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Executives

Gerard J. Gould - Vice President of Investor Relations

Brian P. Concannon - Chief Executive Officer, President, Director and Member of Operating Committee

Peter M. Allen - Chief Marketing Officer and Member of Operating Committee

Michael Kelly - President of Global Markets

Jonathan White - Chief Scientific & Technology Officer and Member of Operating Committee

David D. Helsel - Executive Vice President of Global Manufacturing

Christopher J. Lindop - Chief Financial Officer, Executive Vice President of Business Development and Member of Operating Committee

Analysts

Steven F. Crowley - Craig-Hallum Capital Group LLC, Research Division

Edwin McClellan Johnston - Sandhill Investment Management

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Raymond A. Myers - The Benchmark Company, LLC, Research Division

James Francescone - Morgan Stanley, Research Division

Anthony Petrone - Jefferies & Company, Inc., Research Division

Haemonetics Corp (HAE) Annual Investor Day Conference May 16, 2013 10:00 AM ET

Gerard J. Gould

Well, good morning, everybody, and welcome. Thank you for coming. Welcome to the Haemonetics Annual Investor Day event. Now through 11:30, we'll have some presentations by our management team, and then we'll have a 30 minute question-and-answer period. So if you would please hold your questions until that point in time, we'll make sure everybody gets their questions in. We are webcasting from now through noon, so the presentations and the Q&A period. So welcome to those of you who are joining us by means of the Internet.

The presentation deck and the replay of this event will be live on our website by the end of the day tomorrow. What will happen after 12:00 is we'll have lunch, we'll explain to you more how that's going to work close to the time, and we'll have some breakout sessions this afternoon so you can meet the various presenters from management and dig deeper into the various topics that we are presenting today.

On Slide 2 here, for those of you who look in your deck, is our cautionary language. We remind you that some of the statements we make today are forward-looking and involve some risks. So you should look at this slide and the details that we provide in our recent public SEC filings.

With that, I'd like to introduce Brian Concannon, our President and CEO.

Brian P. Concannon

Thanks, Gerry, and good morning, everyone. Let me add my welcome to those of Gerry and those of you who are able to join us here at the Seaport Hotel in Boston. A great day. It will be close to 80 degrees here today. We welcome those of you who are able to join us on the webcast as well. Thank you for making that time.

Our Annual Investor Conference, we try to do 2 things at this conference. The first is, obviously, to provide clarity on our annual operating plan, the guidance we provided to you 2 weeks ago. But most importantly, we try to give you a good glimpse at the strategic direction of the company particularly in the near term, but certainly out as far as 5 years. And so I want to take this opportunity to set that up.

I'll start with our fiscal '13. Fiscal '13 was a strong year for us, both strategically and financially. Just reflecting on some of the strategic accomplishments, in August of this past year, we completed the acquisition of the whole blood business from Pall Corporation. This was our largest acquisition to date. 9 months later, it is substantially complete in integration. We have a few things left to be done this fiscal year but for the most part, this integration has gone about as well as any I've been involved in my career.

Now there's a reason for that. You've heard us speak about the governance process we put in place when we acquired this business, and we commissioned 17 cross-functional teams with the responsibility of managing key elements of the integration and reporting to the executive team on a weekly basis with the metrics designed to drive the progress. Now I tell you that because you're going to hear us speak more about that, that process serves us well and serves us -- will continue to serve us well with project management as we go forward.

At the same time that we commissioned these 17 cross-functional teams on the integration, we also commissioned 10 teams that looked at what we call Value Creation and Capture. Now those are just really the work to understand what did we acquired. We've been pretty acquisitive over the last 6 years, 13 M&A transactions, but we've made a lot of progress, we grew quite a bit, we had some redundancies. So really starting to look at how we could tease out the enterprise value at this business as we go forward, looking to return more to our shareholders. And that work began back in August, and we start to see some of that with information we provided with you 2 weeks ago. We'll provide more clarity on that today.

In the year, we saw our hospital franchise return to growth, minus 1% in fiscal '12, up 8% in fiscal '13. You saw a strength in emerging markets continue, double-digit growth. But we commissioned a project in China to really understand how we could grow faster in these markets because we're first to market a wonderful opportunity, we want to sustain this double-digit growth for years to come. And you'll see that, that served us well.

We had a good year from a regulatory standpoint, 2 key notables is the 510(k) approval in the new OrthoPAT Advance, currently in limited market release, good reviews from customers, we launched that product later this year in full market release. And we also received 510(k) approval for Donor Doc 1.0, you've heard us refer to this as paperless phlebotomy. In one customer, if those went well, will be launching that in at least 2 additional customers. The launch of the wireless tower later this year, which will allow us to go from fixed site to mobile drives. We expect to be in at least 100 mobile drives by the end of the fiscal year. And just prior to the end of the -- I should say, just last month, we finished the acquisition of the assets of Hemerus, particularly the SOLX solution, bringing new science to this space for the first time in quite some time.

From a financial standpoint, we had a good year as well, 23% growth from the top line, 4% organically and double-digit operating income and earnings per share growth for our business once again. When you look at our business across the board, we have a very diverse product portfolio, a big business in plasma and a good business with end markets growing mid-single digits, we expect that to continue. We have a much larger blood center business today with the acquisition of the whole blood business. But for the first time in our history, we can provide virtually all the products our customers need in this space.

I've already spoken about our hospital business returning to growth, our software business continuing importantly, to be that enabler of blood management solutions. A little challenge on the plasma software, we will talk about that, we see that returning to growth in the next couple of years. But our hospital software business continues to grow, and as I said, an important enabler. And then our equipment. This represents now which is sold, but are placement are up as well and the best indicator for our future disposables growth. We have a solid footprint around the world, little over 1/2 of our business in the U.S. but good positions in Europe, Asia-Pacific and particularly in Japan, where we enjoy market share against a very large Japanese competitor, not something usually that an American company can say. So a good footprint around the world.

So let me take a step back and reflect what does the last decade look like? Fiscal '13 was the 10th year in the last decade, and when you look at this business over the last 10 years, I do this because I want you to have an appreciation of just what we've accomplished. When you look at this business over the last 10 years and the CAGRs involved in it, you can see some very substantial performance, 10% growth in revenue, double-digit operating income and earnings per share growth on average each of the years over the last 10, and we more than doubled our operating margin at the bottom line.

Now I mentioned we've been acquisitive, so you might think that the majority of that growth has come from acquisitions, it has not. About 60% of our growth during that time frame was organic, about 30% through acquisitions, about 10% benefit from foreign exchange. So you can see we've done fairly well during that time frame, and you can see that we've also performed very, very well against the broader markets.

Now let me pause here for just a minute because I want to take those 10 years, and I want to break them into the first half and the last half. Because when you really look at where we're heading strategically, it's important to understand from where we've come. But when parts of this management team joined this company 10 years ago, in 2003, we found a business that had been, for the most part, sideways for the last 6 years. From '97 to 2003 a business had grown slightly on the top line, but have been backwards in every other line in the P&L. So we really were challenged. What do we do with this business? Where could we take it? We saw our opportunities, we start at the mine. Some of the opportunities in the business, we improve gross margins, we begin to improve operating margins, we had cash to reinvest in the business, but we found an asset that really hadn't found its value yet, and that was our Fifth Dimension business up in Canada, which was our plasma software. And we used that business as an opportunity to mine our customers data, our plasma customers data; turn that data into information; understand our customers' paying point to solve their problems. We became far more relevant in their business.

We really began implementing that in 2006. And by 2008, we really started to grow that business rapidly, and that was the birth of blood management solutions for us. And that's when we recognized, by 2008, we really have something special here. And what we accomplished in plasma, we had the opportunity to do in the blood center setting and the hospital setting. So we began on a very different strategic path of this company in 2008. We became more acquisitive, adding to our existing portfolio and moving into adjacencies, making 13 M&A transactions over a 6-year period there. But we also started to look at this business differently and start to address some of the concerns internally.

5 years ago, we brought Dr. Jonathan White to the company, completely restructured our R&D function. Today, we're seeing improvements in our legacy platform and we're launching new products, but having a meaningful impact in our business. 2.5 years ago, we brought Warren Nighan to our business, and restructured our quality and our regulatory functions, borne out of the orthopedic recall, which really helped us understand some of the challenges that we've had. In just the last 2 years alone, as a matter of public record, we've had 8 FDA inspections, we've only had 2 483s in those each 8 inspections. Each one of those, only one observation. Each of those observations, corrected prior to the finish of the inspection. Now when you compare that to our competitors, and again a matter of public record, we match up pretty well. We're not down with quality, but I'm really pleased with where we've come in the last couple of years, addressing some important issues there.

We brought in Tony Gazikas, our Chief Information Officer, to really understand how to address the power of the Oracle implementation that we made 5 years ago. We continue to revise and look at our business relative to our commercial strategies and make the changes that are necessary there. So we really -- when you look from 2008 to today, we really took a very different strategic path with our business and made a number of improvements. And I think that served us well. When you look at the last 5 years, you see similar performance, you see double-digit CAGR across the board, 12% growth in revenue, double-digit increases in operating income and earnings per share and a continued expansion of our operating margin. Again, when you look at our growth for a revenue standpoint, yes, with 13 acquisitions or M&A transactions in the last 6 years, more coming from acquisitions, but still solid 5% organic revenue growth during this time frame. So we've continued to perform well, and we've continued to perform well against the broader markets.

Now I tell you that because it's really important to understand now where are we going, where are we going to take this business from this point forward. Well, we're going to continue to change -- we're going to invest in our quality and we're going to address the competitiveness of our products and the cost of those products. We're going to continue to look at our plasma business, grow this -- gross with this end market growth. We're going to start to pay more attention in patient blood management, as we've been doing, and growing in our hospital business addressing key issues with health care reform around costs and clinical outcomes. We'll continue to grow double digits in our emerging markets, but I think you'll see that growth accelerate as we come at that even more planfully than in the past. And we're going to start maximize now in this opportunity created by the acquisition of the whole business, the introduction of our first phase of our automated whole blood launch and the introduction of new science in this space with SOLX solutions. And importantly, we're going to continue -- we're going to start to implement the opportunities represented by our Value Creation and Capture teams.

When you look at those teams, we really break the focus for them down into 3 areas. The first is our product and market development. This is really, what products do we need to invent or how do we need to improve our existing platforms, and importantly, what acquisitions the we need to make, either bolster those platforms or move into adjacencies that are important for our customers. Commercial excellence. Once you've done that, how do you take that to market and how do we do that more rapidly, more planfully. And from a manufacturing quality standpoint, how do we address the redundancies and cost that have been created in our business as we've grown rapidly over the last 10 years. And that represents a significant opportunity to take cost of business, reinvest where appropriate, but as well, return more to our shareholders as we go forward. This is what we believe we can accomplish.

When you look at our performance over the last 10 years, from 2003 to 2013, we went from a market capital of about $0.5 billion, just less than $0.5 billion in 2003 to just over $2 billion today. And we believe with the focus on these Value Creation and Capture opportunities, we have the opportunity over the next 5 years to create an additional $1.5 billion worth of enterprise value, initially focusing on our manufacturing and operations, but also executing from a sales standpoint and some pretty important new products in commercial markets that are thirsty for the blood management solutions we bring to our customers.

So how are we going to get at that? How do we tell you a little bit more about that today? Here's our lineup. Pete Allen and Mike Kelly represent our commercial leaders all the way around the world. Pete will start talking about our plasma business and why we continue to expect that business to grow mid-single digits with the end market growth, even in spite of the recent announcement from Baxter with their Phase III trials for IVIG and the treatment of Alzheimer's failed. Mike Kelly will follow Pete, talking about our global growth drives around the world. And what are we doing to establish these positions around the world and position ourselves to accelerate from mid-single digit growth today to at least high single-digit growth in the later of the 5-year strategic plan period we look at.

Jonathan White will follow Mike, and Jonathan will talk about the innovation currently taking place in our R&D function, what are we doing with our existing platform improvements and what are we doing about new products for the future. Then Dave Helsel will come up and talk about our manufacturing optimization. Now Dave joined our company 12 months ago. He's a proven leader in manufacturing and operations managing coming from Covidien. Much of what he's going to talk about today, he's done throughout his career.

Chris will wrap up, taking everything we've talked about and then putting it in a financial perspective for you. But he's not only going to provide clarity in this fiscal year, but he's going to show you how we plan to measure ourself against that $1.5 billion goal of enterprise value. I'll come up with some brief closing comments, and then we'll open it up for a question-and-answer period.

So again, I thank you for taking the time to join us today. We think we've got a great schedule for you. We hope you'll take the time to listen and join us in our breakout sessions afterwards to get clarity on so much information. Thanks very much. Pete?

Peter M. Allen

Thanks, Brian. Good morning. The global plasma business of Haemonetics serves a large, growing commercial plasma market. And we have a significant market share position and long-term contracts that protects our growth.

Now demand for our products continues to grow, and that demand is driven from the increased physician awareness and diagnosis of treatable diseases with these drugs in the current markets, and the expansion of these drugs to emerging markets to increase awareness and access. And that in line is driving increased manufacturing demand and demand for our collections. Now you might ask, why is Baxter study -- does Baxter study in any way affect your guidance based on the fact that they failed their end points for their study. And the answer to that is absolutely not. Our guidance do not include any impact associated with Baxter study. We see mid-single-digit growth in this market and strong foundations.

And we're not the only one that thinks that way. At this year's IPPC the International Plasma Protein Conference, there were numerous presentations supporting a bullish outlook on this industry's growth potential. And to look at that potential, we took a study from last year that looked at the U.S. market and looked at the numbers of treatments associated with the plasma drugs that are derived from biopharmaceutical collections. And then looking at that, we're going to focus in on IVIG because it represents about 46% of the markets revenue.

So looking at this U.S. data, there's a little over 300,000 IVIG treatments. Now let's compare that to the number of discharges over that same period of time at hospitals where IVIG is a potential treatment option, and you're looking at a little over 4.2 million. I think this is the reason why our customers are so bullish on this market. There is tremendous upside potential with or without Alzheimer's disease.

So now let's take a look at Haemonetics' share position. Now we measure share based on collections rather than revenues because that takes all the price differentials off the table. We have over 70% global market share in commercial plasma. In the North America market, we have over 74% market share here. And what's important is, not just it's the largest market, it's also the fastest growing. There are some collections that are shifting off of Europe over to North America. And we have conversations with our customers who have got a collection platform in both U.S. and in Europe, many of them are holding their European collections fairly flat and gaining their incremental collections in the U.S. market. And therefore, using that incremental volume to meet the increased demands that they have for fractionation and manufacturing.

Now that bodes well for Haemonetics. Our commercial plasma business has over 98% of its business under contract to the third quarter of our fiscal '15 and 75% of our business under contract through the third quarter of our fiscal '17. We're in a tremendous position to simply grow with the market. But we're also investing behind our business to ensure our leadership. We are focused on those areas that our customers value most, and that is innovation, manufacturing and operations and in services, honing in on yield and business continuity, and those areas of services that help our customers reduce their cost per liter collected. And this, in aggregate, is what distinguishes Haemonetics from the competition. And what's really important is that we've taken a blood management solutions' aggregated selling approach to our market and have nearly doubled our market share during that time.

Now what's really powerful is the fact that our customers have recognized Haemonetics' leadership, our commitment to this industry and to the fact that we are able to grow and meet their changing needs. But what's even, to me, the biggest reward of all is that over the past 1.5 years, we've re-signed or signed our customers to contract extensions, and some of them long term, without them taking those contracts out to bid. Now that's an acknowledgment of our leadership in this market and we're very proud of that. So plasma is in a mid-single-digit growth market. We've got the share and the contracts to position us to grow with the market, and we're investing in our leadership to ensure that it's maintained for years to come.

And with that, I'll turn it over to Mike Kelly. Mike is our President of Global Markets. And as I'm responsible for plasma worldwide, Mike has the global leadership for the remainder of our portfolio. Mike?

Michael Kelly

Thanks, Pete. Good morning, everyone. Thanks for joining us here today. Today, I'm going to give you -- talk about our global growth drivers, 3 key growth drivers in fiscal '14. But before I get into these, I'm going to reflect briefly upon fiscal '13's growth drivers that I presented last year and alignment them to '14. Last year, I talked about hospital blood management solutions, TEG, I talked about emerging markets, and then we talked about a future growth driver for Haemonetics being whole blood. So how does those relate to our fiscal '14 growth drivers? They align very well.

Hospital blood management solutions. You've heard us say that a lot. We're changing the terminology up on you a bit, not to confuse you, but patient blood management is the way that our customers refer to what we bring to them in terms of blood management solutions in the hospital. So more and more, you'll hear us talk about patient blood management. You'll even hear an acronym emerge, PBM.

TEG is rolled up under patient blood management, and I'll cover that in detail as one of our key growth drivers. I'll also talk about Cell Saver and OrthoPAT. Emerging markets continues to be a double-digit growth driver for Haemonetics, and I'll go into that in a fair amount of detail. Again, last year, we talked about whole blood being a future growth driver. Well, the future is now, and we're very excited. As Brian referenced, we've launched our first phase of the automated whole blood platform and our paperless phlebotomy solution. So I'll talk more about what we're doing to automate the whole blood collection process.

Let's start off by talking about the hospital market. Patient blood management. Brian mentioned this earlier. We've gone from a decline in fiscal '12 of 1% to accelerated growth in this business growing 8% in fiscal '13. Our customers around the world are really seeing that clinical and economic benefits of implementing a successful approach to patient blood management. One of our key opinion leaders from Johns Hopkins Hospital, a physician, recently addressed a customer forum, and I think he studied best. In the summary, he said, when we look to partner with a supplier, we look for suppliers that can either reduce costs or reduce risks or improve clinical care. Rarely do we have the opportunity to work with a partner that accomplishes all 3, and that's what Haemonetics is doing for our institution. Obviously, we are very proud of this comment at that forum, and very proud of what we've accomplished. But we have a lot more we can do, and we realize that, to accelerate the business.

Let me start off in our hospital portfolio by talking about TEG. TEG is our thromboelastography product. Clinicians in the hospital use real-time data from TEG to monitor a patient's hemostasis. They look at patient's clotting profile and they target blood component utilization based on the clotting profile of that individual patient. Ultimately, this leads to reduced amounts of allogeneic transfusions. It leads to improved clinical care for our hospitals and it leads to significant economic benefits which, obviously, fit very well with our blood management strategy. TEG has been a double-digit grower for us for the past 4 years. In North America, we continue to see aggressive growth of TEG by acquiring new accounts in our core market of cardiac surgery, but also we're seeing an accelerated growth in our existing accounts as they expand utilization of TEG to other areas like trauma surgery.

Now outside of the U.S., we're also seeing accelerated growth of our thromboelastography product. That growth is being led by our business in China. In China, they're using TEG a little bit differently. They're using TEG to actually monitor a patient's response to anti-platelet therapy within interventional cardiology. So again, a different application for TEG. And we've seen our business in China double each of the last 2 years.

Now 5 years ago, we acquired Haemoscope. And at that time, it was a $15 million business. We've grown that to a $35 million business. But as importantly, we look to TEG with a market opportunity globally of $350 million to $400 million in the core markets of liver transplant surgery and cardiac surgery. Now we look at the opportunity for TEG in excess of $1 billion global market opportunity, as the application for TEG has expanded beyond those core markets to other areas I've mentioned earlier like trauma, interventional cardiology and in the future, we think there may be an application in stroke. So this is a great market opportunity for us.

TEG is really the newest device entrant we have in the hospital market that we originally got into the market 35 years ago when we invented the Cell Saver technology. We're proud that we've turned this business back around to growth for us, growing 4%, but we're even more excited about our growth in the past 2 years where we've grown this business 9%. The important part to recognize is our Cell Saver business tracks growth from a market perspective with open cardiovascular procedures, which are relatively flat to growing modestly around the world.

So we're taking a significant amount of share from our competitors, and that correlates directly with the launch in fiscal '11 of our newest Cell Saver device, that's the Cell Saver Elite. We've built in some really significant enhancement into Elite. It has an enhanced user interface, a smaller profile, so it's easy to move around the crowded operating rooms. It has integrated suctioning capability built into it. And probably most important, customers are excited about the quality of the blood product that's delivered by the Elite.

In addition to the enhancements we've made to Elite, the success was driven by a new product launch process that we implemented. And we'll be using that same product launch process with the launch of our automated whole blood solutions, as well as our next-generation OrthoPAT product, which we are in the process of launching.

Let me talk about OrthoPAT. Now we're not proud of the performance of this product over the past 4 years, but to put this in perspective, this is less than 4% of Haemonetics' overall business. And we still believe there's a large untapped market opportunity, as less than 10% of the eligible orthopedic procedures actually used cell salvage today. What are we going to do to turn around this product? While we -- the primary driver of the decline of the product have been quality issues the last 3 years, Brian mentioned that in his opening. But we learned a lot through the voice of customer feedback while we're enduring these quality issues, and we've built in a significant enhancements to our OrthoPAT advanced product based on the customer feedback that we received.

One of those examples I'll give you. OrthoPAT is a unique device in cell salvage. It's the only one like it on the market and that it's portable. The reality is that most of the blood loss after orthopedic procedures occurs in the postoperative care units. So OrthoPAT has a unique advantage in that it's small, it can move with the patient. One of the problems with our existing OrthoPAT is the battery life is only 30 minutes. So one of the enhancements we build in based on our customer feedback was extending that battery life to 60 minutes, which is a major upgrade for our customers. There are other significant enhancements we've built in to this product. We are currently, in limited market release, in 3 hospitals in the U.S., we have received 510(k) approval and expect to launch this in full market release in September.

Another thing we're doing relative to the OrthoPAT business, we are piloting approach by working with select orthopedic dealers. We're working with about 4 dealers right now, and we're 90 days into a pilot. This is an effort to really expand our coverage in the United States, which is our largest market for OrthoPAT. In just the 90 days we've had this pilot, we've more than doubled our new opportunities from a pipeline standpoint, new opportunities with OrthoPAT, and we significantly shortened the sales cycle. So the combination of the launch of the upgraded OrthoPAT Advance, together with our tweak to our go-to-market approach, we are confident that we will return OrthoPAT to growth.

So in summary, we have a strong position in our hospital business, focused on patient blood management and delivering to our customers significant improvements in clinical care, as well as significant economic benefits.

Now let me move on to emerging markets. Our characterization of emerging markets at Haemonetics, our business is about $120 million. And you can see that China is a significant part of our business approaching $40 million. We've grown 24% over the last 4 years, and that's not by accident. We worked with McKinsey a couple of years ago, and we really developed a focused, strategic investment plan in China. The biggest part of that investment has been investment in human resources, direct employees in China. We saw our workforce in China grow from the end of fiscal '12 of about 70 people to 125 people at the end of fiscal '13. We have people employed in China, clinical sales people that are focused on supporting our customers efforts to adopt our technology. They're focused on adopting our platelet technology, cell salvage technology, as well as our TEG technology.

As importantly, what we've learned in China, the investments we've made, what we've learned there, we expect to extend to the other emerging market countries around the world. If you look across the BRIC countries, it represents greater than $80 million or about 2/3 of our overall emerging markets revenues, and we've been very -- we've been doing well in these BRIC countries growing greater than 20%. We expect to accelerate that growth with our learnings and the investments we will continue to make in our emerging markets. So in closing that out, we are well positioned to continue accelerated growth in our emerging markets business within Haemonetics.

What an exciting time in Haemonetics to have the opportunity to work with our customers to transform how they collect whole blood, both in the U.S. and around the world. Now you heard Pete and Brian both reference this, but let's go back a decade. A decade ago, we purchased 5D. We got into the software business within our commercial plasma business, helped our customers analyze their business, supported their efforts to streamline their processes to move donors through their plasma collection centers more rapidly. And it's no accident that over that decade period, we saw our market share of disposables in plasma more than double to the place where we are today, which Pete mentioned, where we now have enjoyed 70% market share in commercial plasma. We have the same opportunity to transform the market with whole blood collections and increase our market position in this market.

We have a series of product launches that are planned over the next few years. Following me, Dr. Jonathan White, our Chief Science and Technology Officer, will come up and he's going to give you a detailed review of the clinical and regulatory time lines associated with these product launches. But let me just touch on our path to success here. You all are very aware, Brian mentioned it, we acquired the whole blood business of Pall last year in fiscal '13. The integration went tremendously well. And as part of this business, we brought over greater than $200 million in revenues to Haemonetics. But equally as important, we set the foundation to build upon in our whole blood business, and we intend to build upon that foundation and differentiate that portfolio over the next several years.

Our wireless data automation package, we're very excited about Phase I, the launch of our paperless phlebotomy solution. We recently received FDA approval for that solution. We work with a blood center in the Midwest to actually compile the data to submit to the 510(k) to the FDA. And along the way, we really got some good feedback from that customer. They indicated that the software is intuitive, flexible, easy to use and the most valuable feedback that we hear, and this is what we want to bring to the market is, utilizing this program enables us to reduce manual steps in our process, reduce the amount of errors we were seeing in our process and improve the overall quality of the whole blood collection process. We are in limited market release today at one blood center, that blood center in the Midwest, and we expect to extend that to 2 additional blood centers soon.

We're also excited that later this year, we'll be launching another key component to that paperless lobotomy system, which is the wireless communications tower. This will enable us to take that solution to mobile blood drives, which represent about 65% or more of the blood collected in the U.S. Last month, we announced the acquisition of Hemerus. And with Hemerus comes an exciting new red cell storage solution called SOLX that preserves the life of red blood cells longer than the solutions that exist out in the market today. Dr. Jonathan White, again, will come later and talk more about the science of SOLX, but I'm very excited as this will enable us to further differentiate our manual collection sets in the future.

Finally, all of this innovation culminates with the launch of the automated whole blood collector in FY '15. We believe this combination of product development efforts over the next several years will position us very well for growth. They'll contribute modest growth to us over the next couple of years, but in fiscal '16, we will see accelerated double-digit growth in our whole blood business, as a result of all these investments and product launches that we'll be seeing.

Now in addition to what we're going to do in the future, we have a great short-term opportunity to increase our market share in our core whole blood business. Keep in mind, with the Pall acquisition, 2/3 of the revenues that came over reside in North America. We have a great opportunity to increase our market position in North America here. The fastest-growing product in the portfolio is a product called Acrodose. Acrodose provides blood centers with the ability to collect a therapeutic platelet dose from whole blood that is clinically equivalent to a platelet that's collected from a single donor on apheresis. Why is it so important? It drives tremendous economic benefits because customers would typically discard those components during a whole blood collection. So they save significantly from a cost perspective, and it gives our blood center customers an opportunity to significantly improve their margins as well.

In addition to this product, another product that came over with the acquisition, we also brought over a value stream mapping capability. Why is that important? Many of you have heard us talk about our IMPACT consulting approach in our blood center business relative to red cells. We've now integrated this value stream mapping capability with our IMPACT consulting capability, and we have an integrated service offering now for blood center customers. So we can work with them all the way from the time of donor recruitment to the time of blood component processing. We can help them streamline their process and along the way, where appropriate, we will obviously recommend Haemonetics' solutions be integrated into their operation. So we're in a great position as well in our core whole blood business.

So in summary, great future product developments relative to whole blood automation that are here now with paperless phlebotomy and in the future, culminate with the launch of the automated whole blood collector in fiscal '15. But we really have an excellent chance to -- we really are growing our market share here in the North American market with the existing portfolio of products that came over with the acquisition.

So in closing, we are executing on our vision of delivering blood management solutions to our customers around the world. helping them transform their businesses from both in the blood center, in the hospital marketplace. And as important, we are helping our blood center customers become more than commodity providers of blood. We're helping them deliver solutions to our hospital customers that ultimately improve clinical care and reduce costs into our hospitals.

We've done a lot to innovate in the last 10 years, and we're confident we have more on the horizon that we will bring to the market. So to tell you more about those future innovations, let me introduce Dr. Jonathan White, our Chief Science and Technology Officer. Thank you.

Jonathan White

Good morning. It's always a pleasure to be here to show you the Haemonetics portfolio, but a special pleasure this year because of the additional technologies that we have acquired this year from Pall and Hemerus. As always, my comments will be mostly around the development portfolio, the generics markets and also where technological risks could be mostly eliminated.

In R&D, we organizes around 3 innovation platforms. The first is the component separation of blood into platelets, plasma and red cells. That's by far our largest market still. Secondly, patient blood management, which is based around hospital products, which is our fastest-growing market. We intend to continue to sustain that momentum. And lastly, whole blood, which is by far the biggest opportunity open to us and where we can see these technologies really opening up completely new markets spaces. As I go through this, I think you'll also see the way the software acquisitions we've done have begin to permeate our products and are servicing these new products.

So let's start with component separation. Four new protocols this year rolled out, 2 in platelets, 2 in plasma. The first is the Universal Platelet Protocol, UPP, which is a very high-yield protocol in terms of platelets per hour, but also rolls in a number of the other innovations we've done in the past few years into a single product. So it provides the concentrated platelet that customers want, concurrent plasma in red cells and a process for making the return much more comfortable for donors. We've introduced that into 50 accounts since its launch this year and it's rapidly becoming the go-to protocol for these customers.

At the order end of the scale, we did platelet washing, taking platelets, washing them in [indiscernible] and cleaning them out to remove impurities for critically ill patients. That one we did for one customer, the Japanese Red Cross. But we don't normally do that kind of customization to clients, but the JRC is the biggest customer we have. And also they tend to be on the leading edge of quality innovation, so we think this platelet wash protocol actually have legs in other customers. So 2 platelet protocols to extend the use of platelets.

In terms of plasma, we've introduced the high separation core with a new manufacturing specifications. Some of you may remember, this is a core that separates out cell debris from plasma, and that gives us an exquisitely clean profile as well as additional yield in volume, which is important not only to commercial fractionators, but also to national blood banks, many of whom are trying to become self-sufficient in plasma collection within their own geographies.

And then the fourth one, you may remember again, a couple of years ago, we introduced the EXPRESS protocol which accelerated collection, reduce the time it takes for a donor to give a unit of plasma, and that was part of the reason that we became market-leading in this and helped us with the renewal of our plasma contracts. We've now identified a way with a single core, another software upgrades, we may be able to get another 10% or 15% out of collection time. It doesn't sound like a lot, but if you're a plasma fractionator, that's an extra collection on every device, in every center, every day, and that will further increase our lead in terms of productivity over our competitors out there today. So that's component separation, it really is a franchise. It's where we started, but every year it just gives back more in terms of our ability to innovate.

Moving on to hospital products. The #1 lead product in terms of growth is TEG. Why? Because there isn't a single set of laboratory test that can give you the same information that TEG gives you as a fractitioner. TEG tells you in real time, right here, right now, what your patient's coagulation status is. And more importantly, for critically ill patients, if you give them plasma or platelets, it tells you that you've accurately corrected the defect. You don't overprescribe and you don't underprescribe, because you know right now whether or not you've made the patient better.

As promised last year, we've introduced software -- it's called an upgrade, it was actually a total rewrite of the software. It's given new interface and integration to lab systems. But the big investment in the last 12 months has been in clinical trial. There are dozens of these going on around the world, but the 4 big ones, 2 in cardiac care, 2 in trauma, are designed really to set standard of care protocols for customers. We've got key opinion leaders in Europe, American and China working on these to demonstrate the value of TEG. And by the time we've finished, we'll have over 3,000 patients enrolled in these studies, providing really high-class, definitive proof to our customers of where TEG really adds value in cardiac intervention, in trauma and in angioplasty. And of course, always, we continue to work on simplification of the product both in terms of the interface and in terms of helping people interpret the next generation of crossing drugs coming into the marketplace. TEG is obviously a huge winner for us.

The OrthoPAT is in limited market release now, as Mike said. We've got this approval last year and we've really taken our time to get this product right. You only get one chance to make a first impression. And so we've done extensive nursing simulations in operating places and multiple trials under operating conditions in the OR to really tweak this product and refine it until its performance is optimal by the time we launch. We're really great feedback from multiple test sites. Because we focus from the beginning, changing the electricals, the mechanicals, the disposables, the software, every part of this has changed to make it easier to use. In the past, on the old model, a nurse would have to take 3 different pieces of data from the machine, add them up and record it. Now it's automatically measured and you just get a single digit you can record on the notes. That's always been a barrier to use. And again, the ability to transfer between wards because of battery life, we upgraded the software, easy to remove the disc, there's a host of features built into this that people have been asking for, for a long time. We're excited by this and providing the completes adequate -- right on track to do a full market release September this year.

Moving on to whole blood and I'll spend a little more time here just because the opportunity is so big. We really got some hidden gems when we acquired Pall. Mike talked about Acrodose and why we're excited about this ability to pull platelets together into a product that's like a pharmaceutical, you can store it on the shelf and use it really easily. And that product has shown to have clinical equivalents. So Acrodose platelets are equivalent to anything out there today. A question for us was, could you make it even better? Could you make the product that's better than what's out there? And then this buffer solution inside the pipeline now, a combination of different and organic chemicals and glucose, which actually changed the storage environment of the platelets. Now I hesitate to point out, we've done in vivo studies but on small numbers so far, but at the end of the year we're going to move this into full clinical trial, because we believe based on the results we've seen that at the end of platelet storage life, there is significantly better platelet survival in the bag than with anything out there today. And that really translates to benefits for patients. The clinical trial of this will start in Q4 and we're very optimistic.

The other thing acquired was a red cell filter. It's CE Mark in Europe and in limited market release. And it's soft sided, so upgrade for customers it makes it easier to centrifuge. We're going to move that into developments in the U.S. next year. But that's not why I'm excited, I'm not excited about the filter, I'm excited about what's inside the filter. We talked with Pall about filter independence. This is the first time we've actually had control of what's going into the filter as opposed to having to just buy what's on the shelf. And that really means, for the very first time, this is the process we have for producing media, it's proprietary and extraordinarily flexible. So we can start to tune these products to work best with our products and also to modify and modulate them so we'll be able to change the quality of blood products that pass through them. The opportunity of innovation here is completely untapped.

We believe we can take with filters, media and solution, products that are considered to be commodities and from use of differentiated product. And the big news here, obviously, is the acquisition of SOLX solution, which we acquired last month from Hemerus. This is a superior red cell solution and there hasn't been one for years and years and years. It was produced by Dr. John Hess and his colleague the late Tibor Greenwalt, who had the insight that every storage solutions based on sodium chloride, saline, and saline is just not that good for buffering metabolites in the bag as red cells age.

Consequently, the bag becomes increasingly acid over 6 weeks of shelf life. So if you look on the left, those are normal platelets -- red cells. With the shape this optimize for carrying oxygen. But over time, as acidity builds up, the red cells cannot hold that shape and it begins to crinkle and pucker. And you see on the right, abnormal shaped red cells, which cannot pass through blood capillaries and therefore, cannot pass oxygen on to the tissues. And as much as 25% of the red cells may be in this shape by the end of 42 days. With SOLX, the results are completely different. We already have approval for a 56-day storage in Europe. Dr. Hess pursued that because it was a military application, trying to get blood in the frontline in better condition. We remain very proud of the opportunity we have to continue to support our Armed Forces.

But that's not where the commercial opportunity lies. We have an FDA approval for 8-hour hold and 42-day storage. What that means is the blood can be held for 8 hours before processing and 24 hours before -- 42 days, sorry, before you have to use it. The benefit we're going to bring to SOLX based on the data we've seen is that we can put our first claim in for 24-hour hold. If you're a blood bank, that's huge. Because if you have a blood collected at 4 p.m., you try and get it back to the center. By the time you get it back, you got to run a third shift, the night shift to process the blood. If you can leave that blood until the following morning, you can eliminate all those costs. Furthermore, if you're a big blood bank with lots of centers, it's transportation time back to the production center, and you have to get the blood back within that window. If you can have a 24-hour hold them, you can actually consolidate your production centers. So the bigger the blood center, the bigger the opportunity. That's why we're going after 24-hour hold first. All we need to do is complete some in vitro studies and we'll be able to file that with the FDA.

We also know, you can look this up if you Google EASC 1 [ph] you'll see in the patent that at 42 days, the red cell survival is much, much better. I told you 25% of those red cells are looking like that at 42 days. The body has to clear them, the liver and the spline has to clear them within the first 24 hours, and that's a real load to sick patients. SOLX harvest that load. And we've -- talking to blood bankers we're convinced that will translate into benefits for patients. And then finally, more speculatively, I don't have data on this, but there's very strong theoretical and scientific reasons to believe that if the red cell has been held in that storage for 42 days, we've only looked to end point so far, we're absolutely convinced in the middle range of shelf life we're going to find benefits and that's really important to be able to begin about younger blood. So SOLX, tremendously exciting addition to our portfolio.

Putting SOLX together as the best solution on the market with the filters we've acquired, these are the best filters on the market, we can create a best-of-breed set, and that's why we think differentiation is possible. But moreover, all those benefits translates also into our automated whole blood product line. We launched Donor Doc a short while ago, it's in limited market release, we're ramping up to 3 customers shortly for fixed sites. But the benefits kick in really when we complete the software at the end of this year and role in the mobile wireless tower, because 2/3 of donations are still mobile in the U.S. and most geographies. So we will create the electronic paperless record, which you will be able to use with manual sets in the marketplace.

And then in FY '15, we'll add in ultimately a whole blood collection on top of that to complete the suite. As a proprietary disposable set, it has an 18 gauge needle, take a look at it outside, when you see it, it's tiny. If you haven't given blood before, you can choose your needle. It's a tiny little needle. It's fully integrated in the software for paperless donation. And heres the other thing, this is all on the front end, the collection side. The challenge is, how do you integrate into the blood bank? While what we took is the sets we acquired and we've linked in to the collection sets. So whatever goes back to the processing center, they're totally familiar with. It's the tubing, it's the filters, it's the sets, it's everything we already know. So it's no real set of cost to blood banks on the back end. That's why we think automated whole blood is going to move pretty quickly.

The portfolio overall as you can see, it's starting to emerge over the next 3 years. Whole blood automation, a sequence of filings coming through over the next 3 years. There we are at FY '15 -- '14 and you can see the first when completed Donor Doc 1.0 in FDA approval. There's a range of whole blood automation products to come, a range of SOLX to filings to come and then the RCS filter coming out over FY '14 and ramping up -- down about the end of FY '15, and that's why Mike is so bullish on FY '16 and beyond. This portfolio is here. It's coming out right now.

Finally, we're extremely excited about the technology center that was announced very recently, obviously. You've seen in the P&L how the numbers for R&D investments have ramped up over the past 5 years. What you haven't seen also is the degree to which it began to consolidated within that number around this side and frankly, we're out of space. We've got a lot of signs going on around transfusion medicine. We've got an early portfolio that's maturing that's going to need investment. And so this is absolutely the right time for us to do this in preparation for the future. My team's thrilled. And of course, it's a tremendous opportunity for us to not only build on the last 5 years but really, if you look at the next 5 years, it's going to be something special. So we appreciate the investment.

Thank you all for your time. I'd like to invite Dave Helsel to come up and talk about global manufacturing.

David D. Helsel

Thank you. Good morning. Earlier this month, we announced the variable plan for optimizing our manufacturing network. And so I'm going to take a few minutes here to explain some of the details around that plan. This plan is going to generate almost $35 million to $40 million in overall savings on an annualized basis, which again, as Brian mentioned earlier, will really support and underpin our $0.5 billion in overall enterprise value.

As Brian mentioned earlier, I've been with the company now a little over 12 months. And one of the first things I really wanted to do was really look at our operating vision as far as how we can transform this operation in a couple of ways. Using our operating vision here, we want to still maintain a very intense focus not only on manufacturing productivity, but then also our end product quality. Now within that, we -- to do that, we wanted to focus on in 3 major areas. First of all, understand what core competences we want to maintain, while at the same time understanding our footprint, what made the most sense adopting more or less a regional manufacturing strategy to better support our customers. And then finally, also look at our facilities in order to better serve not only the business, but as well as our customer base. Now using some guiding principles that you can see here, these 4 that we've listed out, the first 3 really represent how we're driving operational intensity to support not only manufacturing productivity, but also quality. The first around transformational goals was really defining those best-in-class or best-in-industry goals that really are guiding our plans today, and then also strengthen the organization. We've done a lot of reorganizing within the manufacturing teams over the past 12 months and really to bring in not only new talent, but then also to reorganize our group in such a way that we're bringing more focus and intensity to where we see some opportunities. And then lately, with the acquisition of the whole blood business, now we're seeing some opportunities to leverage not only synergies, but also combine like technologies across our manufacturing base. So let me take a few minutes though to talk more about optimizing our manufacturing network. Within this, we're going to be consolidating our footprint, and this means that we're going to lower our overhead cost and also increase our presence in low-cost countries. Listen, in this way, we can control our, not only our manufacturing cost, both in labor, but also in other key areas.

But I think also another very exciting area is localization. One of the efforts that we have been making is around trying to improve our cost and our supply chain. And localization does that. What this means is localizing our supply chain in those areas that represent the best value, whether it's in low-cost countries or other areas that offer very low cost raw materials.

Now I want to take a few moments to guide you through our overall project schedule and each of the projects that were announced earlier this month. Now my experience has been almost 30 years in not only in consumer businesses, but also in medical device business, both at Covidien and also at Kimberly-Clark. And one of the things that we wanted to do is really present a very aggressive plan before really our business was faced with some challenges, both in being competitive and also managing cost. And so from this, develop really this plan around not only taking our operating vision and highlighting those areas that represent the best opportunities for us, but then developing a plan in such a way that we could aggressively go after cost savings.

This first project is around moving our equipment to a contract manufacturer. Today, in Braintree, we're manufacturing equipment that's shipped all over the world. And within that, we are making literally dozens of products, whereas we can link in with a contract manufacturer that is global in scale, that's making thousands of medical devices on a weekly basis. So using that scale, we found it advantageous to work really with a strategic contract manufacturing partner to really lower our costs, but as you'll see later on, there's other opportunities to utilize our supply chain to also help roughly developed products. Now we've been going through a very intense effort to analyze and work with at least 5 different strategic contract manufacturing partners. And then we've narrowed that list now down to 3. And in the coming weeks, we're going to be announcing who our strategic contract manufacturing partner is that we're going to be linking in with for the long-term.

The next is our disposables going to Tijuana. With the whole blood acquisition, or before the whole blood acquisition, Haemonetics had no presence in low-cost regions for manufacturing capability. Now with the whole blood acquisition, now we have 1 plant, our Tijuana manufacturing site, that also makes disposables, as well as similar products that are made in Braintree. This includes both supporting our patient and donor businesses.

What this project does is transfer those disposable products into the manufacturing site at Tijuana, combining it with the key processes that are similar between sites. Now what this will require is that our Tijuana site will also have to be expanded, and it's going to be coming in 2 phases. The first phase is that we're going to be adding additional cleaner and space in order to support the initial move of the Braintree products. But then later on, we're going to have a second phase where we'll expand the plant physically in order to make room for not only growth in our business, but for additional products down the road.

Now the Braintree move is going to take close to 18 months, and the Tijuana expansion is going to take a little bit longer in order to accomplish both phases of that project. The fourth project is also one of the more exciting projects that we have as well as we look at where our growth regions are today. As I was mentioning earlier, the operating vision today is to really implement more of a regional manufacturing strategy, trying to get closer to our customers. I want to ensure that not only are we making our products closer to our customers, but that we're also able to source raw materials in those areas in order to have not only business continuity, but also speed of supply to them. An HS site development makes sense for us at this time given the size of the markets that we see growing today in our business. Now we haven't announced yet which country we're going to be manufacturing in, but in the coming weeks, as we negotiate with several different countries, we're then going to announce our final site selection so we can begin development of this plant.

The fifth project is around our supply chain excellence program. For over 10 years, really supply chain has not been one of the key areas of focus within the manufacturing area. And so I'll give you additional details later on, but one of the things that we do see is some great opportunity to drive out additional synergies and costs by maintaining an intense focus in this area, not only just from getting onetime cost savings, but also having an ability to not only beat inflation year-over-year, but also having secondary sources of supply in order to mitigate any sort of risks that can affect our business. And then finally, along the facilities theme, as Jonathan mentioned, we're very excited about the announcement of a technology center of excellence. And this technology, center of excellence, we're going to be evaluating a number of different proposals or ideas for how we'll actually link in, or first of all, expand our R&D area, but then also link in our headquarters into that site.

Now one of the things, when you look at this plant, it's very aggressive, and its going to be happening over the span of the next 3 years. And so you might be asking yourself, how can we accomplish this and commit to the savings that we're looking at? Well, I think, based on my experience, there's really a couple of key factors for us to be successful in this. First of all is to have dedicated product leadership, or have dedicated product or -- excuse me, project leaders for each of these projects, and also a core team that's supporting that project leader. And fundamentally, they're going to be working on these projects over the next 2 to 3 years to ensure its success. The second key area is ensuring that our cross-functional groups are tied into our plan. That includes not only our quality and commercial teams, but we want to make sure that we're -- we do not impact the customer in any way possible. That includes both in service and also quality. And then, I think, a third area, which is also very key, is that there's a number of ways that you can transfer products from one plant to another. You can actually build inventory and have enough inventory, and then transfer those product lines into that receiving site or you can actually build redundant lines, and then validate those lines before you actually transfer those products. We're actually choosing to go ahead and create redundancies within our manufacturing in order to mitigate any sort of risks. What this means is this, whether it's a contract manufacturer or our Tijuana plant, what we're going to be doing is setting up similar lines that are currently in Braintree and then transferring those products once those lines are up, validated and showing the same productivity and levels of quality that exist today.

Now our plan today that I've mapped out here will generate close to $35 million by fiscal '18, half of which will be coming next year. This is a very aggressive plan, again, as I say, and also involves the lion share of the investment that we're making today in the business.

I just want to take you through several of these projects in a little bit more detail to give you greater confidence not only in how we're managing this, but our ability to execute this project. The first is the outsourcing of our Braintree equipment. So I was mentioning before, this is a program that's going to be taking close to 18 months. And how we're going to be approaching this is, first of all, dividing our current equipment into various product families and then moving them in a series of 3 ways. Those 3 ways will begin with our older equipment, finish by our newer, more advanced products that we're making today. Now each of these will take close to 6 months. And once they're complete, each wave, then we'll start to the next wave as far the transfer, again, to mitigate any sort of risk associated with our supply chain. Wave 4 is also the one, the most interesting, and also generates a significant amount of value to our business.

The first is VAVE, or value add value engineering, is a technique that's used to look at existing products and evaluate their designs, removing cost, but also improving reliability, and also bringing in any other inputs that the customer needs. Many of our product designs today are well over 20 years old. And in that, we see a lot of opportunity to use VAVE concepts, working with our contract manufacturer in order to drive out additional cost, but also improve the reliability and quality of our equipment.

In addition to that, we're also going to be using supply chain localization with that contract manufacturer to take further costs down as originally during all of our moves, we're going to be maintaining the same supply chain base as we make those moves.

Just listed out, just a handful of advantages with this program, I just want to mention just a couple of those. First of all, we're linking in with a global partner. That means that, that partner is one of the largest in its field, has global presence and is able to serve many of the markets that we compete in today. And with that, they also bring in a tremendous amount of engineering resources that will also help Jonathan's efforts as we bring new products to market and also speed those products to market much more quickly. Now as I'm showing here, is by fiscal '18, we're going to anticipate to generate from this program close to $7 million a year in annualized savings. Now what we've seen so far from all the proposed that we have received in, not only do we feel very confident that we're going to be able to not only meet the $7 million, but then also overachieve that in the coming years.

Next year, we anticipate from this program to achieve at least $2 million, and you can see the ramp-up from there. The next project I want to talk about is our supply chain excellence program. As I alluded before, one of the key challenges for our operations is that we need to have a more intense focus on our raw material costs. Every business today is faced with rising raw material costs, both in commodity raw materials, also as in our case, electronics and other customized items. So what we've done is we've developed a program, a multiyear program that not only looks at our organization but also enhances our capabilities in such a way that we'll have intense focus in this area. The first area is really around expanding our procurement capabilities, bringing in the right talent, bringing in the organization that really will focus in on this area. Then we've already started working in this area. The second area is around organizing our procurement groups into category management and to develop an expertise in certain key raw materials, such as molding components and other raw materials for us to also drive up cost and develop secondary sources of suppliers. And then the third area is around utilizing our Oracle system to provide the purchasing data analytics for us to make better decisions in the long term, both in which suppliers we're working with today and which suppliers we should consolidate or rationalize in the future.

As an example, we actually buy close to $300 million worth of direct spend today to support these products. And within that $300 million, we have well over 600 different suppliers that we're utilizing. Many of them are single-sourced. And so it represents not only a risk to our manufacturing, but also requires the security inventories in order to support that risk. So within this, our purchasing data analytics will allow us to go ahead and do further consolidation of our supply base, while also qualifying secondary sources of supply. And then finally, consolidation and localization is a huge opportunity, especially as we start operating not only down at Tijuana, Mexico to support the North American market, but also our Asia plant. To support that region, we will want to find those suppliers in those areas in order to do localization and bring our raw materials cost down even further. So I mentioned, there are some advantages to this entire program, which I'm listing out here. I think there's a couple of key areas I want to drive your attention to. First is we're pretty in the high-performance organization that can not only achieve this, but also sustain this type of products or this progress going into the future. And then also taking advantage of certain synergies that we get, especially what we've seen with the whole blood acquisition as it came in by leveraging our scale today to try to drive down cost even further. Overall, this program is going to generate not only about $3 million next year, but then also ramp up very quickly to achieve $14 million in overall savings by fiscal '18.

So in summary, I feel very confident we're going to achieve not only $0.5 billion in enterprise value, but also ensure that we continue our excellent progress, both in quality and service. Now one of the things that I made sure of is this, is that we put in the right team and an experienced team to manage these projects. Because one of the things that, as we saw from the recent acquisition, when you have that, the relative smoothness of how this is implemented ensures that our customers continue to have their confidence in our business. Now we're also focusing in the right areas. Through consolidation, we're reducing our overhead costs. By shifting the low-cost regions, we're able to manage our labor costs more effectively, cutting in half or more than half, in some cases, our labor rates by moving into those regions. Then finally, with our supply chain excellence, by managing our material costs, so we can not only meet inflation, but then also bring additional value to our business.

Thank you for your time, and I'd like to turn it over to Chris Lindop, our Chief Financial Officer.

Christopher J. Lindop

Thanks, Dave. Good morning, everyone, and thank you for joining us this morning.

I'm going to cover 2 topics today. The first, a brief review of our overview for fiscal '14 guidance to provide more details on the information we provided on our conference call, and then to step back and take a more strategic view of the financial impacts associated with the initiatives that my colleagues have discussed this morning.

In fiscal '14, our expectations are for growth, growth in revenues, growth in our gross margins and growth in our free cash flow generation with the expectation that, that free cash flow will be deployed in one of the most exciting investment opportunities that this company has had in the last 10 years. So with that, let's take a quick look at fiscal '14.

In fiscal '14, our revenues will grow between 9% and 12%. And perhaps more importantly, our organic constant currency revenue growth will be between 5% and 7%, right in line with the growth rates that Brian shared with you in our compound average growth rate over the last 10 years in effect, over the last 5 years also.

And turning to our expectations for gross margin in fiscal '14, we anticipate gross margins between 51% and 52%. Let me take you through in more detail how we move from this year's performance to our expectations in fiscal '14.

Firstly, we have to annualize the whole blood acquisition that we did last August. And we told you that the whole blood acquisition, while very profitable, had lower gross margins than the average gross margins for our core business. And so that's going to cost us about 40 basis points of headwind in our gross margin in fiscal '14. Cutting against that, our cost savings initiatives, separate from what they've described this morning, but inherent in our operating discipline moving forward that will drive about 100 basis points of gross margin expansion in fiscal '14. And then we anticipate an incremental 40 basis points of margin expansion derived from a combination of pricing and mix.

And turning to our operating expenses, and just for clarification, these numbers are shown before amortization of deal costs, purchase price of intangibles. And so we anticipate about 9% growth in our operating spending next year at the midpoint of our range, and fully 4 points of that growth are associated with annualizing the whole blood acquisition that the operating costs associated with owning that business for a full year. And the remainder of the increase in spending is split between strategic initiatives and structural initiatives. In the strategic bucket, we'll increase our investment in R&D, we'll continue to increase our investment in the high-growth emerging markets, which have contributed so much to our growth in the past, and are such a big part of our expectations for the future. In the structural bucket, we anticipate increasing costs associated with the medical device tax, thanks to our friends in Washington. And the investments in our information technology infrastructure to further enhance our operating efficiency going forward.

And I mentioned we're excluding deal amortization from our adjusted reported results in fiscal '14. And the impact of deal amortization in fiscal '13 was $21 million and in fiscal '14, at the midpoint of the range, will be $26 million. And so those numbers have been excluded from the prior-year numbers and the expectations for fiscal '14 for comparability. And we did this to better align our adjusted earnings with the adjusted free cash flow generating capabilities of our business.

So looking at the full picture for fiscal '14, 9% to 12% top line growth, that growth, combined with margin expansion, will drive what we like to refer to as positive drop through, 10% to 15% growth in gross profit. And with disciplined approach to our investments and operating expenses, will drop down to between 15% and 21% growth in our earnings per share, right in line with the results that this company has put up year-after-year, over the last 10 years, and Brian shared with you earlier this morning. So we feel highly confident in our ability to execute on the plans that underpin this guidance and deliver the results that we're presenting here this morning.

Now let me change direction a little bit and not focus on fiscal '14, but look forward over the next 5 years, and consider the cash flow generating capability of this business as we anticipate the outcome of the programs and plans that have been described to you this morning by my colleagues.

When we start to think about free cash flow, it's probably good to orient ourselves first to the starting point. So in fiscal '13, we announced our reported adjusted free cash flow of around $70 million. And several factors affected our free cash flow generation, factors that we anticipated and factors, frankly, that were related to the acquisition of the Pall whole blood business back in August of last year. The first of those that we talked about in the past that probably deserves some emphasis here, is that the deal structure that we had with Pall for a variety of reasons excluded the net receivables of the Pall whole blood business. And we had to reestablish the working capital associated with those net receivables in our ownership period of the whole blood business in fiscal '13. And that cost us about $25 million of working capital that could equally have been embedded in the purchase price of the business. We knew this, and we anticipated in.

We also expected to have an aggressive and successful approach to the integration of the business. And we did, and we're happy to report that, that has gone extremely well in fiscal '13, with the majority of our priorities around integration complete. And we're well-positioned to move into the value capture phase of this integration story. But we spent a significant amount of free cash flow in both integrating the business and beginning the -- importantly beginning the VCC initiatives, some of which have been described to you this morning. And in fiscal '14, we told you to expect an incremental $30 million of gross free cash flow generation, but we told you we had some priorities for that free cash flow associated with value capture. We told you we plan to spend $88 million. $11 million will go to complete the integration of the whole blood business and completely integrate the Hemerus acquisition, which we announced on our conference call. The balance, $77 million, split approximately evenly between capital and operating expenses associated with exit costs and technology transfer initiatives, will be deployed against the value capture programs that we've described, the largest of which, obviously, is the program that Dave announced. But we also told you importantly in our conference call and in our press release that the elements that Dave described are foundational elements for a long-term transformation of our manufacturing infrastructure. And so we anticipate in fiscal '15 and '16, that free cash flow in a gross basis will continue to grow, driven by margin expansion and top line growth in our business.

And we have a call on that increased cash flow to complete the transformations that we've described. So approximately another $70 million to $80 million of spending that will go forward in fiscal '15 and '16. But importantly, by fiscal '17, our free cash flow will have doubled, and the journey will be over. And whether you view this as a story of a rapid expansion of the net available free cash flow or a demonstration of the strong gross free cash flow generating capabilities of our razor blade business model, we think it's an exciting story and an exciting value capture opportunity for us and for our shareholders.

So we'll spend, in total, between $150 million and $160 million over a 3-year period, and double our free cash flow by the fourth year from our fiscal '13 level. So as good as our last 10 years have been, I have to tell you that this management team is incredibly excited by the opportunity that's ahead of us to drive strong growth and free cash flow and further increase the value of our company. With that, I'll leave. I'll hand the call back over to Brian to wrap up some closing comments.

Brian P. Concannon

Thanks, Chris. Well, hopefully we've given you a real peak underneath the flaps of the tent to see where this business is going in the next 5 years. To do that, we tried to give you an appreciation of where we've been over the last 10. And I think it gives great credibility to our ability to execute and to achieve what we've laid out for you here today. If were to look at this business 10 years ago, this is how we would have looked in terms of the devices and services, serving the markets that we serve today. Many of you had the opportunity to look at our product portfolio on the hallway. 10 years ago, we could have had that in the closet. Today, when you look at what we've built, bought, created over that timeframe, we've created the largest Blood Management Solutions company in the industry, focused on transforming an industry that, frankly, has not enjoyed very much transformation since the second world war.

In this space, we're not only changing the way our customers look at patient blood management in the hospital, but we're changing the way our blood collectors collect blood. And we're addressing this fragmented broken supply chain of blood management not only in the U.S. but throughout the world, helping our blood center customers become far more relative in their space and delivering Blood Management Solutions to our customers. Thereby, reducing risks, reducing costs and improving clinical outcomes.

And to sustain that, we've announced some pretty bold plans to change the infrastructure of this business. Many companies restructure when they've hit a wall. Many companies restructure when the business is broken. They spend tens of millions of dollars more than they have to, and cost significant amounts more paying to their employees and to their customers.

We're a business that recognizes the opportunity that's before us, maybe even the responsibility that we enjoy as the leader in Blood Management Solutions. We're not going to wait until the company breaks. We're going to take the opportunity now to lead our companies -- to lead our customers to a horizon that they now start to begin to see with us as we go forward.

We'll manage this very carefully. I talked about this government structure a number of times. It's led by the executive team. We meet every Tuesday morning for 4 hours. And as we go forward, there will be 3 vice presidents who'll lead the critical elements of everything we laid out for you today. The first team will be to complete the integration of the whole blood business and to complete the integration of the assets of Hemerus that we just recently acquired. The second team, our VCC operations team, again, led by a senior vice president within our business, will manage the 6 project leads that Dave spoke about earlier. These are dedicated project managers focused on each of the 6 projects that Dave laid out.

And the third team, again, led by a vice president within the organization, will focus on what we expect to do, taking our products and our services to market to transform this industry as we go forward. Once you assemble something, what do you do with it? How do we make that happen more rapidly? As Chris laid out, I think these are bold plans, but I think they have bold results on the other side. We're excited about the opportunity. Over the last 10 years, we created a $1.5 billion worth of enterprise value. We believe that we can create another $1.5 billion worth of enterprise value over the next 5 and half the time. We're excited to share that with you. We'll stop now, and I'll open it up to questions from the audience. Let me just say in the questions that we'll have people that will come to you with a microphone, So if you would raise your hand for the question, you'll be approached with a microphone. This way, the people that are on the webcast can hear the questions as they're being asked. Thanks very much.

Question-and-Answer Session

Steven F. Crowley - Craig-Hallum Capital Group LLC, Research Division

Steve Crowley from Craig-Hallum Capital Group. Just a couple of couple of questions. You gave us lot of interesting stuff about the product portfolio, and a couple of things in platelet, both in new high yield protocol in the Acrodose collection methodology. It's a sizable category for you, guys. Can you make it a growth category? What are the market opportunities that underlay or overlay those product plays?

Brian P. Concannon

Yes. Thanks, Steven, and what I'm going to do is I want to involve the management team a lot more than I've done in the past for a couple of reasons. A, I want you to understand the team that we have here that's assembled to execute on these commitments. And B, I want to hopefully tease you into joining us in breakout sessions afterwards. So the answer to that question, I'm going to ask Mike Kelly to grab that one.

Michael Kelly

Yes. Thanks, Steve. Let me answer that by kind of segmenting the platelet market as we look at it around the world. In emerging markets, our existing apheresis technologies, they actually do quite well. And with the -- even though we're disadvantaged from a double-dose platelet collection process in the developed markets, in the emerging markets, we do quite well. Our platelet technology is less expensive, more simple to use. And with the introduction of the new protocol, that Jonathan talked about, UPP, actually positions us well for the future. So in emerging markets, we're doing okay. And some of our developed markets, where we do have existing platelet share, I think the UPP, the introduction of UPP serves as a nice bridge for us in terms of our platelet business and really overcoming some of the obstacles relative to the competitive disadvantage on double dose. Relative to Acrodose, today, that's primarily a U.S.-focused product. And as many of you know, we pretty much are out of the platelet market in the U.S. So we look at this as a great opportunity for an opportunity for us to participate in the platelet markets in the U.S, with a different type of product that offers our customers significant, as I mentioned, significant economic benefits.

Steven F. Crowley - Craig-Hallum Capital Group LLC, Research Division

Okay. Just one follow-up, I guess, or a little bit of a change of pace to TEG. You're investing a lot of money in clinical trials. That's not a new dimension of the story. It's nice to see the follow-through. But your discussion of new clotting factors, and those new clotting factors emerging over the next couple of years. How active a role have you played in the clinical trials to prove effectiveness of those factors? And do those represent kind of a companion diagnostic play for the company?

Brian P. Concannon

I'll ask Jonathan White to grab that question.

Jonathan White

Really 3 ways to look at that. The first is the platelet function inhibitors, and we have protocols in place in emerging around the function of the platelets that's, which, I think, that are very effective. In terms of the factor Xa inhibitors, no, I don't think we've yet got our hands around that one. That's definitely an element of research for us. The third one is, of course, the use of fibrinogen, which is emerging both in Japan and the United States, and that's an intriguing market for us. We do have a functional fibrinogen test. We could be well into that market if we keep on track. And we certainly have some place in that area right now. But they're early in the pipeline. I'd rather not speculate until we actually have results. I can show you perhaps next time.

Brian P. Concannon

I think in both of these, Steve, what I'd say is this represent significant opportunities for us today. We see what's already happening with TEG, double-digit growth since we've acquired it. I think Acrodose is really going to be a product that'll help us in the interim as we're launching our new products, the automated whole blood, excite our customers about what we'll bring in the market as well.

Edwin McClellan Johnston - Sandhill Investment Management

Edwin Johnston, Sandhill. You talked about plasma in the beginning, and it being a mid-single-digit grower, with 75% of the contracts being long-term contracts. Could you break out volume and pricing there and let us know what's sort of driving that mid-single-digit growth, which is the more important factor there?

Brian P. Concannon

Sure, Pete?

Peter M. Allen

I think it's volume. The biggest driver of that, of course, is volume. We have pricing built into all of our contracts, but it is not as substantial. The primary driver of that will be volume.

Brian P. Concannon

I'd also tell you that the times that did these contracts, this is a little over a year ago now. So anything that we do give up on price, for the most part, has now annualized as we go forward. Larry, I have to tell you, you have a halo over your head there. There's a light coming from you.

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

Two, I guess, a couple of financial questions, if I could. First, thanks for laying out the cost savings by year, but 2 aspects of it I want to get my arms around. What are you guys thinking about reinvestment? Because I think that's probably a net number. And when do we think about the redundant costs for the manufacturing changeovers to go away? And then I have another one.

Brian P. Concannon

I'll ask Chris to grab that one, Larry.

Christopher J. Lindop

So Larry, the free cash flow trends that I put up in the slide is obviously net of any reinvestment. That's the free cash flow that we anticipate the business generating operating cash flow, net of CapEx. So in terms of the redundancy, the redundancy is inherent in our technology transfer cost. So that's part of that number that I showed, the $77 million in '14 dropping to about $49 million in '15, and then dropping down to about $27 million in '16, and will all be over by then.

Lawrence S. Keusch - Raymond James & Associates, Inc., Research Division

[indiscernible] for you is again, when I look at the [indiscernible]

Christopher J. Lindop

Yes. The underlying assumptions are, for mid-single-digit organic sales growth, a little higher than mid, I think. We used 5.6%, which was our tenure CAGR, which we believe the underlying business and our strategic plan would support, and about 350 basis points of margin expansion, which relates really to the $35 million to $40 million that we announced on the conference call, and which Dave confirmed this morning.

Brian P. Concannon

And I'd say, just to add on to that, Larry, just a couple of things, and you heard me say this, I think, on the call. As we go forward, I think investors can expect to win a little bit more as we go forward. We've typically taken about 65% to 75% of incremental gross profit. We invested it back into the business. So you'll see a little bit of a shift there. And you know that our aspirational growth goals are typically in the 12% to 15% range. I think you'd even be thinking over the next 5 years something in the 15% range and north of that. Is that Ray?

Raymond A. Myers - The Benchmark Company, LLC, Research Division

Yes. This is Ray Myers from Benchmark. Brian, could you discuss what OrthoPAT contribution you expect is possible following the full launch in September? And also discuss the decision to transfer to a distributor model?

Brian P. Concannon

Sure. Mike, I'll ask you to grab that.

Michael Kelly

Yes. Post the -- where we project OrthoPAT this year is returning to growth coming off of a fairly significant decline last year. So by the end of the year, we will return OrthoPAT to growth. Relative to your question was about the decision, was there a specific question relative to the dealers or...

Raymond A. Myers - The Benchmark Company, LLC, Research Division

What is driving the transition to distributor model? And how do you expect that, Mike, [indiscernible] the margins [indiscernible]

Michael Kelly

Yes. The transition to the distributor model, OrthoPAT is a very high-tech product. As we've learned in dealing with some of the quality issues and the challenges we've had the last 3 years. And our focus with the TEG product and driving our Cell Saver product, the ability for us to get appropriate coverage for OrthoPAT, we think aligning with select orthopedic dealers is a good way to go. And I think from a margin perspective, we can do that and minimally affect our margin. OrthoPAT, I think many of you know is a very high margin product. So I think we would actually give up very little margin on the base business and really incent the dealers. The primary margin incentive said they have is really on growing the business. So it's really not to dilutive to our existing margin, it's about what can we -- what can they grab by growing the business, and then we'll share some margin.

Brian P. Concannon

And I'd add to that, Ray, that for those of you who have been associated with mesh for some time, you may recall, we did have a distributor model with our OrthoPAT. This model that we're going to in this path is very different. The distributor model that we had, had our distributor take title to the product. As frankly in the early days, their margins that they had with that product were beginning, when I got here, well over 50% of the profit we made. This is a product today that is close to 80% margin product. Even with this model, we expect our margins to remain north of $70 million as we go forward.

James Francescone - Morgan Stanley, Research Division

James Francescone, Morgan Stanley. A couple of questions on the rollout of whole blood automation and on paperless donation. You mentioned some customer experiences where customers were seeing improvements in workflow and productivity. To what extent can you tell us has that translated into a positive financial impact for your customers? I mean, what are your plans to kind of quantify that?

Michael Kelly

We actually have aggressive plans to quantify that that's built into this limited market release process. So that blood center that I mentioned in the Midwest, the early focus of that work was really gathering the data for our 510(k) submission. But along the way, we did gather data that we are now putting into an economic simulation to estimate the savings that were regenerated from what they're using with the paperless phlebotomy solution. That will be a big part, right, of our value proposition as we roll this out in the future. So certainly, the economics, we expect to be there relative to the savings. We don't have that fully available to share with you yet, what type of economics, but we would expect them to be large.

Brian P. Concannon

The other thing that I'd say, Jim, just on that, is that this is one of blood center. While we are comfortable with the savings, certainly announcing what that is today sheds light on a blood center that may not be appropriate. Depending upon the starting point of these blood centers that we work with, it's going to be different. The good news is that we feel comfortable there's a savings associated with this. And add -- pair that up with what we see from an operational efficiency, regulatory productivity component, we're very comfortable about the value this product represents.

James Francescone - Morgan Stanley, Research Division

Okay. And without trying to pin you down, any sense of rough timing on when we might have a little bit more robust analysis on that point?

Brian P. Concannon

Jonathan, I'll ask you to give thoughts on that one.

Jonathan White

I think the real question will come in when we see how it operates on a mobile drive, right? The fixed centers are the minority of them, and they tend to run very efficiently. I think when we have these mobile centers by the end of the year, we'll have data. We'll probably -- I'll show you next year, but not within this calendar year.

Brian P. Concannon

I always love to have the R&D making commitments in front of 100 people. But what Jonathan's talking about here is that the real value here isn't in the fixed site, it's in the mobile drives. And we expect to be in about 100 mobile drives by the end of the year. And I think that will really start to give us a pretty good idea. I'd probably say, James, if we're on track by this time next year, we'll be able to share some pretty decent information with you.

Anthony Petrone - Jefferies & Company, Inc., Research Division

Anthony from Jefferies. A couple on whole blood and then a couple on gross margin. For whole blood, can review for us what is the pricing today for manual collections? And then, perhaps, what will be the pricing for automated collections down the road? And then maybe if we go another step further, what do you think the volume benefit will be for blood centers when they go automated versus manual?

Brian P. Concannon

I'll grab that one, Anthony. Just because there's not a lot of detail we're going to be able to share. It kind of goes off of James' question. But roughly today, and looking at disposable, that's about $20. And that's how we found ourselves, the strategic path we took over the last several years, because when we look initial early offering for whole blood for us, we found ourselves having to put a kit into the market that we knew was going to be beneficial to our customers, but we didn't control filtration. So we're going to be coming out to our customers with a kit that was going to cost more, going to save money later on. And as the analysis showed, that's a pretty tough sell to a risk-averse, change-averse not-for-profit customers serving a not-for-profit client. So today, we feel pretty good about what that's going to look like. We know we can save that money. We know that these are customers that are focused on cost, focused on quality. I think we'll have a better picture on that in about 12 months.

Anthony Petrone - Jefferies & Company, Inc., Research Division

And anything on volume benefits going...

Brian P. Concannon

Yes. I think what we've tried to say is, we're keeping our powder dry right now. We expect to see modest growth as we bring these products to market today. Certainly, Acrodose will help with some of what we're driving there. But we expect to see double-digit growth beginning in fiscal '16 as we launch the entire portfolio. So that's -- look for us to start capturing chunks of market share beginning in '16, not unlike we did with plasma. I expect it'll take longer just because of the nature of the customer. But I expect we'll see double-digit growth from the point forward.

Anthony Petrone - Jefferies & Company, Inc., Research Division

That's helpful. And then for Chris and Dave on gross margins, 51% or 52% for '14, some of the initiatives that Dave laid out. How does that play out at the gross margin level beyond '14, just some of the manufacturing benefits? And then if you could just touch on the benefit of transferring the Pall media assets over, how does that play out at the gross margin level?

Christopher J. Lindop

Yes. The $35 million that Dave indicated shows up in gross margin over that sort 3- to 4-year timeframe. In terms of bringing the Pall media products over, today, we have a pretty nice deal with Pall. They charge us a small margin over the cost of manufacturing the products for that media. In essence, we bought the intellectual property rights, and they're servicing them for us. And when we bring on the $15 million of media asset that they are developing for us, and will deliver to us in Puerto Rico, within the next 3 years, the depreciation of that will essentially offset the margin that will no longer be paying Pall for their manufacturing services. So that's a bit of a cushion. It was always designed in the deal structure to be a push. So there's not a big piece of dividend there. The next generation media that Jonathan alluded to is an exciting opportunity. But that's much, much, farther out and really will be dependent on volumes.

Brian P. Concannon

No more questions? You're going to let us get off that easy or you're that excited about the breakout sessions? I'm not sure which it is. I'm hoping it's the latter or lunch on a great day in Boston.

Okay. Well, thank you very much for those questions and answers. Let me just -- a couple of logistical components here. This is a little hard to read, but frankly, this is our drawing, our layout for our products outside. And I hope you take the chance to get out there and spend time with our marketing team. And looking at the products, looking at the services, get an appreciation for what we talked about today. We're proud of what we've accomplished. We're proud of what we've built. We're proud of how we're taking our leadership position in the market. We're proud of how this is helping to transform an industry. And I think when you get out there and look at it, it gives you a real strong feel and appreciation for what we've accomplished and what we've built over this last decade. What we're going to do is we're going to break for lunch at this point in time. Out in the hallway will be boxed lunches. We would encourage you to grab lunch, grab members of management team. We're going to be available here throughout lunch. We can meet with you, sit with you, talk with you, continue to answer questions that you may have. Starting promptly at 1:00, we're going to have a series of breakout sessions, which is really going to allow you to deep-dive with questions a little further with the leaders of these areas so that you can come away from today wit the clarity that you need and want relative to the strategic direction of our corporation. We're trying to give you a lot of exposure to the business, a lot of exposure to our products, but a lot of exposure to this leadership team that we've assembled, the team that I'm very, very proud of in what they've done, what they've accomplished, more importantly, what they're signing up more to do for the future. So we hope you'll stay, take the time to meet with them in a little bit more about where we're heading strategically. Again, I thank you for joining us here at our Annual Investor Day here in Boston. I really appreciate you taking the time to be with us, both here physically and those who joined us on webcast. Thanks very much, everybody.

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