Haemonetics - Earnings Call - Q3 2016

Transcript

Speaker 0

day, ladies and gentlemen, and welcome to the Haemonetics Corporation Q3 twenty sixteen Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Mr.

Jerry Gould, Vice President of Investor Relations. Sir, you may begin.

Speaker 1

Good morning. Thank you for joining us for Haemonetics' third quarter fiscal twenty sixteen conference call and webcast. I'm joined today by Ron Kelman, Interim CEO Kent Davies, Chief Operating Officer and Chris Lindopf, CFO. 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 and 10 Q filings. On today's call, Ron will discuss highlights of our business performance and Kent will provide more detail on the the important trends in our commercial operations in the third quarter and year to date. Chris will cover financial performance and key elements of our outlook for the business. After some brief closing comments, we will take your questions. Before I turn the call over to Ron, 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 and charges from the adjusted financial results, which we'll talk about today. In the third quarter and year to date fiscal 'sixteen, we excluded certain non cash intangible asset write downs and the reversal of related contingent consideration. And in the third quarters and year to date periods of fiscal twenty fifteen and 2016, we excluded pretax transformation and restructuring costs associated with our Value Creation and Capture or VCC initiatives and related tax effects. The earnings information discussed for all periods excludes deal related amortization expense. Further details of third quarter and nine month fiscal twenty sixteen excluded amounts, including comparisons with applicable periods of fiscal 'fifteen, 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 Ron.

Speaker 2

Thank you, Jerry, and good morning. Over the past four months, I've had opportunities to meet with a number of Haemonetics investors and analysts. Several questions have consistently arisen around the status of both our CEO search and our comprehensive business portfolio review. Both processes continue to move forward on parallel path and I will provide an update after we have given you some detailed information on the third quarter and the rest of the year. We noted last quarter that we have two fast growing franchises, plasma and hemostasis management, which today is the TEG family of products.

These two franchises and our important China market have been delivering strong constant currency growth, which continued through the quarter. Overall, it was a pretty good quarter. Revenue grew 4% on a constant currency basis on the strength of encouraging performances in the plasma and hemostasis management franchises. And we had revenue growth on a constant currency basis in The Americas, Asia Pacific and Europe. Our plasma franchise delivered 14% constant currency growth in the third quarter.

Our initiatives in this business are focused on optimizing collection, productivity and yield and addressing specific high valued customer needs. Together, we continue to keep pace with robust growth in the end market for plasma derived bio pharmaceuticals. We installed over 4,000 plasma collection devices over the past three years and that pace is accelerating with nearly 1,700 devices installed so far in fiscal twenty sixteen. Having recently launched our next gen plasma collection software, our new collection device is on track for commercial introduction early in fiscal twenty eighteen. We expect this combination to deliver differentiated value in each plasma collection event.

Our ability to bring valuable products and services to our customers leads us to expect continued plasma growth above end market rates over our five year strategic horizon. Our hemostasis management or TEG franchise is well positioned and on an excellent growth trajectory with 18% constant currency growth We are maintaining momentum with our legacy TEG 5,000 device even as the limited market release of the new TEG 6s device is ongoing. We expect our TEG family of products TEG 5,000, TEG 6s and TEG Manager to continue to deliver and in fact accelerate growth with existing and new customers on the strength of continued global market penetration. We also had a positive third quarter performance in China with disposables growth in constant currency.

While TEG made up a good part of that growth, platelets comprised over half of our business there and we also enjoyed solid platelet growth in the third quarter. The China healthcare market continues to be very exciting focused on increasing access to an expanding portion of the population. Now I will turn the call over to Kent to provide more details about our business performance.

Speaker 3

Thank you, Ron, and good morning, everyone. This morning, we reported results for our 2016 and we confirmed our previous full year revenue and adjusting earnings guidance ranges. Revenue was $233,000,000 in the third quarter, up 1% as reported and up 4% in constant currency. Our growth drivers of plasma, TEG and emerging markets account for about 65% of disposables revenue. In constant currency, these three business elements had combined growth of 12% in the third quarter.

Drivers include plasma disposables up 14%, TEG disposables up 18% and Emerging Markets excluding Russia up 9%. In the third quarter, plasma disposables revenue was $92,000,000 an increase of approximately $9,000,000 or 11% as reported and 14 in constant currency. Shipments of saline and sodium citrate to CSL contributed about four percentage points of our overall plasma growth in the third quarter. Additionally, plasma growth was realized in Australia, Europe and Japan with softness only in Russia. In the third quarter, blood center disposables revenue declined $6,000,000 or 7% to $78,000,000 Excluding the impact of currency, blood center disposables declined by 4%.

Platelet disposables revenue was $38,000,000 in the third quarter, flat with last year as reported, but up 4% in constant currency due to emerging markets growth. In Japan, our increased market share of single dose collections was offset by the ongoing shift towards our competitors' double dose platelet technology. Red Cell Disposables revenue was $9,000,000 down $2,000,000 or 15% as reported and 14% in constant currency versus last year's third quarter. Our red cell results were influenced by a new long term contract with the American Red Cross to achieve 100% of their double red cell business. This means an increase in volume at a lower price.

Pricing concessions granted in advance of anticipated volume gains in that agreement represented a majority of the third quarter's decline. Whole blood revenue was $30,000,000 quarter, declining $4,000,000 or 12% and down 10% in constant currency. Whole blood revenue was $20,000,000 in The Americas, 7,000,000 in Europe and European distribution markets and $3,000,000 in the Asia Pacific and Japan markets. The ongoing macroeconomic challenges in Brazil and Russia affected our results. North America whole blood revenue continues to be impacted by declines in The U.

S. Red cell transfusion rate, which were approximately 10% in each fiscal year twenty fourteen and 2015. That rate of market decline has slowed in fiscal twenty sixteen and appears to be trending within the 5% to 8% range we previously communicated. Sales of whole blood products to U. S.

Blood centers now represent less than 7% of our consolidated revenue. Hospital revenue was $31,000,000 essentially flat with the prior year third quarter. Excluding the impact of currency, hospital revenue grew by 2% in the third quarter and 3% year to date following 1% growth in fiscal year twenty fifteen. Strong TEG momentum provided growth that more than offset declines in orthopedic cell salvage. We had record TEG disposals revenue of $13,000,000 in the third quarter, up 17% as reported and up 18% in constant currency.

We continue to see strong growth of TEG5000 devices and disposables even as we conduct the TEG 6s limited market release. Globally customers continue to recognize the value of this innovative hemostasis management technology. The limited market release of TEG 6s and our new TEG Manager software is ongoing following the previously announced regulatory approvals. Over the past three fiscal years, we sold nearly 1,900 TEG devices and nearly 600 in the 2016. Surgical Disposables revenue was $15,000,000 in the third quarter, down 3% as reported, but up 2% in constant currency.

In the 2016, Surgical Disposables revenue was up 1% compared with the prior year period in constant currency. An important product enhancement to our Cell Saver Elite, which will enhance its ease of use and processing capabilities is currently in customer acceptance trials. Software Solutions revenue was $18,000,000 in the third quarter, flat as reported and up 2% in constant currency. Initial customer interest in our BloodTrack Hemovanc system remains encouraging and it had good growth in North America and Europe in the third quarter. Equipment revenue was $14,000,000 in the third quarter and $38,000,000 in the year to date period.

Our installed base of equipment, which is the combination of purchased in place devices increased 6% over the last twelve months. The installed basis of Plasma and TEG, two of our growth drivers had increases of ten percent and sixteen percent respectively over the same trailing twelve month period. Before I turn the call over to Chris, I'd like to address a few important revenue items that continue to underlie our fiscal twenty sixteen guidance. Our plasma team continues to execute at a very high level, while serving the expanding end market for collection equipment and disposables. The team recently began shipping saline and citrate solutions to our largest plasma customer.

We have modestly increased our full year outlook for plasma revenue. Hemostasis management continues to grow. We are pleased with our trajectory and remain excited about the prospects for our growing TEG franchise. We had $13,000,000 of revenue in Russia in the 2016, down $9,000,000 or 40% from a year ago. Economic stress and political uncertainty continue in that region.

Meanwhile, China continues to perform and we see our presence there as an important platform for growth. The shift in the Japan platelet market continues with a greater reliance on double dose collection techniques. Today, represents about 15% of collection procedures in Japan and is a trend that we're monitoring closely. While this means a reduction in the market utilizing the traditional single dose technology, we enjoy an increasing majority market share. In software, BloodTrack Hemobank revenue had positive growth in the third quarter.

Software, While we continue to believe in the prospects for growth of this differentiated platform, other elements of our software offering are not growing as rapidly as previously planned, so we have decreased our software growth expectations for the full year. In summary, with some modification of the mix of revenue elements, specifically the strength in plasma and some offsetting weakness in software, we have reaffirmed our full revenue and earnings guidance ranges. With that, I'll turn

Speaker 4

the call over to Chris Lindahl. Chris? Thanks, Kent. As previously stated in the third quarter, total revenue was $233,000,000 an increase of 1% as reported and 4% on a constant currency basis. Currency impacted revenue by roughly 300 basis points as it has throughout fiscal twenty sixteen.

During the quarter, we had constant currency growth in all geographies except Japan. Strong growth in U. S. Plasma and TEG disposables revenue along with modest growth in platelet and surgical disposables more than offset declines in blood center disposables on a constant currency basis. Adjusted gross profit was $110,000,000 down 4% or $4,000,000 year on year.

A $7,000,000 currency headwind was included, so gross profit increased 3% in constant currency. Third quarter adjusted gross margin was 47.1, down two ten basis points. On a constant currency basis, margin declined only 30 basis points compared with the 2015. Benefits from our growth drivers and VCC initiatives were offset by lower pricing and share in our North American blood center business and unfavorable product mix. Adjusted operating expenses were $75,000,000 as reported down $1,000,000 or 1% as compared with the prior year's third quarter, but up $2,000,000 or 3% in constant currency.

Savings from organizational and corporate cost reductions permitted ongoing investments in higher impact growth initiatives. Notably,

Speaker 5

R and

Speaker 4

D spending increased $1,000,000 to 4.6% of revenue. Adjusted operating income was $35,000,000 in the third quarter, down $3,000,000 including a $4,000,000 headwind attributable to currency. On a constant currency basis, operating income was up 3%. Adjusted operating margin was 15% in the quarter, down 160 basis points as reported, but down only 10 basis points in constant currency. Adjusted interest expense associated with our loans was $2,000,000 in the third quarter.

Our tax rate was 25% in each of the 2016 and fiscal twenty fifteen. Adjusted earnings per share were $0.48 down $05 or 9%. We ended the first three quarters with $105,000,000 of cash on hand, down $55,000,000 from our fiscal twenty fifteen year end. We used $31,000,000 of cash net of tax benefits for VCC and other restructuring and $61,000,000 for the repurchase of shares in the open market. We also announced two non cash asset write offs today.

First, we recently performed our goodwill impairment test with inputs from our annual strategic planning process. The bulk of this goodwill arose from the Whole Blood acquisition in fiscal twenty thirteen. We established revised long term expectations for revenue, income and operating cash flows. As a result of analysis, we determined that a write down of goodwill was required. A non cash goodwill impairment charge of $66,000,000 was recorded in our European reporting unit in the third quarter.

Second, during the third quarter, we updated our assessment of the market potential for the SOLEX technology and concluded that it was no longer commercially reasonable to bring this technology to market. We recorded a $14,000,000 net non cash charge in the 2016 to write down intangible assets and contingent consideration resulting from the Solex acquisition. These non cash accounting charges totaled $80,000,000 pretax or $73,000,000 after tax, so $1.44 per share. It's important to note that these charges will impact our liquidity, cash flows from operations, future operations or compliance with debt covenants. They are not in any way intended to be indicative of the results that will come from our ongoing business portfolio review and they are excluded from our adjusted earnings.

Turning to the full year, we reaffirmed our previous fiscal twenty sixteen revenue guidance as Kent noted in the range of $910,000,000 to $920,000,000 including the benefit of a fifty third week. With about 300 basis points of headwind attributable to currency trends, revenue growth of approximately 4% is expected on a constant currency basis. As we approach year end, we made fine tuning revisions to components of our fiscal twenty sixteen revenue outlook, increasing the plasma and decreasing software solutions revenue outlooks. The resulting elements of revenue guidance are as follows: revised expectations for plasma disposable growth of 12% to 13% in constant currency, reflecting strength in The Americas While we've experienced some delays, we expect to meet our targeted annual run rate of saline and sodium citrate shipments under the CSL contract by the 2016. Blood center disposables are still expected to decline 5% to 7% in constant currency.

Hospital disposables are still expected to grow four percent of 3% to 5% in constant currency reflect a further recognition of the revised timeline for market penetration of new products and softness in other parts of our software portfolio. Our full year guidance for adjusted gross margin remains at approximately 47%. Unfavorable mix and currency are expected to continue to offset benefits of VCC initiatives and other structural cost improvements. Adjusted operating margin is still expected to approximate 14%. Our guidance range for adjusted earnings is reaffirmed at $1.65 to $1.75 per share.

An anticipated currency headwind to our earnings growth rate of about 900 basis points reflects the rates at which we have hedged our fiscal twenty sixteen foreign earnings. In constant currency, we expect fiscal 'sixteen earnings growth of approximately 4%. As in the past, our website includes revenue and income statement scenarios, which are based on the elements of the fiscal 'sixteen guidance provided. We are refining our expectations for fiscal twenty sixteen adjusted free cash flow to approximately $70,000,000 before funding $34,000,000 related to our VCC initiatives. We realized $8,000,000 of incremental VCC savings in the 2016 and we expect to reach an approximate $40,000,000 cumulative cost savings rate by the end of this fiscal year.

As I've explained before, VCC savings realized to date have offset disclosed business adversities including currency and volume reductions and pricing concessions in our North American donor business. The potential for incremental VCC savings that could be realized beyond fiscal twenty sixteen will be evaluated as part of the ongoing strategic review of our entire portfolio of business. Regarding fiscal twenty seventeen, we expect to provide guidance when we have our Annual Investor Day in early May. There were however a number of items I provided previously for your consideration in preparing fiscal twenty seventeen estimates. Currency is still expected to have a negative impact on operating earnings in fiscal twenty seventeen, currently estimated to be approximately 12,000,000 Obviously, fiscal twenty seventeen will not include the fifty third week that will benefit fiscal twenty sixteen.

Customer input and our own observations suggest a continuation of whole blood collection declines into fiscal twenty seventeen, though we continue to expect that rate to moderate over time. Our red cell apheresis business in The U. S, price reductions to the American Red Cross and other share losses will have a negative impact on fiscal twenty seventeen operating earnings of about $10,000,000 as compared to fiscal twenty sixteen. We are monitoring the market shift towards double dose platelet collections in Japan, which may have a negative impact on our fiscal twenty seventeen operating results. On the positive side, we continue to expect double digit revenue growth in our plasma business enabled by continued strong U.

S. Market growth and a full $25,000,000 of saline and citrate revenue under a previously disclosed agreement. We also expect to see another year of significant growth for the TAG business consistent with meeting our long term growth expectations for hemostasis management. We continue to have a strong balance sheet and free cash flow, which gives us confidence in our ability to weather the short term challenges and to exploit important strategic opportunities that remain ahead of us. With that, I'll turn the call back over to Ron.

Speaker 2

Thank you, Chris. As many of you know, our Board of Directors is conducting a search for a permanent CEO and that process is moving along well. It is highly likely that we will complete this well before our May Investor Day event. Concurrently, we are working with McKinsey and Company to complete a thorough evaluation of all the franchises within our business portfolio. We expect this will lead to a set of strategies that guide Haemonetics to deliver consistent revenue and earnings growth over a sustained period of time.

Our Board of Directors met about ten days ago for a complete update on this business portfolio review. This process with the Board is also moving along well. It is likely that we will complete this work before our May Investor Day event, so that we can share the results with all of you at that time. We feel strongly that the concurrent pursuit of these initiatives, the CEO search and the assessment of our portfolio growth opportunities is critically important. Our mission is to put Haemonetics on the path to sustainable and differentiated top and bottom line growth as soon as possible.

Regarding our May Investor Day event, we have scheduled it for Tuesday, May 10 in Boston and we will have more details out to everyone soon. We sincerely hope you will mark your calendars and join us. Finally, I thank our employees for their dedication to the needs of our customers and the donors and patients we serve. Their commitment gives me real optimism about turning our potential into better performance. With that, we are happy to take your questions.

Speaker 0

You. And our first question comes from the line of James Francescon with Morgan Stanley. Your line is now open.

Speaker 6

Hey, good morning and thanks for taking the question.

Speaker 5

Hi, James. Hi, James.

Speaker 6

So with 4% growth this quarter, had the strongest results since March 2013. And as you think about the business and where it stands today heading into 2017, to what extent do you think that growth of these results at these rates is sustainable? And what are some of the puts and takes that could either one, drive faster growth or two, conversely drag it back down as we head into 2017?

Speaker 4

Well, some of the elements, James, that I covered in the tail end of my comments certainly present headwinds. And putting aside currency because we are talking about constant currency growth rates, We know that we have made concessions and lost market share in North American red cells and we've quantified that as an earnings impact. You can imagine that there's a revenue impact associated with that. And we've also highlighted our concerns about the ongoing trend in Japan regarding double dose collection. Those are two obvious items that will factor into our thinking about growth rates, which will be considered in 2017.

Speaker 6

Okay. And just to push on that point a bit more, Chris. I mean, I thought that I heard a couple of things change on your comments, again, at the tail end of your prepared remarks about 'seventeen relative to last quarter. And I think one you identified, which is the continuation of whole blood declines. Am I right in perceiving that that's gotten a bit worse?

Two, am I right in perceiving that you're now mentioning platelet conversions double collections where you weren't before? And then finally, you say that you expect strong growth in TEG, but I didn't hear you commit to that very specific 25% target that you laid out last quarter.

Speaker 4

Good listening. So I would say taking your points one by one, whole blood, are year to date, we're seeing end market demand. Remember, is a North American phenomenon more than anything else, down about 6% as we measure it with our customers, which is a representative sample of the market. And that is slowing, but it's not trending back to zero yet. And until we see it getting close to equilibrium, we're still calling it down next year.

That's not a major factor in our overall growth just because that business itself is only 7% of our revenues. But it's a factor, no question. With regard to platelets, we are giving a little bit more color on the Japan situation as we see the penetration of double dose there. That was covered last quarter recall and I just added it to my list of things to pay attention to as we move into 2017. And no, we continue to feel very bullish about TAG.

It's all to do, I think, with the pace of the LMR and moving into full market conversion. And it's only that that would give us a moment's pause. It's not any concerns about it not having strong double dose potential strong double digit potential going forward. Did that answer your question?

Speaker 6

Absolutely. Very clear. Thank you, Chris.

Speaker 5

Thank you.

Speaker 0

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

Speaker 7

Hi, good morning. Clearly, strategic directions or your to look at across the P and L is progressing. I wonder if you can just maybe discuss the decision to discontinue SOLEX. And I sort of gather that I know whole blood the whole strategy there has not been clearly not optimal from what we thought three years ago. But was that decision, is that based on an overall outlook of what you plan to do with whole blood?

Or does this what kind of made you come to reality that SOLEX is just not going to fit into your plans?

Speaker 4

Well, we came to a critical juncture in our evaluation of the technology after we got approval for SOLEX with a whole blood filter. What we knew at that moment in time was that the market had trended the whole blood market in North America trended heavily towards red cell filtration and so that there was an additional development step required. And whenever you make a decision about committing incremental capital and resources towards a long term development project, you have to ask yourself has anything changed And so we went back out and talked to the customers about the prospects for the product and their willingness to pay for it. And the feedback was not positive.

And so we made what I think is a rational business decision.

Speaker 7

Okay. Just shifting gears real quick as a second question. Just on plasma, seems like saline is a little bit less than expected this quarter. I think it was supposed to first start coming out towards the latter part of the quarter anyhow. So it sounds like the underlying market ex saline for you is actually doing a little better.

Is that fair to say?

Speaker 4

Yes. We had a good quarter in consumables in North America.

Speaker 7

Okay. All right. Great. Thanks.

Speaker 0

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

Speaker 8

Hi, good morning. This is Matt in for Brian. Maybe just the first one, could you talk a little bit about the weakness in the other parts of the software portfolio? And what are the key elements to as we move into 2017 really starting to see some growth in that business?

Speaker 3

Yes. Thanks, Matt. It's Ken here. So we had reasonable growth in the software business about 2% up in the quarter. And within that, we're obviously pleased to see the momentum in Blood Hemabank, which performed both in The U.

S. And in Europe and also to see the developing pipeline for that business for which we've had great hopes for some time. We continue to believe that BloodTrack Hemov Bank is a positive part of our future and that the hospital software surrounding that asset is an important part of the future for the business. Clearly, connectivity is a strategic asset for the company and emerging core competence, certainly also the price of admission in the medical device space. And we think we've got some strong resources there.

We're looking at the entire portfolio of software as we look at the entire portfolio across the company. I think we'll be able to parse this for you more clearly in our May Investor Day.

Speaker 8

Okay. Thanks, Ken. Then just jumping back into the discussion on platelet collection in Japan. I think last quarter you mentioned about ten percent was double dose and I thought I heard you say fifteen percent. So it seems like maybe this is something that is evolving rapidly.

Could you just discuss what percentage of overall platelets business is at risk? And what would your response be if this trend continues to evolve this rapidly?

Speaker 3

Yes. So one of the things that we've already done to directly respond to this trend is to put in place a new commercial relationship with our major customer in Japan. And that has actually worked to our benefit. Certainly, we've gained share and likely significant share in the single dose segment in Japan. And that's the part of the market that we can control most directly.

We do expect this to continue to progress at some rate. I think our ability to control it has to do with our ability to react on a commercial level as well as with product and technology, and we're certainly focused on doing both of those things every day in this business.

Speaker 8

Okay. Thank you, Ken.

Speaker 0

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

Speaker 9

Hi, this is actually Candice calling in filling in for David. I just wanted to piggyback on the Hemovanc sales and you seem to be positive on that still. But changed has at all in terms of I know that your software guidance is revised down, but how much of an offset did you expect that to happen and maybe did not see that? Or what does that look like going forward?

Speaker 3

Yes, I think we talked about this is Kent again. I think we talked about that in the last quarterly call, certainly on some of the callbacks after that event and said that we had been quite optimistic in building our plan for this year and a certain portion of that had been software and we thought in fact we've been a bit too about building that outlook for the software business. A lot of that had to do with the rate of growth and our ability to generate immediate traction with a new product BloodTrack Hemabank, which we were then and continue to be relatively confident in. It's proven that that pipeline development is bit slower than we expected, although that pipeline is developing. And again, we had very encouraging growth in Europe and in North America for the BloodTrack Hemov Bank suite of solutions in the quarter.

So we're going to continue to push and do the things that put us in that position to deliver Q3. Hopefully, we'll see similar things from that part of the portfolio in Q4 and going forward. And again, as we said, we're reviewing our entire software portfolio as part of the larger portfolio review for the company.

Speaker 9

Okay. That's great. Very helpful. And one last question on China. You seem still very positive on growth in that area.

Do you still believe you can achieve the double digit growth over the course of the year?

Speaker 3

Yes. We're certainly doing everything we can to sustain our rate of growth in that market. We had 9% constant currency disposables growth in Q3, 10% year to date and are anticipating a strong close to the year. Platelet market is good. The TEG market is good.

The government seems to continue to be supporting the growth and development of the healthcare industry and we're doing everything we can every day on the ground to deliver ongoing results from China.

Speaker 9

Okay, great. Thanks.

Speaker 0

Our next question comes from the line of Anthony Petrone with Jefferies. Your line is now open.

Speaker 10

Thanks and good morning. Maybe just to begin with just some of the impairment charges in the quarter. I'm just trying to get a sense of going forward and even from a signaling standpoint, should we expect something more strategic for whole blood specifically going forward? And then in addition to that, we expect additional goodwill write downs going forward? And then one follow-up.

Speaker 4

Anthony, as I said, the actual actions we took in the quarter were unrelated to our portfolio review. And so whenever we're looking at a portfolio review, that is a possibility that I can eliminate completely. But what we end up doing specifically with regard to goodwill is annually we have a moment in time that we set with our auditors and with our Board And that for us is the first day of the fourth quarter and that comes shortly after the finalization of our strategic plan. We organize ourselves by, if you will, geographic operating units.

And that's the basis upon which we do the evaluation against long term cash flow projections. And this year it just got closer on an intuitive test. And so we did a more thorough review, took it down a level, did some appraisal work with third parties and came to this conclusion with our auditors. This is an estimate at the moment, because we know that there's a second step analysis that needs to be done. And so it's possible that there'll be a tail to this, but we'll update you when we know more.

Speaker 10

All right. And then one follow-up would just be on really R and D investments as you look to 2017. And so I think some of the focus will shift toward reinvestments into the growth areas of the business, so specifically Plasma and TAG. It looks like R and D was down here a little bit and you gave some indication of 2017, but certainly not on that front. Where do you expect R and D to go from here?

And at what point will you begin to reinvest in some of the areas of the business? Thanks.

Speaker 4

Well, in fact on an adjusted basis, the R and D was up about $1,000,000 this quarter. So sometimes the charges which are limited from the GAAP results can skew that trend. We are focusing our R and D very much on plasma Both of these are obviously areas where we have new product introductions that are easily identified and we've talked about a lot. And you can imagine that that's a big focus of our spending.

And we'll continue to do that going forward, because these are very opportunistic and positive portfolios for our business.

Speaker 0

Thank you. And our next question comes from the line of Larry Keusch with Raymond James. Your line is now open.

Speaker 5

Yeah. Hi, good morning. Chris, I just want to I'm not sure if I have this correct, but did you increase the VCC spend? It looks like by maybe $7 ish million. And if that is correct, are you still on track for the run rate savings that you were talking about, I guess, 50,000,000 in 'seventeen and 65,000,000 by 'eighteen?

Speaker 4

Did increase the spend nominally, Larry, good observation. In terms of being on track, all of the major moves that we've talked about making have started. I would say we're slightly delayed on the Scottish closure as we look forward, because that involves the transition to Malaysia. That's more to do with labeling than and having product available in the right with the right label for the different countries around the world than anything else. But in terms of the overall savings, it's really hard to comment on the future savings from VCC at this moment in time when we're doing the strategic review.

I mean, all of our franchises are under review. And I think when we know the answer to that, we'll know much more about the shape of our manufacturing platform.

Speaker 5

Okay. That's helpful. And then just two other ones. Just coming back on TAG, again, if my numbers are right, think you did about 18% growth in the third quarter and around 21% at the nine months. So I recognize that you are balancing the launch of Tech Success and trying to keep customers engaged and using the 5,000, etcetera.

So I know there's a bunch of cross currents going on. But I think there's this at least this 25% growth bogey that's been suggested out there. And again, I just wanted to come back and see if there was anything that was changing that would cause you to deviate from that growth objective.

Speaker 3

Larry, it's Kent here. So the short answer is no, nothing changing for our long term view for TEG. And as we've said a few times in a few different ways in this call, we're pleased performing with TEG right now. Disposables growth was 21% for the year to date. We think we're on track to deliver our long term goal, which is we look at it as more than doubling the TEG business throughout our five year plan period.

And that continues the TEG success limited market release is ongoing. We've had excellent feedback from our users about the functionality of the device and the cartridges in their hands. And I think all of that tells us we're right on track. And the extent that we've implemented our new Tag Manager software, which has now been at multiple locations, we're also having great feedback on the value and utility of a software overlay for this suite of solutions. So TEG is moving in the right direction.

Speaker 5

Okay. And then last one, and this is really just sort of a big picture question. Obviously, it's great to hear that the Board and the senior management are undertaking this portfolio review. I think it's something that's probably been necessary for a long time and maybe the key operative word here is really a comprehensive portfolio review. But I wanted to just get a sense of how broad are you willing to look and are you willing at the end of this review to potentially make decisions about pruning the portfolio and maybe in some businesses that Haemonetics has been in for a long, long time and is associated with.

I just wanted to get some understanding of really how deep and are you willing to go on this process.

Speaker 2

Larry, it's Ron Geldman. As I've said before, everything is on the table. We are willing to look at everything in as much depth as you would expect. And we're not married to any portfolio or any particular strategy. We just want to get the company back growing top line and bottom line.

Speaker 5

Okay, terrific. Thanks for those comments. Appreciate it.

Speaker 0

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

Speaker 11

Good morning. Can you hear me?

Speaker 1

Yes, sir. Yes, Jim.

Speaker 11

Great. A little bit of a different topic, but I'm sure you're aware that the FDA is reviewing changing some of the rules for blood donations because of the Zika virus and possibly banning donations from people who have recently been essential in South America. Do you think this could have any impact on your business here?

Speaker 3

Yeah, Jim, it's Kent. So we don't expect much business or excuse me, much impact at all. We're certainly well aware that the FDA is reviewing their policy. As we look at this virus, the information that we have says that this is a virus that stays in the bloodstream very briefly and that most people who contract the virus have it out of their system within about one week. We have not seen any evidence today that this is a transfusion transmissible virus.

In theory, And if in fact it's proven to be, there's a number of different ways that this can be addressed. One of course, screening of donors with a test. We're not aware of the specific test for the Zika virus at this time. Most likely what's going to happen is that they're going to screen on travel history and that could be implemented very quickly.

So we're not expecting an impact on our business, although we're certainly well aware and are watching the situation closely.

Speaker 11

All right. And then it doesn't sound like you bought any stock back during the third quarter. Do you still have funds available? And what's your thinking there?

Speaker 4

Well, Jim, we didn't we tend to get a mandate from the Board around the time that we formulate our annual operating plan, which includes a capital plan. And so we had 100,000,000 mandate, which we finished up. And we're moving deliberately through our planning process and we'll update you on that when we give you guidance for next year, which is currently expected to be around about our Investor Day in May.

Speaker 11

All right. Thank you.

Speaker 0

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

Speaker 12

Hi, good morning everyone. I guess I really only have one question left and it's kind of a big picture question kind of what Larry was asking about but it's related to the software business you have. And it seems to me that what you're trying to do is sell sort of a productivity solution maybe in an environment that's more concerned about pricing right now. And even though you have blood bank blood track, I'm sorry, that may be doing better, what kind of environment are you selling into? And how receptive is the market to those kinds of products that you're trying to sell?

I'd really be interested in knowing.

Speaker 3

Jan, it's Kent here. Think that's a good question. And the response that we get and the value that a customer places on a software solution really depends on the direct benefits that, that product provides as well as the environment within their market space. And I think that's why this part of the business, in fact, the entire business is so ready for a portfolio review at this time. We know as an example that in our Plasma segment, the customers are extremely anxious to bring on board our new software solutions.

We know that our connectivity capabilities are highly valued. And as I said earlier, really the price of admission in the medical device space these days, we believe we have a great capability. What we're doing is going through the entire portfolio of end markets of software solutions that the company has to face those end markets. And we're asking ourselves the same question that you're asking us. And we expect that to be part of the backdrop for our May Investor Day event.

But generally, we remain optimistic and bullish on software as a differentiating capability for the company. So while we're looking at it through a more discrete and potentially selective lens, we still think it's a real asset and a real differentiator for Haemonetics.

Speaker 12

Thank you very much.

Speaker 0

Thank you. And our next question comes from the line of Michael Petusky with Barrington Research. Your line is now open.

Speaker 6

Good morning. Just a quick one on Russia, is essentially the situation there that there's not a whole lot you can do as long as oil is where it is and the economy as a result is continues to be soft? Or are there steps that you guys are taking or can take that can really meaningfully change that situation in the near term? Thanks.

Speaker 3

Yeah, Michael. Kent again here. Well, in some ways, yes, in some ways, no. The macro economy is the major driver and we are absolutely operating in the context of a very troubled economy. And it has not gotten better and our overall results are highly unlikely to improve significantly until the economy begins to change in that discrete part of our business.

But we are doing things and we're doing things every day in that market to make it better, diversifying our distribution base both within the country and within the region and growing in our hospital market, which hasn't traditionally been an area of focus or strength for our company. This new market context has provided an opportunity for us to look in different places and has been quite fruitful in establishing a platform for growth and some good results in the hospital business, again, a new part of our portfolio in that region.

Speaker 5

Okay, great. Thanks, guys.

Speaker 0

I'm not showing any further questions at this time. I would now like to hand the call back to Mr. Ron Geldman, Chief Executive Officer for any closing remarks.

Speaker 2

Thank you again to all of you and the process for our strategic review continues and we hope to have a lot more information for you at the May investor event and we hope to see you there. Thank you again.

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 great day.