loss of some of the business that was gained. We remain confident in the comprehensive blood management solutions that we're bringing to hospitals, including the development of cell salvage in emerging markets, and we expect this product line to return to growth in the back half of the year. Our customer acceptance trials for OrthoPAT Advance continue. We will release it in the third quarter, and we are advancing our agency sales model to complement our own selling efforts. However, we're now seeing a trend that is working against the use of OrthoPAT disposables; the growing use of tranexamic acid to control postsurgical orthopedic blood loss that obviates the need for transfusion for some orthopedic procedures. Our current year projections for OrthoPAT disposables revenue have been appropriately tempered. Since these market headwinds will also affect future quarters, we evaluated our organic revenue guidance and have reduced it 2 percentage points from its original range of 3% to 5% to a revised range of 1% to 3%. These annual growth rates reflect our continued expectation for 2 percentage points of currency headwinds. This represents an organic constant currency growth rate of 3% to 5% solid growth in soft markets. Turning to profitability. Our manufacturing operations increased productivity through cost efficiencies. These more than offset the impact of lower revenue and our revenue mix toward lower-margin whole blood and plasma disposables. As a result, we achieved 60 basis points of adjusted gross margin improvement. Operating expenses were well managed in the sense that necessary investments were made, while discretionary costs were contained. The acquired whole blood business represented $10 million of operating spend in the quarter. We funded approximately $4 million of increased investment in R&D in our worldwide commercial organization growth initiatives. The combination of improved gross margin and disciplined operating expense management lead to an adjusted operating margin of 15.3%, up 270 basis points. Additionally, we saw a positive impact on our income tax rate, resulting from the ongoing implementation of our global tax strategy. We expect these improvements in gross margin, operating expenses and income tax rates to benefit the full fiscal year, and this enabled us to affirm earnings guidance despite the lowered revenue expectations. We are well positioned with a solid earnings base upon which to seek the added benefit of our Value Creation and Capture initiatives. We also had a number of encouraging developments this quarter, including 3 that I'll mention now. Our commercial plasma business had 11% organic growth in North America on the strength of robust collections. This surpassed the level of growth we expected. This was partially offset by the absence of any plasma disposables revenue in the Australia and New Zealand markets in the quarter. Our plasma business is off to a strong start. Our TEG business had 17% growth, following a full fiscal year '13 with 18% growth. I'm pleased with the continuing growth of TEG in the U.S. and emerging markets. TEG has grown 15% to 20% each year since we acquired it, and we look forward to continued strong performance throughout fiscal '14. The Acrodose system, acquired as a part of the whole blood business, represents an exciting opportunity. This innovative product facilitates collection of ABO-matched, whole blood-derived platelets that are leukoreduced, pooled and bacteria tested. An Acrodose platelet provides a therapeutic dose of platelets equivalent to a single-donor platelet but at a lower cost, providing meaningful economic incentives to our blood center customers. So in summary, revenue growth has been muted by market dynamics, and we've adjusted our top line guidance to reflect this, but our projections for organic constant currency growth of 3% to 5% in a soft market reflect the progress we are making in driving blood management solutions. Additionally, our earnings are on track and we've affirmed our earnings per share guidance. Now I'll turn the call over to Chris Lindop, who'll review the financial highlights of the quarter and our current thoughts on guidance. Chris?

Thank you, Brian. In the first quarter of fiscal '14, total revenue was $220 million, up 24%. Organic revenue declined 5% as reported and 2% on a constant currency basis. The recent weakness of the yen versus the U.S. dollar resulted in 220 basis points of headwind to our revenue growth rate in the quarter. 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 rate similarly throughout fiscal '14. Plasma disposables revenue, which was $65.3 million in the quarter, increased 2% in reported currency and 4% in constant currency. Importantly, North American plasma disposables revenue grew 11%, and our customers are optimistic about end-market demand. But as Brian mentioned, we had no plasma revenue in Australia and New Zealand in the quarter, due to the July 1 conversion of the business of our legacy distributor in that region. This revenue gap represented more than 300 basis points of growth headwind in the quarter for our plasma business. This conversion, which will benefit plasma growth rates and profitability in each of the next 4 quarters, was enabled by the business infrastructure in Australia and New Zealand, which we acquired as part of the whole blood transaction last August. Our guidance range for plasma growth in fiscal '14 is 7% to 9%, a range we increased over our original guidance range of 4% to 6%. We are well-positioned with customer contracts covering over 98% of our commercial plasma business through Q3 of fiscal '15. In the quarter, organic blood center revenue declined 10% to $44 million, with platelets down 8% and red cells down 17%. The red cell disposables revenue decline was driven primarily by the market decline Brian mentioned, and by the timing of orders in North America. You may recall that red cell growth in Q4 fiscal '13 was 13%. All in, we now expect our blood center business to be down between 3% and 5% organically in fiscal '14. We will continue to pursue our strategy of increased red cell market penetration and product share with our IMPACT program. Our Acrodose and our Universal Platelet Protocol products represent opportunities to achieve near-term blood center disposables growth. The whole blood business continued it's reliable performance with $51 million of revenue in the quarter. We have realized a $190 million of whole blood revenue in the 11 months since the acquisition, right in line with our expectations. Whole blood revenue in the quarter included $35 million in North America, $11 million in Europe and European distribution markets, and $5 million in Asia, including Japan. We expect approximately $205 million of whole blood revenue in fiscal '14, about $5 million less than we indicated previously due to a weaker-than-expected blood collection market. Our hospital revenue declined 7% to $30 million in the quarter, while our IMPACT selling approach is advancing blood management solutions to hospital customers, who are seeing the benefits inherent in blood management. We have had a pause in our growth trajectory. Surgical disposables revenue was $16 million in the quarter, a decrease of 12%. We note that's currency cost is over 300 basis points of growth. Additionally, as Brian mentioned, a competitor returned with aggressive pricing. This, compounded by certain items specific to the first quarter including the implementation of our direct strategy in Australia and New Zealand and the timing of tenders in emerging markets, contributed to the weak revenue in our surgical business this quarter. We added another 135 Cell Saver units in the first quarter despite unfavorable order timing, immediately following an install base increase of nearly 2,000 surgical cell salvage devices in fiscal '12 and fiscal '13. This is a leading indicator of future disposables revenue growth in our surgical business and continues to give us confidence of a return to growth. OrthoPAT disposables revenue of $6 million was down 16% in the quarter. Now Brian described the market challenge as well and we've adjusted our expectations accordingly. In diagnostics, TEG disposables revenues was $8 million, up 17% in the first quarter, driven by increases in North America and emerging markets. We installed 143 TEG devices in the first quarter of fiscal '14, immediately following 425 devices installed in fiscal '12 and 675 devices in fiscal '13. We fully expect the strong TEG disposables growth to continue. Considering the first quarter weakness in OrthoPAT market headwinds, we now expect 0% to 3% growth in our hospital disposables business in fiscal '14, down from our previous guidance range of 6% to 9% with growth in TEG offsetting the continued OrthoPAT decline. Software solutions revenue was $17 million, down 3%, due primarily to weaker plasma software revenues in North America. This weakness was somewhat offset by increased blood center and hospital sales. We still 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. Equipment revenue is $12 million in the quarter, down $2 million, or 14%, as compared with a very strong prior year first quarter that had 20% growth. These variations reflect the timing of orders, tenders and capital budgets. First quarter fiscal '14 adjusted gross profit was $114 million, up $23 million or 26%. Adjusted gross margin was 51.7%, up 60 basis points year-over-year. Productivity improvements offset both the inclusion of lower margins in the whole blood business and the revenue mix shift towards lower-margin plasma disposables. Operating expenses were $80 million in the quarter, up $12 million or 18%. Whole blood business expenditures were $10 million of the increase. We continue our commitment to funding planned growth and infrastructure investments, while responsibly managing other spending initiatives. Operating income was $33.5 million in the quarter, up $11.3 million. And as Brian pointed out, operating margin of 15.3% was up 270 basis points. Importantly, this continued operating discipline enabled us to make investments in key growth driver initiatives that will be meaningful to our future growth profile. Interest expense associated with our loans was $2.8 million in the quarter. Our tax rate was favorable at 23.3% in the quarter or 450 basis points below last year's first quarter, reflecting both catch-up benefits and the ongoing implementation of our global tax strategy. For the full fiscal year '14, we expect our tax rate to normalize at around 26%, after which, our ongoing global tax strategy is expected to drive approximately 200 basis points of additional tax rate reduction as we implement the manufacturing network optimization. With the operating income growth and favorable tax rate, adjusted earnings per share reached $0.46, an increase of 46%. We ended the first quarter of fiscal '14 with $166 million of cash, down $13 million after utilizing $23 million to complete the acquisition of the assets of Hemerus Medical in April. We generated $13 million of free cash flow in the quarter after making net investments of $13 million in net capital expenditures and before funding $12 million of cash integration and transformation costs. Summarizing the elements of our revenue guidance, we expect plasma disposables to grow approximately 7% to 9%; blood center disposables to decline 3% to 5% on an organic basis; hospital disposables to grow 0% to 3%; and the software business to grow 5% to 7%. Overall, we expect organic revenue growth of 3% to 5% on a constant currency, and 1% to 3% on a reported basis. Adding expected whole blood revenue of approximately $205 million, we expect total revenue growth of approximately 7% to 10%. On an adjusted basis, our gross margin is now expected to approximate 52%, up about 100 basis points over fiscal '13. And operating margin, excluding deal amortization, is expected to be roughly 18.5%, up approximately 170 basis points. We are affirming our previously provided adjusted EPS range of between $2.30 and $2.40, excluding $0.35 of deal amortization. We expect about 47% of our fiscal '14 revenue to be realized in the first 6 months of the year and an adjusted earnings distribution between the first 6 months and the last 6 months, which will align with the pattern 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 and restructuring and capital investments related to our transformation activities, is unchanged at $125 million, or $2.37 per share. So we still expect a conversion rate of adjusted earnings to free cash flow of approximately 1x. As detailed in our June 19 press release and in the schedule on our website, we plan to utilize $109 million of free cash flow to fund $37 million of capital expenditures and $72 million of transformational expenditures associated with our manufacturing optimization and other VCC initiatives in fiscal '14. Additionally, as I just mentioned, we have utilized $23 million for the Hemerus acquisition, with $3 million to follow upon FDA approval of the SOLX solution for 24-hour hold for whole blood, and we anticipate that $27 million will be directed to the scheduled repayment of outstanding debt. Finally, we have included no net benefit in our fiscal '14 guidance from our VCC initiatives and the manufacturing network transformation. Current period activities will principally be capital investments and technology transfers associated with the transformation. We expect to realize $21 million of benefit in fiscal '15, which will ramp up by fiscal '18 to a targeted level of $40 million to $45 million of annual savings. With that, I'll turn the call back over to Brian.

Thanks, Chris. Without doubt, first quarter revenue fell short of our expectations, and certain market conditions make it necessary to update our guidance. That in turn makes it necessary for us to incur less spending, including variable compensation, and we've made those adjustments as well. We are a company that delivers its earnings commitments and we have taken the appropriate measures that will accomplish that. Meanwhile, our focus is on an integration that is nearly complete, serving our customers without interruption, driving organic growth in the base business and investing for future revenue and earnings growth acceleration. We anticipate revenue growth for the full year as we move past some of the headwinds we faced in the first quarter, and we're confident with our expectations for both operating income and earnings per share. In the category of business highlights, I'd like to mention a few. We completed the acquisition of the assets of Hemerus Medical in April. Our plans in fiscal '14 for pursuing FDA approval of the SOLX stored solution for 24-hour storage of whole blood remain on track. Additionally, the work to qualify the SOLX solution for use with the filtered technology acquired in last year's whole blood acquisition has begun and is also on track. The first phase launch of our new automated whole blood product and the completion of the paperless phlebotomy offering with the communications tower are progressing according to plan, as we expand to at least 2 additional customers. We're focused on realizing the benefits of our VCC initiatives, including transforming our manufacturing network. This is a big undertaking, but these activities are important to sustaining our quality, service and cost competitiveness for years to come. They are necessary and I'm confident in our plans to execute. We firmly believe that the VCC initiatives will solidify the foundation of our business and position us for continued growth. Recognizing the significance of these initiatives, our Board of Directors recently granted restricted market stock units awards to 13 executives, including me, in the form of a special long-term incentive award under our 2005 stock plan. This grant is intended to drive accelerated achievement of ambitious goals in our strategic plan and to ensure the retention of key management throughout the plan period. These grants vest in March 2017 and provide for shares to be issued at various levels if the market value of Haemonetics stock exceed a threshold value and grows from there, consistent with the enterprise value creation we reviewed in our May investor conference and driven by a doubling of our free cash flow over the next 4 years. The incremental compensation expense to be recorded for these grants approximates $2 million in fiscal '14 and is included in the transformational expenses we've previously discussed. The blood center collection trend and the soft surgical procedure volumes we are experiencing today are market headwinds that will subside. As we long expected, we'll focus on blood management in bringing about alternatives to transfusions, which in turn is -- meaning less cell salvage and less blood collected. Over the strong and expanded global footprint, new products in the pipeline and the broadest array of product and services to offer to our customers, we are uniquely positioned to grow our current market shares to larger positions. The fundamentals of our business remain strong and our commitment to bringing new solutions to our customers is unchanged; solutions that are critical to customers and that our focus on reducing costs and improving patient care. And our Value Creation and Capture initiatives will put us in a great position to further transform our industry and represent significant opportunity for our customers and shareholders alike. I want to close by, once again, thanking our employees for their dedication and focus on our customers. They are focused on this effort everyday and share our customers' passion for bringing blood management solutions to the donors and patients we serve. With that, we're happy to take your questions.

[Operator Instructions] Your first question comes from the line of Brian Weinstein with William Blair.

This is actually Matt in for Brian this morning. You talked about some whole blood share gains offsetting the loss that low-margin European business. Are you still confident that you'll be able to make some of those gains? You mentioned the $5 million shortfall from the softwares and collections, but just thoughts on the share gains there.

Yes. There's nothing that's changed there, Brian in terms of the market movement. What has changed in just the softness in the market that we've seen. In fact, we continue to be very confident in our ability to drive market share gain shifts over the next 4 years.

Okay, Brian, just a quick follow-up here. With EPS growth being weighted [ph] for the second half, just any thoughts increased visibility towards some of these businesses in the second half so we can get a little more comfortable with that ramp?

We're very confident with our outlook for the full year and -- but we don't guide to specific quarters.

And what I'd add there, Brian, is just -- what we're looking at and what we talked about here, and we've talked about in the past, is look for an earnings per share back half versus front half that mirrors what you saw last year. So when you see some of the shifts that are occurring that are a little different than what happened last year, we're still going to see an earnings trend that mirrors last year. As an example, this Medtel distributor in Australia and New Zealand, that will have much a bigger impact in the first half versus the back half as we start to see the revenue and gross profit, incremental revenue and gross profit, that results from that shift. So that's why we're signaling a back half versus front half of earnings per share growth similar to last year.

Your next question comes from the line of Dave Turkaly with JMP securities.

Quickly on the collection comments, 70% with volumes down 5%. Is that -- have you seen a decline like that in the past? I know there's not a lot of alternatives necessarily for those collections, but that sounded large. So I'm just curious is this something you've seen in the past?

Not to this degree, Dave. This was a bit of a surprise for us in the quarter and that's why we spent so much time trying to understand this with these customers. I'm confident in the data that we've received. But as we dug into the hospitals to understand what's driving this, what's causing this, because it seemed pretty universal. And it was a number of factors. You see a continued soft surgical market shifting winds, but for the most part, at best, it's flat. Some say, it's down 1% to 2%. That depends upon who you speak with. We're seeing blood management have a continued impact on the use of blood. Remember we've talked about we believe it's about 6% of an average hospital's operating budget is on blood. So as hospitals now are looking at their spend, especially in light of new CMS guidelines and the cost pressures that hospitals are facing, they're looking at their largest budgets and how do they influence those. And clearly, this is impacting surgical practices in a positive way. The whole intent of what Haemonetics brings to that market is to prevent a patient -- prevent a transfusion for a patient that doesn't need one. But then, when one does, to ensure they get the right product at the right time and the right dose. So these are blood management trends that are encouraging as we continue to focus on capturing a bigger piece of that market.

And then my follow up just to be clear. The whole blood -- you haven't lost any other customers, its was just the 1, the $5 million cut has nothing to do with any other additional customers not being on your roll anymore.

Yes, that's correct. It's a one customer that we talked about last quarter. So we continue -- and again, as we start to roll out automated whole blood and the paperless phlebotomy, we continue to be very encouraged with what we're seeing there. We're moving to 2 customers. Remember what we said, we moved to 2 customers, we want -- we launched the power with between those 3 customers in total. That will put us, by the end of fiscal year, somewhere in the neighborhood of about 100 mobile blood drives, which I think will give us some very substantial data to share with you in terms of what we believe will start to happen in fiscal '15 and beyond.

Your next question comes from the line of Jim Sidoti with Sidoti & Co. James Sidoti - Sidoti & Company, LLC: Great. Can you just follow up on the shift in Australia and New Zealand? Has that inventory been depleted at this point or is there's still wood on them [ph] to burn off?

Mostly depleted, Jim, about $3 million in the quarter. James Sidoti - Sidoti & Company, LLC: Okay. And you said that you're on schedule with the work with the FDA to get SOLX approved with the Pall filter technology. Can you just remind us, when is expected submission to -- for a 510(k)for that technology?

It will be later this year, early next year, as we're going through the lab work.

Your next question comes from the line of Larry Solow with CJS Securities.

Just on -- just a couple of things on the surgical market. Do you sort of -- imagine some of these are shorter-term in nature, it just seems like a bigger drop can't all be macro. But -- so how does that impact, or what's your feeling as you look out on surgical, on blood collection and OrthoPAT, particularly to some changing trends there that you highlight?

Well, there are a number of things here. First of all, when we look at surgical blood salvage, that is shorter term in nature. This is competitive where we saw our growth last year -- in fact, growth that was a little bit more accelerated due to a natural disaster that occurred, we expected that. It was a little bit higher in Europe where customers typically have multiple technologies that they use, so that hit us a little bit harder in the quarter than we had originally expected. But what we're doing with blood management continues to be powerful, continues to be meaningful. So to your point, we see that more as more short term, and we signaled that you'll see that return to growth in the back half. OrthoPAT continues to be a smaller product line as it represents to our total revenue. But it is a focus on orthopedic cell salvage and blood management, that I think is important to our customers. You've got over 4 million orthopedic procedures around the world. You've got over 1 million that we believe have sufficient enough blood loss to be able to salvage. That number is going to continue to climb. We believe that. Just as those procedures improve and as we see things like tranexamic acid, which is a generic drug that is being used off label, which really hit us in the quarter. And the reason why we didn't see that coming is this, they had the association, the AAOS meeting for orthopaedic -- the Annual Association of Orthopedic Surgeons. And this got a lot of attention, far more than we ever expected. And we saw a spike in the use of this following that meeting, which was a bit of a surprise for us. But again, if you look at what we're salvaging today, roughly about 40,000 procedures a year in a market that's still, from a cell salvage standpoint, 1 million procedures, we still see that as a target-rich environment and just something that we need to get back into the right way with the right product focused on our customers and delivering that value. And I think, as well, what we're doing with orthopedic distributors in that space will continue to enhance that value. We're seeing that happen.

Your next question comes from the line of Steven Crowley with Craig-Hallum Capital.

Okay. Now in terms of understanding the weakness in the blood collection marketplace, that's showing some signs of being secular, and how you compensated for that within your product mix, which is really been built around better blood management solutions and patient management solutions, where do we see that crossover and how quickly? What product lines are going to really drive you if this trend picks up steam over the next 15 months or 18 months?

Well, there's a couple of ways you're going to see this happen. First of all, we believe we're going to continue to penetrate that whole blood market not only because we're in that market with a very good product, the acquired product is an exceptionally good product, we continue to focus on the filtered technology and investing in next-generation products there. This is something our customers continue to be very interested in. We have the double red cell product that as this market rebounds -- and it's going to happen. And my guess is that it's probably going to rebound with as much of a surprise as it has declined. And it's just -- I think what you see is the shifting sand in this market relative to what's taking place -- cost pressures on hospitals, the Health Care Reform Act, new patients are going to be entering this market. There's going to be a lot more of them. But also, what we're doing outside of the U.S. markets, especially in our emerging markets and the products we're looking at there, because you've got a very, very large world population in countries where they are not collecting enough blood today. So we see all of this converging over these next 4 years. The question is, Steve, is that 1 year, is that 18 months? I can't tell you exactly. You just know the trends are going there. What we're seeing is success in what we're doing. We're a victim of our own success to a certain extent in terms of blood management. That's a positive thing. When customers feel like you're the one contributing to addressing some of their concerns is a value there. It's just a matter of when those periods come together, and that value get realized.

Now, Brian, you mentioned emerging markets, and I noticed in your press release that China was up 12%, which -- obviously, that's a meaningful number, but it's not a wow number. Were there any distortions in that figure that we should be aware of? And then could you follow up on your progress with HCA that was a topic last quarter?

On the first point on China, Steve, we were going through a labeling and packaging conversion, which slowed down the availability of product for TEG in that market. And that was probably -- if I were to point to one thing that would be the thing that was affecting growth rates in China. You know that TEG has been a very aggressive grower in that market. So -- and we don't -- that's totally temporary and we're past that issue.

Yes, I was going to say that's Q1 issue, done, and we're already seeing the growth really accelerate as we expected it would. In terms of HCA, and you're talking here I assume, Steve, of SafeTrace Tx and the contract with HCA continues to progress as we expected. We are very, very excited about what that opportunity represents. And again, as we bring software to the forefront here, this is going to help this customer, who is very aggressive -- aggressively focused on cost, be able to identify other opportunities that will work with them on as we go forward. So that's one that we continue to be very focused on and very excited about.

Your next question comes from the line of David Roman with Goldman Sachs.

I was hoping just to go into some of the segments were you saw pretty rapid changes this quarter. And I guess what I'm struggling with, as I look at across the entire med tech market and generally the categories in which you compete, it seemed like the overall operating environment is relatively stable quarter-to-quarter. So I'm just wondering, why such a massive incremental step down in some of these businesses? Anything you're seeing competitively? I can appreciate the macro trends around open surgery versus MIS, but I'm just struggling to see the sharp deceleration in growth in 1 quarter in what otherwise looks to be a fairly stable environment.

Yes, and I think I've covered this, but let me try to be real clear and make sure you get this, David, as you're new to the story. So if I'm not here, please press this. And I said, I agree with you about the market. What we're seeing is stability, and as I said, in some sectors and some people you talked to, maybe down 1 point, maybe as much as 2 points. But for the most part, a fairly flat surgical marketplace. I mean, we've actually tried to look at it in both the orthopedic environment and the cardiovascular environment. And again, come out with very, very similar conclusions. What we are seeing in the surgical cell salvage, a return to the market of a competitor who have been out of the market due to a natural disaster last year. It's a European customer who was affected by an earthquake that virtually shut down their production for several quarters. We expected that to happen, primarily a European impact. We've maintained the majority of that business. Our new Cell Saver Elite is being well-received by our customers. We fully expect that to return to growth in the back half of the year, so that's one of those short-term issues. In orthopedic cell salvage with the OrthoPAT, we're seeing the greater use of a drug in the space, a generic drug that was, for the most part, driven by a spike following the AAOS meeting where this drug got a lot of attention in terms of its use, and it stems bleeding in orthopedic cell salvage. Now again, this is a market where we continue to believe the opportunity for surgical procedures that are losing -- orthopedic surgical procedures that are losing sufficient enough blood to salvage remains high, about 25% of that total market. So it really is, how do we launch our OrthoPAT Advance back into this market, how do we come at this market the right way, and how do we come at this from a go-to-market standpoint differently than what we've done in the past as we partner with orthopedic distributors in that space. When you look at this by market, we continue to see gains in our emerging markets. These are markets where they are not collecting enough blood today. They know they need to address that. Safety is a concern. They're making great strides as it relates to their safety programs. We fully expect those markets to ramp in terms of collection, but we're seeing the benefit to surgical cell salvage in those markets. We expect that to continue to ramp.

So when you think about this in a broader context, obviously there are some puts and takes here, some thing maybe one time, maybe not. And one of the things you described, I think, was on the issue of surgical volumes, that as you expand to emerging markets in that category, that should help. But I -- my understanding is that emerging markets, while they may start as open surgery markets, are going MIS in the end anyway. So assuming that, that catches up to you at some point, why isn't 3% to 5% the right sustainable growth number for the business?

You're talking 3% to 5% reported growth this quarter I'm assuming. And it is merely a reflection of what we see happening in this market, in this period of time, in light of those shifts that we've seen this quarter. The collection market, which is a reflection of blood use in hospitals, is very significant. And what we're seeing that reflected in the surgical markets is, again, not so much in terms of less surgeries, as I've said, we think it's pretty stable, maybe down slightly. But it is really a reflection of how blood is utilized in those same procedures that are being performed today. These are hospitals that are focused on cost reductions of significant nature. And when you've got a budget were 6% of your spend is in blood today, it's gaining the attention of hospitals. That's a good thing ultimately for us, but it is a bad thing for us here in the near term. We fully expected this to happen. I think it's just coming together more rapidly than we had expected.

Your next question comes from the line of Larry Keusch with Raymond James. Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division: Brian, just a question on plasma. Obviously, the North America comments are very positive and you obviously did raise your guidance to 7% to 9% from 4% to 6%. I guess if we just do the math on what you did in the first quarter and what it takes to get to the bottom end of that range, you'd have to grow about 9% over the next 3 quarters. So what happens there to drive that acceleration in the growth?

Well, there's a couple of things, but the biggest thing you're going to see happen there -- and I'll turn it over to Chris to give a little more color, is the fact that the biggest part of the business that we did not have in the first quarter, with the distributor change in Australia and New Zealand, was our plasma business. So we saw -- in a quarter where we did okay, we saw a significant hold [ph] relative to our plasma business as we made that conversion. So that's going to come back this quarter and for the remaining 4 -- 3 quarters of this fiscal year, the next 4 quarters, as Chris indicated. So that's probably the biggest driver that's going to address that. On top of that and we've seen this year-to-year. You don't see the wild swings in plasma anymore, but you do see the plasma customers that are managing their inventories. We have no visibility to that. We base it off forecast. But our customers, especially our U.S. collectors, continue to be bullish about the end market toward demands, and our forecast reflect that. So that's what you're seeing in our guidance. Chris, would you have anything to add to that?

Just to sort of expand on the Australian distributor point, which is an important. one. It was about a 300-basis-point headwind for us in the first quarter so that sort of goes away. What have you to also understand is that, that distributor was marking up our product to the customer. And so we become the beneficiary, not only of a normal revenue stream, but also a revenue stream that includes that profit, which is higher than our previous year's revenue. That's a benefit that will flow through in the next 4 quarters as we annualize the transaction.

Your next question comes from the line of David Lewis with Morgan Stanley.

Maybe just 2 questions. One, I just wanted to come back to Mr. Roman's question around secular growth rates. And, I mean, on one hand, Brian, you're saying you expected this to happen, but we didn't hear about some of these secular trends at the Analyst Day. So are you still committed to the long-term outlook based on these trends that you gave at the Analyst Day? And specifically back to the RSU comment that you mentioned, is that only tied to free cash flow in 2017 or is that tied to free cash flow plus some dynamic related to organic revenue growth? And I have one quick follow-up.

The LPI, or that incentive program, it's tied to the price of the stock. So it's based off of how our investors realize the result of the changes that we're making, not only to our company, but in transforming the industry. As it relates to the growth rates, we covered the 4 things at our Investor Day. We signaled directionally what was taking place there and what our expectation was. What we did not see at that time, and didn't see until we got into the quarter, was the impact both in terms of use of blood in hospitals, and ultimately, what that represented to our collectors, and therefore, the impact that was having on their growth rates or expected collection rates, I should say, over the full year. And that's what was a bit of a surprise for us in the quarter. Do I expect that to reverse? Yes, I fully expect that to reverse. What we're seeing is, to a certain degree, the success of what we're looking at. When you look at the U.S. market alone and how it compares to the rest of the world, our transfusion rates in the U.S. market are, by far, some of the highest. So the fact that this is starting to get under control shouldn't be a surprise to any of us. I think the speed at which it's happening is a bit of a surprise to us. But I think it's a good thing, because this market was going to shrink in terms of blood use. It's just a matter of who's going to help our customers realize that and how we're going to benefit from that on the other side of this, and we fully expect to be beneficiary of that.

Okay. And Brian, just to be clear, it sounds like if this trends continue for a 18-month, 36-month period of time, the mid to upper single digit or something better than 5% growth would be challenging if those trends were to continue, if they were not to reverse.

Well, realize this as well. What's going to drive our growth as we go past this? It's not going to just be what we're doing relative to the trends in the surgical market, but it's going to be how we plan to capture share relative to where and how blood is collected. And that's our automated whole blood collector and the progress we're making there. We're bringing -- at the time that we've entered that market with a very good solid acceptable product with what we acquired from Pall, we are now investing in the science of those filters. We've brought new science forward with SOLX that we expect to be very meaningful for our customers upon FDA approval. Of 24-hour hold, we'll qualify that on the Pall filter. So 1 year from now, we're going to have something that's economically and scientifically meaningful for our customers at a time when we're advancing the automation into the collection in the whole blood industry. This is an industry that you think through how this happened in the plasma industry. We expect to see, while the REMS may not be as dramatic as what we saw in plasma, we do expect to see growth rates starting in fiscal '16, latest, start to accelerate up.

Your next question comes from Spencer Nam with Janney Capital.

Just a couple of questions, one on guidance and then one on gross margin. So guidance, over the last, say, 6-plus months, we've seen a couple of tick down on guidance. And I'm just curious, how we should interpret or view the latest guidance, revenue guidance, whether you guys are looking at that as sort of the bottom end of the potential range, or is that as more of -- as you -- kind of your view as you go? How should we interpret this new message?

Well, what we're doing here, Spencer, is working with our customers to really understand what are they seeing, how are they seeing that. As it relates to the hospital market, we're trying to use as much data as we can, not only from people in the industry that have to report in this space, public hospital companies, but also those experts that are out there that have knowledge into that space. And I think that's what goes to both David Lewis' question and David Roman's question, in this market, what are we seeing in terms of surgical trends? And I agree with those conclusions, call it flat, call it down 1% to 2%. It's basically a fairly flat market. So what I think we're seeing is a market that is addressing something that we've been a proponent on for quite some time, as you know, which is blood management. We're seeing hospitals use much less blood today than they were using only a few years ago. Again, I use that statistic, I forget the ranking, but we're ranked in the double digits against the rest of the world. I think it's mid teens in terms of transfusion rates. We're not even close to the top in terms of how that's practiced. And that's something that our customers are starting to pay a lot more attention to. It is good for patients. It is ultimately good for our business, as we're the proponents of that with our customers. But it is affecting us in the near term a little bit more aggressively than we had expected. All of this will reverse as you got more people coming into the health care system in the U.S., as emerging markets are emerging more rapidly, we've got to bring solutions to those markets that are tempered to those markets and those rates and those growth periods. They're not going to come to those markets, somebody had said it. They're not going to come and grow in those markets taking the time that it took the current developed world to get to where we are. They're going to get there more rapidly in terms of how they manage blood. It's going to be more of a straight-line than more of a journey we've seen in some of the developed world.

And then the follow-up question is on gross margin. It seemed like the first quarter margin was pretty strong. And the implied message that we're getting obviously here is, given that the revenue outlook has been lowered without changing the EPS guidance that you guys are expecting the sort of the higher-than-expected margin level would be sustained throughout the rest of the year. How -- what's driving that? Are you guys doing something different this year versus last couple of years, that could be a driving this improvement?

Yes, Spence, it's actually a continuation of what we've been doing year in, year out, which is sustained management of productivity levels with our planned infrastructure. And we are seeing positive trends just now. We continue to expect those to be with us throughout the year, and so we're guiding to the high end of the range that we outlined previously with a meaningful improvement in gross margin. So we feel highly confident in that.

Yes. And I'd probably add there, Spencer, much like we have -- we're reacting to what's taken on -- what's taking place with our customers on the revenue side, we're also seeing the benefits of what we've done from an infrastructure standpoint prior to the acquisitions, certainly during and post the acquisition. And we're driving more success in this space as you might expect. This is an area where we have typically executed exceptionally well and I think you can continue to expect that as we go forward. We continue to remain very confident in what we're doing relative to our VCC initiatives, but also the value of what we began last year and how it's carrying forward into this year, as Chris said, and what that's going to mean as we continue that focus throughout the remainder of this year on the VCC initiatives. $21 million worth of value next year, ramping to $40 million to $45 million over the next 4 years. But again, recognize what we said at the Investor Day, there's still more to come next year as it relates to that. So you'll continue to see that focus on net value. And those are things that are going to put us at a much better position to compete with our -- with the competition, relative to that smaller market but capturing greater market share on the back end of this.

Your final question comes from the line of Raymond Myers with Alere [ph].

Brian, could you discuss the European whole blood market? Were there further customer defections in the quarter or was this decline a of follow-through from the previous losses?

It is the latter of those, Ray, it's -- there's nothing more there. But this is a market were there are some unique cost pressures and cost competitiveness. It speaks to exactly why we're doing what we're doing relative to the VCC initiatives. We've got a great product here. We're bringing new science here. We're bringing new automation to a manual process that has existed for decades. We've got to customize that for that market. All of those things we knew, all of those things we're focused on. But that's why it was difficult for Pall to compete in that market. We're simply inheriting that, but it is certainly our intention to address that, that we're doing through the VCC initiatives going forward.

All right, that's good to hear. And my follow-up is about the U.S. transfusion rates being higher than -- in benchmark countries, other developed markets that you mentioned during your call. How much higher is a U.S. transfusion rates than benchmark markets? How fast do you expect that the U.S. can close that gap?

I don't have that data in front of me, Ray, but we'll get that data for you. And again, this is something that the medical community is focused on. It is something that is significant. It is something we've known about for quite some time. It is certainly something that has the attention within the transfusion medicine community. And we've seen our key opinion leaders address this in many of the industry meetings that they've attended. So I expect that is going to continue to get attention. And again, I think it's probably going to happen a little quicker than we had expected it would happen originally, but we'll get you that exact information.

I will now like to turn the conference back over to Mr. Brian Concannon for closing remarks.

Thank you, Darla. Market conditions and progress in blood management are impacting revenue growth, but we continue to make progress bringing new and unique blood management solutions to our industry. An organic constant currency growth of 3% to 5% in this environment is very encouraging. The fundamentals of our business remain strong. We have substantially completed the integration of the largest acquisition in the history of our the company ahead of schedule and on budget. Yet, this acquisition has enabled us to further transform our the company to better meet the needs of our customers while driving significant shareholder value over the next 4 years. Our Value Creation and Capture initiatives will help us sustain and accelerate growth, while we continue to deliver double-digit operating income and earnings per share growth. I've said it before and I'll say it again, we believe our best years at Haemonetics are still ahead of us. Thank you for your time this morning.

This concludes the Q1 FY '14 earnings release conference call. You may now disconnect your lines.