Haemonetics' (HAE) CEO Brian Concannon on Q1 2015 Results - Earnings Call Transcript

Jul.30.14 | About: Haemonetics Corp (HAE)

Haemonetics Corporation (NYSE:HAE)

Q1 2015 Results Earnings Conference Call

July 30, 2014 08:00 AM ET

Executives

Gerry Gould - VP Investor Relations

Brian Concannon - President and CEO

Chris Lindop - CFO and EVP of Business Development

Analysts

David Roman - Goldman Sachs

Jim Sidoti - Sidoti & Co.

Anthony Petrone - Jefferies Group

Matt Larew - William Blair

James Francescone - Morgan Stanley

Raymond Myers - Alere Financial

Jan Wald - Benchmark Company

Operator

Good day ladies and gentlemen and welcome to the Haemonetics Corporation First Quarter Fiscal Year 2015 Earnings Release. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder this conference is being recorded.

I will now turn the call over to your host Gerry Gould, Vice President Investor Relations. Please go ahead.

Gerard Gould

Thank you. Good morning, everyone. Thank you for joining Haemonetics first quarter fiscal '15 conference call and webcast. I'm joined by Brian Concannon, President and CEO; and Chris Lindop, CFO and Executive Vice President of Business Development.

Please note that our remarks today will include forward-looking statements. Our actual results may differ materially from anticipated results. Additional information concerning factors that could cause actual results to differ materially is available in the Form 8-K we filed this morning, as well as in our recent 10-K.

On today's call, Brian will review the highlights of the quarter and the outlook for our performance going forward. Chris will cover operating performance as well as guidance for the full fiscal year in more detail then Brian will close with the review of our strategic initiatives and some summary comments.

Before I turn the call over to Brian, I would like to mention the treatment in our adjusted results of certain items, which by their nature and size, affect the comparability of our financial results. Consistent with our past practice, we have excluded certain costs from adjusted financial results we'll talk about today.

In the first quarter is a fiscal '14 and fiscal '15, we have excluded pre-tax transformation, integration and restructuring costs associated with our Value Creation and Capture program and other productivity initiatives. Additionally, the earnings information discussed for all periods excludes deal-related amortization expense.

Further details of excluded amounts, including comparison with the first quarter of fiscal '14, are provided in our Form 8-K and have been posted to our Investor Relations website. Our press release and website also include a complete P&L and balance sheet, as well as reconciliation of our GAAP and adjusted results.

With that, I will turn the call over to Brian.

Brian Concannon

Thank you, Gerry and good morning everyone. This morning we reported results for our first quarter of fiscal ‘15 which I characterize as a good start to the year and in line with our expectations.

Total revenue in most revenue segments came in above where we expected and we saw robust growth in our identified growth drivers. Our whole blood business had declines that were consistent with known trends. There are three revenue elements I would like to highlight for clarity. First, there is no impact on total revenue from currency in the quarter and revenue increased 2% both as reported and in constant currency. However, we still anticipate an ongoing impact from the devaluation of the yen later in the year. Second, our growth drivers Plasma, TEG and emerging markets which represented 58% of our disposables revenue in the first quarter, grew in constant currency at combined 19% with Plasma up 22%, TEG up 24% and emerging markets growing 11%.

Now plasma growth in the quarter benefited from the Australian and New Zealand distribution change during Q1 of fiscal ‘14 which contributed seven percentage points to the 22% Plasma growth that we realized. Adjusted for the impact for this change, our combined growth drivers grew 14%. It’s important to note that over half of our disposable business continues to deliver solid double-digit growth.

The third revenue element I would like to highlight is the anticipated headwinds which partially offset the performance of our growth drivers in the quarter. For the full fiscal year, we guided that these headwinds, reduced pricing, market share shifts and overall market declines in the demand of red cells in our U.S. blood center business together with currency pressure would overwhelm the real growth of our growth drivers. We still believe that’s going to happen. However, we also still believe that these headwinds will abate.

We expect the anniversary of the impact of the U.S. blood center pricing and market share shifts early in fiscal ‘16. And we also expect the clients in U.S. transfusion rates, which are impacting the market demand for red cells and therefore whole blood to abate in fiscal ‘16 turning to levels in the low 30s per 1,000 of population.

So as we look forward to fiscal ‘16, we believe that the ongoing momentum of our growth drivers will become more evident and we expect to return to revenue growth in the mid-single digits.

Moving on to earnings. In the quarter, $0.38 per share approximated 20% of our full year EPS guidance. And that’s what we expect to go into the year. Our Value Creation and Capture or VCC programs advanced as planned in the quarter and should provide the acceleration in earnings expected in the second half of the fiscal year.

Altogether, this means improved gross margins in the second half and accelerating earnings later in the year.

Now I’ll turn the call over to Chris Lindop who will review the financial highlights of the quarter and our current thoughts on guidance. Chris?

Chris Lindop

Thank you, Brian. In the first quarter, total revenue was $224 million, an increase of 2%, both as reported and on a constant currency basis. On a company wide basis, revenue from disposables grew 3% in the quarter. For this quarter, there was no net currency impact on our revenue growth rate. Our full year expectations contemplated topline currency headwind of 1% to 2%. And during the quarter, both the prevailing yen and euro spot rates were somewhat stronger than expected, benefiting the topline.

Plasma disposables revenue was $79 million in the quarter, an increase of $14 million or 21% as reported and 22% in constant currency, benefiting from the Australian and New Zealand distributor change about a year ago which Brian mentioned. North American plasma disposables revenue grew 14% and our customers continue to be optimistic about end market demand. Our guidance range for plasma growth in fiscal '15 is 7% to 9%, reflecting some tougher comps as the year progresses.

Blood center disposables revenue declined 10% to $86 million with red cells up 2%, platelets up 11% and whole blood down 26%. The red cell disposables revenue was $10 million in the quarter and its growth included 5% in North America was driven by order timing and by seasonality. The market trends we've discussed previously declining demand continues and our guidance takes that into account.

Platelets disposables revenue was $38 million in the quarter and increased principally in the emerging markets where growth was 22% impart due to order timing. Whole blood revenue declined 26% to $38 million with $25 million in North America, $9 million in Europe and European distribution markets and $4 million in the Asia Pacific and Japan markets.

North American whole blood revenue declined by $10 million, reflecting the trends in demand for red cells, the impact of the transitional OEM supply contract with Pall Corporation that recently expired, lower pricing in the HemeXcel contract and lower American Red Cross volume. Regarding the loss of ARC whole blood tender, this was fully transitioned to our competitor late in the first quarter. So the $25 million annual run rate of the loss business were the $26 million quarterly revenue impact will be felt in each of the remaining quarters of fiscal '15. We continue to expect our blood center business to be down between 10% to 12% in fiscal '15.

Hospital revenue grew 2% to $31 million in the quarter. Surgical disposables revenue was $16 million in the quarter, down 3% both as reported and in constant currency. Strength in the emerging markets was offset by weakness in mature markets. In diagnostics, TEG disposables revenue of $10 million, up 26% as reported and 24% in constant currency in the first quarter, driven by increases in North America and China.

We installed nearly 1,800 TEG devices in the last three fiscal years and fully expect strong disposables growth to continue. Taking into account current and anticipated trends in surgical ongoing OrthoPAT market headwinds, and continued strong growth in TEG, we’re confirming expected revenue growth of 4% to 6% in our hospital disposables business for fiscal ‘15 consistent with prior guidance.

Software solutions revenue was $18 million, up 6% driven by BloodTrack orders in the U.S. and the UK. We continue to see a steady pipeline of software opportunities as hospital customers increasingly recognize software’s importance in identifying and implementing blood management solutions. We continue to expect 2% to 4% software growth in fiscal ‘15.

Equipment revenue was $11 million in the quarter, down $1 million or 10%. Our install base of equipment, which is the combination of purchased and placed devices increased 7% in fiscal ‘15 and this bodes well for future growth in disposables revenue.

First quarter fiscal ‘15 adjusted gross profit was $109 million, down $5 million from the prior year quarter. Adjusted gross margin was 48.4%, down 330 basis points year-over-year; 70 basis points of this decline related to currency, the remainder is attributable to lower pricing and volume in the U.S. whole blood business and mix towards lower gross margin plasma revenue.

These headwinds more than offset productivity gains achieved in operations in the quarter. Adjusted operating expenses were $80 million unchanged from the prior year's first quarter. However, we increased R&D and emerging markets commercial investments enabling critical product and market development to continue and we accrued variable compensation at a full level. Offsetting these increases we implemented cost reductions during the quarter.

Importantly, our commitment to funding plan growth and infrastructure investments in emerging markets as well as in R&D to support the development and introduction of new products continued in the quarter. Adjusted operating income was $28.8 million in the quarter down $4.7 million. Adjusted operating income reflects currency headwinds of $2 million in the first quarter related to the devaluation of yen denominated revenues.

Now, let me remind you how currency and hedges impact our results. We place foreign currency hedges 12 months in advance to facilitate planning. These hedges are designed to lock in the U.S. total volume over foreign currency earnings. Our top-line results reflect both the prevailing spot rates and actual settling hedge rates. Our earnings are influenced principally by the settling hedge rates. And the settling yen hedge rates in the quarter were 22% weaker than the prior year's rate.

Adjusted operating margin in the first quarter was 12.8%, down 250 basis points as the pricing and volume pressures in the U.S. whole blood business far outpace the ramp of benefits from VCC and other cost savings initiatives.

Interest expense associated with our loans was $2.2 million in the quarter, our tax rate was approximately 25% compared with 23% in the first quarter a year ago when we had some one time catch up items. We continued to benefit from the ongoing implementation of our global tax strategy and in fiscal ‘15 we expect our tax rate to return to around 26%, reflecting our relative profitability in certain tax efficient jurisdictions in the near-term.

Adjusted earnings per share were $0.38 down 17% attributed primarily to the immediacy of the whole blood pricing and volume declines versus the steady ramp in VCC and other cost benefits that I mentioned earlier.

Turning to guidance, we still see fiscal ‘15 as a year of transition with profitable growth in plasma, TEG and emerging markets, being offset by previously disclosed earnings headwinds in three areas. First the U.S. blood collection market, second currency, and third full bonus funding.

Our fiscal ‘15 revenue guidance on a reported basis includes plasma disposables growth of 7% to 9% a decline in blood center disposables including whole blood of 10% to 12%, hospital disposable growth of 4% to 6% and software growth of 2% to 4%. Overall we expect revenue to be flat to down 2% on reported basis.

On an adjusted basis we expect gross margin to approximate 50% and operating margin to finish at roughly 16%, each down 100 basis points versus fiscal ‘14 we are affirming these elements as well as the adjusted EPS range of between $1.85 and $1.95 per share.

For those of you maintaining quarterly models I want to provide some color with respect to revenue and earnings trends for Q2 and for the front and back half of the year. Our expectation for the second quarter revenue reflects only modest sequential growth. And the second quarter this growth will be net of $5 million decline related to the previously disclosed loss of the ARC whole blood tender which as I noted earlier was fully transitioned to a competitor late in the first quarter.

Also in the second quarter, operating margin will trend up modestly from Q1 levels driven by revenue mix and sequential declines in operating expenses reflecting both seasonality and the impact of cost savings action implemented in the first quarter.

In the past we have told you that seasonality tends to distribute our revenue roughly 48.5% to the first half of the fiscal year and 51.5% to the second half. This year the presence of $5 million of ARC whole blood revenue in the first quarter is skewing this to roughly 49% in the front half and 51% in the back half.

Accelerating gross margins related to both mix and the planned realization of our VCC initiatives will increase gross margins in the second half and steady operating expense spending between the first and second half will result an accelerated earnings later in the year.

As in the past, our website includes revenue and income statement scenarios which are based on the elements of guidance provided in my comments for the full-year.

We ended fiscal the first quarter of fiscal ‘15 with $140 million of cash on hand, down $53 million from the prior year. We used $24 million net of tax benefits for VCC and other restructuring, $7 million for net debt repayment and $26 million for the repurchase of approximately 834,000 shares in the open market under the current $100 million share repurchase authorization.

We amended our credit facilities extending the maturities and repayment base by about two years and doing so we were able to gain operating flexibility and enhance our liquidity.

For the full fiscal year, we still expect free-cash flow generation of between $120 million and $130 million before funding $80 million of restructuring and capital investments related to our VCC activities. By fiscal ‘18 incremental annual VCC savings over and above the $30 million planned to be realized and reflected in our guidance for fiscal ‘15 are expected to approximate $30 million to $35 million for a total of $60 million to $65 million in annual savings.

In fiscal ‘16, we expect to return to mid single-digit revenue growth and double-digit adjusted operating income and earnings per share growth. The VCC and restructuring investments should be coming to a conclusion in fiscal ‘16, helping to drive margin expansion and a more competitive cost position for our products around the world.

All this will occur as the call in our free cash for investment in these programs declines in fiscal ‘16. With that I’ll turn the call back over to Brian.

Brian Concannon

Thank you, Chris. As said before, it deserves repeating. There is no change to our strategy. Our vision that patient blood management would drive economics that in-turn create an intense demand for automation and innovation in collecting, processing and supplying blood is reinforced by recent market developments and it’s being played out quite similar to what we saw in our commercial Plasma business years ago.

One quarter ago and at our Annual Investor Day in May, we told you that we plan to bring four new products to market in fiscal ‘15, positioning our company for accelerated growth in subsequent years. Our plans include a next generation software products for commercial plasma collection, a major upgrade of our blood tack software offering, a next generation TEG success device of enhanced features and in the important whole blood space, a comprehensive software product for donor recruitment and retention that will complement to Donor Doc Phlebotomy product already in the market. 90 days into the year, we remain on track in our pursuit of these advances.

Additionally, we continue to work with the FDA toward approval of the SOLX red cell storage solution with our own filtration. Our strategy continues to be focused on delivering solutions that help our customers impact the $1,100 cost of a red cell transfusion. We are uniquely positioned in our industry with the capabilities to do this. We remain focused on working with our customers to prove these capabilities for both our existing and new products to deliver on this value proposition. We expect to enter fiscal ‘16 well positioned to help our blood center customers, provide meaningful value to our hospital customers as our blood management strategy delivers the expected value in both cost savings and patient outcomes.

We continue to do the work needed to bring value engineering to our whole blood kits, reducing their costs and allowing us to better compete in markets throughout the world, markets that are embracing leukoreduced technology and markets that are three times larger than the U.S. market. Our customers in the international markets share the same passion for blood management improvements.

Our Value Creation and Capture initiatives will streamline our operations, improve quality and deliver annual savings of $60 million to $65 million by fiscal ‘18. These important initiatives remain on track.

We made the decision to retain and renovate our corporate facility here in Braintree Massachusetts. We’re proceeding with the previously announced state-of-the-art technology center to house our research and development activities. A facility that will enhance our ability to attract and retain the best and brightest scientists and engineers focused on transfusion medicine, further enhancing our commitment of innovation to bring the next generation of devices, disposables and services to our industry.

We continue to position Haemonetics for even greater success in the future. Many of the current headwinds will abate early in fiscal ‘16 and the real strength of this business will emerge. Strength that we expect will translate into a return to mid-single-digit revenue growth and double-digit adjusted operating income and earnings per share growth in fiscal ‘16.

Our business fundamentals remain strong as we focus on bringing solutions to market to reduce costs and improve patient care. We have a strong and expanding global footprint, differentiating new products in the R&D pipeline and increasing advantages cost structure and the broadest array of products and services in the blood industry.

We are well-positioned to meet the needs of our customers, capture global market share and drive sustainable profitable growth. The steps we’ve taken in recent years have put us in a good position to react to current U.S. market dynamics and international opportunities on the horizon.

With confidence in our strategy, earlier this year our Board of Directors authorized the repurchase of up to $100 million of Haemonetics shares. We completed $26 million of that program in May and June at an average price of $32.21 per share. This program continues and we’ll provide an update at the end of the next quarter.

We recently announced some changes to our Board of Directors, the first being that Larry Best decided not to stand for reelection. Larry served our Board well over 11 years and we wish him continued success. Second, we announced the election of Chuck Dockendorff, CFO of Covidien, to our Board of Directors. Chuck is a seasoned healthcare executive with the wealth of financial, operational and strategic experience and will be a great addition to our Board. We look forward to his contributions.

And finally, we announced the Paul Black has resigned from our Board to focus on his current company’s need. We thank Paul for his considerable help while member of our Board and wish him continued success.

I’ll finish as I always do by thanking our employees. It’s hard for the casual observant to fully understand the challenges of integrating multiple acquisitions and completely transforming the manufacturing and distribution foundation of the business, while continuing to maintain a positive focus on the current and longer term needs of our customers. Yet this is what our people have done and still do today. They continue to earn my respect and appreciation.

With that we are happy to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from David Roman with Goldman Sachs. Your line is open.

David Roman - Goldman Sachs

Thank you, good morning everybody.

Brian Concannon

Good morning, David.

David Roman - Goldman Sachs

Hey guys. I wanted just to start with maybe the gross margin and Chris really your commentary around the progress of earnings throughout the year is very helpful, but maybe you could just go into a little bit more detail about the ramp in gross margin from the 48.5% level that you generated in Q1 up for towards the 50% level. I guess what I am trying to get at there is understanding the ARC tender headwinds that’s start to effect growth in those subsequent three quarters of the year just maybe helping us think about the bridge of 48 to something over 50 by the end of the year to average out to the guidance, then I have one follow-up.

Chris Lindop

Sure there is really two principal elements David, one of course is VCC and the ramp of VCC, the progression of cost savings in manufacturing begins by being realized and then caught up in inventory in positive variances and then leads in for the P&L over the course of the year. So we have relatively good visibility into where we think that will end for the year.

The second element is really it relates to the acceleration of our hospital business and that’s a story by the emerging markets, where we’ve got a number of initiatives designed to focus on acceleration of that business, where we have an installed base of devices that we're working aggressively. And both of those asset mix and VCC realization lead to higher than average for the year, average gross margins in the second half compared to first half, and you should see sort of progressive improvement Q1 to Q2 and so on.

David Roman - Goldman Sachs

That's really helpful. And then just Brian as you still start to look towards fiscal ‘16, you should have given us a teaser now two quarters in a row kind of on the mid-single digit, topline growth and then the double-digit earnings growth. Did you think about the inflection from this year to next year, besides the abating headwinds in whole blood, is there anything else that changes in your assumptions regarding the business as we move into the fiscal ‘16? And any parameters you might want to put around double-digit growth at this point?

Brian Concannon

Yes, this mid-single digit revenue growth is really driven by the bad things, not being, not negative not happening or not being as bad. We know that we're going to anniversary the last year the American Red Cross business in Q1. We know that we are going to anniversary the pricing concessions we gave on the HemeXcel contract.

And then, so those are known and the timing of those are known. We have pretty good visibility into what's taking place in the decline and demand in the whole blood market. But in fairness, that supplement continues to move a little bit and we think we've appropriately guided with that in mind. And so we've been pretty responsible, I would say in terms of our view of that. So, we think this one half of our business growing double-digits very strong and other half flattening out, you start to see the recognition of a mid-single digit growth rate emerging from that.

Our emerging markets, our TEG business, our plasma business continues to be strong. We're going to be launching four new products which will boaster that. So we feel pretty good about that mid-single revenue growth number even with some potential unknowns of the exact bottoming out of the demand in whole blood.

As it relates to operating income, it's really a couple of things. It’s much like Chris talked about our VCC initiatives really starting to gain momentum that we've expected. We've got good visibility towards taking place there. The leverage that we enjoy in our P&L with positive drop through and how we reinvest in our business as we go forward in investing $0.65 to $0.70 of every incremental gross margin dollar as we look to the future. So the way I would like to say it is, after a very challenging year in fiscal '14 we have more positives happening in fiscal '16 that we did negatives in fiscal '14.

David Roman - Goldman Sachs

Got it okay, thank you very much.

Brian Concannon

You're welcome thank you David.

Operator

Our next question comes from Jim Sidoti with Sidoti & Co. Your line is open.

Jim Sidoti - Sidoti & Co.

Good morning, can you hear me?

Brian Concannon

Good morning Jim.

Chris Lindop

Hi, Jim.

Jim Sidoti - Sidoti & Co.

Can you give us a little more color on the status of the new TEG system exactly what steps are left to get that into the market and also from the new SOLX solution?

Brian Concannon

Sure Jim with regard to the TEG’s success we're going through a process of responding to questions from the FDA on the original clinical trial. We've made two flings, one with regard to the core system and the second with regard to the platelet mapping as we continue to be on track we're working through what we are calling cap trials customer acceptance trials where we work with customers and we have a series of eight of those planned of which I think three have happened or underway at the moment. So I’d say three months as we spoke about at the last update which was really on May 20th.

With regard to SOLX you know that there is a clinical trial ongoing. The latest update I have which is within the last week is that the recruitment is almost complete. As you know, this is a trial which involves tracking the blood for 42 day storage. So, we believe we’re still on track for the original schedule which is to be done with the trial in the sort of September, October timeframe and get the data to the FDA before the end of the calendar year.

Jim Sidoti - Sidoti & Co.

So, do you think it’s feasible to have both these products in the revenue mix by the end of fiscal ‘16 and what do you think would come in first?

Chris Lindop

I would say TEG would be more impactful, more noticeable, just because of there is a franchise there, there is sort of pent up demand for that product customers love. It is more by the new product doing what they love more easily for them. With of course SOLX we’re talking about a revolution of brand new solution into the whole blood market which is obviously a market that’s slower to move. So I would just naturally anticipate TEG to move faster than SOLX.

Brian Concannon

The answer to your question Jim is yes. As we get closer to that year and as we have more visibility to the approval of those products we’ll be able to guide better in terms of what we expect those to do in the fiscal year.

Jim Sidoti - Sidoti & Co.

All right. But you think that it’s reasonable to think that by the end of ‘16 you’ll have both those products in the market.

Brian Concannon

Yes. The answer of the question is yes, I think that’s reasonable.

Jim Sidoti - Sidoti & Co.

Okay. Thank you.

Operator

Our next question comes from Anthony Petrone with Jefferies Group. Your line is open.

Anthony Petrone - Jefferies Group

Thanks and good morning. Maybe to start a little bit on the blood bank disposables as a whole and specifically with platelets and red cells and so platelets had the benefit of an emerging market order, I guess reversing this quarter. How much of the performance in the quarter was exclusively related to that emerging market or was there some rebasing in that performance in the quarter? And then the same on red cells, how much of the improvement in the quarter was just seasonal and if you back that out was there any sort of indication of rebasing in that business?

Chris Lindop

When you see rebasing Anthony, could you just clarify what you mean by that from my side?

Anthony Petrone - Jefferies Group

Sort of getting to a point of where those businesses will be on a normalized run rate once we've sort of bypassed all the headwinds that these businesses are experiencing?

Chris Lindop

Yes. The biggest dominant effect in the quarter was order timing. If you go back to a year ago at this time you'll see that we had order timing as sort of a reason for poor performance and therefore we've got the comparably stronger performance this quarter. Fundamentals of those markets have not really changed, I mean for platelets for us to go with this about emerging markets and so if you want the positive there is that emerging markets get bigger and bigger everyday and therefore the ability to influence overall corporate growth rates is more in platelets because of the size of the emerging markets opportunity. And we continue to expect that but certainly it's not an 11% growth business in emerging markets.

Brian Concannon

And as red cell piece Anthony, the way I'd say that is, is that a little pop damp and up is a little bit of surprise but as we contemplated. Really shouldn't be you have, your seasonal demand that occurs in the summer time in a declining market, the need to react double red cells is a logical way to get out that to address a bump that's not going to be a new trend. So that makes sense to us but that's why we really try to caution that to recognize that’s not a return to growth in that product line as that market continues to rebase.

Anthony Petrone - Jefferies Group

No, and that’s helpful. And then maybe over to whole blood and your comments were helpful on American Red Cross, but also maybe on HemeXcel. That contract sort of I think regularly comes into the fold so where is HemeXcel in terms of fully adopting the Haemonetics of whole blood collection capabilities at this point? And are there still sites within the HemeXcel network that have to still fully adopt?

Brian Concannon

No it’s completely transitioned.

Anthony Petrone - Jefferies Group

Okay, great. And then just lastly on SOLX and I will hope back in as you mentioned at Analyst Day, Brian several studies were potentially those could be published before year end, I am just wondering if there is any update there?

Brian Concannon

I think Chris provided some color on that we remain on track with everything that we had laid out for you at the Investor Day we continue to feel positive about that. Getting the studies done is certainly the step ahead of filing with the FDA for approval of these products. So important milestones forward, but we remain on track.

Anthony Petrone - Jefferies Group

Thanks.

Operator

And our next question comes from Brian Weinstein with William Blair. Your line is open.

Matt Larew - William Blair

Hi guys. This is Matt in for Brian this morning. Thanks for taking my question.

Brian Concannon

Hey Matt.

Matt Larew - William Blair

Just wanted to follow up on HemeXcel here saw a couple of days ago with that OneBlood and ITxM in Pittsburg announced that they were looking to merge, would that fall within the HemeXcel contract, isn’t that OneBlood is a part of HemeXcel? And if so how quickly would you think that might come under the fold?

Brian Concannon

Matt OneBlood part of HemeXcel, ITxM is part of HemeXcel. So they both are customers of ours today. So that would have no impact in terms of incremental revenue. But the important piece here is, is that each one of them approach their markets somewhat uniquely. And if you think about what we’re advocating relative to blood management, at least in a part of the ITXM business, they practice that type of blood management with key customers in the Pittsburgh market today. And when you look at customers today of ours that are aggressively pursuing blood management, one blood would fall into that -- the category of one of those customers, those top customers doing that.

So, this is a very strategic move on their part, an important move on their part. And I would say without having had the benefit of speaking with them about this myself but it just reinforces their commitment to becoming more relevant for their hospital customers relative to blood management.

Matt Larew - William Blair

Okay, thanks Brian. And then you’ve mentioned in the past that acquisitions will be a part of the capital allocation policy moving forward. Just wondering if -- what you are seeing out there, anything of particular in just in terms of market adjacencies or geographies that look very interesting right now? Thanks.

Brian Concannon

As always, things that interest us, when you have the ability to buy, there is always things that interest you. But it has to fit in our strategic needs. And we've been pretty clear about that. I think as we get through this fiscal year, I mean you often hear me say that acquisitions are as much painful as they are opportunistic. But as we get through this fiscal year with the bulk of the VCC initiatives behind us, we will continue to look aggressively at acquisitions and what they could mean. And I don't mean to say that that's not happening today, but our appetite will only continue to increase as we go forward.

But again, they have to fit very, very well strategically with the direction that we’re taking with respect to blood management. And we’ve often said the focus, what are we doing to automate our OUS markets much like we’ve done in the U.S. with our software business. So that’s the point that we continue to stay focused on in expanding.

Matt Larew - William Blair

Thanks Brian.

Brian Concannon

You're welcome, Matt.

Operator

Our next question comes from James Francescone with Morgan Stanley. Your line is open.

James Francescone - Morgan Stanley

Hey, good morning. Thanks for taking the questions.

Brian Concannon

Good morning, James.

James Francescone - Morgan Stanley

First, I wanted to talk about hospitals, so up 2% in the quarter, obviously full year guidance for 4% to 6% growth. So, you're certainly assuming some acceleration there even as the comps get tougher, particularly in the back half. And can you talk a little bit about particularly given how important that line seems to be for you expectations on gross margin improvements, you can talk about what rise your confidence that, that line continues to get better through the year?

Chris Lindop

Yes, it's very much cell salvage in emerging markets. And part of the pattern that happens there is you see the market with equipment and then you -- in many of those markets you are really trying to demonstrate the value through a clinical cell so that the equipment is more aggressive to utilize. And we know that in all of those markets, there is a relative shortage of blood components, relatively lower rates of transfusion for those. And so this is a perfect solution for those markets. And so it's a very targeted program across many different countries with a lot of management focus and monitoring going on.

So as much as we can feel confident about that we do, I mean we've made the investments in terms of feet on the street, we know where we're going to sell the products. So we're going to very much focus on that.

James Francescone - Morgan Stanley

Okay, that's helpful. And then on Plasma, I mean should we start to get a sense that your guidance for the year there is the conservative? Obviously the growth rates in the first quarter were a little bit distorted but even if I look at just the dollar figures, 1Q is usually the weakest quarter; if I just annualize to 79, I am already getting something at the high-end of the guidance range.

Chris Lindop

Yes. Certainly, we benefited in Q1 from this comparison. Essentially, there was really no -- Australia is a big plasma market for us relatively speaking because of their strategy towards plasma of course our market share and having no revenue in that quarter and then and not only having revenue but having the margin on the revenue that previously went to distributor, gives us an extraordinary growth in the quarter. And we try to emphasize that when you look at the growth rates in reported last year in ‘14 going quarter-by-quarter because I did the same analysis, James, I was scratching my head. They’re up 10% Q2; 13% Q3; 9% Q4. And so if you average that with our expectations for each of the last three quarters and think about that as a two year CAGR, we’re certainly in the high single-digit range in each of those quarters on a two year CAGR. And I think that that’s the pattern that we’ve seen they may [over climbed] a little bit and as they open centers or as a cadence of centers opening changes, but on the average, over time we’ll see that’s 7% to 9%, perhaps 8% to 10% growth rate. But we’re comfortable with the 7% to 9% growth that we’ve guided for the year at the moment.

James Francescone - Morgan Stanley

All right. Got it. Thank you.

Operator

Our next question comes from Raymond Myers with Alere Financial. Your line is open.

Raymond Myers - Alere Financial

Thanks for taking questions.

Brian Concannon

Sure Ray.

Chris Lindop

Hi Ray.

Raymond Myers - Alere Financial

Hi guys. Brian, I hope you might clarify for me the guidance that calls for $50 million to $55 million of revenue headwinds from volume and pricing as well as yen weakness this year. Chris stated in the call that about $5 million sequential impact should be expected in fiscal two from ARC’s loss. So I look at 5 million to the next three quarters is 15, it's hard to square that with $50 million to $55 million total headwind?

Chris Lindop

There were other elements in those headwinds. Of course, we identified with regard to revenue, it was ARC tender loss, which was a run rate of $20 million to $25 we said, $15 million of U.S. donor market declined. So remember that we’re dealing with a market, the background against which we’re operating is declining and about 10%. And then lastly yen headwinds which were estimated for the full year around $15 million. Now what happened in the quarter was that euro spot rates offset yen headwinds. But the yen headwinds are real and the euro spot rates, we can’t predict. And of course our hedging program is focused on guiding -- thanks for giving us clarity on the bottom-line rather than the top-line.

So what you're not seeing is that the guidance I gave, the 5 million was really about a sequential decline related to specific item. The backdrop for the year is certainly as the market declines that we talked about and that will have the currency headwinds from the yen.

Raymond Myers - Alere Financial

Okay, that's very helpful. And you mentioned the euro, what euro rate are you pegged at now so that we can understand how future changes will affect future…

Chris Lindop

It's really euro spot rate, it's not a pegged grade, it’s a spot rate. So just look at the euro rates there and you'll see that there is relatively year-over-year I think about 6% strengthening in the euro, in the quarter. And it bumps around I think in the quarter as well.

Raymond Myers - Alere Financial

Strengthening of the euro is positive for your results?

Chris Lindop

Positive for our top-line we essentially hedge the bottom-line and so the top-line is never fully hedged because there is a natural hedge in euro expenses as well. But on the top-line there is a 6% strength and euro effecting from a spot rate which is neutralizing the effect of the Yen.

Raymond Myers - Alere Financial

Perfect. And then my follow up question is about gross margin with the very strong first quarter revenue, gross margin still came in the 48% range lower than in the past, is that primarily the HemeXcel price concession or are there other factors affecting that?

Chris Lindop

It’s very much about the price concessions and a of bit mix but.

Raymond Myers - Alere Financial

Okay, thank you very much.

Chris Lindop

And currency.

Operator

Thank you. Our next question comes from Jan Wald with Benchmark Company. Your line is open.

Jan Wald - Benchmark Company

Good morning everybody, congratulations on the quarter. It looks like you are making good progress given the difficult environment. So I guess I have some questions I guess, the plasma’s business seemed particularly strong test, what do you think is driving the strength you are seeing there?

Brian Concannon

I think Chris has given some pretty good color on that if you think about an increase in constant currency of 22%, 7 points is really been driven by the fact that in Q1 of last year. We had a transition from a distribution market in Australia and New Zealand to a direct market.

So a year ago Q1 as that was happening the distributor was using up their inventory, we had virtually no sales in plasma. So we went from, not only did we from no sales for a quarter but this year, we went to a full quarter of sales without a distributor. So you have the benefit of both, so that's what you are seeing there. I think you are seeing as well as a weaker comparison in the Q1 of the previous fiscal year to the strength in Q4 of fiscal ‘13.

So, those two things combined. Bottom line is, it's the plasma market continues to be a good strong seller robust market for us. The demand for the plasma-derived bio-pharmaceuticals continues to remain healthy and we continue to benefit as our customers expand their collection capacities to address that.

So, it's artificially high in the quarter, but we continue to feel this is a good solid market for us with high single-digit growth guided for the year.

Jan Wald - Benchmark Company

Thanks. And would you be able to remind us the more tenders are going to offered over the next 12 months that you might be able to participate in, for the whole blood business?

Brian Concannon

Well, we've not been public about any tenders that are out there, some of them are opportunistic, we find out about those, but we've not been public about any tenders that our customers have not been public about as you might expect.

So, there is not a whole a lot of color we can give to you in that respect. What I can say, how I would answer that question is that, we see the greatest opportunity in whole blood to be outside of the United States. This was not a strength for Pall as we acquired that business, they did not enjoy a manufacturing position, cost position for lower cost manufacturing to compete in that market. Some of it had to do with a manufacturing, some of it had to do with how they made their kits, what was in their kits, the component fee of the kits.

So, these are things that we gave you a fair amount of color at, at our May Investor Day. What are we doing to not only focus on the reduction of the cost of those kits but to make those kits in lower cost areas. It will take us still a little bit of time to move to those lower cost areas specifically Penang, Malaysia; Tijuana, Mexico but the work's being done to take out components and reduced cost with those kits to allow us to compete in those markets.

And as that comes into visibility we'll continue to give that to you as our customers allow that to happen.

Jan Wald - Benchmark Company

Okay. One last question in the software business, do you see an uptick in growth and that business, it seems to me that would imply that your business model for the hospitals is actually taking off and being accepted, so I am right about that? And secondly, I guess do you see an uptick?

Brian Concannon

The way I would answer that question Jan is that the growth that we saw in the quarter was software up 2% to 4% is encouraging. And you’ll recall that we said that this is really driven by strength in BloodTrack order. So that was a product that we spent a fair amount of time, focused on at our May Investor Day. We do see that as being a product and it gets at a health portion of that $1,100 cost of transfusion.

So you are right about the focus, I wouldn't breakup the marching bands on 2% to 4% increase. It will mean to minimize the success that our teams are having there, the good work that they're doing and how they turn this around to growth. But we expect that to accelerate in the out years, that's an important product for us. And so yes you are seeing initial steps of that and that’s encouraging.

Jan Wald - Benchmark Company

Thank you very much.

Brian Concannon

You're welcome.

Operator

I am currently showing no questions at this time. I will now turn the call back over to Brian Concannon for closing remarks.

Brian Concannon

Thank you, Stephanie. With the first quarter behind us, we’re off to a good start in fiscal ‘15. Our identified growth drivers plasma, TEG and emerging markets representing 58% of our disposables revenue continue to drive strong double-digit growth, which is being offset in the near-term by declines in our U.S. whole blood business consistent with known trends. Our VCC initiatives remain on track to provide the acceleration in earnings expected in the second half for the fiscal year, plans to bring four new products to market and fiscal ‘15 also remain on track and we continue to work with the FDA towards the approval of the SOLX red cell storage solution with our own filtration.

We affirmed our guidance but importantly we remain focused on execution. Thank you for your attention this morning.

Operator

Thank you. Ladies and gentlemen, that does conclude today’s conference. You may all disconnect and everyone have a great day.

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