Haemonetics Corporation (HAE) Q3 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to the Haemonetics Corporation Q3 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will have a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Gerry Gould, Vice President of Investor Relations. Please go ahead.

Good morning. Thank you for joining Haemonetics third quarter fiscal ’15 conference call and webcast. I’m joined by Brian Concannon, President and CEO; Chris Lindop, CFO and Executive Vice President of Business Development. Please note that our remarks today will include forward-looking statements. 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 latest 10-K and 10-Q filings. On today’s call, Brian will review the highlights of the quarter and the outlook for our performance going forward. Chris will cover third quarter and year-to-date operating performance, our guidance for fiscal ’15 and our outlook for fiscal ’16. Then Brian will close with a review of our strategic initiatives and some 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 the third and year-to-date periods of fiscal ’14 and ’15, we have excluded pre-tax transformation, integration and restructuring costs associated with our Value Creation and Capture and other productivity initiatives. Additionally, the earnings information discussed for all periods excludes deal-related amortization expense. Further details of excluded amounts, including comparisons with the applicable periods of fiscal ’14, 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 will turn the call over to Brian.

Thank you, Gerry, and good morning everyone. This morning we reported results for our third quarter of fiscal ’15 in-line with our expectations. With three quarters now complete in this year of transition, you can clearly see that we’re building momentum towards return to growth in fiscal ’16. We saw continued progress and indentified growth drivers, we made key new product advances and the headwinds represented by the decline of our whole blood business continue to be consistent with expected trends. This was another solid quarter. Adjusted earnings per share finished at $0.53 in the third quarter and a $1.38 for the first nine months. We’re reaffirming revenue earnings per share in free cash flow guidance for fiscal ’15 and we remain confident that fiscal ’16 will bring a return to mid single digit revenue growth. Like most companies with significant portions of their revenue outside the United States, we’ve seen currency headwinds increased over the last several months. Currency now represents greater than 500 basis point headwinds to our expected operating income growth rates of fiscal ’16. Therefore, we’re revising our fiscal ’16 outlook for adjusted operating income and earnings per share to high single digit to low double digit growth to account for this shift in currency. It’s important to note that our outlook for adjusted operating income and earnings per share growth remains at double digit levels in constant currency. In other words excluding the impact represented by the strengthening of the U.S. dollar. Now, I’d like to provide a bit more color on some important revenue elements. First, in the quarter revenue decreased 4.3% as reported, but only 1.4% in constant currency. Approximately 25% of our revenue is denominated in the Yen and the Euro. We hedge a portion of this foreign currency denominated revenue to provide predictability of foreign sourced operating income for a rolling 12-month period because only a portion of foreign sourced revenue was hedged increasing dollar strength tends to dilute revenue growth and we’re seeing that in our performance this year. Year-to-date revenue was down 2% as reported and 1% in constant currency, as currency headwinds accelerated as the year progressed. We still anticipate finishing fiscal ’15 with a 0% to 2% revenue decline including the impact of currency. Second, in constant currency, our growth drivers of Plasma, TEG and emerging markets accounted for 60% of our disposables revenue in the third quarter. These three elements of our business had combined growth of 7% in the third quarter and 10% in the first nine months. Plasma was up 13%, TEG was up 24% and emerging markets flat year-to-date. The weakening economy in Russia which represents about 3% of our revenue impacted emerging markets growth. Disposables revenue and emerging markets excluding Russia grew 8% in the third quarter and 4% year-to-date. Third, anticipated headwinds beyond currency included reduced pricing, market share loss, the end of an OEM supply contract and overall market declines and the demand for red cells in our U.S. blood center business together with currency. These more than offset the performance of our growth drivers in the quarter and we expect to see this continue in the fourth quarter as well. Importantly the anniversary of the impact of U.S. blood center pricing will occur by the beginning of fiscal ’16, and the anniversary of the market share loss and the OEM contract expiration will occur in early to mid-fiscal ’16. Therefore the majority of the headwinds we experienced in fiscal ’15 will be behind us by the midpoint of fiscal ’16. The U.S. whole blood business represents 10% of our revenue, and so any risk of continued decline in transfusions should be minimal. We expect the declines in U.S. transfusion rates to moderate in fiscal ’16 turning to levels in the low 30s per 1,000 of population consistent with global best practices. In summary, as we look forward to fiscal ’16, we believe that most of the headwinds in the U.S. blood collection market will be behind us and the ongoing momentum of our growth drivers will more than offset further declines in whole blood collection. Our expectation of returning to revenue growth to a revenue growth rate of mid single digits in fiscal ’16 includes both the headwind resulting from continued strengthen of the U.S. dollar and a partial offset provided by the 53 week. We continue to make progress on several of our strategic priorities. Here are few updates building upon advances we noted last quarter. We recently received the first two of the three required 510(k) clearances for the new TEG success diagnostics device. We expect to begin a limited market release in the U.S. in early fiscal ’16. We completed the planned clinical testing of our SOLX storage solution and we’ve submitted the clinical data to the FDA. Additionally, we filed for Canadian registration. We’re currently formulating plans to introduce SOLX together with our whole blood filter in the North American limited market release after we receive the required clearances. Our next-generation BloodTrack software, incorporated in the new HaemoBank smart refrigerator is gaining considerable customer interest as a key element of our comprehensive blood management solutions offering. We’ve already received several customer purchase orders and are preparing for an April limited market release. I’ll give you an example of how CBMS benefits a customer later in this call. Today, we announced that KEDPlasma USA has signed on as our second customer for our next-generation Plasma software. KEDPlasma has gone live and is using our software to achieve greater efficiency, improved quality and lower cost. As we move toward our fully integrated Plasma center solution with aligns between hardware, software, and [indiscernible], we’re encouraged that our customers are embracing this productivity advance. We’re optimistic about the prospects for similar contracts with additional Plasma customers. Our Value Creation and Capture or VCC initiatives advanced as planned and drove a sequential growth in earnings in the third quarter of the fiscal year. In short, we’re making good progress both financially and strategically and we’re well positioned to return to growth in fiscal ’16 and beyond. I’ll now turn the call over to Chris Lindop to review the financial highlights and our current thoughts and guidance in more detail. Chris?

Thank you, Brian. In the third quarter total revenue was $232 million, a decrease of 4.3% as reported and 1.4% on a constant currency basis. For the first nine months of fiscal ’15 total revenue was $684 million down 2% as reported and 1% in constant currency. Our full year expectation still contemplates a top line decline in revenue as reported of 0% to 2%. Plasma disposals revenue was $83 million, an increase of $6.5 million or 8% as reported and 11% in constant currency. North American Plasma disposals revenue grew 13% in both the quarter and the first nine months. Our customers remain optimistic about end market demand. Accordingly, we boosted our guidance for Plasma growth in fiscal ’15; we’re now expecting 9% to 11% growth in Plasma disposables versus the previous range of 7% to 9%. Blood center disposals revenue declined 17% to $83 million with red cells up 10%, platelets down 12% and whole blood down 28%. Platelet disposables revenue was $38 million in the quarter and $116 million year-to-date. Our largest platelet market is Japan and so the growth of this franchise was disproportionately impacted by the devaluation of the Yen. Year-to-date our platelet business declined 2% on a reported basis but was up 4% on a constant currency basis. Growth in the quarter was impacted by weakness in the Russian market as well. Red cell disposables revenue which was $11 million in the quarter and $31 million in the first nine months grew 10% in the third quarter and 4% year-to-date. This largely reflects some market timing, adjusted for this red cell disposables revenue was essentially flat in the quarter and year-to-date. In an environment of declining transfusions, customers are employing collection strategies that leverage our Apheresis technology to optimize red cell collections. Whole blood revenue declined 28% to $34 million with $21 million in North America, $9 million in Europe and European distribution markets $4 million in the Asia Pacific and Japan markets. North America whole blood revenue declined by $11 million reflecting the trends and demand for red cells. The impact of the transitional OEM supply contract with Pall Corporation that’s winding down lower pricing in the Hemic cell contract and lower American Red Cross volume. The lost American Red Cross whole blood business was fully transitioned to our competitor late in the first quarter. So that $25 million annual run rate of the lost business or the $6 million quarterly revenue impact was felt in the second quarter and third quarters and will continue to affect us for the rest of the year. We still expect our blood center business to be down between 10% to 12% in fiscal ’15. As Brian mentioned, we will anniversary the headwinds associated with the American Red Cross lost business volume, the Hemic cell pricing decline and the OEM contract expiration by mid fiscal ’16. The decline in the U.S. red cell transfusion rate was approximately 10% in fiscal ’14 and is trending down approximately 10% in fiscal ’15. The business most impacted by that market decline which is U.S. whole blood business represents a little less than 10% of our consolidated revenue and this market decline is expected to moderate in fiscal ’16. Hospital revenue was $32 million in the third quarter and $93 million year-to-date essential flat with the prior year. Continued strong TEG momentum offset declines in surgical and orthopedic cell salvage and the impact of weaker foreign currency rates in both the third quarter and the first nine months. Surgical disposals revenue were $16 million in the quarter and $47 million in the first nine months, down 7% as reported and 1% in constant currency in the quarter and down 5% as reported and 2% in constant currency year-to-date. In diagnostics, we had record TEG disposables revenue of $11 million in the quarter, up 27% and $31 million in the first nine months, up 26% as reported. Constant currency growth was 25% in the third quarter and 24% year-to-date driven by increases in North America and China. We installed nearly 1,900 TEG devices in the last three years and we fully expect strong disposables growth to continue. Given the increase in currency headwinds in the un-hedged portion of our revenue and softness in the Russia market related to macroeconomic conditions, we’ve lowered our guidance range for hospital growth in fiscal ’15. We’re now expecting 0% to 2% growth in hospital disposables where currency has a meaningful impact versus the previous range of up 4% to 6%. Software solutions revenue was $18 million in the quarter and $54 million year-to-date that’s 3% increase in the quarter and 5% year-to-date. We continue to see a steady pipeline of opportunities. Hospital customers in North America are increasingly recognizing and we are increasingly capitalizing upon software importance in identifying and implementing blood management solutions. We continue to expect 2% to 4% software revenue growth in fiscal 2015. Equipment revenue was $15 million in the quarter and $41 million in the first nine months of fiscal 2015. Our installed base of equipment, which is the combination of purchased and placed devices increased 7% in fiscal ’14 and another 5% in the first three quarters of fiscal ’15. This is a leading indicator of future growth in disposables revenue. Third quarter fiscal ’15 adjusted gross profit was $114 million, down $10 million from the prior year third quarter. Adjusted gross margin was 49.2%, down 210 basis points year-over-year. Importantly, our sequential gross margins are improving as fiscal ’15 unfolds. We reported 48.4% in the first quarter, 48.8% in the second quarter and now 49.2% in the third quarter. 40 basis points improvements were realized in each of the second and third quarters indicating that our cost reduction programs are beginning to work and deliver the desired results. Despite the headwinds from product mix, our gross margin is trending towards 50% once again as a productivity gains achieved with our VCC initiative are coming to fruition. Adjusted operating expenses were $76 million; down 7% as compared with the prior year third quarter largely the benefit from ongoing organizational cost reductions. Adjusted operating income was $38.4 million in the quarter, down $4.1 million. Adjusted operating margin in the third quarter was 16.6%, down 90 basis points. Pricing and volume pressures in the U.S. whole blood business outpaced the benefits from our growth drivers and the VCC and other cost-saving initiatives. We are encouraged that third quarter fiscal ’15 adjusted operating margin was up sequentially 250 basis points over the operating margins in the first half of the fiscal year. This improvement bodes well as approach the end of this transitional year. Adjusted interest expense associated with our loans was $2 million in the third quarter. Our tax rate was 24.4% compared with 19.6% in the third quarter a year ago. Certain tax statutes expired in the third quarter of fiscal ’14 providing a onetime benefit in that quarter. Our year-to-date tax rate is 25% and we expect that to be the tax rate for the full fiscal year ’15. We continue to benefit from the implementation of our global tax strategy. Adjusted earnings per share were $0.53 down 14% attributed primarily to a full quarter of the whole blood pricing and volume declines more than offsetting as steady ramp in VCC and other cost benefits. Turning to guidance fiscal ’15 is playing out as the year of transition that we expected with profitable growth in our identify growth drivers Plasma, TEG and emerging markets offset by earnings headwinds in the U.S. blood collection market, currency and bonus funding. So, in summary our fiscal ’15 revenue guidance on a reported basis includes plasma disposables growth of 9% to 11%, a decline in blood center disposable was including whole blood of 10% to 12%, hospital disposables growth of 0% to 2% and software growth of 2% to 4%. Overall, we continue to expect revenue to be flat to down 2% on a reported basis. Our full year expectations for adjusted gross margin is that we will end the year at approximately the same 49% level we reported for the first nine months. This is 100 basis points below our prior estimate of 50%. Higher Plasma and lower hospital revenue guidance combined to represent an unfavorable gross margin mix. With 49% gross margin, continued expansion of our VCC benefits and continued operating expense discipline in the fourth quarter we are able to reaffirm the full year adjusted EPS guidance range of between $1.85 and $1.95 per share. As in the past, our website includes revenue and income statement scenarios, which are based on the elements of guidance provided in my comments for the full year. We ended the third quarter of fiscal ’15 with $125 million of cash on hand, down $67 million from our fiscal ’14 year end. Year-to-date we’ve used $81 million net of cash tax benefits for VCC and other restructuring, $10 million for net debt repayments and $39 million for the repurchase of shares in the open market. We repurchased 130,000 shares during the third quarter bringing the nine month total to 1,165,000 shares at an average price of $33.22. As we announced previously our Board of Directors approved the repurchase of up to $100 million of shares. We affirm fiscal ’15 free cash flow guidance of between $100 million and $110 million before funding $89 million of restructuring and capital investments related to our VCC initiatives beyond the $30 million reflected in our guidance for fiscal ’15, we remain on track to realize the incremental VCC savings needed to bring us to the targeted total of $60 million to $65 million in annual savings by fiscal ’18. The VCC and restructuring investments are on track to come to conclusion in fiscal ’16. For fiscal ’16, we are confirming our expectation of returning to mid single digit revenue growth. We have evaluated and included the impact of the continued strengthening of the U.S. dollar which represents a headwind of approximately 200 basis points. Fiscal ’16 will benefit from inclusion of 53rd week which will partially offset this currency headwind. We have noted emerging challenges related to trends in the Russia market and our current outlook for fiscal ’16 also incorporates an estimate of the impact of these headwinds. The situation is fluid and will continue to monitor market conditions as we finalize the current fiscal year. Continuing to fiscal ’16 we currently expect to return to double digit adjusted operating income and earnings per share growth rates on a constant currency basis. In fact that constant currency earnings growth rate is expected to be sufficient to absorb what we currently expect to be greater than 500 basis points currency headwind and to still deliver a high single digit to low double digit adjusted operating income and earnings per share growth rate on a reported basis. With that I will turn the call back over to Brian.

Thank you, Chris. The third quarter of fiscal ’15 much like the first two quarters was in line with our expectations so we were well positioned to achieve our full year revenue and earnings guidance. Advancement of our new product initiatives in the third quarter were also encouraging including the first two of three needed 510(k) clearances for the TEG success device, submission of SOLX clinical data to the FDA and the successful introduction of our new blood track software with the new HaemoBank device. These innovations advances representing encouraging progress towards building out the suite of products and services we need to achieve our vision. Our comprehensive blood management solutions or CBMS offering incorporates these and other products and our hospital customers are recognizing the benefits. Let me share with you one example that highlights the benefits of our CBMS offering at 350 bed community hospital. Through our value stream mapping process, we were able to identify inappropriate or unnecessary use of blood products and the inefficiencies associated with the logistics of delivering these blood products safely to the point of care. By implementing comprehensive blood management solutions, solutions that include blood track and HaemoBank, TEG, cell salvage, safe trace TX another software product and services, we expect the hospital to realize net savings in excess of $2.5 million over the 24 month following full implementation. And for Haemonetics, we expect incremental revenue of nearly $1 million in the first two years with equipments, disposables, software and services being fully implemented and then steady disposable revenues stream thereafter. It's becoming increasingly clear that our hospital customers are ready for and in fact need the software and the software enabled devices we offer in their efforts to manage the total cost of blood transfusion. We believe that demand for our CBMS offering will ramp up throughout fiscal ’16 and become more meaningful in fiscal ’17 and beyond. We will give you more visibility to this initiative at our investor conference in May. And the area of our VCC initiatives, I would like to mention that our Tijuana and Mexico facility expansion is complete. Most of the transfer of the disposable products from our Braintree facility has occurred and the rest is scheduled by the end of this fiscal year. And our new Penang Malaysia facility is also complete and we will begin manufacturing in this facility in the fourth quarter of fiscal ’15. Our manufacturing and distribution footprints are revolving on schedule. And this is key to continue profitability improvement and operating margin expansion. As the year of transition approaches an end, we feel very good about the progress we have made. Let me mention a few of the highlights. Our identified growth drivers generated 10% growth in constant currency, the direct results of investments we made in fiscal years ’13 through ’15. We are on track to deliver the four new products we identified at our May 2014 Investor Conference and our fifth one with the blood track HaemoBank. We expanded our already strong Plasma franchise with the saline and citrate contract and the next-generation software product that gained immediate customer acceptance. Our comprehensive blood management solutions initiative is emerging an importance for hospital customers as we begin to demonstrate the real value of our products offerings. Software continues to emerge as a core competency as the use of software helps customers understand better blood management practices. VCC initiatives advance considerably with the completion of the Tijuana and Mexico expansion and the new Penang Malaysia facility keeping us on track to finish our VCC expanding in fiscal ’16 and to realize our targeted savings by fiscal ’18. We will emerge from fiscal ’15 well positioned to return to mid single digit revenue growth and including the increased pressure of greater than 500 basis points currency headwind we expect high single digit to low double digit adjusted operating income and earnings per share growth. Again I will stress that our outlook for the adjusted operating income and earnings per share growth remains at double digit levels in constant currency excluding the headwind represented by the strengthening of the U.S. dollar. Our business fundamentals remain strong. We enjoy an expanding global footprint differentiating new products advancing through the R&D pipeline and increasingly advantages cost structure and the broadest way of product and services in the blood industry. Our customers are taking notice. We are increasingly well positioned to meet the needs of our customers, capture global market share and drive sustainable profitable growth with meaningful domestic and international opportunities on the horizon. I would like to convey my thanks and appreciation to our employees for ensuring that the current and longer term needs of our customers are always met and for sharing our passion for improving transfusion medicine practices around the globe. With that we are happy to take your questions.

[Operator Instructions] Our first question comes from the line of David Roman with Goldman Sachs. Your line is now open. Please proceed with your question.

Thank you and good morning Brian and team. I wanted to start with emerging market side. I think if my math is correct that growth driver has been decelerating a little bit the past couple of quarters and I know that Russia is sort of an anomaly right now, it's hard to predict when that market might turn around but can we maybe just talk to more broadly about what's going on in the emerging markets and the reason I asked just that we have heard from other companies some challenges in the hospital markets outside the U.S. maybe we can just start with those businesses?

Yes, so emerging markets I will jump in here and maybe let Chris provide some additional color as necessary. But, the biggest challenge we face there is clearly Russia. If you look at the impact, you just think about where we were at the time of our October earnings release the price of barrel of oil was over $80, today it's under $50 high 40s, so no secret that the price of oil and barrel of oil will clearly drive the Russian economy and really affects that the health care spending. So, we are seeing that and we have got a pretty good distributor there in Russia, a solid distributor healthy distributor but we are going to continue to see the Russian economy influence by that. We saw the same thing happened in 2009. We saw the price of oil decline; we saw it come back up. I think the same thing will happen here David but I think it's going to take a little bit longer. I don't think the rebound this is personal opinion, I don't think the rebound will occur as rapidly this time around but I think it will occur and I think it will continue to see growth rates. We are five times larger in Russia today that we were in 2009. So that's where the biggest impact is happening. Elsewhere around our emerging markets we see strength, we see China continuing to be a very good market for us, other Pacific Rim countries be solid for us. We are seeing Brazil, Latin America emerge for us. We think these are more than we can do there. But the biggest impact is clearly Russia.

The only thing I will add David is that the emerging market growth rate in the quarter ex- Russia was 8% confirming what Brian said, that was in our comments.

Got it and then maybe just the follow up for Chris on the gross margin, can you maybe help us think about the puts and takes around that line as we go forward, obviously you have been doing extraordinarily well in Plasma which I think has a lower than average corporate gross margin but and then VCC sort of an offset to that but help us think about the moving parts around that line, I think you could also just remind us on your currency hedges as well, how we should think about that as we move into fiscal ’16 just given the extreme volatility we have seen?

Yes, in terms of margin obviously our plans are for improvement from the current level of 4% to 9%, one of the headwinds in the gross margin line that actually is positive on the net is the operating leverage inherent in our Plasma business so when we have stronger Plasma business we tend to have less traction in the gross margin line but we get good contribution down below and the offset to that is when we are weaker and/or actually adding to that effect when we were weaker in our hospital products, we stand up higher gross margins, we have pressure on our gross margin. That's really what we are seeing obviously our goals are to continue to push a balance growth in the business and to drive the VCC initiative which still has a fair amount of run way ahead of it in terms of operating leverage on the gross margin line between now and fiscal ’18 and another $30 million to $35 million that we are targeting in terms of structural savings in that line item. So steady improvement I don't want to say anything more than that but of course we will give guidance for next year on our year end call and that will include guidance on gross margin. In terms of currency and hedges, we have this ruling hedge program where we sort of sell foreign currencies forward on a rolling 12-month basis with a objective of hedging our operating income so that we have predictability for the next 12 months. We are partially through, but almost completely through the origination of our hedges for next year so we have reasonable visibility and it's that visibility that permits us to measure the sort of the currency headwind that's evolving in our original outlook for fiscal ’16 which was of course prepared almost a year ago and which were being updating as we go through the year. So and that demonstrates the continuing strength of the dollar and the hedges that we have looked in the hedge rates that we’ve locked in essentially indicates a headwind.

Okay. Thank you very much.

Thank you.

Our next question comes from the line of Lary Solow with CJS Securities. Your line is now open. Please proceed with your question.

Hi, good morning guys. Just wondering if you can give a little more color just on the Plasma market quality 11% growth it seems like above market and I think you raised the guidance I think for the second time this year, is the market growing faster than you expected or are you taking more share faster and I think you also cited some recent contract wins is that addition to the next generation Plasma software one you decided?

So, a bunch of moving pieces there, so we are continuing to see very solid growth in the end markets. We are seeing those collectors that we have our agreements growing rapidly at least one of the larger ones growing rapidly. What we are also seeing is that the shift last year Australia, New Zealand that took place so that has been a little bit of lift in that growth rate as we have talked about before. Software is not in there. Software we measure separately, but yes, I mean, it is clearly when you look at the combination of the two of those and use that comment the lines are blurring and they really are relative to our devices and our disposables. We are building next-generation devices that are built in conjunction with our software. And so that is contributing to that straight and certainly the view that our customers have of us and then of course the announcement that we made last quarter as we assist our Plasma customers and one in particular relative to sodium citrate and saline and that has had no impact to-date, but that will be a lift for us as we go into fiscal ’16.

Okay. Yes, I was actually going to ask you so has that pretty much progressing, you still expect to sort of ramp and get to close to that 25 million or reach that 25 million by year end ’16 I guess?

But in an annualized basis, yes but you won't see 25 million there.

Yes right, the run rate of 25 million by year end.

Yes. That we do expect we will hit that run rate by the end of fiscal ’16.

You have said that would be at similar margin to Plasma or corporate average or?

No, it will – we haven’t given any guidance on that. Once we give guidance at the end of this quarter we will give a little more visibility to that.

The key point there is highly leveraged offering, we got to think about it relatively operating margin this is product like that sort of rides along, it's product that leverages existing capacity to some extend and rides along with other products so to simplifying the supply chain for the customer.

Got it. And just one real quick follow up, little bit lower gross profit obviously some moving parts mix is probably the biggest issue and maybe some more currency, you have been able to offset that with a little bit lower expenses, has your other costs cutting initiates actually accelerated a little bit?

It was always designed to sort of ramp as the year progress.

Okay. Great. Thanks.

Our next question comes from the line of James Francescone with Morgan Stanley. Your line is now open. Please proceed with your question.

Hi, good morning guys. Thanks for taking the question. First I just wanted to make sure that I am clear on exactly what you are saying on fiscal ’16 guidance from a top line perspective. So if I understand things correctly you are guiding to mid single digit revenue growth on a reported basis and that is net of 200 basis point currency headwind and a benefit from a 53 week, is that correct?

Yes, which is about 2% as well.

Yes and the other thing that remember what I just talked about with this new sodium citrate and saline agreement.

Okay. So, if you were to excel both currencies and the 53rd week it would still be mid single digit.

Yes.

Okay. Perfect. And then the back half guidance, I mean you have lowered GMs for the full year by 100 basis points and also SG&A for the full year by 100 basis points, but obviously considering there is only two quarters left in the year, the remainder of the year you are taking gross margin down by 200 basis points, well relative to when you previously gave guidance. Does that make sense?

Okay.

It seems like a large magnitude of a move in margins purely on mix. So are there any other changes in your expectations relative to either VCC or other types of operating expense or is that totally mix?

Yes, it's predominately mix. It seems.

Yes, I guess the additional color I give on that James is really when you look at where we expected the majority of our hospital products growth to come, was in the emerging markets and primarily in Russia and China. And what we have expected to occur in Russia has virtually dried up in those hospital products.

And we do have a fairly decent range in the gross margins of our products from the lowest to the highest which it can create lot of leverage one way or the other.

Our next question comes from the line of John [indiscernible] with Raymond James, your line is now open, please proceed with your question.

Good morning. A quick question going into 2016, I guess could you give us some color around whether you expect the strength of plasma to continue and again I know hospital the weakness there is mostly due to Russia but just any color you can give us around 2016 on that.

I am not going to give any John, as you can imagine any product line guidance for 2016 at this point. We will give all that as we always do at the end of our fiscal ’15 when we give full year fiscal ’16 guidance. I will say that what the industry expectations are as for continued strength in the plasma market. They are expecting so that's public information and that's - and they are talking about end market demand plasma drive by pharmaceuticals continuing to grow and that yield a high single digit range at a minimum so you continue to see that range there.

And also I will just add you know hospital business we have got two exciting new products there that are coming to the market and that period TEG success which is moving to the regulatory approval process and blood track and the HaemoBank which is approved and has a lot of positive energy in the market. So that’s really a bit of color on what we expect in the hospital sector.

Okay great and then just on the manufacturing cost reductions, I mean whole blood disposables it's going to be a big component of competitive positioning on the pricing. So I guess today how are you tracking to plan there with cost reductions and I guess how should we think about the timeframe to get to the optimal cost and the drivers there?

Remember what we said it will take us about a two year period of time to get there. These are our value, add value engineering initiatives and I would say that we are tracking along and it's not only the clearly the whole blood is the biggest one we are focused on but those initiatives are not just focused on our whole blood product but on other products as well. As we typically will look at those from time to time but we took advantage where we are looking so focused on whole blood to look at all of our products but I would tell you that remains on track. We will give more color for that at our May investor conference when we give a little deeper dive on some of these strategic initiatives.

Thank you. Our next question comes from the line of Anthony Petrone with Jefferies. Your line is now open. Please proceed with your question.

Thanks and good morning. Maybe to begin Brian just on your comments on blood management solutions can you give us a sense maybe what the revenue opportunity looks like for complete suite of blood management solutions or if hospitals are looking at some of the individuals solutions such as blood track and certainly TEG as a driver and HaemoBank. So just trying to get my head around those comments that you made earlier in your prepared remarks?

Well, the example that I gave you certainly that was a good one for mid to upper mid size community hospitals, 350 beds. And that was in the first two years incrementally a million dollar in sales and then ongoing disposable revenue stream after that. Think probably on the average is about 3x to 4x higher than our average hospital sales today. So that would be north of 300,000 to 400,000. But again, we are learning this as we go through Anthony, we are understanding it and one thing we are certain of it you have seen one hospital you have seen one hospital and we are excited about what it's finding in. We are really encouraged by the way that the hospitals are embracing this. The changes that need to be made aren’t dramatic practice changes. They are pretty logical changes that value stream mapping points out and in many cases they stop doing things. Our device like HaemoBank will put blood at the point of care it will eliminate and this case for this institution it will eliminate 1000s of unnecessary trips with runners carrying blood and little [indiscernible] with dry ice back and forth to the point of care. It will eliminate 1000s of unnecessary types and cross matches every time blood comes out of inventory in the lab and moves to a point of care. So these are some very significant changes from a cost standpoint but not tremendously difficult changes to make from a practice standpoint.

And I am just wondering a follow up there would be how much easier does this make it for blood banks to institute because the consignment model eventually I mean do they need some of these solutions to be in the hospital. Is that sort of the driver that you see eventually expanding some of the initiatives that is going on?

I would answer that question this way a year ago I really expected blood centers to carry these solutions to our hospital customers. That has not transpired as we would have expected. We shifted our focus earlier this year to the hospital in implementing these directly with the hospitals and selling them directly to the hospitals. And that's accelerating for us. It will absolutely create an easier path for blood centers at the end of the day to implement those models. But what we’re finding is that again the demand side of this supply chain is going to dictate to the supply side how that business is done.

Our next question comes from the line of Brian Weinstein with William Blair, your line is now open, please proceed with your question.

Hi, guys good morning, this is Matt Larew in for Brain.

Hi, Matt.

Just wanted a follow up on the comments on TEG success, you mentioned that that two of these missions complete, is there anything inherent to the third submission that will make it more challenge and then beyond that just the expectations for the product, early market really here in fiscal ’16 is that something that can become meaningful soon as end of fiscal ’16 is something that will demand premium, just any more color you can provide on the success product?

Yes. So, nothing to be read in the timing, I mean the FDA will make those decisions as it is necessary and appropriate for the FDA. I would tell you that we view the two clearances that we have received as the more involved clearances if you will and that this third one is a little less involved, but again we wait for the timing of the FDA there to provide those clearances. So, there is nothing that we are concerned about there, we are always at the mercy of the FDA to come back and ask questions but nothing to till date so that’s why you heard us say we continue to expect that we will move forward as we are doing. What you have seen is the investments we have made in the diagnostics product we were growing mid teens up until last year you saw us take a meaningful shift in terms of investments and you have seen grow very solidly with diagnostics to the first three quarters from a constant currency standpoint, 24%, 23%, 25%, 24% year-to-date. So, you have seen us move that meter dimensionally dramatically. You also heard us say that our main investor conference we do expect to drive an incremental $100 million in TEG revenue over the next five years and so to do that we needed to move up these levels and in fact I would tell you we need to move up to growth rates in the low 30s. So, I’m encouraged by the movement we’ve seen already in advance of launching this new product and yes, we do expect this product will begin to have an impact immediately when it’s launched. Remember we’re not selling it today in Japan and that we’ve clearance and we’re starting to accelerate penetration in parts of Europe, so that’s why we remain encouraged there.

Alright, thanks Brian, really appreciate the detail there. And then, following up on the earlier question about, sort of the CBMS offering, sort of the focus here selling the portfolio sort of repackage in a different way, is there certain product reemphasizing, what are you keen on here for driving success into the hospitals?

I can add, in answer to your question is, you remember our old impact program, our old impact program not only allowed us to go in and do an analysis for a customer to help them understand how to implement a solution. TEG was probably the one that was most affected by our impact program. Think of CBMS as impact on steroids it looks at blood use in the hospital from the time of bag of blood breaks the plane of the loading dock at the hospitals, the time goes into the vein of the patient and how that blood is handled all the way through and how ours solutions can influence that blood both in terms of its use, clinical application as well as the logistics associated with the movement of that blood inside the four walls of the hospital to include redundant testing that takes place in these cases. In one such analysis we did, I mentioned the cross matching. In one such analysis in a hospital that we did may transfuse 6,500 units of blood in the operating every year but they would do 26,000 types in cross matches for those 6,500 units of blood that’s almost 20,000 tests roughly $60 a test fully loaded with labor that are totally unnecessary. So it’s an example of what we talk about and what we are in covering for hospitals in terms of blood use. Lot of people think that our blood management solutions is focused on help on how to use less blood there is clearly that element but that’s happening with the transfusion trigger changes on a number of other things and that’s going to continue to happen and yes part of what comprehensive blood management does do is, put the hospitals to the effective use of blood clinically but the waste that occurs relative to logistics and how blood is being managed before is tremendous and the positioning of a couple of strategic HaemoBank or even smaller units that we have with our blood track product line allows hospitals to store blood at the point of care every unit and that to refrigeration unit is typed and cross matched already. Every patient being treated as typed and cross match they can perform on electronic cross match in 15 seconds. So this is clearly some improved technology for our hospital customers.

Our next question comes from the line of Jim Sidoti with Sidoti & Co. Your line is now open, please receive your question.

Good morning. Can you hear me?

Yes, good morning Jim.

Hi Jim.

You guys all dugout.

Well, it’s pretty wide outside.

Well, based on the updates you have given so far it sounds like you are getting closer to regulatory approval for both SOLX and TEG. How long should we model to get production ramped up to get the sales force trained? And when we get those products rolled out?

Well, I tell you, you are going to see as I just mentioned a moment ago a pretty immediate impact you have already seen how we have ramped from fiscal ’14 to ’15. I expect that will once we get that product ramp or I’m sorry approved you will see that start to ramp in fiscal ’16. The training for the tag has already begun when [indiscernible] as you might imagine, it is a far more simple product to use to train to teach to implement. So the TEG we are excited about, SOLX on the other hand I can't give you any idea how long that will be enhances at the FDA but as we always said don’t expect any significant impact in revenue for SOLX in fiscal ’16 as that visibility comes into play as that clearance comes through we will certainly keep you informed but we will show you what that means a little bit at the main investor conference as well.

Alright and any updated guidance?

I’m not touching that but I will very quickly Jim because you mentioning the snow and should have said this in the beginning and I thank everybody for your patience as we took a more prudent force and moved our call a day because of the snow storm, so thank you for your flexibility in working with us on that.

Well, you’re not pointing the giant, so I think you have got a chance.

We are not deflated by anything that’s -

Yes, I know, it seems like deflation is a big issue in Boston this month.

Thank you. Our next question from the line Jan Wald with Benchmark & Company. Your line is now open. Please receive your question.

Good morning everyone. I guess, I have a couple of questions left. One is after the TEG approval I guess, what I’m interested in knowing is, you have a pretty nice base of customers out there, how you are going approach new customers. You got to approach a new type of customer with the new TEG and if so how do we understand the sales process going forward for that?

So, we are not approaching new customers, we can only use the device for the – for it’s clear to be used for and it’s going to be focused on the exactly same customer base recognized that our growth you have seen this year is not just for new customers but from penetration of existing customers. Not uncommon to customer that implements two TEG devices grows to four to five TEG devices, six TEG devices overtime and some larger institutions I was in a very hospital in China, where I was in the laboratory and there were 12 TEG devices lined up and they were running virtually all day. So, it really drives that penetration but what’s going to drive it further. Remember when we began this where we are entering a $300 million market that’s growing to be a $400 million market and our products about 85% market share in a market where $40 million so there is still tremendous penetration opportunity upside as it relates to this market. So that’s our focus remember what I said earlier, we are now cleared for Japan, we haven’t begun selling there yet. So that will be upside for us and we are just starting to penetrate number of markets in Europe where we have not been selling previous to now and our growth in the U.S. continues to be very strong, very robust.

Okay, just on the point that Brian made. Our market opportunity just based on the current label claims is around $300 million our expectations that opportunity in terms of procedure going et cetera is that will increase close to $400 million within 5 years so it is a lot of run way for us from the perspective of penetration and we have a strong market position.

And maybe just as follow up to that, I remember hearing that some parts of the world and eventually cardiologists were beginning to use TEG, do you see that as part of your existing customer base or will that be a new customer base?

It’s not part of our current focus that’s being used in China and we currently have a very large clinical study going on in China for that practice alone, but that is strictly related to China.

Thank you and with no further questions in the queue I would like to turn the call over to Brian Concannon for any closing remarks.

Thank you, Nicholas. As fiscal ’15 comes to a close and fiscal ’16 is almost upon us, we have established some important positive momentum. We continue to make great progress with our identified growth drivers. Most of the near term headwinds causing declines in the U.S. whole blood business will pass by mid fiscal ’16. Software advances and sodium citrate the saline solutions capabilities have strengthened our Plasma franchise. Our new product initiatives both in software and devices are forming the foundation of a comprehensive blood management solutions offering as it is catching the attention of our hospital customers. Our VCC initiatives remain on track to provide the savings we have targeted, we are well positioned. Success is all about execution and we remain laser focused on execution. I mentioned our May Investor Day, we have scheduled that for Tuesday, May 19 in Boston at the same venue we utilized last year. We expect to demonstrate our new products, highlight the capabilities of our value stream mapping and CBMS programs and provide the opportunity to meet our management team. We hope that you will be able to join us then. Thank you for your attention this morning.