Haemonetics Corporation (HAE) Q4 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Haemonetics Corporation Fourth Quarter Fiscal Year 2015 Earnings Release. At this time, all participants are in a listen-only mode. Later, there will be a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, today’s call is being recorded. I would now like to turn the conference over to Gerry Gould, Vice President, Investor Relations. Sir, you may begin.

Thank you. Good morning. Thank you for joining Haemonetics four quarter fiscal ’15 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 will include forward-looking statements. Our actual results may differ materially from anticipated results. Additional information concerning factors that could cause results to differ materially is available in the Form 8-K we filed this morning, as well as in our prior year 10-K and recent 10-Q filings. On today’s call, Brian will review the highlights of fiscal ’15 and key elements of our strategy, which will influence our performance going forward. Chris will cover fourth quarter and full year operating performance in more detail, as well as guidance 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 fourth quarters of fiscal ’14 and ’15, and in both fiscal years, we have excluded pre-tax transformation, integration and restructuring costs associated with our Value Creation and Capture initiatives and the associated tax effect. 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 fourth quarter and fiscal ’15, and we provided guidance for fiscal ’16. In the quarter, revenue was $226 million, down 6% as reported and 4% in constant currency. For the full year, revenue was $910 million, a decline of 3% as reported and 1% in constant currency. Approximately 25% of our revenue is denominated in the yen and the euro. Our goal is to minimize the impact of foreign currency fluctuations, making our earnings performance more predictable over a rolling 12-month period. Certain of our costs are also denominated in foreign currencies. So we hedge only a portion of our foreign currency denominated revenue. Therefore, increasing dollar strength dilute revenue growth and we saw that in our performance in each quarter of fiscal ‘15 and the currency headwind accelerated as the year progressed. In constant currency, our growth drivers of Plasma, TEG and emerging markets accounted for about 60% of our disposables revenue in the fourth quarter. These three elements of our business had combined growth of 8% in the fourth quarter and 9% in the full year. Plasma was up 11%, TEG up 24% and emerging markets up 2% in fiscal ’15. The weakening economy in Russia, which represents about 3% of our revenue, impacted emerging markets growth. Disposables revenue and emerging markets excluding Russia grew 23% in the fourth quarter and 9% in fiscal ’15. The Russian economic trends we saw emerged in the back half of fiscal ‘15 were not anticipated in our original guidance and represent the key element of variability from our original expectations for the year. Chris will discuss Russia's impact on our revenue and earnings in more detail. And which were anticipate in our original guidance included reduced pricing, market share loss, the end of an OEM supply contract and overall market declines in the demand for red cell in whole blood collection, all affecting our U.S. Blood Center business. Together with the currency in Russian market headwinds, these more than offset the performance of our growth drivers in the fourth quarter and the full fiscal year. Fiscal ‘15 was a year of transition. We expect that many of the headwinds faced in fiscal ‘15 will be behind us by the midpoint of fiscal ‘16. This moderation of headwinds combined with continued growth in our identified growth drivers will be the main contributors to our return to growth in fiscal ‘16. Additionally, we're seeing progress with key new product advances and traction being gained with our comprehensive Blood Management Solutions or CBMS. In product development, we committed to delivering four new products and we delivered five. We advanced our Value Creation and Capture initiatives, achieving all milestones and saving $30 million of the total $65 million that we've targeted by fiscal ‘18. In short, we made great progress during this year of transition. Turning to fiscal ’16, we established our guidance for revenue with growth in the range of 4% to 6% consistent with our previous outlook of a mid single-digit growth rate. This includes 300 basis points of currency headwind. So our guidance is for 7% and 9% revenue growth on a constant currency basis. We established our guidance range for fiscal ’16 adjusted earnings per share at a $1.98 to $2.08, representing earnings growth of 7% to 12%. This too is consistent with our previous outlook of high-single to low double-digit earnings growth. In constant currency, our fiscal ‘16 earnings growth will approximate 15% to 20%. We also provided guidance for free cash flow of $105 million to $110 million. Importantly, with only one quarter of our free cash flow committed to complete remaining spending under VCC initiatives and three quarters truly free. We plan to complete the remaining $61 million of share repurchases authorized under our current program. Chris Lindop will provide more detail about our fiscal ‘15 results and our fiscal ‘16 guidance. But before I turn the call over to Chris, I'd like to point out several important elements that we see as indications we are at a positive turning point as fiscal ‘16 begin. Our Commercial Plasma business enters fiscal ‘16 well-positioned, with 80% of its current business under contract for the first quarter of fiscal ’19, a robust end market for plasma derived our biopharmaceuticals and a growing installed base of equipment. We expect this business to achieve growth that exceeds end market growth rates, on the strength of recent customer contracts for our NextGen DMS software and for the saline and sodium citrate solutions we will provide the CSL Plasma. Our software and solutions capabilities will enable us to participate in a larger share of each collection event driving revenue that will be incremental to our plasma collection disposables. We expect our TEG diagnostics business to deliver accelerated growth beyond the 24% it achieved in constant currency in fiscal ’15, on the strength of a growing installed base of equipment and the launch of the new TEG success device in consumables in fiscal ’16. We see our Russia business stabilizing over the course of the year, enabling our emerging markets to grow by high-single digits in fiscal ’16. So our combined growth drivers representing about 60% of our disposables revenue, Plasma, TEG and emerging markets will continue to produce double-digit revenue growth and early successes of our new Plasma NextGen DMS and BloodTrack HaemoBank software offerings indicate that software is well-positioned to contribute meaningfully to growth in fiscal ‘16 as well. We also enter fiscal ‘16 nearing or having past the anniversary dates of market share loss and price concessions in our U.S. blood center business as market decline is moderating. For all of these reasons, we are confident in returning to revenue growth in fiscal ‘16. At the same time, our VCC initiatives are moving forward on plan with our new production facility in Penang, Malaysia and our expanded facility in Tijuana, Mexico, allowing us to consolidate the manufacturing of products formerly produced in the U.S., Italy and Scotland. Spending on VCC initiatives will be completed and incremental cost savings realized from these initiatives are expected to approximate $14 million in fiscal ‘16. Despite the currency trends we're experiencing, I am pleased with the positive momentum in the commercial and operational elements of our business. Chris will expand further on this after he reviews the reported results and guidance. Chris?

Thank you, Brian. In the fourth quarter, total revenue was $226 million, a decrease of 6% as reported and 4% on a constant currency basis. For fiscal ‘15, total revenue was $910 million, down 3% as reported and down 1% in constant currency. In fiscal ‘15, revenue in Russia was $8 million lower than in fiscal ‘14. The impact on our consolidated revenue growth of this Russia weakness was 2% in the fourth quarter and 1% in the full year. Early indications are that we will see the impact continue in the first half of fiscal ‘16 before recovering later in the year. In the quarter, Plasma disposables revenue was $76 million, an increase of $2.3 million or 3% as reported and 5% in constant currency. In fiscal ‘15, Plasma disposals revenue was $319 million, up $27 million or 9%. North American Plasma disposals revenue grew 10% in the quarter and 14% in the full year. Global Plasma growth in the quarter was impacted by softness in the Russian market and a flu outbreak in Western Europe which affected donor availability in Germany. We installed over 4000 Plasma collection devices in the past three years and we fully expect strong disposables growth to continue as our customers keep pace with the growth in the end market demand for Plasma derived by pharmaceuticals. In the fourth quarter, blood center disposals revenue declined $10 million or 10% to $86 million. In the full year, blood center disposables revenue was $339 million, down $51 million or 13%. Excluding the impact of currency, blood center disposals declined $41 million or 11% for the year. Plasma disposals revenue was $37 million in the quarter -- excuse me, platelet disposables revenue was $37 million in the quarter and $153 million in the year. Our largest platelet market is Japan and so the growth of this franchise was disproportionately impacted by the devaluation of the yen. In fiscal ‘15, our platelet business declined 3% on a reported basis but was up 3% on a constant currency basis. Red cell disposables revenue which was $11 million in the quarter and $43 million in the year was down 7% in the fourth quarter but up 1% in the year. Adjusted for some order timing, red cell disposables revenue was essentially flat in the quarter, as well as in the year. In an environment of declining transfusions, customers are employing collection strategies that leverage our Apheresis technology to optimize red cell collections. Whole blood revenue was $38 million in the quarter and $144 million in the year, declining $7 million or 15% for the fourth quarter and $47 million or 25% for the year. In the quarter, whole blood revenue was $23 million in North America, $11 million in Europe and European distribution markets and $4 million in the Asia Pacific and Japan markets. The $7 million decline in the fourth quarter occurred in North America, reflecting the lower American Red Cross volumes and trends in the demand for red cells. The lost American Red Cross whole blood business was fully transitioned to our competitor late in the first quarter of fiscal ‘15. So the $25 million annual run rate of the lost business or the $6 million quarterly revenue impact was felt in each of the second, third and fourth quarters and will continue to affect our comparable growth rate for one more quarter going into fiscal ‘16. The decline in the U.S. red cell transfusion rate was approximately 10% in fiscal ‘14 and roughly another 10% in fiscal ‘15. The business most impacted by that market decline which is our 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. We will anniversary most of the headwinds in our North American whole blood business by mid fiscal ‘16. As a result, we expect our blood center revenue to be down between 4% to 6% in fiscal ‘16 which is largely attributable to currency. And this is much less than the decline reported in fiscal ‘15. Hospital revenue was $32 million in the fourth quarter and $125 million in fiscal ‘15, essentially flat with the prior year. Excluding the impact of currency, hospital revenue grew 1% in both the fourth quarter and the year. Continued strong TEG momentum offset declines in surgical and orthopedic cell salvage, as well as the impact of weaker foreign currency rates in both the fourth quarter and the full year. Surgical disposables revenue was $16 million in the quarter and $63 million in the year, down 11% as reported and 8% in constant currency in the quarter and down 6% as reported and 4% in constant currency for the year. In diagnostics, we had record TEG disposables revenue of $12 million in the quarter, up 27% and $42 million in the year, up 27%, both as reported. Customers are discovering the value of this innovative technology. Constant currency growth was 26% in the fourth quarter and 24% in the year, driven by increases in North America and China. We sold nearly 1900 TEG devices in the past three years and we fully expect strong disposables growth to continue. Software solutions revenue was $18 million in the quarter and $72 million in the year, a full year increase of 2%. We continue to see a steady pipeline of software opportunities. The equipment revenue was $14 million in the quarter and $55 million in fiscal ‘15. Our installed base of equipment, which is a combination of purchased and placed devices increased 7% in fiscal ‘14 and another 7% in fiscal ‘15. The install base of plasma and TEG, two of our growth drivers had average annual increases of 10% and 16% respectively over this time, the same two-year period of fiscal ‘14 and ‘15. These are leading indicators for future growth in disposables revenue. Fourth quarter fiscal ‘15 adjusted gross profit was $110 million, down $7 million from the prior year fourth quarter. Fourth quarter adjusted gross margin was 48.7% in fiscal ‘15 and 48.8% in fiscal ’14. In fiscal ’15, adjusted gross profit was $444 million, down $35 million or 7% and down 6% in constant currency. Adjusted gross margin was 48.8%, down 230 basis points as pricing and volume pressures in the U.S. whole blood business and unfavorable product mix outpaced the benefits from our growth drivers and VCC savings initiatives. Adjusted operating income -- excuse me, adjusted operating expenses were $75 million, down $8 million or 10% as compared with the prior year's fourth quarter, due to the timing of expenses incurred within the two fiscal years ‘14 and ’15, and the benefit from the planned organizational cost reductions, which ramped up during fiscal ’15. For the year, adjusted operating expenses were $307 million, down $13 million or 4%. Adjusted operating income was $35 million in the quarter, up $1 million. Adjusted operating margin in the fourth quarter was 15.5%, up 130 basis points. In fiscal ’15, adjusted operating income was $138 million, down $22 million or 14% and down 11% in constant currency. Full year adjusted operating margin was 15.1%, down 190 basis points as the pressure upon gross margin of the pricing, volume and product mix which I mentioned, outpaced the benefits from our growth drivers, VCC and other cost savings initiatives. Adjusted interest expense associated with our loans was $2 million in the fourth quarter. Our tax rate was 25%, compared with 23.5% in the fourth quarter a year ago. Our full year tax rate was 24.9% in fiscal ‘15 and 23.3% in fiscal ‘14, as certain tax statutes expired benefiting the prior year. We continued to benefit from the implementation of our global bank strategy. In the quarter, adjusted earnings per share were $0.47, up 2% attributed primarily to the increased operating income in the quarter. Declines in our Russia business adversely impacted earnings by $0.07 in fiscal ‘15. As noted previously, this trend is expected to continue through the first half of fiscal ’16, before beginning to recover in the second half of the year. We ended fiscal ‘15 with $161 million of cash on hand, down $32 million from our fiscal ‘14 year end. We used $92 million, net of cash tax benefits for VCC and other restructuring, $10 million for net debt repayment and $39 million for the repurchase of shares in the open-market. As we announced previously, our Board of Directors approved the repurchase of up to $100 million of Haemonetics shares. We repurchased 1,174,000 shares at an average price of $33.25 in fiscal ‘15. We intend to complete this program in fiscal ’16. Turning to fiscal ‘16. Our revenue guidance on a reported basis includes Plasma disposables growth of 10% to 12%, a decline in blood center disposals including whole blood of 4% to 6%, Hospital disposables growth of 4% to 6% and software growth of 10% to 15%. Overall, we expect revenue to be up 4% to 6% on a reported basis. Fiscal ‘16 will benefit from the inclusion of a 53rd week. With about 300 basis points of headwind attributable to currency trends, revenue growth is projected to be in the 7% to 9% range on a constant currency basis. For the full year, our expectation is that adjusted gross margin, which will average between 48% and 49%, will increase gradually over the course of the year. Factors impacting year-over-year comparisons of gross margin include mix and currency, offset by VCC and other structural cost improvements. Currency will represent a 100 basis point headwind to gross margin improvement year-over-year. For the full year, adjusted operating margin is expected to average between 15% and 16%. Our adjusted earnings guidance range is $1.98 to $2.08 per share. This represents 7% to 12% earnings growth over fiscal ’15. As previously indicated, we anticipate a significant currency headwind, reflecting the rates at which we have hedged our fiscal ‘16 foreign earnings. In constant currency, our fiscal ‘16 earnings growth will approximate 15% to 20%. Now, beyond the elements of guidance I've already provided, I think it's important to provide some additional color on the expected phasing of our revenues and earnings. In fiscal ’15, 49% of the year’s revenue was generated in the first half with some order timing and the inclusion of the ARC whole blood business in the first quarter, benefiting the first half and the decline in Russia, revenue arising in the second half. It’s normal for our company to generate approximately 48% of its revenue in the first half of its fiscal year and 52% in the back half. In fiscal ’16, revenue related to our Russia business will be roughly $10 million lower in the first half than in the second half of the year, reflecting an adjustment of inventory levels in the channel due to revised near-term expectations for that market. With this trend in the Russia business and the 53rd week being part of the second half, we expect revenue to be split 46% in the first half and 54% in the back half of fiscal ‘16. Along with these expected revenue trends, we expect gross margins to increase gradually over the course of the year and operating expenses to be spread fairly evenly across the four quarters. Accordingly, the first half of fiscal ‘16 is expected to deliver less than its proportionate share of full year earnings. As you build your models for the year, a reasonable expectation would be for a 35% of earnings in the first half and 65% in the back half, as revenue and earnings are expected to accelerate as the year progresses. As in the past, our website includes revenue and income statement scenarios, which are based on the elements of fiscal ‘16 guidance we provided. When we provided fiscal ‘16 free cash flow guidance of between $105 million to $110 million before funding $27 million related to our VCC initiatives, this means we expect only about one quarter of our free cash flow to be committed to VCC activities and three quarters to be available for other corporate priorities. The VCC and restructuring investments are expected to come to a conclusion in fiscal ‘16. And we remain on track to realize the incremental VCC savings needed to bring us to our target of $65 million in annual savings by fiscal ‘18. With that, I will turn the call back over to Brian.

Thank you, Chris. A year of transition has ended and we feel very good about the progress we made. Let me mention a few of the milestones we reached in fiscal '15 that give me confidence in our guidance for fiscal '16. Our identified growth progress generated 9% growth in constant currency despite the Russia headwind. This result demonstrates the value of investments we made in fiscal years '13 through '15. Our comprehensive blood management solutions initiative continues to gain traction with our hospital customers, demonstrating the real value of our product offering. We expanded our strong plasma franchise with a saline and citrate contract and our next generation software product gained immediate customer acceptance by KEDPlasma and CSL Plasma. In addition to the plasma and BloodTrack software launches I mentioned, DonorSpace, our donor recruitment and management software is currently being installed at our first blood center customer. We will also have the flexibility and capability to be offered to our plasma customers as they implement NextGen DMS software. Software is having an increasing impact upon our strategy of building connected devices and integrated solutions. With 10% to 15% growth expected in fiscal '16, software is emerging as both the core competency for Haemonetics and the future growth driver. We delivered on our commitments with the four new products we identified at our May 2014 Investor Conference and a 5th new product has also been introduced and commercialized, the BloodTrack HaemoBank. We shipped nine units today to customers in the U.S., the U.K. and the United Arab Emirates. These innovations demonstrate that we are building out the suite of products and services we need to achieve our vision. Our comprehensive blood management solutions, or CBM, offering incorporates these and other products. Our hospital customers are recognizing the benefits. We also made considerable advances with our VCC initiatives. The Tijuana, Mexico facility expansion and the new Penang, Malaysia facility construction were both completed. Product transfers, distribution system upgrades, and vendor optimization initiatives were implemented without any interruption to our customers needs. Our new manufacturing and distribution footprint is key to the continued profitability improvement and operating margin expansion we expect going forward. The VCC initiatives are especially noteworthy as they were both transformative and timely. The profit and cash generating capabilities of our company have been considerably enhanced by the benefit of these programs. We remain on tract to finish the VCC spending in fiscal '16 and to realize our targeted savings by fiscal '18. We emerged from fiscal '15 well positioned to return to top and bottomline growth and to withstand the increased pressure of currency headwinds. Our adjusted operating income and earnings per share are expected to grow 15% to 20% in constant currency, demonstrating the strong earnings potential of the business. This morning we also announced a couple of important management changes designed to accelerate the execution of our comprehensive blood management solutions strategy. Kent Davies, our President of Global Markets for the past 12 months has been promoted to the position of Chief Operating Officer with overall responsibility for our global commercial focus as well as our product management and new product development capabilities. In addition, Byron Selman, who joined us in August 2012, and who since that time has served as the President of our North America business, has been promoted to the position of President of Global Markets, which was previously held by Kent. In this role, Byron will assume the responsibility of leading our commercial operation and servicing blood collectors at hospitals around the world and the delivery of our comprehensive blood management solutions. Pete Allen, our President of Global Plasma will also report to Kent and will remain responsible for our commercial plasma business worldwide. Our business fundamentals remain strong in expanding global footprint, a steady flow of differentiating new software and devices, a solid R&D pipeline, and ever improving cost structure and the broadest array of products and services in the blood industry. We believe the positive momentum will manifest itself in increased demand for our CBMS offering, demand that will ramp up throughout fiscal '16 and become much more meaningful in fiscal '17 and beyond. We will give more visibility to this initiative and so much at our Investor Conference on May 19. I would like to thank our employees and convey my appreciation for their constant attention to the needs of our customers. They have remained very committed throughout these times of change. With that, we are happy to take your questions.

[Operator Instructions] Our first question is from Larry Keusch of Raymond James. You may begin.

Thanks. Good morning, everyone.

Good morning, Larry.

Good morning, Larry.

Hey, Brian, could you, I guess, just talk a little bit about blood management? You obviously indicated I think nine system shipped in the fourth quarter. And I am talking for the HemoSafe. But could you talk a little bit about how are you thinking about that opportunity and how we should be thinking about it for '16?

Yes. Larry, we are intentionally being very careful about how we view that opportunity right now. We are seeing some very significant success. We have conveyed that to you in the last call. We have made very solid progress since that time with an increased number of hospitals in the pipeline. We are going to give more visibility to this at the May Investor Conference, but it is still a very low end. I would say less than 20 accounts at this point that we are actively engaged in. And so we are being careful in how we represented until we know really what we have there. What I expect is that we will see greater visibility to this throughout fiscal '16 as we indicated. We are optimistic about it. We have not had any accounts that we’ve looked at, not want to proceed with the exception of one that was involved in merger. So our progress here has been very solid and we are very excited about that. And as you mentioned, one of the key product lines that necessary to the success of that program is the HaemoBank and we are already starting to see that accelerate in its growth, but that growth I would tell you Larry is for the most part outside the United States at this point. So you will see that continue to accelerate domestically as well as CBMS takes hold.

Okay. That’s helpful. And then just as a follow-on. I mean, you obviously indicated that the transfusion rates in the U.S. declined by about 10% both in '14 and '15 and I think very consistent with what you guys have been thinking. And you are also indicating that you would anticipate that to moderate in '16. Maybe just again remind us and help us think about why and what tangible evidence there is that will moderate, and sort of when you say moderate, what are you thinking?

So I think this is one that really deserves some additional attention, because what gives us confidence kind of moderate. If you think about a transfusion rate that was roughly about 42 years ago, 2 years of 10% decline takes us down in the low-30s consistent with practices around the world, and this is practices that are really being driven by transfusion triggers. But what gives me further comps. You heard me say this is that we have dialed in what our customers tell us they believe is going to happen in this market, which is lesser declines than the 10% but something of the magnitude of 5% to 8%. But you heard me give my opinion that I personally believe it's going to be less than that just simply because the math holds that out, but there’s nothing that would indicate that we should do different than what our customers have told us, although we’re starting to see that. What did we see? So we saw this year quarters of whole blood that was $38 million in Q1, $34 million in Q2, $34 million in Q3, and $38 million in Q4. Interestingly our $38 million in Q4 equals our Q1 does not include the American Red Cross business roughly about $6 million in sales, which was in the $38 million in Q1. So this is something that we’re continuing to look at and monitor. What I would tell is we planned responsibly, if we’re wrong there is upside here.

Thank you. Our next question comes from Brian Weinstein of William Blair. You may begin.

Hi. Thanks for taking the question. Question on the saline, citrate opportunity, can you just again quantify what that is for next year? And then you had talked about some additional opportunities with addition potential partners there, can you just update if those are ongoing and if those are baked into any assumptions for next year as well?

When you say next year Brian, let me clarify your question. When you say next year, you talk of fiscal '16 which we just starting or '17?

Yes. I’m sorry, '16.

Okay. So it is dialed into fiscal '16. This is a contract with CSL Plasma that want to hits its full potential at current collection rates. It’s worth about $25 million to us. It will ramp throughout the year that will get to that annualized run rate. We’ve dialed in high-teens in terms of revenue for that this year.

And are there partners that you are -- you had discussed previously, there were other partners who were potentially looking to expand that business and work with -- is there anything for other partners that is baked into the guidance?

There is nothing that’s baked into that guidance for fiscal ’16?

Thank you. Our next question comes from James Francescone with Morgan Stanley. You may begin.

Hey, thanks for taking the question. I was wondering if you could clarify a little bit your assumptions on Russia through the year. It sounded to me the way that you’ve described it that you’re assuming that there is continued year-over-year impact in the first half of the year, but it wasn’t clear on what you’re assuming in the back half. In particular, are you assuming that that Russian revenue actually grows and comes back in the second half of the year? And if so, what gives you the confidence that that will be the way things play out?

Hi, James. This is Chris here. Year-over-year because the back half of this year was severely depressed. We believe that there will be growth. But we see the order rates that we experienced in the back half continuing into the first half. And year-over-year overall where we had a decent front half, a weak back half in '15, we’re seeing a weak front half and a decent back half in '16, which gives us generally a flat outlook for Russia year-over-year.

To be clear, we’ve not dialed anything incremental in Russia, but as they used down inventories that they’ve built up, we’ll see less in the front half than we’ll see in the back half. That’s what we’re seeing.

Yes. And the macro factors are moderating a little bit, certainly currency makes us a lot easier now for distributor.

So if I got that right, it’s inventory draw down in the first half is kind of artificially depressing those numbers and that’s why you get better results in the back half. Is that right?

Yes. That’s correct.

And usually the back half is when a lot of tenders go out in Russia, it’s just the pattern of their buying.

Thank you. Our next question comes from Larry Solow of CJS Securities. You may begin.

Hi. Good morning, guys.

Good morning, Larry.

Just discussed, just a little bit more on the gross margin outlook for ’16. I realize you mentioned it’s about 100 bps from currency and I know that plasma obviously is a little bit less so that impact is just mix. But certainly, excluding just the currency, it should -- on guidance it’s about flat, so maybe slightly up, so is there other pricing pressure? And maybe increase in additional price pressures maybe in blood center or what is it that’s not giving you much lift despite the increased VCC savings?

It’s absolutely three things. Mix, as we said that we’ve got high-teens dialed in, in our growth for solutions, which have lower gross margins but attractive operating margins. Plasma is a big part of our growth. And as you alluded to, the plasma is part of our growth and has lower gross margins. Currency is a big headwind, 100 bps of currency headwind year-over-year is overwhelming the benefits generated from VCC that we’re seeing and expecting in the year.

Okay. And just switching gears for the second question. Just on the hospital market or just more particular the surgical, Cell Saver, OrthoPAT, I assume, hard to say, when the down flow stops or the bleeding if you will, no part intended. But just on Cell Saver, is this also getting sort of caught in hospital, improved efficiencies of hospitals and I know you lapped competitor back in the market earlier in the year? So what sort of your outlook going forward?

We don’t give guidance by product line, Larry. But I will expect -- we will expect to see the OrthoPAT declines continue as tranexamic acid is expanding, use not only domestically but internationally. Our cell salvage business, we expect to grow in the emerging markets as those markets still don’t meet demand for blood today. So cell salvage becomes a normal path to take within those markets. As well we’ll see that stabilize domestically. We’ve launched our new software on that device earlier this fiscal year, so we’re excited about that launch. We’ll launch a next-generation software for that device toward the end of this fiscal year. So we’re seeing improvements that new platform which is gaining customer acceptance.

Thank you. Our next question is from David Roman of Goldman Sachs. You may begin.

Thank you, and good morning, everybody.

Hi, David.

I wanted to start with two specific elements of the guidance. As I look at how things ended the year specifically, in hospital and software, those appear to be the two categories, where you’re contemplating the most significant acceleration in growth in FY16? Could you maybe go into a little bit more detail, what the underlying factors are supporting the sharp change in the growth rate in FY16?

Well, in software, it’s primarily the BloodTrack HemoSafe which is as you know a new product. It’s one that’s a very deeply integrated and implicated let say in the CBMS strategy that we are implementing in North America. It has good traction outside the United States as we alluded to even just in the fourth quarter orders. So that's the biggest single element of software, but of course, we are rolling out as we’ve mentioned already NexGen DMS for a plasma customer at this point. So these are the elements of the software story. And in hospital we are expecting strength in TEG as you would expect with a new product launch and even in advance of the new product launch we have very attractive growth rates. In fiscal ‘15 and the improvements or enhancements we making for the Cell Saver Elite, we think will give us some traction, primarily OUS initially or in the cell salvage area.

Okay. Got it. And then maybe just a follow-up on currency. I think you said in the prepared remarks, Brian, that 25 % of your revenue is exposed to the euro and the yen, but obviously your ex-U.S. exposure is bigger there? Can you may be just help us understand the impact of foreign currency hedging gains or losses to the P&L and how we should think about forward period as those hedges roll off? Is there any type of impact to the FX rates stay where they and how much is the net impact of FX this year, the translation impact, I guess, net of the hedges?

Well, just to recap on the hedging strategy or how we approach the hedging, we are really taking a portion of our revenues, which are the net -- naked exposure to the currency and selling them forward in increments every month over rolling 12-month period using forward contract. So a portion of our revenues are unhedged by virtue of the fact that we are only -- we are choosing only to hedge a portion of them, because we have natural hedges further down the P&L and their expense structure. We’ve locked in hedges for fiscal ‘16 and as we’ve said, there’s sort of 300 basis points of headwind, no one embedded in the hedges that we’ve locked in related to the strength of the dollar and that cascades down the P&L to a very significant impact at the net income line. So what we know is that the net income exposure will be hedged with great precision. There's still a little bit of variability on the topline for that portion of the revenues that are not hedged. We -- all the hedging strategy does for us as this gives us visibility over 12 months. So as rates progress during fiscal ’16 we will be stepping into those rates into our hedges and that's what we’ll experience in fiscal ’17. And I don’t really have a crystal ball yet about what that will be.

Thank you our next question is from Anthony Petrone of Jefferies. You may begin.

Thanks, gentlemen. Just an update on VCC, maybe specifically at the operating margin level? What level of, I guess, aggregate savings just baked in from VCC initiatives in the operating margin guidance? And then a follow-up just on margins generally, how margin accretive this software revenues relative to the corporate average?

Yeah. VCC we’ve got -- realized in the P&L. I presume you are asking now about fiscal ’16…

’16. Yeah.

And as realized in the P&L, we got about $13 million, $14 million of incremental…

$14, what we have said.

$14 million of incremental benefit coming through for VCC and that will drop down, but will be, as I said earlier, will be offset by some fairly significant currency headwinds in the gross margin line.

Yeah. And one thing, before Chris goes on and talks about the software margin component, Anthony, I think it’s really important for us all to understand just what VCC is meant to us in terms of the profitability of this business. So much of this is offsetting some very significant headwinds. Headwinds at every company is facing in this space to some degree or another. I wish -- I wish that I could say we were so clairvoyant we saw this and we are responsible in what we did. We want -- we saw the opportunity to improve the profitability of this business and we took it. It was very bold. We did something that companies much larger than us maybe wouldn't do. So I'm really proud of what the team did here and how we've accomplished that. We are on track. We’ve completed the second of three years and arguably the heavier lifting is behind us. Had we not done this, this P&L would be a very, very different looking P&L. We save $30 million to date, return $30 million of profitability to date, that's a very, very significant impact overall. So it's important for us all to understand and appreciate just what that’s meant. In the software?

Yeah, accretive to our gross margins.

Thank you. Our next question is from Jim Sidoti of Sidoti & Company. You may begin.

Good morning. Can you hear me?

Yeah.

Yes, very clear.

Can you just give us some more color on the status with the FDA regarding the TEG approval and the SOLX approval?

Sure. So taking TEG first, there are three clearances that we were looking for. And we have two of the three, one relates to the analyzer and one relates to play that mapping cartridge. And the general hemostasis cartridge is pending. And really, Jim, the reason that, that is happening is the order in which the original submissions were made and the insights we gained from going -- the back-and-forth with the FDA during the approval process. And so we're -- we remain optimistic about the outlook for approval sometime in the first quarter for that. With regard to the SOLX submission, the data is in hand. We’ve submitted it to the FDA. It will be reviewed. It's hard to predict exactly when but certainly not sooner than six months. So start to think about that as a midyear event when we’ll have enough data on that, mid fiscal year.

So are you having dialog with the FDA over the past quarter or are you waiting for response from them?

Dialog certainly on the TEG success but not so much on SOLX at this point and that's not unusual. You really can’t engage in a dialog until they give you their feedback.

Thank you.

Sorry.

Thank you. Our next question is from Jan Wald of Benchmark Company. You may begin.

Hi everyone. I guess most of my questions were already asked. But one of the things, I did want to ask about was the management changes that you’ve made, sort of the rationalize you had for making those changes and what you hope to get from them?

Yeah. Really, two things, Jan. First in full motion, the primary reasons for making any change is to improve the focus that you trying to have in the business. And that’s both from a commercial execution standpoint as our comprehensive blood management solutions offering matures and starts to come into a better light, how do we execute on that? Not only domestically, we were starting to gain traction, but what does that mean internationally? And secondly, to be able to drive that faster how do we better align our product management, product development focus at the same time? So, commercial people asking for certain things, the development people delivering on them based off of the commitments of sales and revenue as well as the cost to do it and that determines the priorities, grossly oversimplifying, but that’s the biggest reason and that’s all now aligned under one person. And that’s call it 80%, 90% of the reasons why we're doing it. Secondarily, it is certainly a signal as we look at succession planning and the responsibilities that I have to prepare this organization for the future. When I say that, I don't want anybody to take that as a signal but my departure is imminent. My departure will be measured in years, not in months, I promise you that. There is a number of things that I want to get done but this is nothing more than a mature approach by me, by the corporation, by our board, as we look to the future.

Thank you. And I guess one last one. Software has become -- as you said it is becoming more important for you and probably those could be a growth driver in the future. And you’ve said you had some success. What’s the environment out there that you’re dealing with? There are others that are probably competing with you in that space. And how do you see yourself fitting in and where do you see yourself being in terms of the competition?

We compete with device and disposable companies and we compete with software companies. We’re not competing with anybody that is connecting devices and disposables with their software and that's the biggest difference you are seeing here. Never again will we develop a product that isn’t connected into our software that can upload into the electronic health records of hospital or the mainframe systems of our collection customers. And that’s a very significant difference between what our competitors do.

Thank you. Our next question is a follow-up from Brian Weinstein of William Blair. You may begin.

Hey, guys. Thanks for taking the follow-up. I just want to clarify something. Was there an incremental investment that’s being made in VCC? I remembered something like a $160 million now and I think you are saying $175 million. I just want to clarify that.

Absolutely. Yeah. That’s correct. And we’re looking at the high end of our range now in terms of savings.

Was there anything that was driving that in particular or was there additional investments to make that or different than what you thought? Or were they just running a little bit, the investments were running a little bit more than you thought. In other words, were there different projects that you started or it is just costing more than you to start?

No. There is a number of things, Brian, that we informed as we went along that we were going to do that was incremental. Some of it’s in vertical integration. But if you recall, the original estimates of our savings were in the $60 million range. We’ve taken them now to $65 million. So you're seeing a relatively rounding in terms of what we're spending as well as what we’re saving.

Thank you. Our next question is from Dave Turkaly of JMP Securities. You may begin.

Hey. Good morning. Just a quick one for Chris. This $13 million non-cash valuation allowance, I was wondering if you could just give us a little detail on that and then tell us will we see that or see anything like that again moving forward? Thanks.

No. It’s a one-time event that’s why we’ve carved it out. It relates to a somewhat esoteric tax issue, tax accounting issue. And it relates to the value of deferred tax assets in the jurisdiction. And because of the VCC activities that we've had and the concentration of spending in the United States and in fact, our strategy in many cases to bring foreign spending, restructuring spending back to United States using different techniques. We've got losses within the United States. And when you do that on a cumulative basis for three years, which is essentially what a look back gives us. We are required to -- in a non-cash charge required to revalue those deferred tax assets. Those deferred tax assets will inevitably be reinstated on to the books in a non-cash event sometime in the future. I don't think in ‘17, but maybe after fiscal ‘17. And so that -- and we know that the core profitability for U.S business is very strong. But we’re not allowed to make that assumption onto the accounting rules. So hopefully that helps.

Yes. It does. Thanks a lot.

Thank you. There are no further questions at this time. I’d like to turn this call back over to Brian Concannon for closing remarks.

Thanks, Sharon. Fiscal ’15 is behind us and our attention is fully focused on fiscal ’16 and beyond. We have positive momentum in the business, both strategically and financially. We continue to make great progress with our identified growth drivers. And we’ll begin to see growth emerge in other areas as well, such as in our Software business. Most of the headwinds that caused declines in our U.S. whole blood business will be behind us by mid fiscal ’16. Our Plasma franchise is enjoying above market growth, leveraging software advances and sodium citrate and saline solutions capabilities. And our comprehensive blood management solutions offering is demonstrating real value to our customers, based on the foundation of new software products and connected devices. Our VCC initiative is providing the savings we expected and our investment in VCC is nearly complete. Our Investor Day is rapidly approaching. The event will be held on Tuesday, May 19th in Boston at the same venue we utilized last year. We look forward to demonstrating our new technologies with an expanded product display and highlighting the capabilities of our value stream mapping and CBMS programs. Also, we will include break-out sessions to provide the opportunity to meet our management team. We hope you’ll be able to join us. Thank you for your attention this morning.