Haemonetics - Earnings Call - Q1 2016

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Haemonetics Corporation First Quarter Fiscal Year twenty sixteen Earnings Release Call. At this time, all participants are in a listen only mode. Later, we will conduct a question answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference Mr.

Jerry Gold, Vice President Investor Relations. Sir, you may begin.

Speaker 1

Thank you. Good morning. Thank you for joining us for Haemonetics' first quarter fiscal twenty sixteen conference call and webcast. I'm joined today by Brian Kincannon, President and CEO Kent Davies, Chief Operating Officer and Chris Lindop, CFO and Executive Vice President of Business Development. Please note that our remarks today will include forward looking statements.

Our actual results may differ materially from anticipated results. Additional information concerning factors that could cause results to differ materially is available in the Form eight ks we filed today as well as in our recent 10 ks filing. On today's call, Brian will discuss key elements of our strategy that will influence our performance going forward. Kent will review important trends in our commercial operations and Chris will cover first quarter performance and our fiscal twenty sixteen guidance in more detail. Then Brian will close with some summary comments.

Before I turn the call over to Brian, I would like to mention the treatment in our adjusted results of certain items which by their nature and size affect the comparability of our financial results. Consistent with our past practice, we have excluded certain costs from the adjusted financial results we'll talk about today. In the 2015 and 2016, we excluded pretax transformation and restructuring costs associated with our value creation and capture or VCC initiatives and related tax effects. Additionally, the earnings information discussed for all periods excludes deal related amortization expense. Further details of first quarter fiscal twenty sixteen excluded amounts including comparisons with the 2015 are provided in our Form eight ks and have been posted to our Investor Relations website.

Our press release and website also include a complete P and L and balance sheet and a summary statement of cash flows as well as reconciliation of our GAAP and adjusted results. With that, I will turn the call over to Brian.

Speaker 2

Thank you, Gerry, and good morning, everyone. This morning we reported results for our 2016 and we reaffirmed our full year guidance. First quarter revenue was $213,000,000 down 5% as reported and down 2% in constant currency. Approximately 25 of our revenue is denominated in the yen and the euro contributing to 300 basis points of currency headwind in our revenue growth rates in the first quarter consistent with our expectations for the full year. Our growth drivers of plasma, TEG and emerging markets account for about 60% of our disposables revenue.

In constant currency, these three business elements had combined growth of 5% in the first quarter. The weak economy in Russia impacted our emerging markets growth as we expected it would with greater impact in the first half versus the back half of the year. Disposables revenue and our growth drivers excluding Russia grew 10% in the first quarter with plasma up 8%, TEG up 20% and Emerging markets up 18%. The Russian economic trends we saw emerge in the back half of fiscal twenty fifteen continued as anticipated in the first quarter. Ken and Chris will discuss Russia's impact on our revenue and earnings in more detail.

The anniversary of the American Red Cross share loss in The U. S. Whole blood market passed at the June and that headwind is now behind us. We expect a positive trajectory in revenue growth over the course of fiscal twenty sixteen. This will be driven by the moderation of the two headwinds I just discussed Russia and the ARC share loss plus four new product launches shipments of saline and sodium citrate under our agreement with CSL Plasma and the fifty third week.

Our profitability was encouraging. On a constant currency basis, margin improved 40 basis points over the 2015, driven by the benefits of our VCC initiatives. Spending on the VCC initiatives will be completed this fiscal year and incremental cost savings realized from these initiatives totaling $4,000,000 in the first quarter are expected to approximate $14,000,000 in fiscal twenty sixteen. Our first quarter operating earnings were as expected and in line with our guidance range for the year as operating expenses were well controlled in the quarter. We plan to spend evenly throughout fiscal twenty sixteen.

This operating discipline together with second half revenue growth provides confidence in our outlook for improving margin performance throughout the year. We've reaffirmed our fiscal twenty sixteen guidance for reported revenue growth in the range of 4% to 67% to 9% on a constant currency basis. We also reaffirmed our guidance for adjusted earnings per share of $1.98 to $2.08 representing earnings growth of 7% to 12% as reported and 15% to 20% in constant currency. We're making good progress with the four new we introduced in fiscal twenty fifteen. Notably, the TEG 6S diagnostics device and its single use disposable cartridges received final clearance by the FDA for marketing in The U.

S. For cardiology and cardiovascular applications. We're optimistic about the potential for TEG growth as we pursue both additional clinical applications and new geographies. The U. S.

Commercial launch has begun following earlier launches in Europe, Australia and Japan. A second important milestone in the quarter was the initial launch in key markets of our BloodTrack software with our Hemobank storage device, which continue to generate considerable customer interest. I'll now turn the call over to Ken, who'll review the elements of our first quarter revenue performance and the expectations we have for growth. Kent?

Speaker 3

Thank you, Brian, and good morning, everyone. As Brian noted, we realized 5% constant currency growth in our identified growth drivers in the first quarter. And excluding Russia, this growth was 10%. This first quarter compares with a prior year quarter in which we had roughly $5,000,000 of whole blood disposables business with the American Red Cross. This loss accounted for much of the decline in our U.

S. Whole blood business. Importantly, The U. S. Whole blood market began to show signs of moderating declines in the quarter.

We continue to expect many of the headwinds faced in fiscal twenty fifteen to be behind us by the midpoint of this fiscal year. This moderation of headwinds combined with continued strong performance in our growth drivers will be the main contributors to our return to growth in fiscal twenty sixteen. Additionally, we'll benefit from several new product advances and traction with our comprehensive blood management solutions or CBMS initiative. In the first quarter, plasma disposables revenue was 80 approximately $2,000,000 or 2% as reported and 5% in constant currency. North America plasma disposables grew 10%, while global plasma growth continued to be impacted by softness in the Russia Our commercial plasma business is well positioned with 80% of its current business under contract through the 2019.

We expect strong disposables growth to continue as our customers keep pace with robust end market for plasma derived biopharmaceuticals. We installed over 4,000 plasma collection devices in the past three fiscal years, another 600 devices in the 2016 and this trend in our installed base of equipment is accelerating. This year, we expect our plasma business to surpass end market growth rates on the strength of North America demand and the recent CSL plasma contract with supply the of saline and sodium citrate solutions. Over our strategic horizon, we expect the combination of the recently launched next gen DMS plasma collection software and our smart collection device to deliver differentiated value to our customers in every collection event, permitting us to continue to grow faster than the end market. In the first quarter, blood center disposables revenue declined $12,000,000 or 14% to $74,000,000 Excluding the impact of currency, center disposables declined $9,000,000 or 11%.

Platelet disposables revenue was $31,000,000 in the quarter, down 7,000,000 or 19% as reported and down $5,000,000 or 14% in constant currency. The majority of the constant currency decline was in Russia, where our largest distributor is making good progress selling through inventory on hand. Red Cell Disposables revenue, which was $11,000,000 in the quarter, was up 4% as reported and up 5% in constant currency over last year's first quarter. Sequentially, this follows a flat fourth quarter and a flat fiscal year 2015. In an environment of declining transfusions, customers are favoring automated red cell collection strategies to optimize donation efficiency.

Also, certain U. S. Blood collection customers are pursuing new agreements for red cell disposables. We are seeing increasing competition for this business, which will likely affect future red cell market share and pricing, primarily in fiscal twenty seventeen and beyond. Whole blood revenue was $32,000,000 in the first quarter, declining $6,000,000 or 15%.

Whole blood revenue was $20,000,000 in North America, dollars in Europe and European distribution markets and $3,000,000 in Asia Pacific and Japan markets. North America whole blood revenue declined by $6,000,000 reflecting the lost American Red Cross volume and more moderate declines in the end market demand for red cells. The ARC whole blood business was fully transitioned to our competitor late in the 2015, so the final impact of this on our revenue growth rate was felt in the 2016. After declines in The U. S.

Red cell transfusion rate of approximately 10% in each fiscal year and 2015, our U. S. Whole blood business now represents less than 8% of our consolidated revenue and we are encouraged by the moderating market decline we noted in the first quarter. Hospital revenue was $31,000,000 essentially flat with the prior year first quarter. Excluding the impact of currency, hospital revenue grew 3% in Q1 following 1% growth in fiscal year twenty fifteen.

Continued strong momentum offset declines in orthopedic cell salvage. In Diagnostics, we had record TEG disposables revenue of $12,000,000 in the first quarter, up 23% as reported and up 21% in constant currency. Globally, customers continue to recognize the value of this innovative technology. Over the past three fiscal years, we sold nearly 1,900 TEG devices and over 200 in the 2016. Importantly, 29 of the new TEG 6s devices were installed in Q1.

The U. S. Commercial launch of TEG 6S is currently commencing following the previously announced approvals for sale in Europe, Australia and Japan. We expect our TEG Diagnostics business to deliver accelerated growth with existing and new customers on the strength of the launch of TEG 6S in fiscal twenty sixteen, facilitating our ongoing global growth and market penetration.

Speaker 0

Disposables revenue was $15,000,000 in the first quarter, down 5% as reported and flat in constant currency consistent with market dynamics. A major cell salvage platform enhancement is anticipated

Speaker 3

global to launch later in fiscal twenty sixteen, bringing new clinical benefits and significantly enhanced data connectivity. Software Solutions revenue was $17,000,000 in the first quarter, down $1,000,000 or 5% as reported and down 1% in constant currency. Customer interest in our new BloodTrack Hemobank system is encouraging and we have now launched this product in numerous global markets. BloodTrack Hemobank along with SafeTrace Tx, our transfusion services software for hospital customers and a building pipeline of CBMS engagements represent the drivers of software growth that we expect to be 10% to 15% in fiscal twenty sixteen. Equipment revenue was $11,000,000 in the quarter.

Our installed base of equipment, which is the combination of purchased and placed devices increased 5% over the last twelve months. The installed bases of Plasma and TEG, two of our growth drivers, had increases of 1115% respectively over the same trailing twelve month period. Before I turn the call over to Chris, I'd like to point out several other leading indicators of positive momentum as fiscal twenty sixteen unfolds. We see initial signs of our Russia business stabilizing. Our largest distributor is selling through inventory and is better positioned to match supply with recovering market demand.

With expecting year over year improvement in Russia over the course of fiscal twenty sixteen, continued success in China, a solid foundation in commercial plasma and accelerating TEG revenue, our combined growth drivers are expected to produce double digit revenue growth in fiscal twenty sixteen. At the same time, we have passed the anniversary dates of our market share loss and price concessions in our U. S. Blood center business and we see early signs that the whole blood market declines are beginning to moderate. For all of these reasons, we are confident in returning to revenue growth fiscal 'sixteen and I am pleased with these indicators of positive momentum in the commercial and operational elements of our business.

Finally, we continue to make progress on initiatives that are important to our longer term growth. Our CBMS initiative continues to be received positively by our customers and our ongoing findings reinforce a compelling value proposition that includes substantial cost savings for our customers and meaningful revenue opportunities for Haemonetics. We are encouraged by these early results and will update you as this new selling method scales. In addition to the 29 TEG 6s devices I mentioned, the first TEG Manager software system was recently installed in a U. K.

Site. We also fulfilled our first TEG 6s order in Japan and we are now launching TEG 6s in The U. S. Following receipt of our final five ten clearance in June. 12 BloodTrack Hemobank storage devices have been shipped to customers in The U.

S, The U. K. And The United Arab Emirates. Early customer reactions to these new products and technology solutions are certainly encouraging and they validate our strategy of smart connected devices driving a stream of disposables revenue. And now, I'll turn the call over to Chris Lindock.

Chris?

Speaker 4

Thanks Kent. In the first quarter, total revenue was $213,000,000 a decrease of 5% as reported and 2% on a constant currency basis. Currency is expected to continue to similarly impact revenue by about 300 basis points in fiscal twenty sixteen. Disposables revenue in Russia and in U. S.

Whole blood products sold to the American Red Cross combined were roughly $9,000,000 lower than in the 2015. So the combined impact on our consolidated revenue growth of these known headwinds was approximately 4% in the first quarter. As Kent noted, we expect to see the Russia impact continue in the 2016, but the lost ARC business is now behind us. Adjusted gross profit was $104,000,000 down 5% or $5,000,000 year on year of which $4,000,000 was attributable to currency. First quarter adjusted gross margin was 48.5%, up 10 basis points as reported and up 40 basis points in constant currency as benefits from our growth drivers and VCC initiatives were offset by currency headwinds and product mix.

Adjusted operating expenses were $78,000,000 as reported, down $2,000,000 or 3% as compared with the prior year's first quarter, but up $600,000 or 1% in constant currency. Planned benefits from organizational and corporate cost reductions permitted ongoing investments in the business. Adjusted operating income was $26,000,000 in the first quarter, down $3,000,000 including $1,000,000 attributed to currency as the pressures upon gross profit outpaced the benefits from our growth drivers VCC and other cost savings initiatives. Adjusted operating margin, was 12% in the quarter, down 70 basis points is expected to improve sequentially over the course of the year as revenue growth drives operating margin improvement. Adjusted interest expense associated with our loans was $2,000,000 in the first quarter.

Our tax rate was 24.5% compared with 25.5 in the first quarter a year ago. We continue to benefit from the implementation of our global tax strategy. Adjusted earnings per share were $0.35 down $03 or 9%. Declines in our Russia and ARC business adversely impacted earnings per share by zero seven dollars in the quarter. As noted, the Russia trend is expected to continue through the second quarter before beginning to recover in the 2016.

We ended the first quarter with $112,000,000 of cash on hand, down $48,000,000 from our fiscal twenty fifteen year end. We used $16,000,000 of cash net of tax benefits for VCC and other restructuring and $39,000,000 for the repurchase of shares in the open market. As we announced previously, our Board of Directors approved the repurchase of up to $100,000,000 of Haemonetics shares. We repurchased 1,200,000.0 shares in fiscal twenty fifteen and 1,000,000 shares in the 2016. In total, we spent $80,000,000 to acquire shares at an average price of just over $37 per share.

We intend to complete this program with $20,000,000 of additional share repurchases in fiscal twenty sixteen. Turning to the full year, we reaffirmed our fiscal twenty sixteen guidance on a reported basis for plasma disposables growth of 10% including whole blood of four percent to 6% hospital disposables growth of 4% to 6% and software growth of 10% to 15%. Overall, we reaffirmed our guidance for revenue to be up 4% to 6% on a reported basis including the benefit from a fifty third week. With about 300 basis points of headwind attributable to currency trends, revenue growth is reaffirmed in the 7% to 9% range on a constant currency basis. Our full year guidance is for adjusted gross margin to average between 4849% adversely affected by mix and currency and positively affected by VCC and other structural cost improvements.

Adjusted operating margin is expected to average between 15 to 16%. Our adjusted earnings guidance range of $1.98 to $2.08 per share as reaffirmed representing 7% to 12% earnings growth over fiscal twenty fifteen. Anticipated currency headwinds of about 800 basis points reflect the rates at which we have hedged our fiscal twenty sixteen foreign earnings. In constant currency, we are reaffirming our fiscal twenty sixteen earnings growth rate of 15% to 20%. At the outset of this fiscal year, I provided some additional color on the expected phasing of our revenue and earnings.

While it is normal for our company to generate approximately 48% of its revenue in the first half of its fiscal year and 52% in the second half, year we expect revenue to be split roughly 46% in the first half and 54% in the back half. This is the result of a fifty third week in the back half of fiscal twenty sixteen, the planned ramp of our solutions sales to CSL Plasma and revenue of our Russia business, which we expect to be roughly $10,000,000 higher in the second half than in the first half of the year. We still expect gross profit to increase gradually over the course of the year and operating expenses to be spread fairly evenly across the four quarters. Accordingly, we remain confident in our previously stated expectations for 35% of earnings to be realized in the first half and 65% in the back half of fiscal twenty sixteen. Revenue and earnings are expected to accelerate as the year progresses.

As in the past, our website includes revenue and income statement scenarios, which are based on the elements of the fiscal twenty sixteen guidance that we provided. We reaffirmed our fiscal twenty sixteen free cash flow guidance of $105,000,000 to $110,000,000 before funding $27,000,000 related to our VCC initiatives. We continue to expect about one quarter of our free cash flow to be committed to VCC activities and three quarters to be available for other corporate priorities. We plan to complete the remaining $20,000,000 repurchases authorized under our current program in fiscal twenty sixteen. We realized $4,000,000 of the planned $14,000,000 of expected fiscal twenty sixteen incremental VCC savings in the first quarter.

The VCC and restructuring investments are expected to wind down in fiscal twenty sixteen and we remain on track to realize target of $65,000,000 in annual savings by fiscal twenty eighteen. With that, I'll turn

Speaker 2

the call over to Brian. Thanks, Chris. Let me now highlight a few of the milestones we reached confidence in our growth prospects. Excluding Russia, our identified growth drivers generated 10% growth in constant currency. Importantly, the positive impact of the full market release of TEG 6s increased solution sales to CSL Plasma, the expected second half recovery in our Russia business and the fifty third week all lie ahead of us as fiscal twenty sixteen unfolds.

Early customer reaction to the TEG 6s platform in international markets is very encouraging and the recent U. S. Approval and limited market release gives us reasons for optimism. We're on track to reach the $25,000,000 annual run rate of saline and sodium citrate shipments to CSL Plasma by the 2016 and we continue to evaluate emerging opportunities with our other plasma customers. Early indications suggest that normal ordering patents in Russia and moderating declines in The U.

S. Whole blood, two elements of our fiscal twenty sixteen revenue assumptions are starting to appear. Our CBMS initiatives continue to gain traction with our hospital customers, demonstrating the real value of our comprehensive product offering. Our blood track donor space and other software offerings are increasingly gaining attention with our customers and we anticipate that our pipeline will expand accordingly. Donor space will also have the capability to be offered to our plasma customers as they implement next gen DMS software as we head into fiscal twenty seventeen.

We're on track to deliver the four new products we identified at our May 2015 Investor Conference, bringing us to nine new products in fiscal years 2015 and 2016 combined. And we're also on track to finish the VCC spending in fiscal twenty sixteen and to realize our targeted savings of $65,000,000 by fiscal twenty eighteen. We remain well positioned to return to top and bottom line growth in fiscal twenty sixteen and to withstand the pressure of currency headwinds. We reaffirmed our guidance for fiscal twenty sixteen. Importantly, our adjusted operating income and earnings per share guidance reflect strong double digit growth in constant currency, further reflecting the true earnings power of this business.

Before closing, I'd like to once again thank our employees and recognize their dedication to meeting and surpassing the needs of our customers. With that, we're happy to take your questions.

Speaker 0

Our first question comes from the line of Laurence Kusch with Raymond James. Your line is now open.

Speaker 5

Good morning. This is John Hsu in for Laurence.

Speaker 6

Hey, John.

Speaker 5

Good morning. Morning. Just a couple of questions. First on capital allocation with VCC spending tailing this year, you obviously mentioned the $20,000,000 remaining in share repurchase. Could you just remind us your overall capital allocation priorities?

Speaker 4

Sure. As we've said many times before, it is acquisitions and then return of capital to our shareholders primarily in the past through share repurchases and then of course debt service to the extent necessary.

Speaker 5

Okay, great. And then it looks like with the updated guidance that the it looks like the ranges were widened a bit on the gross and operating margin line. Can you just kind of walk us through the bridge for the prior guidance versus why the ranges are kind of wide now? Thank you.

Speaker 4

Well, I think what you're referring to is scenarios that we build on the web, are within our original guidance ranges. I think if you go back to the script last quarter is exactly what we said 48 to 4915% to 16%.

Speaker 0

Thank you. Our next question comes from the line of James Francon with Morgan Stanley. Your line is now open.

Speaker 7

Hey, good morning. Thanks for taking the question. Good morning, James. First, I just wanted to drill down on Russia a little bit given the importance of that expected recovery to the back half growth and earnings. Why are you confident that that gets better?

And to what extent has the decline in that business that you've seen been a reduction in inventory versus market sales? And conversely, how much of the improvement that you're expecting through the year is, let's say, a reduction of that inventory drawdown versus a real improvement in end market sales?

Speaker 2

Let me ask Kent to answer that question for you James as he just came back from Russia just last month.

Speaker 3

Hi, James. It's Kent. Yes, as Brian mentioned, I was in Russia earlier this month, obviously very interested in seeing for myself what's going on, on the ground there and came away feeling quite good about our business. We're starting to see a recovery in tender activity. As we've mentioned, our primary distributor is selling through inventory and has done a very nice job of doing that over the last few months.

That represents the beginning signs of recovery in end market demand. We're expecting to see that supply demand balance reached with that distributor sometime in Q2. Meanwhile, our hospital business is doing very well across the region and new and existing distributors across the region are performing very well. So obviously it's a situation we've got our eyes on, but I came away from that visit and from all of the time and analysis we do on this piece of business feeling quite encouraged about what's ahead.

Speaker 2

And I would remind all of us that this is a business that had declined from $34,000,000 to $26,000,000 last year. And our plan for this business this year is $26,000,000 So flat to last year, but with more revenue in the back half versus the front half as we knew the distributor was going to be working down some inventory that had increased as a result of the slowing market. So we think we have a pretty good idea of what's taking place there. We have a good team of people on the ground in Russia and we've had very, very good and open discussions with our primary distributors.

Speaker 7

Okay. Thank you. And then second on red cells. Clearly far from shocking that competition has come to red cells after what's happened in whole blood. Maybe to provide context in that business, what would you say that your market share and profitability there is today?

And how do you think of the potential risk to competition? Is there some reason that the impact of competition in red cells would be different than what we saw in whole blood?

Speaker 4

Yeah. It's substantially a North American business for us, red cell technology double red cell technology. We have I'm guessing around 60% market share there, well positioned with our technology and it's a has a profitability profile that's similar to our or slightly better than our corporate averages. And of course, we take the defense of this business very seriously.

Speaker 2

And I'd add as well on top of that James that this is a market unlike whole blood, we had only entered the whole blood market in fiscal twenty twelve. We invented double red cell separation technology. This is something we continue to invest in. The automation part of our business is an area where we continue to invest. You've seen now what we've done with plasma automation.

We've certainly indicated we're making some very significant investments in the remainder of our automation platforms. We'll continue to do that going forward. But this is a part of our business that we have greater confidence in as we come to the markets. There's going to be an impact both in terms of price and in terms of share. We recognize that.

Some will make those decisions. But we remain confident. The biggest player in that space is the American Red Cross and we feel good about the discussions that we're having with them today.

Speaker 0

Thank you. And our next question comes from the line of David Roman with Goldman Sachs. Your line is now open.

Speaker 7

Thank you. Good morning, everybody. Hi, David. Brian or Kent, I was hoping you could go into a little bit more detail on the BloodTrack launch. You talked about some initial positive conversations with your customers.

But maybe you could help us translate that into some detail as it relates to the financial projections. I think you're saying 10% to 15% growth in software for the year versus the minus 2% in Q1. Can you just maybe walk through some specifics on that bridge?

Speaker 3

Yes. So I'll David, hi, it's Kent. Yes, no, we're quite pleased with the launch of Hemovanc thus far. As we mentioned in our materials, we've shipped 12 to date and we're building pipeline. I think that's incredibly important to the economic story that you're asking about.

The response from customers has been very good as they continue to think about safety, economics, speed traceability of blood products. As it relates to our software business overall, we are incredibly excited and as I think as you probably picked up at our Annual Investor Day, you saw the influence of software right across the business. So, we're rolling through the product line, bringing product line enhancements and entirely new products to the market and a lot of that is driven by and significantly influenced by our software capabilities. Our major new product launches of the BloodTrack Hemabank as well as our next gen system for the plasmas business are receiving rave reviews from customers and so now with Hemabank particularly in the market, it's about building that pipeline, getting our sales people who have just come off of a major launch meeting in mid June out into the market and selling this significant new device. So we feel great about it and hope to be able to bring you much better results in the quarters ahead.

Speaker 2

And one two things I'd add to that David is that it doesn't take a lot to move the needle in selling hemobanks. This is an expensive device with software that our customers have to buy, but significantly reduces costs well beyond that expense. And our pipeline in that respect is growing. There's a significant amount of interest in this new product.

Speaker 7

Okay. That's helpful. Then maybe just a follow-up the P and L. I believe in the prepared remarks you made a comment to the effect that the current level of discretionary spending was sort of at the levels that you thought were appropriate and that leverage in the model would come to the balance of the year as revenue grew. I hear that correctly?

So sort of $67,000,000 SG and and type then really the percentage of revenue goes down as the revenue scales from now through the balance of the year? Yes. Correct. Okay. Thank you.

Speaker 6

You're welcome.

Speaker 0

Thank you. And our next question comes from the line of Anthony Petrone with Jefferies. Your line is now open.

Speaker 8

And good morning. Maybe to jump in on TEG for a moment there. You're mentioning the five ten clearance in The U. S. Can we maybe get an update on just what the installed base of the 5,000 is in The U.

S? And maybe how quickly those can turn over with the five ten clearance in hand? And then one follow-up. Thanks.

Speaker 4

So the installed base is around 4,800 for TEG and that's primarily in obviously it's 5,000. Our strategy

Speaker 2

And that's a worldwide number.

Speaker 4

Worldwide number, yes. Yes. About 2,000

Speaker 2

in The U. S. I think you asked The U. S. Number.

Sorry. Yes.

Speaker 4

But our strategy is not one of necessarily replacing

Speaker 2

5000s in every case. It's a strategy that's driven by the relatively low penetration of the product against its market opportunity and the opportunities for growth in places that haven't yet even tried TEG. Where we expect to see that change out Anthony of a TEG 5,000 to a TEG 6s is where the clinicians need flexibility in the location of testing. In other words, an operating theater, a clinical area where rapid results and turnarounds are critical. The TAGS success allows that testing to move from the laboratory environment to that clinical environment.

But where that doesn't need to happen, we don't expect those customers to change those out. We expect them to continue to move forward as they are with the TEG 5,000 at least for the time being. Yes.

Speaker 8

That's helpful. And then just a follow-up would be on SOLIX. Any updates on that? And I'll hop back in queue. Thanks.

Speaker 4

No update. As we said, we've submitted the data to FDA expectations towards the end of this calendar year for a response on that and we're going to have to just wait and see how that goes. But we have submitted the data.

Speaker 0

Thank you. And our next question comes from the line of Brian Weinstein with William Blair. Your line is now open.

Speaker 6

Hi, good morning. This is Matt Leroux in for Brian. Can you hear me okay?

Speaker 2

Good morning, Matt. Yes.

Speaker 9

So just wanted to follow-up on Anthony's question about TEG. You mentioned development in The EU and Japan and obviously received five ten ks clearance here in The U. S. Could you maybe help us understand how much of your expectations for the accelerating impact of Tech Success are in The U. S.

Versus Japan versus The EU?

Speaker 2

Well, the majority of our business is in The U. S. And China. And if you recall last year that business grew 27%. For us to achieve the targets we've outlined this year, we have to have a growth rate of approximately 30%, a little over 30%.

So not a huge jump that needs to take place. In fact with this impending launch, we're encouraged with growth rates at 23% in the quarter. So when you think about you've got two very, very well established markets growing rapidly U. S. And China with a number of new geographies coming on that are beginning to accelerate interest in the technology.

We're pretty excited about what this represents. Jumping from 27% to 30% isn't a big jump. So we feel very, very optimistic about outlooks for this product.

Speaker 9

Okay. Thanks, Brian. And then an additional one here on TEG. Can you maybe discuss the road to additional clinical applications and the potential timeline there? I think you mentioned you had claims for cardiology and cardiovascular here in The U.

S. Is maybe the road and timelines for additional applications?

Speaker 2

Yes. Let me just jump in on that one and then ask Kent for any additional color he might add. But you recall at our May investor conference, I thought Jonathan did a really nice job and that material still lies on our website about explaining where we would go next with expansion of the clinical applications of the testing, trauma being the first one up that we would seek clearance for next. But let me ask Kent to provide any additional color there.

Speaker 3

Yes. I'd agree with Brian. I think the notes from the May Investor Day are a great source. And some of specific targets we talked about in those materials and in the script and some we left out there for future disclosures. I think the big idea is that we see the opportunity first with TEG, then in building TEG's applications, building the entire family of TEG solutions, adding to 5,000 the 6s device and adding the TEG software, TEG Manager software to this family and then beginning to think about the broader space for blood diagnostics as a company.

So we think this is a fruitful space and believe that TEG will continue to march through the growth steps that we've outlined.

Speaker 2

One more point that I'd emphasize there Matt and important for everyone to understand and we talked about this while the question was asked about our expenses and our spending for expenses very consistent throughout the year, but we continue to reevaluate what we spend and where we spend it. And we've been very clear about our expectation that as we make decisions about spending, we're going to continue to accelerate our investments in R and D in the coming years with a focus on TEG clinical spending as well as spending in our apheresis platform. So that focus will continue.

Speaker 0

Thank you. And our next question comes from the line of Jan Wald with Benchmark. Your line is now open.

Speaker 6

Good morning, Good morning, Jan. I guess just going a little bit deeper into a couple of the questions because a lot of the questions that I would have asked have already been answered. But Brian, I guess in your script you talked about the whole blood market decline is moderating. And I guess it would be nice to know how much it is moderating to a certain extent. When do you expect it to kind of stabilize or maybe even begin to grow again not your business but the market itself?

Speaker 2

Yes. Jan, it's a question that I think many people are seeking answers on. What I would tell you what do I first mean by moderating? We're looking at two years of decline of double digits around 10% fiscal twenty fourteen fiscal twenty fifteen. Our customers guided us this year to a decline of about 5% to 8%.

We're seeing a decline. We're seeing growth in other markets international markets which are moderating our U. S. Declines. But we're seeing declines in The U.

S. That are moderating closer to the 5% closer to the low end of the range than the upper end of the range. It's one quarter. This is a market that I think has a better understanding of what's taking place, but still it's a pretty fragmented market. And so fully understanding that market is somewhat of a backwards look than a forward look.

But I think we're starting to understand it a little better than maybe we have in the past. But that's what I mean by moderating. In terms of growth, I think this is a global market with about half the world's population lying in geographies where demand for blood is still yet to be met. When the world catches up to that is anyone's guess, but you're starting to see economies emerge in trying to address these health care needs. We typically see that in platelets first before whole blood.

And the good news is that our focus with our technology, which is a cheaper technology and an easier to use technology, we typically get a first glimpse of that. I think it's something that will happen slowly and probably not anything that's imminent in the near term.

Speaker 6

Okay. And I guess my next question is on the red cell market. You said that competition was coming. Do you expect it to be the same kind of competition as you saw in whole blood where it's going to be kit versus solutions where people are going to be much more sensitive to maybe much more sensitive to price things like that they have been?

Speaker 2

What I think we saw in the whole blood scenario is that price was far more sensitive than anything else. There is still the need for solutions, but that's really being driven by hospital decision making versus blood center decision making. Our blood center customers remain very, very focused on price and technology. We like where we are. We like what we're doing to invest in the future both near term and longer term.

And we're encouraged by what we're seeing. But it is going to be a market that will see price declines and share shifts like we saw in whole blood.

Speaker 0

Thank you. And our next question comes from the line of Jim Sidoti with Sidoti and Company. Your line is now open.

Speaker 10

Good morning. Can you hear me?

Speaker 2

Yes. Good morning, Jim.

Speaker 10

Great. So you have a lot going on, on the hospital side with the blood track, the new TEG success, the new CellSaver. Have you added salespeople? Or have you trained salespeople for specific products? Or will they be selling everything?

Speaker 3

Yes, Jim. Hey, it's Kent Davies here. We're certainly adding sales representation by number in our emerging markets. We're absolutely training our team to sell in a very different way and I think you've seen that in what we've talked about in comprehensive blood management solutions, the need to approach customers in a very different and consultative way and that new skill set is going to be vitally important all over the world as we've changed up the org structure here a little bit, folks like Byron Selman coming on board. It's really part of that plan to take those CBMS skills that have been forged here in North America and translate that way of selling all over the world and he is actively doing that and we're doing that with our team.

Speaker 10

All right. And then can you update us on the status of the plant in Penang?

Speaker 2

The plant is complete. It is up and running and we are assembling product in that location. As we speak, we continue to shift production. The plans to shift production from our Bothwell Scotland facility to the Penang facility is what's up next.

Speaker 0

Thank you. And our next question comes from the line of Larry Solow with CJS Securities. Your line is now open.

Speaker 11

Great. Thanks. Hi. Good morning, Good

Speaker 2

morning, Larry.

Speaker 4

Just a couple of follow ups.

Speaker 11

Most of my questions were also answered. Just in terms of the gross margin outlook, you did like a you're about in the middle of the range in the quarter relative to the full year range. Is the fact that you're going to you should or expect much higher revenue on a sequential basis as we go on, Is that really mix that's going to sort of keep that gross margin from rising higher as the year progresses? Or is there any other issues in there?

Speaker 4

The currency headwinds are a little stronger in the back half of the year. And yes, we'll continue to see strength from plasma, which is obviously a very large number and has relatively lower gross margins.

Speaker 2

Especially, Larry, when you consider the solutions contract in the back half that will really start to accelerate. We've talked about that's a lower margin product.

Speaker 11

Right. And just on currency, guess essentially you guys are you're twelve months forward looking. So you have sort of an idea at least today what the impact of currency would be at least on the early part of fiscal twenty seventeen. Is that right?

Speaker 4

Yes. We have a view of it in fiscal twenty seventeen, yes.

Speaker 11

And is that I mean I assume it would be there's still as you stand today, do you have a number you could share those in terms of expectations?

Speaker 4

Yes. Think we did at the Investor Day. It's if you think about the headwind to growth rates in operating income that we disclosed in our Investor Day range, it will be about the same nominal amount in fiscal twenty seventeen and obviously a lower percentage because we'll be coming off a higher base.

Speaker 0

Thank you. And I am showing no further questions at this time. I would like to turn the call back over to Brian Concannon for closing remarks.

Speaker 2

Thanks, Kaylee. We see continued progress with our identified growth drivers. At the same time, most of the headwinds that caused declines in our U. S. Whole blood business will be behind us by midyear.

And early signs are indicating that The U. S. Whole blood market declines are moderating and Russia orders are beginning to rebound. Our U. S.

Plasma franchise continues to enjoy above market growth leveraging software advances in sodium citrate and saline solutions capabilities. And our CBMS offering is demonstrating real value to our customers based on the foundation of new software products and connected devices. Our VCC initiatives are providing expected savings and our investment in VCC is approaching completion. Our business fundamentals remain strong with an expanding global footprint, a very strong customer base, a steady flow of differentiating new software and devices, a solid R and D pipeline and improving cost structure and the broadest array of products and services in the blood industry. We believe we have an increasing demand for our comprehensive blood management solutions offering throughout fiscal twenty sixteen and CBMS will become much more meaningful in fiscal twenty seventeen and beyond.

Thank you for your attention this morning.

Speaker 0

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.