Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Haemonetics Corp. (NYSE:HAE)

F4Q08 (Qtr End 03/29/08) Earnings Call

May 1, 2008, 10:00 am ET

Executives

Julie Fallon - Director, IR

Brad Nutter - Chairman and CEO

Chris Lindop - CFO and Vice President of Business Development

Brian Concannon - COO

Analysts

Steven Crowley - Craig-Hallum Capital

Larry Solow - CJS Securities

John Putnam - Dawson James Securities

Victor Gezunterman - Morgan Stanley

Phil Steckle - William Blair

David Turkaly - SIG

Joshua Zable - Natixis

Kevin Casey - Casey Capital

Andrea Beachy - Schroder's

Operator

Good morning, ladies and gentlemen. Welcome to the Haemonetics Fourth Quarter Fiscal Year 2008 Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. Let me introduce Julie Fallon, Director of Investors Relations for Haemonetics.

Julie Fallon

Good morning and thanks you for joining Haemonetics fiscal year end earnings call. Today I am joined by Brad Nutter, Chairman and CEO; Chris Lindop, CFO and Vice President of Business Development; Brian Concannon, COO; and Lisa Lopez, Vice President of Corporate Affairs.

Please note that during the course of this call, we may make statements that could be characterized as forward-looking. Our actual results may differ materially from the anticipated results. Additional information concerning factors that could cause actual results to differ materially is available in our press release and 10-K.

Today, Brad Nutter will discuss the highlights of the year. Chris Lindop, will review our operating performance, and fiscal '09 guidance and Brian Concannon will share our progress on transformation.

Before I turn the call over to Brad, I want to review a few items that affect our comparative results. You may remember that in fiscal '07 four items impacted our results. First, the favorable resolution of certain tax contingencies. Second the restructuring of our Asian business. Third, the in-process R&D charge related to our acquisition of Arryx, and fourth a favorable legal settlement. These combined to negatively impact fiscal '07 net income by $3.5 million. For comparison purposes we've excluded these costs from our fiscal '07 adjusted results.

Now moving to fiscal '08, we also had restructuring costs. So our adjusted full year net income excludes $4.2 million associated with the on going restructuring of our European business. As is our normal practice our press release and website include a completely P&L and balance sheet. Our press release also includes selected reconciliations between our GAAP results and our results adjusted for the items I just mentioned.

But those who have been reviewing the business on today's call in order to give greater clarity to our operating results. We will be speaking of adjusted financial results.

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

Brad Nutter

Thank you, Julie. Good morning everyone and thank you for joining our call today. Let me start by making a few comments regarding our Q4 performance. Simply put, I am pleased with our performance. For the fourth consecutive quarter, we achieved double-digit revenue growth, with revenues increasing 19% and that's 13% in constant currency.

The growth drivers of our business were consistent during Q4 and all of fiscal '08. Plasma, red cells, OrthoPAT, equipment and software and services all grew very, very well. This year our geographies in Asia and Europe showed outstanding growth. So, let me turn to our full year performance and why this was such critical year for shareholders.

First on the financial standpoint we're very pleased. We over achieved the high end of our sales and growth profits guidance ranges. We achieved our operating income target and with EPS at $2.10 we finished the year at the high end of our EPS range of 207 to 212. This was the fine year on all parts of the P&L.

In our financial marketplace that has been extremely volatile, Haemonetics' consistent operating performance is noteworthy. Now five years ago we set out to create and sustain shareholder value. Since, then we have added more than $1 billion in market cap.

Our success comes from a disciplined focus on two strategies. You know them well. Strategy number one is leveraging the core business to improve profitability And strategy number two is expanding the business by leveraging our three core competencies. Fiscal '08 was a very strong year as revenues, operating income and EPS all grew double-digit for the first time in many, many years.

Fiscal '08 was a pivotal year and here are some of the highlights. We added contracts with Haema AG and Octapharma Europe in our commercial plasma business. We expanded our business with the US Department of Defense.

We launched seven new products throughout the year. We made two strategic acquisitions Haemoscope and Infonale. We completed Phase I of ERP transformation converting all geographies, sales, service and financial function to our new Oracle based system. We are on time and most importantly we are on budget with the strategic $35 million projects. We expect to complete the ERP this fiscal year.

We restructured our European, Japan and Asian operations producing strong results. Asian, and Europe had double-digit revenue growth for the first time in many, many years. We strengthen our management team and built on our strong succession plans. At no time in our history has the breadth and depth of our management team been stronger.

We completed $75 million stock repurchase while making two strategic acquisitions amounting to $46 million and still finish the year with more than $130 million in cash and just $12 million in debt.

We began implementing a long term vision for your company. Today Haemonetics is a global leader in blood management solutions for our customers. No one company can deliver the broad portfolio of products, information and technology platforms and services that Haemonetics delivers. No other company can service the entire blood supply chain from donation to transfusion.

We believe the financial results achieved your management team are an output of leadership. This is our strongest year in the last five years and really sets a stage for a strong future. Now what do I say then, while we believe that our future is best predicted by our past. Now five years ago our market potential was only $900 million, today our market potential is more than $2 billion. Five years ago our revenues were only $337 million, today our revenues are $516 million.

Our five year compounded annual growth rate on sales is 9%, operating income is 23% and earnings per share is 20% and these CAGRs are despite some significant challenges. We've really transformed from a niche medical device company to our total blood management company. So in a volatile financial market your company has and is performing very well.

Fiscal '08 was a year to transition us to the kind of long-term revenue growth you should expect from a company like Haemonetics. Last year we shared with you a model for our growth. We said we had three ways to grow. First, our core business, second, new product and third acquisition.

Through these we aspire to be a company that consistently sustained a five year compounded annual growth rate of 10% to 12% in revenue. In fact if you back out currency from our fiscal '08 performance we grew 12.6%, with core products, new products and acquisitions all contributing. This was the model we shared with you last year and the model we believe is sustainable. As we look out five years we aspire to a five year revenue CAGR of 10% to 12%.

Now moving to operating income, our five year strategic plan targets a CAGR of 12% to 15%. Our past five year CAGR was 23%. Now, you would ask why our operating income growth rate will change. Well, I'll recall that during our repositioning phase we will just fix the business. Part of this, if you will, was grabbing some low hanging fruit to improve gross margins and reduce expenses. Thus our strong growth on operating income.

Now, we are in a transformation phase. We are positioning for stronger, sustained revenue growth. We need to invest now in the business to achieve that long-term goal. Consistently achieving 12% to 15% in operating income will deliver significant shareholder value over the next five years. As all our shareholders know this management team has been focused aggressively on growing operating income.

Our compensation is tied to operating income growth and its our belief that by growing operating income in the 12% to 15% range, we will continue to consistently drive shareholder value. Our FY '08 performance laid a solid foundation to achieve these longer term aspirations.

With that let me turn the call over to Chris Lindop. Chris?

Chris Lindop

Thanks, Brad. Before I review the numbers, let me repeat a very simple investment thesis for Haemonetics. We have a diverse product portfolio with multiple ways to win. We participate in markets that have more than $2 billion of opportunity. The competitive landscape is changing in our favor. We see little risk in our ability to grow profitably neither market dynamics nor regulatory or reimbursement issues will affect our future growth. Our cash flow is strong. With that let move to the results.

Regarding fourth quarter, let me just say that we were pleased with the consistent and positive results. Briefly, the Q4 highlights were 18.7% revenue growth, 20.2% gross profit dollar growth with 70 basis points gross margin improvements and 10% operating income growth and earnings per share of $0.58 in line with our expected finish. All-in-all a very good quarter.

Now moving to our full year performance, revenue grew 14.9% making the year one of our strongest revenue growth years in recent history.

Now, let me break this down by product. Starting with our largest business Plasma. For the year plasma disposable revenue was $155 million, up 22.2% driven by US plasma revenue growth of 26%. In Q2 we shared with that we expected the plasma business to grow double-digits for the next few years. Our confidence stands from two areas. One, the fundamentals of the market, and specifically the explosive growth in plasma collections and increasing demand for IVIG. And second our strong device placements.

Let me remind you that we placed 2,300 devices in fiscal '08 and for every 2,000 devices we will generate an incremental $26 million in annual revenue when they become fully operational 18 to 24 months after installation. We believe in the long-term growth of the plasma business for the reasons I just mentioned.

So this is a particularly good year as we implemented the Talecris, Haema AG and Octapharma Europe agreement. We are very bullish about this business and anticipate that plasma will continue to be a growth driver.

Now let me move to our software and services business, which performed very well. Software and service revenue was $39 million up $17.1 for the year. Revenue growth is driven by the acquisition of IDM and organic growth in our plasma markets.

I am pleased to announce that we have expanded our agreement with the US Department of Defense. The revised agreement will contribute about $8 million in revenues over the next two years. We will leverage our information technology expertise, to manage the blood supply chain with the Department of Defense. This is a good piece of incremental business, because it demonstrates our strength as a blood management company.

This contract as well as other contract already in place give us confidence that software will continue to be a growth driver for the company. Our red cell business with $49 million in revenues, did well as revenues were up 12.6%. Now this growth was a combination of equipment and disposables. Red cell disposable revenue was $46 million up 6.8%.

In the year we launched the Cymbal system. We placed 75 Cymbal systems driving some of our red cell equipment sales and positioning us very well for future disposable growth. This is a good start in a limited market release. The Cymbal goes into full market release this quarter, so we expect new systems placements and growth at existing customer sites will continue to drive strong revenue.

OrthoPAT disposables revenue was $34 million up 12.4%, in the year we placed more than 175 devices in the field, so again these equipments placements will drive future disposables revenue growth. The Orthopedic market remains a growth market and it's underserved in blood management.

And to close our revenues, let me talk a little bit about equipment. Equipment revenue, which was about $33 million for the year grew 47.6%. These particularly strong equipment sales were driven by plasma devices in Europe, platelet devices in Europe and Asia and red cell devices in the United States.

Equipment sales will decline to more normal levels in fiscal '09 after an extraordinary performance in fiscal '08. We are pleased with our fiscal '08 sales and as much as they are leaving indicator for future disposable sales trend.

Now let me switch gears. We have three ways to grow the business, core products, new products and acquisition. I've covered our core products line growth, so now I'll address new products and acquisitions.

For the year new product growth was slightly below our expectations as our sales team capitalized on competitive market forces and focused on our core business growth. We are not disappointed with this, because when you exclude currency, acquisitions and new products our core business grew 9.1% for the year and this is higher than our long-term growth plan for the core business.

Let me remind you that we are creating new markets. The process of changing customer behavior takes time, but we have confidence in our ability to penetrate these markets. We finished the year with more than $4 million in new product sales.

Highlights from new products include the placement of 75 Cymbal systems and 50 CardioPAT systems and the FDA clearance our eLynx and Symphony software. So we had a good start, so we have a higher expectations. Fiscal '09 will be a growth year for new products and more on that in a minute.

Now let me just comment on our most recent acquisition Haemoscope. The integration has progressed smoothly and revenues are growing at more than 15% as expected. So let me turn to the rest of the P&L.

Gross profit was $258 million, up 13.4%. In the year the substantial growth of our plasma business affected mix. As a result, gross margin declined from 50.6% to 49.9% year-over-year. We expect margin improvements in fiscal '09 and I will cover that later.

Operating expenses grew at 77% of incremental gross profit dollar growth, higher than our plans due to ongoing investments in the businesses future growth. Nonetheless expense management still drove 10% operating income growth. And earnings per share finished at $2.10 for the year up 10.5%.

Moving to the balance sheet we generated 76% million in cash flow from operations and invested $57 million in capital expenditure as we invested in ERP, plasma equipment and software development. After our $46 million investment in Haemoscope and Infonale acquisitions and $75 million share repurchase. We have almost $134 million in cash and just $12 million in debt.

So, all-in-all fiscal '08 was a very good year. With that, let me move to our fiscal '09 guidance.

Our guidance is revenue growth of 8% to 11%, operating income growth of 14% to 17% and earnings per share ranging from $2.31 to $2.41. And we've posted income statements and product line growth scenarios on the website that you find useful.

The revenue growth drivers of fiscal '08 were solid and provide a strong base for growth in fiscal '09. There have been no fundamental changes in our markets. The plasma business will benefit from ongoing growth in the fractionation market and from key contracts we had signed in the past two years. The software business will grow as we implement contracts sold in fiscal '08 and as we launch eLynx and Symphony.

The OrthoPAT business will continue to strengthen as disposables use increases on devices placed in fiscal '08. OrthoPAT will also benefit from product line expansions extensions that we believe will speed adoption of the technology.

Finally, the red cell business will grow faster as blood shortages become more routine as we ramp this disposable usage and as the Cymbal moves into full market release. With regard to geographies, we continue to expect that North America, Europe and Asia will grow double-digit in fiscal '09.

Now let me address Japan. As reported last quarter, we're seeing variability in Japan sales quarter-to-quarter with revenues both up and down. Because of this variability we plan Japan revenues to be down modestly in fiscal '09. We also expect equipment sales to be down in fiscal '09. Okay, moving down the P&L, in fiscal '09, we've seen significant improvement in gross margin and operating margin. Gross margin is planned to increase from 49.9% to about 51.5% and that's more than a 150 basis points and it will be driven by mix, structural cost savings, business transformation and currency tailwinds.

As we look at expense management, we have done a great job of leveraging the P&L over the past five years and fiscal '09 will not be an exception. We expect expenses to grow at a rate of 65% of incremental gross profit dollar growth, driving operating income growth of 14% to 17% and we expect fiscal '09 operating margins to increase about 70 basis points from 14.8% to 15.5%.

Earnings per share will grow between 10% and 14% in fiscal '09. This is lower than the operating income growth and reflects a declining interest rate environment. Simply stated, we will earn less interest income on our invested cash balances in a lower interest rate environment.

As a result, in the short-term, our EPS growth will be moderately constrained, but we continue to believe that operating income growth of 14% to 17% is the best indicator of the long-term health of your company.

With regard to our fiscal '09 expectations, we will take a restructuring charge of $7 million to $8 million to support our global transformation effort. Our guidance excludes these costs. And Brian Concannon will review the strategic significance of the restructuring and the ongoing benefits in a minute.

To close out my financial comments, we expect to generate over $40 million of free cash flow after deducting the cash cost of the restructuring. This positions us well to fund future acquisitions and a stock repurchase and I'm also pleased to report that the Board of Directors has authorized us to purchase $16 million of Haemonetics stock.

So to close, if you like fiscal '08, you're really going to like fiscal '09, briefly here is whey. Revenue growth of 8% to 11% dropping through to 14% to 17% operating income growth, with EPS growing between 10% and 14% and growth and operating margin expansions with strong cash flow.

Two years ago we set out to transform this business and fiscal '09 is a final phase of that transformation. With a completion of the ERP manufacturing plants and automation and the restructuring, we will provide significant benefits in revenue growth and margin improvement in fiscal '10 and beyond.

Now with that, let me turn the call over to Brian.

Brian Concannon

Thanks, Chris. Chris just talked about the numbers and how we're building the business. I am going to talk about how we're changing the company to deliver these results. As you've listened to these calls before, you've heard us talk about what we call transformation. I can assure you positive transformation is the right description for what has been going on into your company.

Let me explain, five years ago we set out to fix the business and we did that. This was our Phase I, repositioning for success.

First, we restructured the U.S. business into the leaner, donor and patient operating structure we have today. This reduced structural cost and got us closer to our customers. Then we rationalized product lines, raised prices and reduced our manufacturing costs and what happened the North American business has a three-year revenue CAGR of more than 20%.

Next, in fiscal '07, we transformed Japan resizing our structure to align it with modest growth expectations going forward, given our 70% plus market share. At the same time, we strengthened and grew our Asia Pacific structure to align it with our expectations for significant growth in that market.

Frankly, these changes were very different for each of these markets, but they paid significant dividends. Then we move to the toughest job yet. We transformed our European operations for growth. This included moving to a shared services model of centralized customer service, finance, distribution and warehousing. We reorganized the sales and marketing organization, adopting a new model of Pan-European sales and global marketing.

We changed our distribution model too, going direct in some countries and streamlining our distribution channels. And at the time with all this was going on, we began implementing a single platform enterprise-wide ERP system, we knew would be critical for growth. Did we take on a lot? Yes, we did. But it was necessary and it was worth it. Since we began this transformation five years ago, we've increased revenue $179 million.

Last year, Europe delivered 18% revenue growth and Asia did even better with 22% revenue growth. That's the double-digit growth we were targeting, but about 12 months sooner than we planned when we began the transformation. And over the past five years, we have improved results on more than the top line. Our gross margin improved from 46% to 50%. Operating income, our favorite line in the P&L increased nearly $40 million to $76 million.

As an output for all that we have accomplished, our share price improved from $22 to $57, translating into market cap appreciation from $500 million to $1.5 billion. Now, as important as all of these financial results are, there is something else. The organization learned how to implement and accept change fast. These five years have been an incredible journey, but remember, we said we would take three years to fix your company and then three years to transform the company.

So on fiscal '09, the last year of transformation, there is some unfinished business. Once completed, it will position us well to sustain the results you've seen and to deliver on our vision of being the global leader in blood management solutions for our customers, while creating increased shareholder value.

The areas of the business where we structure or transform next include manufacturing, quality, R&D and Europe phase two. To put is simply, the benefits of these changes will be significant. We expect margin improvement by more than 150 basis points in fiscal '09 and another 150 basis points in fiscal '10. And we will take those margin dollars and invest at the rate of 65% of incremental gross profit dollar growth to fuel our blood management solutions vision. This will result in more products and more services to help our customers reduce blood costs and improve patient care.

We will expand operating margins by 70 basis points in fiscal '09 and another 70 basis points in fiscal '10. We will provide more details and some of our ideas for new products that support our vision at our Investor Day scheduled in New York later this month.

The transformation actions that we this year will require restructuring charge of approximately $7 million to $8 million. For competitive reasons and out of respect for our employees, I'm not going to share our detailed plans on this call. We will give you more visibility into specific actions at our upcoming Investor Day.

But remember, this is not our first foray into transformative change. We have significant experience at this. We've completed phase I and achieved outstanding results. We have confidence and our performance proves that we know we are doing in change management. Our confidence stems from our belief in our people. They have worked very, very hard. They believe in our vision. They are energized, they are committed and they have delivered. I'm enormously proud of their performance this year and want to thank each and every one of them.

Now with that, let me turn the call back to Brad for final comment.

Brad Nutter

Thanks, Brian. I've had an opportunity to visit with many of our shareholders and many of you have commented on the consistency of our message and performance. Frankly, we take great pride in our consistent leadership. We firmly believe that the future is best predicted by our past performance. Fiscal '08 was an excellent year. Fiscal '09 will be just as positive.

Our revenue growth drivers remain very strong. We will see both growth and operating margin improvement. Operating income in fiscal '09 will grow slightly higher than our expected five-year compounded annual growth rate for the future.

We expect operating income growth in the range of 14% to 17%. We will generate over $40 million in cash and have plenty of cash to expand through possible both-on acquisitions or stock repurchase.

The investments and restructuring to complete the final phase of business transformation will solidly position this business for growth and improved profitability, as both Brian and Chris have said in fiscal '09 and fiscal '10. In other words, in a volatile financial market, our consistent drive towards our vision to become the global leader on blood management solutions for our customers continues to create long-term shareholder value. Fiscal '09 will build on a very strong base of performance in fiscal '08.

Let me share with you one recent comment from a shareholder. When I described our past five years and our consistency of execution regarding our performance, I made the comment to the shareholder that perhaps we're becoming maybe a slightly boring company and his response was, Brad you tell us what you're going to do and then you and your team do it consistently. That's not boring, that's great. That's why I believe if you like fiscal '08 you're really going to like fiscal '09. It's very consistent both strategically and operationally. We have and will continue to build your corporation and to leverage our leadership position as the global leader in blood management solutions for our customers.

Fiscal '09 will be another great year and with that we'll turn the call over to your questions.

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. (Operator Instructions) Your first question is from Steven Crowley with Craig-Hallum Capital. Please go ahead.

Steven Crowley - Craig-Hallum Capital

Good morning.

Brad Nutter

Good morning.

Chris Lindop

Good morning, Steve.

Steven Crowley - Craig-Hallum Capital

Couple of questions for you on the software and services business. You're telegraphing continued nice growth in that business. The performance of the business in the fourth quarter might represent really the only first blush blemish and a nice Q4 performance. Can you tell us what's going on there and what drives some of the variability of the business and how we should think about consistency of that business in 2009?

Brian Concannon

Hey, Steve this is Brian, I'll take that question for you. What you saw happen in the Q4 was the comparison to a services part of our business, the contract with a large blood bank customer that will not repeat itself, worth about $1.6 million. So we continue to remain very positive and very bullish about this business independent of that.

Steven Crowley - Craig-Hallum Capital

And your commentary about the Department of Defense Chris, and any sizable incremental piece of business. I want to understand how incremental that is my sense is that you had some run rate business with the Department of Defense. And how much of this is really a step up versus a continuation. And did I hear that blood bank service contract was $1.6 million annualized?

Brad Nutter

Steve this is Brad. The Department of Defense contract, we have had for some time. This is an extension and addition to that contract. So, it's going to be $8 million incrementally over the next 24 months. What's important about that, the reason Chris mentioned it. It's not the fact of that particular $8 million contract, but it does show the fact that we are transforming this business from being a medical device company to a blood management company.

Specifically, if we are able to help the Department of Defense a governmental agency manage their blood supply chain at the time of war all the way through that blood chain that really speaks to the software, the services, the product line and the consulting services that are of great value not only to this customer but to many customers in the future.

One thing I would also mention in terms of software business. We are expecting revenue growth in FY '09 of about 15% to 20% and we have that on our website. So, we would expect this business to perform just as well in FY '09 as it did this year.

Steven Crowley - Craig-Hallum Capital

Okay. And the one contract that's no longer recurring or progressing that Brian mentioned is a blood bank services contract that was $1.6 million on an annual basis that's now fallen off?

Chris Lindop

It was actually Steve in Q4 last year and it was a consulting services contract providing Six Sigma consulting to a large blood bank customer. We were actually helping them to think about how they operated their business and how they could be more efficient and that was a very successful contact. That was an episodic contract that occurred last year, we don't have an equivalent contract industry.

Operator

Thank you. Your next question is from Larry Solow with CJS Securities. Please go ahead.

Larry Solow - CJS Securities

Good morning. Good quarter.

Brad Nutter

Thanks Larry

Chris Lindop

Thanks Larry.

Larry Solow - CJS Securities

Just to look at into '09, I know my questions are limited, so I'll just jump right to '09 on your guidance. Can you just elaborate a little bit more? It looks like operating expenses will continue, will be rising and kind of eating a little bit into your actual gross profit expansion?

Chris Lindop

We've always said Larry, that we're going to invest in the business for a long-term and of course, we continue to do that and the metric that we were using is 65% of our gross profit growth is committed to those investments, but you know when you look from top line of 8% to 11% down to operating income of 14% to 17%, we very feel pretty good about that.

Brad Nutter

Yeah, that's a positive drop through Larry, that we've expected and you've seen those for the last five years and we continue to expect into FY '09. And as both Chris and Brain said, we expect a 150 basis points improvement in gross margin in FY '09 and we'll see about 70% basis point improvement in operating income. So you're going to see the traditional positive drop through that we've become used to performing to over the last few years.

Larry Solow - CJS Securities

And your target to still grow has been 50% of gross profit being spent, is that right?

Brad Nutter

In the first three years when I joined the company it was 50% because we are really reorganizing the business in ways that we could get that low hanging fruit I had referenced in our prepared comments, Larry.

Now, as this business transformation goes on, we're finding that with the new product launches and with the competitive markets in the state they are, we're able to invest more into the business to sustain that top line growth of 10% to 12%, we hope to aspire to over the next five years. So we have to invest a little bit more in expenses and a new ratio, which will be characteristic over the next few years will be not 50% of incremental gross profit dollars but 65% of incremental gross profit dollars, which will still provide tremendous leverage as you're seeing in our FY '09 guidance from sales all the way down to operating income.

Operator

Thank you your next question is from John Putnam with Dawson James Securities. Please go ahead.

John Putnam - Dawson James Securities

Yes, thanks and good morning. I think you've done a great job in transforming the company from a device company to blood management company that you've come. But what I wonder is, Brad there are other areas in terms of blood management that you need to I guess, add to your product offering and round out your current product offering.

Brad Nutter

Yeah, John it's a great question and at our investor conference we're going to talk a little bit about Arryx, and the tremendous progress we've made in Arryx. We're also going to share with you some new opportunities to round out that entire area of blood management. There are couple of exciting things and I don't want to steal a lot of thunder from our investor conference or Concannon will have nothing to say.

But, beyond that we see a couple of really exciting things we anticipate excluding Arryx, we anticipate that there is about $2 billion of area in blood management that we can go after. And we will share with you a targeted game plan to go after that with new devices and new services for our customers at the growth conference on May 29th. So you're exactly right there is still plenty of ways for us to take this $2 billion market and expand it to close to $4 billion market.

John Putnam - Dawson James Securities

Yes. My follow up question Brad is are you satisfied with the red blood cell growth or could we except it maybe to accelerate in '09?

Brad Nutter

John, you know I'm never satisfied with the double-digit growth I want it to be higher all the time. I think this year was a transformational year on that product line for us since we launched Cymbal. That took some heavy lifting. We're expecting our RBC market or red blood cell market in FY '09 to grow at the rate of 10% to 15%, which is very consistent with our five year CAGR of that business. So we feel very good about 10% to 15% growth on the red cell business as we look into FY '09 and that's the model that you'll find on our website.

Operator

Thank you. Your next question is from Victor Gezunterman with Morgan Stanley. Please go ahead.

Victor Gezunterman - Morgan Stanley

Good morning guys.

Brad Nutter

Good morning.

Chris Lindop

Hi, Victor.

Victor Gezunterman - Morgan Stanley

Looking at your blood bank number, it seems like it was up sequentially quite a bit. Can you talk about that which you think in terms of 2009? Sorry.

Brad Nutter

Yes. Our blood bank business has been a real pleasant surprise for us this year. As you know last year when we began the year we expected zero growth in bank because that's primarily our platelet business. Yet in Asia this year we grew 22% over prior year and Europe we grew 17.7% over prior year those were reported sales growth and a lot of that growth was in platelets. So we really saw our blood bank business do better than we expected and it grew more than 6% over prior year. So this was a particularly good year and from a competitive environment standpoint we took advantage of growth in those particular markets and they really grew our platelet business very well.

Victor Gezunterman - Morgan Stanley

And what is your outlook for blood bank in '09?

Chris Lindop

We are estimating around 2%. So we have been able to harvest in a competitive marketplace that's changing some real good growth in Asia and Europe and we expect that it would be, that's really a non-growth market. The market is not growing so we really don't plan for it to be a significant impact. But this past year in FY '08 it was the strongest year we have seen in the last five years in terms of the platelet growth.

Operator

Thank you. Your next question is from Phil [Steckle] with William Blair. Please go ahead.

Phil Steckle - William Blair

Good morning everyone. Thanks for taking the call.

Brad Nutter

Hi Phil. We had to.

Phil Steckle - William Blair

I was wondering if you could elaborate a little bit on the variability you are experiencing in Japan and the outlook there and for that to continue and then a follow-up would be, yeah, what are the implications you might expect connected to the selection of Gail McGovern as the new Red Cross head?

Brad Nutter

Yeah, let me take the first part of your question Phil. Japan, As you know for the last five years, I first joined the company five years ago, we shared with you that we had 70% market share in platelets and today we have 70% market share in platelets and we have 80% market share in plasma and five years ago and we have that today.

So, it's been one of our most highly penetrated markets and it's a very profitable market for us. What we've seen is a little volatility over the last couple of years frankly. We had some quarters that were up this year and some slightly down and we've seen some rebalance in the Japanese market, when our only competitor had some product quality problems, we were able to capitalize on that a couple of years ago and then we rebalanced a year or later.

So we really look at that business as being pretty stable. That's our intention. Brain did a magnificent job with the team in Japan to right size that for stable growth. So over the next four to five years we don't expect that to be a growth market. Our whole objective there is to make sure that our product quality is high as possible to the standards that they require of us and other manufacturers and frankly they have rewarded us for our high quality with a tremendously high market share and to maintain that business at about the same market share levels we have. So that's our overall game plan there.

In terms of the ARC, now we had seen a number of changes go on in terms of senior leadership at the ARC. So we always welcome the opportunity to work with new leaders in that organization. I think Pete Allen and our team in the Donors division have done a excellent job of developing a relationship with the ARC.

I can remember joining the company five years ago, we did less than $4 million a year with the ARC, today we are doing more than $16 million a year. So we have seen some tremendous improvement in five years the ARC. They are excited about working with us on information technology platform and devices and so as we work throughout that entire organization we are looking forward to continuing that kind of growth rate well into the future.

Operator

Thank you, your next question is from Dave Turkaly with SIG. Please go ahead.

David Turkaly - SIG

Thanks. I think you mentioned on the call the ERP spend all in was like $35 million. How much of that was in 2008 and is it complete that you said it on the call?

Chris Lindop

It's not complete, the last year is '09 and that's when we're going do what we call Phase II, which manufacturing and HR and the spend this year in the P&L was around $7 million to $8 million.

Brad Nutter

So, that completes the three year process of ERP. About half of that money is capitalized and half is an expense, but this is the second time I've gone through an ERP implementation and I'll tell you that being on time and on budget halfway through. I'm very, very proud of Dottie Barr and her team have done an excellent job of making sure that we integrate from multiple systems and multiple countries and it's a tremendous effort. And when you really think about the impact for our shareholders it goes to the point that Brian raised in the call. You know here we are, we're transforming this business while simultaneously implementing ERP and still drawing double-digits on sales, operating income and EPS in FY '08. So that's a tremendous example of focus and execution ability by this tremendous operating team.

David Turkaly - SIG

And in fiscal 2009 the ERP spend will be?

Chris Lindop

About the same

Brad Nutter

About the same. And that will be the last year.

Operator

Thank you, your next question is from Joshua Zable with Natixis. Please go ahead.

Joshua Zable - Natixis

Hey, guys thanks for taking my question and congrats. I know it's obviously very difficult delivering on any plan, but five years especially. So congrats on that and we really appreciate it.

Brad Nutter

Thanks, Joshua and we are really pleased with FY '08 and our whole communication with you today is if you like '08 you're going to really like '09, because we're pleased to see that positive drop through on our P&L from sales to operating income and double-digit growth on EPS is a continuing effort.

Joshua Zable - Natixis

Great. Well, just kind of a quick one here, first just a clarification on the share repurchase. The $60 million left right now is that correct?

Brad Nutter

This is a new incremental allocation so we, yeah and there's $60 million left. We are going to start and when we come out its blackout phase.

Joshua Zable - Natixis

But it was incremental was there anything left over from the previous one?

Brian Concannon

No we did that quickly.

Joshua Zable - Natixis

Okay. Great.

Brad Nutter

And that would be our plan going forward Josh. A lot of times people announce stock repurchases and then they hang on for a while. We've been very, very consistent in the last two we have done and we'll be consistent in this one. When we announce it, we'll move forward within transition.

Joshua Zable - Natixis

Great. And then just looking through your FY '09 revenue scenarios. Just a couple of questions here, the first one or the most obvious one that sticks out to me is the surgical and diagnostic products, obviously 18% growth you're looking at. Can you just give us a little bit more color. I know you have some new products there and I guess I'll follow-up on the new products in a second?

Chris Lindop

Yes, sure okay. That really just includes the Haemoscope business which is sold in. It's a diagnostic that is sold into our hospital arena. So it's slump because its' a new business.

Brad Nutter

Remember that was a $15 million business and we are anticipating growing somewhere around 15% I believe, is in the model. Right Chris.

Chris Lindop

And so we only had about $5 million of that revenue in last year and we've got about $18 this year.

Joshua Zable - Natixis

Okay. That's very clear. And then just on the plasma business obviously it's been very strong continues to be a growth driver. Don't get me wrong, 10% to 15% is obviously still very, very impressive what you are looking at. But I guess a) What do you think -- can you just kind of frame out how you get to that relative to the kind of how strong it was this year and b) from a mix stand point relative to equipment and disposables how you think that's going to shake out?

Brad Nutter

Sure. We expect a place of somewhere between 1,500 and 2,000 new machines as we go into next year, point one. Point two, that has been a tremendous growth business for us and I'll pass on to Steve Swenson that you think he is a sandbagger on his 10% to 15% growth, but it really is based in fact, Josh that we've pretty much implemented ZLB, we are in the phases of the implementing Talecris as that was a new agreement and then we'll continue to spur growth will be that Octapharma Europe and Haema AG agreement.

So we feel very comfortable with that number. I want to reflect that for all of our shareholders. It was about three and half years ago, four years ago that Alpha Therapeutics, our largest plasma customers was purchased by our only competitor in this marketplace, which is now Fenwal. And we had about 6,000 devices globally in the market. Well, today as we look at our marketplace today we have got more than 12,000 devices in the market.

So, in a three and half, four year period this $90 million business is going to $155 million business and is now the largest business of the corporation and really that plasma growth of 10% to 15% we feel very confident in as we indicated on the Q3 call. We expect the next three years to have double-digit growth. So we feel very, very confident in this business and I would also remind all our shareholders that we are spending $10.5 million to complete a automation project in our Pittsburg plasma manufacturing facility, which as Brian indicated as did Chris, in FY '10 we should see about 150 basis points improvement in gross margin. And that's partially because of the automation of our manufacturing plant and partially because our contract calls for price increases that starts this year going to the next four or five years. So, we feel very, very good about this commercial plasma market and it's been a tremendous success story of Haemonetics.

Joshua Zable - Natixis

Thank you. Your next question is from James Sidoti with Sidoti & Company. Please go ahead.

James Sidoti - Sidoti & Company

Good morning, Brad.

Brad Nutter

Good morning, Jim.

James Sidoti - Sidoti & Company

Hi, Chris. Two quick questions on the incomes statement. One, can you what options expense were in FY '08 and what do you think that will be in FY '09?

Chris Lindop

Its around $10 million both years.

James Sidoti - Sidoti & Company

Okay, so its going to stay even.

Chris Lindop

Yes.

James Sidoti - Sidoti & Company

And then, in terms of the investments you are making to help keep the business growing. Can you break it out in terms of R&D and in terms of marketing. Is it weighted more towards one than the other?

Brad Nutter

Jim, this Brad. We have continued to spend about $20 million to $25 million in R&D. That is the right spend for a company like us. Now we are also acquiring R&D, when we acquired the TEG business, the Haemoscope business. We have invested substantially in the Arryx technology, which you are going to see at the Investor Conference. You will be very, very pleased with our progress as shareholders with what we said we were going last year is what we have prepared to show you this year. So we have made good investments there and we think the $20 million to $25 million range is the right kind of investments because we've been able to acquire product line as a growth driver. So we feel very good about our R&D spend, number one.

Number two, in terms of new products let me just make one comment that we expected to do $7 million to $9 million in new products sales, which is more than doubling our growth rate of this year as we look into FY '09. So doubling our growth in new products, it will be about 10% of our incremental revenue. Next year will come from new products, I really like the fact that new products are beginning to have a substantial impact on our incremental growth. So we feel very, very good about that as well. So in terms of R&D and our product spend as we transition to a blood management company, we're investing also in new IT software, Symphony, Surround are some of things that we introduced this year. So you'll see us spend less on devices and more frankly on some of the software programs.

Operator

Thank you your next question is from Kevin Casey with Casey Capital. Please go ahead.

Kevin Casey - Casey Capital

Hi, guys. I'm trying to reconcile the net income growth don't we have tale. Don't we have tail winds from the benefits in Europe and also in Japan coming through this year?

Chris Lindop

We will…

Kevin Casey - Casey Capital

Okay.

Chris Lindop

I am sorry, could you clarify your question Kevin.

Kevin Casey - Casey Capital

I'm curious why you're not seeing more flow through the operating income line.

Chris Lindop

In '09?

Kevin Casey - Casey Capital

Yes.

Chris Lindop

Going 14% to 17% growth on 8% to 11% top line growth.

Kevin Casey - Casey Capital

Yes

Chris Lindop

It's really all about the decisions we are making to invest in the business.

Kevin Casey - Casey Capital

And then how much is the ERP expense? Is that [actually meant] for next year.

Chris Lindop

Same as this year between 7 and 8.

Brad Nutter

$7 million, $8 million next year in '09.

Operator

Thank you your next question is from Andrea [Beachy] with Schroder's. Please go ahead.

Andrea Beachy - Schroder's

Good morning. Can you walk through next years restructuring and kind of break down the cost a little bit.

Brad Nutter

Andrea, this is Brad. We're sharing with our shareholders today this restructuring for the first time before we have had a chance to share it with our employees and roll out a detailed plan. So out of respect to our employee group. We don't want to go public with this until we've had a chance share our plans with our employees.

However, having said that, I will share that our manufacturing operations area is the last place that we are going to transform. When you think of that going to five years. We transformed ourselves into the donor and patient division five years ago, we transform our sales and marketing structure. Under Brian's leadership we have transformed all our geographies, US, Asia and Japan and the last area in this broad plan of transformation involve the internal functions of operations and manufacturing and some R&D.

So when we looked at our transformation say relatively the areas that they were involved on our Investor Day, Brian Concannon will give a lot more detail after the specific action that we hope to take and what the benefit of those actions will be going forward.

Andrea Beachy - Schroder's

And this will the final year of our six year plan.

Julie Fallon

Okay. Thank you.

Brad Nutter

Thank you.

Operator

Thank you. Your next question is form John Putnam with Dawson James Securities. Please go ahead.

John Putnam - Dawson James Securities

My follow up question was answered, thank you.

Brad Nutter

Okay. Thank you, John.

Operator

Thank you. Your next question is form Steven Crowley with Craig-Hallum Capital. Please go ahead.

Steven Crowley - Craig-Hallum Capital

Hello, I just want to come back and ask for some additional color on two of important areas of your business. You talked about Cymbal moving to a full market release mode in 2009. Can you compare that, contrast that to what you've been doing so far and may be help us to understand what the significance of that step function could be?

Brian Concannon

Sure, Steve this is Brian. What we do, we launch a new product a new device, we take it into customer acceptance trials, which really speaks for the efficacy of the device. Once we complete that we then go into limited market release, which looks at our printed materials, our promotion materials how we interact with the customer. That's complete, in fact frankly this week we just passed 5,000 procedures on the Cymbal. So in Q1 we will go to what's called a full market release, which means we'll begin selling this in all market that it's cleared for sale.

Steven Crowley - Craig-Hallum Capital

And in the context, I guess of a limited market release, you placed 75 units last year. What are the implications of going for market release? Is it 50% more than that this year as a reasonable bogey, or am I out and I feel better?

Brian Concannon

Our growth as we've given it to you is about 10% to 15% on the red cell business and that's our target for that business going forward. We feel very good about what took place in the limited market release, limited market release focuses on specific customers to test the launch of that product. As I said that's gone well. Getting to 5,000 procedures on this new device is a milestone. That's significant and that means that we have used this device 5,000 times successfully to this point. So, that really does make us feel good about that 10% to 15% as we go to full market release.

Julie Fallon

As a reminder this is a product that is smallest in the marketplace. It's battery operated, its uniquely positioned to take advantage and penetrate a 70% of [reflections] in the United States that are performed in a mobile environment and the community and school, churches, it's precisely fit for that market and our customer so far has been delighted with its performance?

Brad Nutter

Yeah. I would just add Steve a little bit more color on the new product. I was delighted with the donor division, the leadership team, the efforts with Cymbal. This is a product line that we said to you at the beginning of the year. We wanted to place about 80 units and we placed 75. So, they are right on plan and I am budgeting on time with that in this limited market release. And I feel very good about that, frankly, I think it's going to be a product line that's going to be a winner for us. I also feel particularly good that we placed 175 incremental OrthoPAT units into the marketplace this year.

So, I will congratulates our patient division leadership team in the fine job that they have done. So, placing new equipment has been particularly good year this year. We hope to reap the benefits of that and therefore that's why you are seeing our new product expected to grow $7 million to $9 million over doubling the run rate of what we get addition. So we feel very good that 10% of our incremental operating income will come from new products. That's a wonderful position to be in.

Operator

Thank you. There is no time left for further questions. Here is Mr. Nutter with closing comments.

Brad Nutter

Thank you very much. To our shareholders we would like to close by saying that if you like fiscal '08, we think you are really going to like fiscal '09 give us why, we're going to see the tradition positive drop. So that you have come to expect from your company. We'll see revenue growth of 8% to 11% dropping through to 14% to 17% operating income growth. EPS will grow between 10% to 14% and we'll see improvements as gross profits and operating margin expansion will happen this year and we gave you a little guidance into FY '10.

We'll continue to see strong cash flow with the business being positioned to expand, with possible acquisitions that we could bolt-on to make this, the blood management company that we have so successfully become over the last 12 months. Two years ago we setout to transform this business and fiscal '09 is the final phase of that transformation. With a completing of ERP and our manufacturing plant automation that I talked about on the call and the restructuring. We really believe that we're trying to be able to provide significant benefit in revenue growth, margin improvement, operating income growth and EPS growth in fiscal '09 and '10. So we look forward to seeing you on May 29th at our Investor Day in New York. Thank you, good bye.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Haemonetics Corp. F4Q08 (Qtr End 03/29/08) Earnings Call Transcript
This Transcript
All Transcripts