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Haemonetics Corporation (NYSE:HAE)

F3Q09 Earnings Call

February 2, 2009 10:00 am ET

Executives

Alicia R. Lopez - Vice President of Corporate Affairs

Brad Nutter - Chairman and Chief Executive Officer

Christopher J. Lindop - Chief Financial Officer, Vice President

Brian Concannon - President, Chief Operating Officer

Analysts

Lawrence Solow -CJS Securities

David Lewis -Morgan Stanley

Steven Crowley - Craig-Hallum Capital Group LLC

James Sidoti-Sidoti & Company

Anthony Petrone - Maxim Group

Daniel Owczarski - Avondale Partners

Operator

Good morning ladies and gentlemen and welcome to the Haemonetics Third Quarter Fiscal Year 2009 Earnings Review. (Operator Instructions). At this time please let me introduce Alicia Lopez, Vice President of Corporate Affairs for Haemonetics. Please proceed ma’am.

Alicia Lopez

Good morning. Thank you for joining Haemonetics Third Quarter Fiscal ’09 Earnings Webcast. I am joined today by Brad Nutter, Chairman and CEO; Christopher Lindop, CFO and Vice President of Business Development, and Brian Concannon our Chief Operating Officer.

Please note that during the course of this call we may make statements that could be characterized as forward-looking. Our actual results may differ materially from the anticipated results. Additional information concerning factors that could cause actual results to differ materially is available in our press release.

On today’s call Brad Nutter will review the highlights of the quarter; Chris Lindop will review our operating performance and Brian Concannon will talk about global market trends and key strategies.

Now before I turn the call over to Brad, let me remind you that as we shared last quarter, we will be leveraging our website more often as a means of disclosure. Of course we will continue distributing press releases over the wire for significant material information, but in addition our website contains industry news, presentations, and fact sheets which are available only there. You can register on our website to have this information automatically sent to you via email.

Okay, let me begin. A few items that affect our comparative financial results: in connection with the ongoing transformation of our business, we incurred restructuring costs in both fiscal ’08 and ’09 that we have excluded from the financial results we will talk about today.

In fiscal ’08 our adjusted third quarter and year-to-date net income excluded $1.2 million and $4 million respectively in pre-tax costs associated with the restructuring at our European business. In the third quarter and year-to-date for fiscal ’09 we have incurred restructuring costs of $400,000.00 and $2.6 million in pre-tax costs respectively.

Let me remind you that our full year guidance for fiscal ’09 excludes $6 to $7 million of restructuring in this our final year of business transformation. Again, we have excluded these costs from our numbers today so that we can give greater clarity to our operating results.

As is our normal practice, our press release and website include a complete P&L and balance sheet. Both the release and website include reconciliations between our GAAP results and our adjusted results.

With that let me turn the call over to Brad Nutter.

Brad Nutter

Thanks, Alicia and good morning everyone. Once again I am extremely pleased with our quarterly and year-to-date results. In the quarter revenue grew 16% and operating income increased 20%. Gross margin increased 90 basis points to 50.4% and operating margin grew 50 basis points to 16%. Earnings per share are $0.64, up 10% year-over-year.

This is the second consecutive quarter of strong double-digit growth and we continue to achieve positive drop through with expanding gross and operating margins. Year-to-date revenue was up 18%, operating income is up 30%, and earnings per share are up 18%. We are very well positioned to achieve the high end of our annual EPS guidance and we are increasing our annual revenue guidance. I am very proud of our consistent strong performance.

Now as I met with investors this past quarter, not surprisingly, I was asked about current market forces and their potential impact on our business. These questions were basically focused on three area’s: first, currency and its impact on our business; second, plasma and the near-term outlook for this business which has grown so significantly in recent year; and third, global economic trends and specifically the impact that financial pressures on hospitals may have on our patient business. So, we will address each of these questions today.

Chris Lindop will cover currency and describe its impact on our business now and over the next 12 months.

But, on the topic of currency let me add some needed perspective. As this fiscal year ends we will have enjoyed a six year reported revenue kegger of about 10%. Our six-year operating income kegger exceeds 20%, as does our EPS kegger. Now in some of those years we have had currency tailwinds and in some we have had currency headwinds, but regardless of these temporary affects your business has performed very well over the long term.

Chris will also talk about the ongoing strength of our plasma business. Plasma is a big business for us and all the broader market indicators show that this business will continue to be a growth driver for your company.

Finally, Brian Concannon will talk about the impact of the current economic environment on hospitals and explain why the time has never been better for our blood management solutions vision. We expect the issues of elective surgeries to have a very modest impact on Haemonetics in fiscal 2010.

As many of you know, we aspire to become a company that can sustain a five year compounded growth rate of 10% to 12% in revenue and we have also said that our aspirational goal for operating income is to grow 12% to 15%.

Now at the end of this fiscal year ’09, we expect to be a company with a six year compounded annual growth rate of 10% in revenues and over 20% in operating income. So, as we embark on fiscal 2010 on the strategic plan developed by this management team the fundamentals of the business continue to trend very positively and we continue to see outstanding prospects for long-term success.

With that, let me turn the call over to Christ Lindop who will review our quarterly and year-to-date performance as well as our guidance for the remainder of fiscal ’09. Chris?

Christopher Lindop

Thanks Brad. Well le me say at the outset that I am extremely proud of our results. We are well positioned with our year-to-date performance to achieve the high end of our annual guidance, even as we continue to invest in the long-term success of the business.

Now let me move to the revenue growth drivers and highlights of the income statement and balance sheet.

Our third quarter reported revenue growth of 16% breaks down as follows:

The core business remains strong with 12% growth, excluding currency and the TEG acquisition and year-to-date reported revenue growth for the entire business including TEG is 18%. Revenue growth in the quarter came from plasma, diagnostics, and blood banks. Year-to-date all product lines are contributing with solid growth. As we have said many times, we have multiple growth drivers, so let me share more insight.

First I will discuss plasma, our largest business with year-to-date revenues of $150 million. Plasma disposables continue to grow exceptionally well at 30% in the quarter and 31% year-to-date. This growth is driven by market expansion and new contracts. We saw increases in all geographies including Japan as demand for IPIG and albumin outpaced global supplies of plasma. In the US Haemonetics also benefited from a new contract with Octapharma which we announced in Q1 of fiscal ’09. In Japan we saw stronger unit growth combined with a year-over-year price improvement related to a plasma safety enhancement released in Q1 of this year.

It is important to note that plasma-derived drugs are not considered elective treatments and as such are not impacted by current economic trends. Fractionators continue to make investments in their business and industry analysts report that collections are expected to grow about 12% over the next year to meet ongoing drug demands. So as we have shared previously, while we expect plasma growth to moderate from the current extremely high growth rates, we currently expect double-digit revenue growth in the plasma business for the next 24 months.

Blood banks, which are mainly platelet collection disposables, are our second biggest business with $108 million in revenues year-to-date. Blood bank disposables grew 10% in the quarter and 8% year-to-date. The platelet market is growing nominally in developed markets, but we have identified areas for growth in emerging markets, specifically Eastern Europe and parts of Asia. In addition, as you may recall, this year we are benefiting from the market share gains through a contract with Canadian Blood Services. We saw the comparative benefit of the CBS contract through our past quarter. We are pleased that our blood bank business continues to contribute to overall revenue growth as we continue to gain market share in the developed markets and expand markets globally.

Moving to red cells, the red cell disposables business, which has revenues of $37 million year-to-date, grew 5% in the quarter and 7% year-to-date. While more than our original expectations for growth in this product line, our outlook has us growing it between 8% to 10% for the full year.

The patient side of our business is also doing well and let me remind that the patient business consists of our cardiovascular surgical blood salvage systems and our diagnostics, which are grouped as surgical and diagnostics, as well as our orthopedic surgical blood salvage systems.

First surgical and diagnostics, which is a $66 million business year-to-date, grew 21% in the quarter and 30% year-to-date primarily due to the TEG acquisition. In the quarter TEG sales were $5 million. We saw the comparative benefit of the TEG acquisition through the anniversary of the purchase in mid-November. The TEG business is growing at about 15% year-to-date.

OrthoPAT, a $26 million business year-to-date had level sales in the quarter and grew 5% year-to-date. Although we are disappointed with growth for this product line in the quarter, we remain bullish about its long-term prospect as a critical element of our blood management value proposition, as hospitals begin to come to grips with the impact of blood use on their finances and Brian will go into more detail later on the call.

Software and services has $30 million in revenue year-to-date and in the quarter revenues declined 10%. Year-to-date revenue was up 1%. Now the software part of the business is up 27% year-to-date, but this growth was offset by a decline in service revenue that we expected. Service revenues can fluctuate from quarter-to-quarter and last year we had a large consulting service contract which did not repeat this year. Strength in the software business came from our contract with the Department of Defense and from other new contracts.

Equipment sales, which are a great leading indicator of future demand for our single use disposables are $27 million year-to-date and this represents an increase of 21% in the quarter and 23% year-to-date. Equipment sales were particularly strong in Japan, as the Japan Red Cross purchased a large number of platelets and plasma collection devices.

To summarize revenues, we continue to see growth across multiple product lines. So far this year we have balanced, double-digit growth in all of our geographies with North American sales up 21%, European sales up 17%, Japan sales up 11% and Asian sales up 21%. Again, that is double-digit growth in all of our geographies. The prospects for this business continue to be very solid.

Now let me review the rest of the P&L.

Third quarter gross profit was $78 million up 18% and gross margin is 50.4% up 90 basis points. Year-to-date adjusted gross profit is $226 million up 20% and gross margin is 50.8% up 100 basis points over fiscal ’08. Gross margin improvements benefited from currency, manufacturing efficiency offset by product mix.

In the quarter we managed operating expenses well. Despite incremental expenses from the TEG business, which were not included in most of fiscal ‘08 expenses, we kept operating expense dollar growth to 66% of incremental gross profit dollar growth. And for the full year we plan to manage operating expenses to approximately 60% of incremental gross profit dollar growth.

Adjusted operating income grew 20% in the quarter and operating margin expanded 50 basis points to 16%. Year-to-date adjusted operating incomes growth is 30% and operating margin is 15.7% up 140 basis points.

Other income declined in the quarter, compared to the prior year, for three reasons: First, we deployed cash for a share buyback and second interest rates were lower year over year, and third, exchange rate volatility impacted us adversely. Adjusted earnings per share were $0.63 in the quarter, up 10% and $1.80 year-to-date, up 18%.

Now moving to the balance sheet, we closed the quarter with a cash balance of $125 million. In the quarter we generated $14 million in free cash flow after making net investments of $16 million in capital expenditures. Now let me remind you that we began the year with $133 million in cash on hand. We subsequently purchased $60 million in Haemonetics stock and we’re closing out this quarter with $125 million on hand. This is an extremely strong cash generation model.

Based upon the strong performance year-to-date we feel very comfortable updating our annual revenue guidance and affirming that we should be at the high end of our previously published scenarios for operating income and earnings per share. Fiscal 2009 revenue growth is now expected to be between 15% and 16%. Operating income growth is expected to be between 23% and 25% and EPS growth is expected to be between 14% and 16% or between $2.40 and $2.44 per share.

Now clearly, on all points our fiscal ’08 results will be very strong, but remember that our growth is benefiting from strong currency tailwinds and a significant acquisition. As I’ve said many times, look to the current product portfolio to deliver 8% to 11% growth in revenue. This will be a great year, but please, guys, don’t get ahead of us.

Now before I hand the call over to Brian, let me share some comments on foreign exchange as some of you have asked about the impact to Haemonetics of recent currency fluctuations. The bottom line is in fiscal 2010 the impact from currency on revenue will be about 1% positive. As Brad said earlier, by fiscal year end we will have had a six year compounded revenue growth rate of 10% over a time when currency has been both with us and against us. So while currency risk is certainly an environmental factor that we have to address and manage from year-to-year we remain focused on managing your business for the long term.

Let me remind you that we have a hedging practice that gives us 12 months visibility into the impact of foreign exchange on the businesses operating income, so that we can plan appropriately. Our hedge contract supplements the natural hedge of the cost structure inherent in our global organization.

Now currently we have locked in exchange rates on anticipated International revenues through Q3 of fiscal 2010 representing our anticipated net loan position in those currencies. Obviously this is a unique time because currency fluctuations have been so significant. The strong yen benefits us as nearly 15% of our total company revenues come from Japan, but these tailwinds are offset by the weakening euro. On the other hand, the relative weakness of the British pound and the Canadian dollar on our manufacturing and other costs we incur in those currencies is helping gross margin and operating income.

We had not previously hedged the pound or Canadian dollar relying instead on our correlation with the euro and the US dollar respectively. So, we are seeing some benefit from these currency market fluctuations in the current quarter.

As we look forward into fiscal 2010 we expect relatively modest, positive impact on revenue due to currency. So for those of you modeling, let me be specific again. In fiscal ’10 the positive impact from currency on revenue will be around 1%.

In summary, we are well positioned for a strong, balanced, revenue growth by-product line and geography and our currency hedging strategy has locked in for the next 12 months the positive trends that I described earlier. Despite pressing global economic factors and market extremes like we have never seen, Haemonetics is performing exceptionally well. The invest pieces for Haemonetics remains strong. Q3 was another great quarter and positions us well as we close out the fiscal year.

With that, let me turn the call over to Brian.

Brian Concannon

Thanks Chris and good morning everyone. Chris just mentioned two key points: global economic factors and market extremes. Some of you are asking how Haemonetics will be impacted by the turmoil in the global economy, the predicted downturn in elective surgeries and lower capital spending at hospitals. So, let me try to address these questions, but first, let me give you the bottom line.

We expect any negative impact in fiscal ’10 to be modest. Haemonetics is the global leader in blood management solutions, so at the heart of our business is blood and transfusions are a critical part of every health system around the world. Try to run a hospital without blood. It is impossible. Let me share one example.

Recently a leading hospital network, which accounts for about 5% of inpatient admissions in the US, released some key statistics. The company said that for the nine months ended September 2008 blood costs represented 6% of its total expenses. In this period, while its inpatient census grew at about 2% blood costs were rising at nearly 18% year-over-year. This statistic was compared to pharmaceutical costs, which rose at about 1% per year, and med-surg supplies which grew roughly at 5%.

So we know that there are large for profit organizations incurring significant blood costs affecting their income statements. Inevitably, healthcare providers will have to better manage blood costs and they have only two choices, stop surgeries or control the costs of blood. Which is a better financial decision?

Haemonetics value proposition directly addresses our customer’s needs. Our blood management solutions save hospitals in blood collected money while improving patient care. Our consulting services help hospitals better manage blood supplies. Our software provides critical tools for measuring baseline and success. And, our devices can predict demand for blood before surgery and salvage blood during and after surgery. These in turn can reduce demand for donated blood which can be costly and can lengthen a patient’s hospital stay. We have hospitals struggling to manage blood expenses and this is a strong validation of our strategy. Haemonetics is the only company in this market that can reduce total blood costs.

Now let me cut this another way. More than 30% of our business is plasma collections and as Chris shared earlier this is a growing market with ongoing demand for plasma derived drugs. Industry analysts see that demand continuing. 35% of our business is platelets and red cell collections and 15% of our business is cardiovascular surgical blood salvage and diagnostics. The fact is, if you need a transfusion as part of you cancer treatment, or if you need heart surgery these are not elective procedures.

The one area where we could have exposure in the changing economic climate is elective surgeries and specifically orthopedic surgical blood salvage. But here our total exposure is just around $35 million annually. Less than 6% of total corporate sales come from our OrthoPAT. The OrthoPAT device can save the hospital costs and the orthopedic surgical blood salvage market is less than 10% penetrated. Downward pressure on large joint procedure reimbursement, a 25% decline in 10 years, combined with increased implant prices is putting pressure on healthcare provider’s profitability. What does all of this mean?

In order for hospitals to make money on a procedure the cost of the surgeon, the nurses, the OR, and yes, the blood products have to be managed. If we can save hospitals money on blood costs in our under penetrated market than some elective surgery issues can be resolved.

Now when you consider that a recent study by the Englewood Hospital in New Jersey estimates the total cost of delivering a unit of blood for transfusion is approximately $1,100.00, the value of avoiding or minimizing transfusion becomes clear. Even in the declining procedure market there is significant opportunity for OrthoPAT growth for market penetration by helping hospitals to control total blood costs.

Let me remind you of Atlantic Health, the health system we spoke about last quarter. Atlantic Health implemented Haemonetics blood management systems and saved about $1 million in blood related costs.

My final point is we place devices and generate revenues from the sale of disposables that save the hospital money every time they are used. With this business model, we avoid the inevitable pressures of tightening capital budgets. We are not in the capital equipment business.

In closing, nearly all of Haemonetics revenue comes from products, systems, and services that healthcare providers need despite a downturn in the economy and pressures on healthcare systems. Our strategy addresses a growing need. We believe we are uniquely positioned in these troubled times as the blood management company. We are the only company which can help customers control blood costs throughout the total blood supply chain from the donor to the patient.

Haemonetics will continue to address customer’s needs. Our blood management solutions vision is gaining momentum and we have got products in development, whole blood automation and a blood typing system, that will add meaningful market potential to our blood management portfolio.

I am extremely pleased with our quarterly results. I am pleased that our efforts have delivered strong, consistent growth in revenue, earnings per share, and free cash flow in each of the last six years. And, I am confident that we have positioned ourselves well for ongoing success.

Now let me turn the call back to Brad.

Brad Nutter

Thanks Brian and let me thank Haemonetics employees for their outstanding efforts for the third quarter. I am very proud to be able to represent this team to you, our shareholders.

As you know, this will be my last investor call as CEO as I transition in April to become your Executive Chairman. To our shareholders, let me thank you for the opportunity to lead your company. This has been a very rewarding experience. I am proud of our results over the last six years and strongly believe the company is positioned to make the next six years very strong indeed.

I will look forward to focusing my attention on board governance as your chairman and I will continue to work closely with the Haemonetics leadership team on strategy and our blood management solutions vision that Brian and Chris have talked about.

Our leadership transition is going very well. We have continuity in our people, our annual operating plan, and our long-term strategic plan. The playbook that has served us so well over the past six years isn’t going to change. In a marketplace of financial turmoil, Haemonetics consistent performance, strong balance sheet, and improving margins, are a result of excellent execution to our strategic plans. We have had six years of excellent performance and we are positioned with a strong, experienced management team to lead us going forward. A strong plan to which we are confident we can execute. And, an economic environment that favors Haemonetics value propositions to our customers.

As I have said before, I am proud of our results over the last six years and strongly believe that the company is positioned to make the next six years more productive for you, our shareholders.

With that, let me turn the call over to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Lawrence Solow from CJS Securities.

Lawrence Solow -CJS Securities

Congratulations on another good quarter Brad and congratulations to the CEO and I am sure with the management team you have built we expect a seamless transition.

I just have a couple of questions. First of all on plasma, could you maybe talk about kind of the revenue outlook? With 12% expected growth in collections would you expect over the next 12 months, even though you have been taking market share, to at least achieve a number kind of in the mid single to the mid double digits?

My second question would be what your cost outlook is? With the Pittsburg facility, I think, near completion would you expect some further improvement in plasma margins specifically?

Brad Nutter

As we look out, and as we have talked about in the past, we have some pretty good visibility with our customers as this market is consolidated and our position with four of the five collectors of plasma. We believe that this is a business that will continue to grow in the mid teens, minimally, over the next couple of year.

As it relates specifically to the margin we have done a number of things that will improve the profitability of our business. Our new automation is now on line, as we burn that in, in Pittsburg, and we qualify that equipment over the fourth quarter. We expect that to provide us some benefit, as we have talked about before. Our contracts that are driven by CPI and PPI have escalated, so nominal impact there. And, we have launched our express product which we expect to be a benefit for us, particularly as we are more aggressive in the focus of that going into FY10. So, I think those are the factors I would consider.

Brad Nutter

I would also add that, as you know, we got the approval from the board a couple quarters ago to launch a commercial plasma manufacturing facility out west. That will be in Salt Lake City and we are really working hard to get that up and operational. Again, that will be another opportunity to better serve our customers out in that part of the country.

Operator

Your next question comes from David Lewis from Morgan Stanley.

David Lewis -Morgan Stanley

Brad I have a picture of the stock chart over the last five years in front of me, so once again congratulations on creating a dramatic amount of shareholder value, you and the team.

Brad Nutter

The team has done a great job and will continue to do a great job David, thank you.

David Lewis -Morgan Stanley

My first question is following up on the plasma comments. I mean you are basically forecasting to Brian’s comments over the next 12 to 18 months growing 500 or 600 basis points faster than the market. Can you just give us a sense of how you had the visibility on that type of, sort of, out performance? Are we talking about across all of your customers or are we talking about one specific customer that is driving this type of market share gains?

Brad Nutter

It is generally across all customers, David. We have really good visibility with the commercial plasma customers. As we know there are a limited number of customers in this market. We have those contracts where we are the primary provider of devices and disposables, plus our IT program. As we have our integrated IT systems in with a lot of these key customers we get grate visibility from their demand all the way through. So, we are able to build that into our modeling and that is why Brian and Chris are so confident that this will continue to be a double-digit grower going forward.

David Lewis -Morgan Stanley

My other strategic question is not quite a tale of two cities here, but the plasma business is so dramatically strong, but the next strategic vision for the business blood management whether it be TEG or surgicals is sort of a little weaker than expectations and has been for a couple of quarters. Is not the time, given that margins are headed in the right direction, you have a dramatic amount of plasma growth, to dramatically reinvest in blood management to try to get that business in a position next year where it may need to be if plasma is going to decelerate? Have you considered reinvesting more dramatically?

Brian Concannon

The answer to that question is not only are we investing, but we are also providing for a different focus. One of the things we have not had a lot of discussion about is the changes we have made in our patient business to provide a greater focus in the orthopedic area. Today we have 14 dedicated resources specifically on the OrthoPAT to focus on this part of our business. This is the pull side of the business and we believe that we need to be able to drive that business in that sense.

As it relates to TEG, TEG is growing well for us. As that continues to grow well for us we believe that will continue to be a growth driver for us as we move forward. The focus will be, if we are disappointed in our growth results in one area, it would be the OrthoPAT, but we continue to remain bullish about what this can represent for us and it’s a key pivot point in the hospitals that will really drive the adoption of our blood management solutions.

Brad Nutter

Brian, I would address one part of David’s question a little bit more in detail and that is, as you know, when Baxter spun out Fenwal they had a long-term contract that they were going to continue to use Fenwal’s equipment over a five year period. Fenwal has been an independent company owned by the Texas Pacific Group and other investors over the last two plus years. Given the fact that Baxter is one large contract that we don’t have we would anticipate looking forward to an opportunity of serving Baxter’s business in the next three years. So, that would be a growth opportunity well past that 24 months that Brian and Chris are talking about and it is a very large contractual opportunity for us.

Operator

Your next question comes from Steven Crowley with Craig with Hallum Capital Group LLC.

Steven Crowley-Craig-Hallum Capital Group LLC

You talked a little bit about your automation efforts in the plasma business. One factor that would appear to be on the horizon of helping you on the cost side, lower input, lower petroleum based raw material prices, and I am wondering to what extent over what time frame they might play into your equation.

Christopher Lindop

We are already beginning to see some of that in our negotiations with our customers. Of course our prices didn’t go up as much as the cost proportionally, with the cost of raw petroleum and they hadn’t come down as much either. But, we are already beginning to get some of those advantages in our cost structure. As Brain said, the equipment is coming on line, down in Pittsburg today and hopefully we will start to see the benefits of that as we trend out through fiscal ’10.

Brad Nutter

I would add that, as you know, this is an area of our business that we don’t talk a ton about, but we have a great focus there and that is the cost of parts of our business from a manufacturing standpoint. We have had great success over the years of taking costs out year-over-year. It is a part of our planning process. It is a part of our planning process that will continue and in fact, we are going to continue to look at ways to focus on procurement specifically and how that might help us going forward.

Steven Crowley-Craig-Hallum Capital Group LLC

Okay and in terms of follow up, a couple of things you have touched on, both express and that upgrade and the adoption of that upgrade. I am wondering where you are at this stage, where you think you could be a year? Then also on OrthoPAT and some of the focus you have put on that product line, when did you put these people and when have you made some of the changes to increase the focus on the product line there?

Brad Nutter

I would share that Express is relatively new. It was launched over the last quarter. As a matter of fact, we are working with Baxter and a few select centers on the Express product line. That is a new opportunity for us. It is not a big piece of business, but it is an opportunity to engage in sharing with them our total capabilities in plasma.

I will let Brian comment on the other part of your question.

Brian Concannon

Just to expand on that further Steve, as Brad indicated, this is a very early adoption. We have had some successes. We have put this out in some pilot sites to make sure we understand how the product works. Is it driving the benefit to our customers? Is it getting the results we expected? The bottom line is, is we feel good about that. We will grow this further as we go forward in a broader launch in the first quarter of fiscal ’10.

Operator

Your next question comes from Joshua Zable from Natexis Bleichroeder Inc.

Joshua Zable - Natexis Bleichroeder Inc

Brad congratulations and thanks for everything. I know a bunch of people have said it before us, but congratulations for all your hard work and kudos for building up a team that, I think, all of us have a ton of confidence in.

To get to my questions here, can you clarify the comment you just made about a new commercial plasma center in Salt Lake City. Can you just give us a little bit more details when that is going to be up and running? If you just started it, what you think that will do for you guys other than obviously better service, maybe on the manufacturing side or cost side etc…?

Brad Nutter

We anticipated about 90 to 180 days ago the need to get into expanding our commercial plasma manufacturing capacity. As you know, we have one plant in the United States and so as part of making sure that we can go to our plasma customers and have the continuity of supply we really felt that we needed to build out a separate operating platform, if you will, or manufacturing plant servicing west of the Mississippi river. We looked at a number of locations and selected Salt Lake as a great geography for us to have a new plant up an operating and the time frame is about 18 months.

Joshua Zable - Natexis Bleichroeder Inc

Have you guys started building it already?

Brad Nutter

We are just in the process of looking for leased space versus building out a building, number one, so it will be a leased, low cost kind of model which is very similar to the model we have in Pittsburg. We will be taking an automation line that we are just getting up and operating in Pittsburg. We are validating that now. We have done a number of runs on that automation line. We will be building that out in Salt Lake as an automated facility as well. So we will improve our manufacturing capacity substantially and with that, because there will be automated lines, we see margin improvement in both the Pittsburg plant and the Salt Lake plant.

Christopher Lindop

And Joshua, just to follow up on that with a bit more granularity, once we get into the site we will use it as a western distribution center which has logistics efficiencies as far as that we will get a benefit from in fiscal ’10 and then the manufacturing will come on line after that. We will be really a duplicate of the manufacturing automation that we’re building in and bringing in, in Pittsburg today.

Brad Nutter

Josh, Chris brings up a great point. That distribution site will not only be just for commercial plasma, but it will be distribution for other products as well. We think there will be a distribution cost savings with that plant, plus you will have distribution capacity; so it is on cross multiple product lines.

Joshua Zable - Natexis Bleichroeder Inc

Great, and then I have a couple of questions on the P&L here. Chris I know you mentioned there might still be somewhat of a miner tailwind on currency. I know you mentioned sort of on the other expense line it was higher due to volatility. If you could clarify that, such as should we see higher other expenses going forward offsetting or does it depend on the volatility?

Then on the SG&A side, on a percentage of sales it keeps improving on an absolute basis going up still with your sales growth, which is fine. I am just trying to gauge how we should really think about it. If we should sort of see that 32%, I know you talked about 60% in total so that seems to make sense, but even going forward it is sort of at that level where it sort of should stay.

Christopher Lindop

That is a complicated question. Okay so, yes we have a little bit of currency tailwinds on the top line in Q3 and we see a modest currency tail wind in Q4, like about 1%, maybe less.

In terms of the volatility affect, really you have got to go to the month of October and look at the relative interest rate environment between US, Japan and Europe and see those sort of spread contracting radically. So, what ended up happening for us was the revaluation of the points in our forward contract gave us a big negative hit in other income. We don’t necessarily expect that to impact us again going forward, it is just one of those very unusual effects of the volatility that we saw.

In terms of going forward, we are going to maintain that discipline of the 60%, 65% of gross profit dollar growth being invested and therefore the balance being dropped through the bottom month.

Operator

Your next question comes from James Sidoti with Sidoti & Company.

James Sidoti-Sidoti & Company

Brad, can you make some comments on the Fenwal settlement that came across Friday?

Brad Nutter

I will ask Alicia, who coordinated our efforts on that, to make a few comments Jim.

Alicia Lopez

Jim, I want to be clear that this is not a settlement. I am, frankly, delighted to report that on Friday a jury in our Boston Federal District Court here returned a verdict in our favor that the double red cell collection of our only competitor infringes a Haemonetics patent. The jury awarded damages in that case of about $15.7 million. Now to be clear, the verdict is subject to appeal and there is no immediate impact on our financial statements, so will just have to see how the process plays out.

James Sidoti-Sidoti & Company

Based on this verdict though, will you go the next step and try and get Fenwal out of this market completely?

Alicia Lopez

I don’t want to comment on that, because it is part of an ongoing legal process.

James Sidoti-Sidoti & Company

All right, but that is an option it sound like?

Alicia Lopez

That is an option.

Operator

Your next question comes from Anthony Petrone with Maxim Group.

Anthony Petrone - Maxim Group

In terms of the body languages given the economic backdrop into plasma, collectors here are expanding collection capacity. Is there any language that they may slow that process down given the backdrop?

Secondly, are there any outcomes regarding CLS Talecris, what would be the implications either way for the company?

Brad Nutter

First, in terms of strength of the market I think you are exactly right, that this market is going to continue to be strong. Frankly, when we look at the beginning of the year, our original guidance was 15% to 20% growth and we felt very comfortable about that. As we have seen the strengthening of the market, we have performed significantly better than that. So our ability to work with the plasma fractionators and have them predict their business, they are just seeing, and you can see it with Baxter and CLB, Octapharma and other organizations, they are doing a tremendous job in this marketplace. They are really playing catch up as are we and we are seeing strong growth, so we anticipate that going forward.

I don’t want, nor would Brian or Chris, want to get ahead of ourselves and suggest that for the next year we are going to continue to grow at 25%or 30%, but I think that this will be a strong growth market. Baxter is in Phase II clinicals on IVIG with an application for an Alzheimer’s, Octapharma is doing some work on that as well. Ultimately we see this as a strong growth market going forward. It is our largest business and I think what you will see in the future is commercial plasma. We’ll focus on gross margin in the next couple of years. Not only are we going to see good sales growth, but we are doing a number of things, as these guys have talked about, to really improve the margins of our biggest business as well.

Christopher Lindop

Absolutely we are and that includes the manufacturing expenses that we have talked about and distribution efficiency.

Brad Nutter

As well as Express and the price increases on the contracts and those contracts are going well.

The last part of your question was the CLB and of course Talecris. Those are two existing customers of ours. We have been pleased to serve them as their primary vendor. They are coming together. We expect that that is going to be sometime in the next five or six months that that would go through all the regulatory process and we don’t have anymore clarity than that as to when that would all come together, but ultimately, since we serve both customers that will be good for us.

Operator

Your next question comes from Daniel Owczarski with Avondale Partners.

Daniel Owczarski - Avondale Partners

Can you talk a little bit more about Japan? I mean was that a higher growth rate than what you were expecting and what seemed to go right there?

Christopher Lindop

Sure, I mean Japan there are a lot of good things going on there. We had a big equipment quarter which bodes well for future utilization of disposables. It is always a market share balancing in terms of the equipment fleet that the GRC has. We had a good performance in plasma. There are very, very good, strong market conditions for plasma over there and currency helps us, so all of those things went with us in the Japan business.

Brad Nutter

I would also mention Dan, that we have seen great balanced growth in all geographies. North America is up 21%, Asia is up 21%, Europe is up 17%, Japan 11%, although we, as Chris indicated, some of that currency. The fact is, this is the first time in a long time that we have seen all of our geographies all growing double digits, so that is a tremendously strong aspect of our business when you consider that more than 50% of our sales are outside of the United States. We like that balanced growth. North America has done that for four years in a row, but it is nice to see both Asia and Europe do it two years in a row.

Daniel Owczarski - Avondale Partners

Okay and then as far as red cells you had talked about that may be still a little bit below what your targeted growth rate of what double digits, 10% or so. What can you do specifically there to kind of bump up that growth rate in red cells?

Brian Concannon

We continue to remain confident in our ability to get to a 10% growth rate in this business. What we have seen is, as we have put this Symbol out there, we have seen with the hot plasma market that the Symbol adoption has not been what we had hoped it would be because of not having a plasma protocol on that device. But, we have seen increased strength in our MCS product which does have a plasma protocol, so that bodes well for us as we go forward. We believe that this is a market that can be grown 10%. Our focus is there to drive that at 10% and we believe that as we continue to emphasize our blood management solution, connecting hospitals and our blood banks together, we can have an impact as we go forward there as well.

Brad Nutter

I would make one additional comment. Brian has talked about the MCS that platform that really drives a lot of red cell growth as well as Symbol, but when Alicia was talking about the patent infringement, that product line, Alex, is a product that has had displacements over the last 12 months in the marketplace of 55 Alex and we have placed 143 placements of our technology. So, whether it is Symbol or MCS the important part is that we have two product platforms that will allow us to grow in a marketplace with two different kinds of platforms to meet the needs of our customers. That uniquely positions Haemonetics to serve their needs.

Operator

Your next question is a follow up question from Steven Crowley with Craig-Hallum Capital Group LLC.

Steven Crowley - Craig-Hallum Capital Group LLC

I just wanted to come back around and ask you again; on the OrthoPAT you had mentioned that you had placed some more focus and some people specifically on the OrthoPAT. I am wondering when you did that, and what kind of fuse you think there is to some benefits?

Then I have a question about M&A opportunity set. What are you seeing in these roiling seas in terms of opportunity for you to add to the business?

Brian Concannon

I will take the OrthoPAT question and I will turn that over to Chris for the M&A.

With respect to the OrthoPAT, we did this over the last quarter, so those announcements have now gone out, and our selling organization is focused. I think that they will settle into that in the fourth quarter and I expect that to really benefit us as we go into fiscal year ’10. We are pleased that year-to-date we have added 154 OrthoPAT devices out there and in total we have got over 2,900 devices being use by our customers today. Again, this is a business that we feel does have the ability for further penetration, further growth and we feel good in its ability to grow in the 10% t0 15% range as we look to the future.

Christopher Lindop

On M&A, no real change there. Just to recap, we are modeling M&A at sort of a 1% to 2% contributor to our growth rates over a 5-year strategic planning period. That means we are not looking at real big companies, we are looking at companies that are tuck ins. We have a very sort of strong strategic discipline, a map if you will, of what we are interested in and where we are going to go to get it and so we are not opportunistic. So, when you see roiling markets, you may see opportunistic acquisition activity. You wouldn’t see that from us. You will see us sticking to our game plan. Being very disciplined and hopefully bringing forward a list of acquisitions that when we tell you we have done them you will go ah ha, that makes sense!

Steven Crowley - Craig-Hallum Capital Group LLC

Does the environment we are dealing with make it easier to execute the strategy or does it add to the degree of difficulty?

Christopher Lindop

I think it probably makes it a little easier, although I don’t want to say that in front of Brad and Brian or it will affect my bonus, so…Obviously it makes it a little easier. People view the benefit of being associated with a large mother ship that is kind of has the same strategic focus and say yes, maybe now is a good time to do it. Hopefully that will continue and we will be able to build a great company focused on blood management solutions.

Operator

As there is no time for further questions, I would now like to turn the call over to Mr. Nutter for closing remarks.

Brad Nutter

Thank you very much, operator. These are very, very difficult capital markets, all of you are aware of that. Yet, Haemonetics consistent performance, strong balance sheet, and improving margins are a result of excellent execution to our strategic plans. I firmly believe that we are positioned with a strong, experienced management team to lead us going forward, a strategic plan to which we are totally confident that we can execute upon, and an economic environment that favors, most importantly, our value proposition to our customer.

As I go into my new role with the company as your executive chairman, I will look forward to seeing you on May 14 at our annual investor conference here in Braintree. Thank you very much.

Operator

Thank you for your participation in today’s conference. This concludes the presentation.

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Source: Haemonetics Corporation F3Q09 Earnings Call Transcript
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