Haemonetics - Earnings Call - Q4 2017

Transcript

Speaker 0

Good day, ladies and gentlemen, and welcome to the Hamedics Fourth Quarter and Year End 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 follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Gary Gold, Vice President, Investor Relations.

Sir, you may begin.

Speaker 1

Thank you. Good morning. Thank you for joining us for Haemonetics' fourth quarter fiscal twenty seventeen conference call and webcast. I'm joined today by Chris Simon, President and CEO and Bill Burke, 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 latest 10 ks filing. This morning, we posted our fourth quarter and fiscal twenty seventeen earnings release to our Investor Relations website. We also posted two tables with information that we'll refer to on the call. Today, Chris and Bill will discuss our strategy and business performance, important trends in our commercial markets, key elements of financial performance and our fiscal twenty eighteen guidance, then we will take your questions.

Before I turn the call over to Chris, 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 fiscal 'seventeen, we excluded restructuring and turnaround charges related to cost reduction initiatives we launched in the fiscal year. In fiscal twenty sixteen, we similarly excluded restructuring and related charges. In both fiscal twenty seventeen and 2016, we excluded goodwill impairment and other asset write offs as well as dealer related amortization expense.

And finally, we excluded the tax effects of those excluded items. Further details of fourth quarter and fiscal twenty seventeen excluded amounts, including comparisons with the same periods of fiscal twenty sixteen, 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 reconciliations of our reported and adjusted results. With that, I'll turn the call over to Chris.

Speaker 2

Thank you, Gerry, and good morning. I'm pleased to say that we successfully completed the stabilization phase of our three phase turnaround. Despite challenges, we achieved most of our goals and key milestones over the past year. We prioritized and refocused resources, funding needed investments in our growing businesses to ensure our lasting success. We've put in place new governance to expedite and improve decision making, and we established return on invested capital as a key metric along with revenue, operating income and free cash flow.

Importantly, we attracted top talent and reduced turnover throughout the organization. Our fiscal fourth quarter twenty seventeen and full year performance was in line with expectations. We achieved our revenue, profit and cost reduction objectives in spite of setbacks such as the filter recall and various inventory charges. Continued strength in plasma, hemostasis and transfusion management was offset by declines in blood center and cell salvage. Our fourth quarter fiscal twenty seventeen revenue was $228,000,000 down 6% as reported and 5% in constant currency.

Our fiscal twenty seventeen revenue was $886,000,000 down 2.5% as reported and 1% in constant currency. There was one less week in the 2017 versus fiscal twenty sixteen. We estimate this difference led to an unfavorable comparison of 6% in the fourth quarter and 2% for the year. On an adjusted basis, we earned $20,400,000 or $0.39 per share, 5% above the fourth quarter a year ago and we earned $1.53 per share in fiscal twenty seventeen, down 6% compared with the prior year. We exceeded our $40,000,000 cost savings objective and generated $113,000,000 of adjusted free cash flow.

This surpassed our 90,000,000 to $95,000,000 target and confirms the strong cash generating capability of our business, positioning us well for fiscal twenty eighteen. I will discuss the key elements of the next phase of our turnaround and fiscal twenty eighteen guidance. But first, I'll turn the call over to our CFO, Bill Burke to comment further on our results. Thank you, Chris, and good morning, everyone. Please refer to the two tables we posted to our website with a link in our earnings release.

We provided specific revenue and income dollar amounts that derive the percentages I'll refer to in my comments. We had continued strong results in plasma. In the fourth quarter, plasma revenue was up 2% in constant currency and fiscal year plasma growth was 9%. Considering the impact of the extra week in fiscal twenty sixteen, our fourth quarter and fiscal year twenty seventeen plasma growth was consistent with market growth rates. While liquids contributed approximately half of the year plasma growth, they had no meaningful impact on the fourth quarter growth.

Even with the impact of the extra week in fiscal twenty sixteen, North America plasma disposables excluding liquid solutions were flat in the 2017 and up 5% in the fiscal year. Growth continued to be driven by strong end market demand for plasma derived biopharmaceuticals. Also contributing to plasma growth was revenue in Japan, which grew 7% in the fourth quarter and 31% in the fiscal year. Plasma apheresis collections increased with the ongoing market shift to double dose platelet collections. The use of double dose platelet collections increased meaningfully in fiscal twenty sixteen and 2017, which in turn enabled plasma collections from would be platelet donors.

As anticipated, fourth quarter fiscal twenty seventeen plasma revenue growth in Japan was impacted by customer order timing, which muted the rate of increase compared to the first nine months. We maintain high confidence in the continued growth of the market underlying our commercial plasma collection business. In our hospital businesses, hemostasis management remained on a strong growth trajectory with revenue up 8% in constant currency in the fourth quarter and up 14% in fiscal twenty seventeen. Considering the impact of the extra week in fiscal twenty sixteen, we had strong mid teens growth in the fourth quarter and fiscal year twenty seventeen. The TEG 6s product offering was again a meaningful part of hemostasis management revenue and a major contributor to its growth in the fourth quarter.

Fiscal twenty seventeen growth was split about evenly between the TEG-five thousand and the TEG-6S with solid performance in The U. S, UK and China. The TEG-five thousand is approved for a broad set of indications in all of our markets. The TEG-6S and TEG Manager are approved for the same set of indications as the TEG-five thousand in Europe, Australia and Japan. In The U.

S, TEG-6s is indicated for cardiovascular surgery and cardiology and we are pursuing the broadest set of indications beginning with trauma. Also within our hospital business, cell processing and transfusion management revenue declined 3% in constant currency over the prior year fourth quarter and 4% in fiscal twenty seventeen. OrthoPat and Cell Saver declines were only partially offset by growth in Blood Track in fiscal twenty seventeen. Blood center revenue was down 15% in constant currency from the prior year fourth quarter and down 14% in fiscal year twenty seventeen. Considering the impact of the extra week in the prior year, the fourth quarter had the lowest decline of

Speaker 3

the

Speaker 2

year. Driven by the continuing shift to double dose collections in Japan, Platelet Disposables revenue declined 22% in constant currency compared with the prior year fourth quarter. Approximately 25% of collections, so nearly 40% of platelet units collected in Japan were by double dose collection techniques in the fourth quarter. For fiscal year twenty seventeen, platelet revenue declined 16% in constant currency, mostly attributable to the Japan double dose trend, but also impacted to a lesser extent by customer order timing in EMEA and APAC. Red Cell disposables revenue declined 2522% in constant currency in the fourth quarter and fiscal twenty seventeen respectively due to lower volume and pricing inherent in previously announced U.

S. Customer contracts. Whole blood disposables revenue declined 59% in constant currency in the fourth quarter in fiscal twenty seventeen as recent moderation in the rate of collection declines continued. U. S.

Customers have indicated that we should expect this moderating trend to continue over the longer term. Blood center software equipment and service revenue was down 13% in the fourth quarter and down 10% in the fiscal year in constant currency. These declines were attributable to the prior year expiration and nonrenewal of a U. S. Government software contract.

We remain committed to stabilizing, separating and optimizing our Blood Center business, and we have made solid progress toward our goals. We will remain diligent in preserving operating income through operations and commercial cost rationalization while simplifying our business model. Fourth quarter fiscal twenty seventeen adjusted gross profit was 43% of revenue, up 170 basis points over the prior year fourth quarter. Although we once again had inventory charges in the fourth quarter, we had similar type charges in last year's fourth quarter. The result was a net favorable impact in the fiscal twenty seventeen fourth quarter, which accounted for the improvement.

Fiscal twenty seventeen adjusted gross profit was 44.7% of revenue, down 150 basis points from the prior year as productivity efficiencies were more than offset by inventory charges, filter recall costs and pricing. Adjusted operating expenses declined $4,000,000 or 6% compared with the 2016 and were essentially flat at 30.7% of revenue. Fiscal year twenty seventeen adjusted operating expenses declined $20,000,000 or 7% compared with fiscal twenty sixteen and declined by 130 basis points to 31.7% of revenue. The lower operating expense demonstrates the benefit of early fiscal twenty seventeen cost reduction initiatives, which exceeded our $40,000,000 target. Our income tax provision on adjusted earnings was 22.5% in the fourth quarter, about 400 basis points higher than in the same quarter of fiscal twenty sixteen.

Our fiscal twenty seventeen adjusted tax rate of 26.1% was lower than the twenty seven point five percent we projected ninety days ago as we had initiated and have now completed a series of tax planning strategies designed to optimize our tax rate after we anticipated upward pressure from a shift in geographic income mix. Free cash flow before funding restructuring and turnaround activities was $113,000,000 in fiscal twenty seventeen, up from $58,000,000 in fiscal twenty sixteen and above the range we estimated most recently. Continued improvements around management of capital contributed to the overachievement. We finished in a strong position with $140,000,000 of cash on hand. This balance represents an increase of $24,000,000 since the beginning of fiscal twenty seventeen.

We repaid $93,000,000 of debt and we funded $27,000,000 for restructuring and turnaround initiatives net of tax. We recently completed our annual goodwill impairment test with inputs from our annual strategic planning process and giving consideration to recent changes to the company's operating structure. Although long term expectations for North America Blood Center revenue, profitability and operating cash flows did not change materially from the previous analysis, we determined that a write down of goodwill was required. The bulk of this goodwill arose from the Whole Blood acquisition in fiscal twenty thirteen. A non cash goodwill impairment charge of $57,000,000 was recorded in our fourth quarter.

We also recorded $18,000,000 of non cash charges to write down other non performing assets in fiscal twenty seventeen. As we noted in our earnings release, these non cash accounting charges will not impact liquidity, cash flow from operations, future operations or compliance with debt covenants. With that, I'd like to turn the call back over to Chris. Thank you, Bill. We have begun the transformation phase of our multiyear turnaround, during which we are laying the foundation for profitable future growth.

We are building long term momentum by executing business unit specific strategies and putting in place a purpose built customer centric organization, while also reducing complexity, fixing inefficiencies and improving corporate productivity. We are identifying growth segments across the portfolio and geographies, exploring inorganic business development opportunities and preparing to roll out new products. For example, in April, we completed the submission of our five ten notification for PCS-three 100 to the FDA. We look forward to engaging with the regulators and ultimately receiving the clearance that will enable us to move forward with this innovative new technology. In parallel, we are pursuing divestiture of non core and underperforming assets.

The sale of the Zebra benchtop and handheld sealers on April 27 is an example of this. This line of products represented $6,000,000 of annual revenue and was not central to the growth plans of our plasma business unit. The recent closure of our Niles, Illinois facility and the sale of our Bothwell, Scotland plant are examples of our manufacturing network rationalization. These transformation activities are our focus in fiscal twenty eighteen and importantly, they are the enablers of growth acceleration in fiscal twenty nineteen and beyond. For fiscal twenty eighteen, our guidance is for flat revenue and adjusted earnings of $1.55 to $1.65 per share.

These ranges are in line with expectations and approximate first call consensus. Our guidance for plasma revenue growth is 3% to 5%, inclusive of the Siebert divestiture, which represented 1.4% of annual plasma revenue. Disposable sales in North America, our largest market, are expected to grow high single digits, consistent with continued strong collection rates and market demand. However, we expect declines in Japan due to government plans to reduce frozen plasma inventory levels and also continued weakness in the distributor markets in Europe. We expect 7% to 10% growth in hospital led by an acceleration of hemostasis management growth and new growth in transfusion management.

We are anticipating continued declines in transfusion rates of whole blood and a further decrease in single dose platelet collection trends leading to a 7% to 10% decline in Blood Center revenues. We expect to gain operating leverage from productivity in fiscal twenty eighteen and we intend to reinvest much of these savings for profitable earnings growth and ROIC expansion. To realize our full potential, the Plasma business requires capital to produce new devices and expand manufacturing capacity to support disposables growth. We will also incur increased operating expenses related to the swap out of PCS-two devices for the PCS-three 100. The hospital business requires investment in operating expenses for the build out of our sales force, the expansion of clinical and health economic studies and improving our regulatory submissions.

These investments will support and enable revenue growth and margin expansion as contemplated in our long term strategic plan. Our earnings guidance includes $0.04 0 to $0.50 per share of investments in fiscal twenty eighteen. Our strong cash generating activity is expected to continue in fiscal twenty eighteen and along with 140,000,000 of cash on hand enable us to fund needed investments. Capital and operating expense investments net of expected tax benefit are included in our fiscal twenty eighteen cash flow projections at $70,000,000 to $90,000,000 Including these investments, our adjusted free cash flow is expected to be $35,000,000 to $55,000,000 in fiscal twenty eighteen. Our strategy remains unchanged to compete in winning segments and geographies capable of sustaining superior revenue growth and profitability to achieve and maintain the number one or two market positions and to deliver superior short and long term operating performance through greater productivity, return on invested capital and cash flow.

We continue to believe that we will achieve income and up to a fourfold increase in our adjusted free cash flow from fiscal twenty sixteen levels to fiscal twenty twenty one. But again, I remind you that the path forward will not be linear. Our Investor Day meeting is scheduled for Monday, June 19 in Boston, and we will have detailed information about the event to you soon. We invite you to join us to meet our new management team and view our array of products. We will review our high level strategic plans and the key assumptions underlying our performance expectations.

I'll close by thanking our customers and shareholders for their continued support and trust, and also our employees and business partners for their dedication and for delivering a successful year. We appreciate you joining today, and we'll now proceed with your questions.

Speaker 0

Thank you. Our first question comes from Larry Solow with CJS Securities. Your line is open.

Speaker 3

Good morning and thanks for taking the questions. Chris, just you've obviously been there a little over twelve months and you're sounds like things are relatively in line. Your targets are unchanged and sounds certainly enthusiastic in terms of the doubling in operating income, which essentially now if we sort of plug in the mass of this year would looks like you're basically going to be flat since 2016. So that's going to command like a near doubling in three years. Fair to say that globally fiscal twenty nineteen will I guess will have to be part I know you didn't say it won't be linear, but I assume fiscal twenty nineteen will have to be somewhat of an inflection point to sort of get to that growth rate.

With that said, could you just update us on the outlook for I imagine the PCS-three thousand will drive a lot of that. So can you sort of give us your view on how that will be rolled out? Will a lot of that come out in 2019? Or is there a chance that it takes several years to roll out?

Speaker 2

Larry, thanks for the question. We clearly expect FY twenty nineteen, FY twenty twenty and FY twenty twenty one to represent, as we said from the outset, accelerated growth, both top and eventually bottom line as well. Of course, the new technology, our Galaxy platform and the core piece of that is the PCS-three 100 will be an important growth driver, as is plasma overall. But we're also expecting robust growth in the hospital segment and kind of cleaned up and focused properly important contributions, especially to EBITDA from our Blood Center business as well.

Speaker 3

Okay. And you had sort of talked about, I think, on the last call, I know it wasn't guidance, but perhaps mid single digit revenue growth in 2018. Obviously, the Zebra line impacts that about 1%. Any other things that have changed sort of over the last few months to sort of reduce that outlook a little bit?

Speaker 2

Larry, just to clarify, you're talking specifically about our expectations for revenue

Speaker 3

For fiscal twenty eighteen.

Speaker 2

Fiscal twenty eighteen

Speaker 3

in flat. And

I'm talking just in overall, I know you hadn't given guidance, but I think in the call some of your color was sort of we could reach mid single digit revenue growth and little operating margin expansion was I think sort of some of the takeaways from last call. It looks like now a little bit of margin expansion, but a little bit less on the revenue growth side.

Speaker 1

Larry, I believe it was this is Gerry. I believe the comment was I'll go back and look at it was low single digit growth on the revenue side and with the question we indicated that there could be as much as no operating income leverage. Yes.

Speaker 2

And again, Zebra is a $6,000,000 line that wasn't going to contribute meaningfully to our growth trajectory going forward. The restatement with that out of our revenue going forward, reclassification with that out, matters, but it's rounding. We remain very bullish on plasma. As I said, the North American disposables growth rate that we're experiencing is high single digits. And as we move forward, we'll expand we would look for expansion across all dimensions.

We're going to improve our gross margins. We'll take share where we can, and we'll continue to grow appropriately within that. But so no change in our outlook and our optimism vis a vis Plasma.

Speaker 3

Great. Thanks very much.

Speaker 0

Thank you. Our next question comes from Larry Kusch with Raymond James. Your line is open.

Speaker 4

Terrific. Thanks for taking the questions and good morning. Wanted to Chris, made some suggestion in the prepared comments that, you were continuing to look at portfolio pruning. Just wondering if you could put some sort of goalpost around that. Is it sort of more SEBRA like?

Or could you also be contemplating larger divestitures?

Speaker 2

Yes.

Speaker 1

I think in terms of

Speaker 2

our FY 2018 plans, what we're prepared to talk about, we will always do just as hygiene proper portfolio review. And whether they are projects or products, we will look to prune and redeploy that capital for things that contribute positively towards our growth and contribute against the key metrics that we run to return on invested capital, revenue growth that exceeds the segments we compete in, operating income that exceeds the revenue growth rates, you are creating operating leverage within your business And then of course, flow, which is critical for us at this stage in our growth trajectory. So we will always assess our asset base vis a vis that. And I think for the foreseeable future, that's probably as far as we're willing to go in terms of guidance.

Speaker 4

Okay, perfect. And then two other ones, I'll just ask them. Just updated thoughts on how quickly you can swap out the older PCS machines? Is that kind of a two year, three year type of view? And then also relative to the long range strategy that you've put forth, does that do those targets, the free cash flow and operating income growth targets, is that all organic or is there some inorganic contribution there as well?

Thank you very much.

Speaker 2

Thanks, Larry. Good. So on the PCS2 swap out, based on growth in our share, we place somewhere between 1,802,500 pieces of equipment a year. We would look to accelerate that dramatically. And I've said, and I don't mean to be flippant about it, we will go absolutely as fast as our customers are prepared to go, but no faster.

And I think it's important given the growth in demand and the role we play in the industry to not in any way shape or form disrupt the important role that we play in that supply chain. So we're definitely looking to pull it forward. I think you can work backwards from FY 2021 that gives you an appropriate sense for the aspiration. And we're committed to making that happen. Obviously, we need to work through the regulatory review process and secure release.

And just as soon as we do, we'll begin to move forward and refine and button this up. But the rollout has to be seamless. And you start perfect and get better from there in terms of the customer service. That's what we're aspiring to. In terms of the long term strategy, the 2x and 4x and whatever the shorthand that gets distilled from that, it is primarily organic growth.

The caveat I put around that is I think we've been clear from the outset where we have opportunities to do what I would describe as modest tuck in acquisitions, where we believe we are the natural owner of the asset, where it's accretive, not just in financial terms because we can borrow favorably, but it's accretive to our operating performance and our operating leverage, we will pursue those acquisitions as a way of augmenting and balancing it. And probably the area we would have the most focus for that and where we see the greatest opportunity near term is in our hospital segment.

Speaker 4

Okay, terrific. Thank you very much.

Speaker 0

Thank you. Our next question comes from David Lewis with Morgan Stanley. Your line is open.

Speaker 5

Good morning. Chris and Bill, I want to come back to kind of what matters here over the next three to four years, which really is PCS and TEG, the two principal growth and profitability drivers. So can we just kind of go back to PCS-three 100 just to start there? What was embedded in guidance for this year? Because obviously, you want to go as fast as your customers will let you go, but yet you're not approved yet, so it's hard to have an active dialogue with customers.

And obviously, the faster you go, the greater depreciation load there'll be on the business. So can you just help us understand what's embedded in the 155,000,000 to 165,000,000 number as it relates to PCS-three 100?

Speaker 2

David, it's Bill. Obviously, revenue stream related to whether it's the PCS-three 100 or PCS-two will essentially be the same with the disposables. The And PCS-three 100 will hopefully be approved at some point this fiscal year. But we don't have, I would say, meaningful revenue attached to the 300 this year. We do have costs related to the rollout of the device and also collection costs related to the PCS2 to bring it back any devices back from the field and then refurbishment related to that, but no meaningful revenue in FY 2018 is projected on that device.

Speaker 5

Okay. So maybe just to

Speaker 1

I'm sorry, Chris, go ahead.

Speaker 2

Yes. The further comment, because you had made the remark about depreciation, we can't have clairvoyance around this because we've got to manage the existing base. What I would say is an active focus and something we look at in our plasma business unit, but we look at across the corporation is leveraging that installed base, right? We have 20,000 devices in North America, approximately half that again outside The U. S.

The model outside The U. S. Is different and more hybrid. Some of the devices are placed, some of them are leased, some of them are sold outright depending on the legal parameters that we operate within. And there are opportunities to be creative as we bring devices in.

The PCS-two 100 PCS-two, excuse me, has proved to be an incredibly durable piece of equipment. And we have the ability to refurbish them. We upgrade the centrifuge and we place them elsewhere. And we're going to be as creative as our customers will let us be to deploy that capital elsewhere and make sure it's a productive and contributing part of our ROIC aspiration.

Speaker 5

Okay. Very clear. Maybe just two follow ups next. I think this is the important debate for the stock. So a couple of things.

First, Chris, you mentioned disposables, that stream really doesn't change. I guess my sense was you're obviously going to be looking for a price premium on PCS-three 100 disposables versus PCS-two. So just help us understand that. And then is it possible, as we look into next year, guys, that EBIT could be flattish again? If 2019 becomes the really material year for the rollout of PCS-three 100, can EBIT be flat in 2019 or the way you see the scheduling of depreciation and other costs, that's unlikely?

Speaker 2

Yes. So at the outset, we're not going to talk about 2019 today, David, as you can appreciate. The commentary around revenue and the uptake on that was for FY 2018 specifically. What we do envision with the new platform and the partnerships that we're putting forth with our customers is that we will look at all aspects of this, right? So we participate with our share with the organic growth collection volume, and we see no abatement to that in the near term, which is fantastic for us and for the customers who are served by that those end user markets.

We will participate in margin and share expansion as the opportunities present themselves,

Speaker 0

And that will include both in North America, but globally as well. And then of course, we are trying hard to be good stewards of the resources that we preside over, which includes

Speaker 2

and this recycling of devices, but it also includes improving our cost of goods sold and managing our OpEx accordingly. So we need to spend to execute a flawless deployment. But within that, we're challenging our business to become more productive in everything they do.

Speaker 5

Okay. And just lastly for me, I'll jump back in queue. Just the you're obviously reclassifying the hospital business, but it sounds like TEG is accelerating for fiscal twenty eighteen, just sort of confirming that you do expect TEG to accelerate. And then Chris, what's driving that in fiscal twenty eighteen? Thanks so much.

I'll jump back in queue.

Speaker 2

Yes. We remain very bullish on TEG and its growth potential. The desire to focus at one level on the hospital segment is really just a reflection of the fact that we are managing that those product lines, both TEG and cell salvage and transfusion management as a business unit and trying to gain the associated focus and operating leverage within as a result. So last year, we had the management team had given guidance in the high teens. And the reality is we fell just shy of that.

Just to be clear, the differential of the 15% compound annual growth rate that we experienced versus the midpoint of the guidance range was less than $2,000,000 in revenue. And I think candidly is more of a reflection of the difficulty forecasting nascent and emerging and fast growing product line. And in terms of where that grows, so we expect to actually exceed prior year's growth rate and that's what we're building towards and that's what rolls to that 7% to 10%. We will on a quarterly basis read out on TEG because it's an important focus and it's a topic the company has talked a lot about historically. I just want to be clear about for our product is at that stage in its lifecycle that it is difficult to predict the exact uptake.

In terms of where the growth is coming from, it is as much about market development as it is share attainment. We aspire to both, but it's a product as Bill said in his prepared comments, we have the full release outside The U. S. For the 6s. It's an outstanding product and we intend to give real focus and attention on those markets to driving that performance.

We've enjoyed strong performance both of existing and new customer involvement in North America and in China and we expect that strength to continue as well.

Speaker 5

Great. Thanks so much.

Speaker 0

Thank you. Our next question comes from Weinstein with William Blair. Your line is open.

Speaker 6

Hi, good morning. Thanks for taking the questions. I just want to go back to the prior question and some of the stuff on the PCS II versus the Galaxy and the comment on no difference in revenue stream. Excuse me, I think you said that there was no expected difference. I just want to clarify you guys are still expecting a price increase when the Galaxy is rolled out.

Is that correct?

Speaker 2

Yes. Again, I just want to be crystal clear. The guidance we're providing is for FY 2018. We submitted the PCS-three 100 to FDA for their review last month. So we will work through the FDA's timeline.

We remain optimistic, but we're not going to get in the business of trying to predict things we cannot control in terms of the exact timing of rollout and that's what's reflected in our guidance for FY 2018. FY 2019, 2020 and 2021, we're expecting meaningful uptick in the PCS-three 100 platform with all the associated benefits to our customers and our participation in those benefits as part of our partnerships.

Speaker 6

Okay, fair. Thanks for the clarification. And then with the platelet business right now, obviously seeing issues in Japan. Can you talk about what percentage of the remaining platelets are at risk either in Japan or in other countries of people going to a double dose collection?

Speaker 2

Yes. So on platelets, we actually we on the double dose rate, we came out of FY 2017 at an average for the year sorry, if you look at the average for the year is in the mid-20s on the platelet collection. We came out of the year at a slightly higher rate more in the upper 20s And we're predicting a continued increase on a stepwise basis during FY 2018 up to the high 30s, high 30% range on the platelets collections.

Speaker 6

Okay. Was that I'm sorry, was that just for Japan? Was that for the entire market? I'm sorry, can you

Speaker 2

just That's clarify for Japan. That's where the majority of the impact is for us.

Speaker 6

Got you. So you're not seeing any double dose collection moving outside of Japan into other territories or other businesses that could be at risk there?

Speaker 2

I think there is a general trend across all markets that where the population and the procedures within the blood centers will support it, they will attempt to double dose collection. And what our forecast is predicated upon is retaining the remaining single dose collection where our technology is superior and we have good established relationships.

Speaker 6

Okay. And then last question for me. You guys guided, I believe to can you clarify what the guidance is for North American plasma disposables excluding the solutions business or just total what disposables are? Because I think you said the market is growing high single digits. Are you guys expecting to be similar in North America next year high single digits?

Speaker 2

Yes. We don't guide specifically to the North American disposables. But based on the comments that we make about North America disposables in our FY 2017 results, you can expect something that's in line with FY 2017 for 2018.

Speaker 6

Okay. Thank you, guys.

Speaker 2

Thanks.

Speaker 0

Thank you. Our next question comes from Anthony Piccione with Jefferies. Your line is open.

Speaker 7

Thanks and good morning. Maybe just a couple on plasma and then one on blood center. On plasma specifically, can you maybe quantify the benefit of double dose platelet collection on plasma collections in Japan? That would be helpful. And then in terms of the capital investments, the 55,000,000 to $60,000,000 I'm just wondering how much of that potentially is beta testing by some of the plasma customers out there?

And then lastly on Blood Center, maybe just an update on cost rationalization and where the SKU count is? Thanks.

Speaker 2

Okay. So the first question on the plasma in Japan. So in the fourth quarter, we actually saw a growth rate in plasma in Japan that was lower than the growth rate we've seen in the prior three quarters. And that was directly a result of the contract that we have with the Japanese Red Cross where it's a market share contract with another competitor. And in the fourth quarter, we through three quarters, we were overachieving the market share.

So they just had to pull back on revenue with us to provide it to the competitor, but we had anticipated all that in our finish in the fourth quarter. Does that answer your question there?

Speaker 7

Yes, does. Thank you.

Speaker 2

Okay. And then on the capital piece for FY 2018, we do have we have capital that is in excess of what we spent in FY 2017. And the majority of the difference in there is related to a couple of things. One, capital costs related to the build of the PCS-three 100, but also costs related to capacity expansion that we had planned in our factories.

Speaker 7

Got it. And then maybe lastly, just on Blood Center, just cost rationalization and the SKU count.

Speaker 2

Yes. Anthony, thanks for the question. The focus on our Blood Center, as Bill articulated, stabilization, separation and optimization. And by focusing on that as a discrete business unit, really looking carefully at the cost, trying to discern what adds value to our customers currently and going forward, that is what initiated the original look at both SKU and geographic rationalization. So in the SKUs, we had almost 2,000 SKUs in our inventory base.

Clearly, that doesn't make any sense for what is essentially 40 customers worldwide that make up in excess of 70% of our revenue base. So we've gone back through and we've pruned that. We now have less than 300 SKUs. We would aspire to take that number down further. But as you can imagine at this point, we're very much in dialogue with those customers about what they value.

So where we can make further rationalization jointly with the concurrence of customers, we'll do so. And that's an important part of simplification of complexity reduction, which is a key theme for us as we turn into 2018 and beyond, taking unneeded and costly complexity out of our business. Doing so in the blood center should enable us to be able to hold that EBITDA constant over the strategic planning window, which is something we aspire to as a company.

Speaker 7

Thanks again.

Speaker 0

Thank you. Our next question comes from James Sidoti with Sidoti and Company. Your line is open.

Speaker 8

Good morning. Can you hear me?

Speaker 2

Yes, Jim.

Speaker 8

Great. So you anticipate you said spending about 15,000,000 to $25,000,000 in operating expenses outside the capital investments Can you just give us a little more color as to what that is? Is it people? Is it what is that made up of?

Speaker 2

So it's a few things in there, Jim. It is people. It's the build out of the sales force and clinical specialists on the CAG side. And we said we've been adding headcount there and Chris referred to it earlier and answer to a different to continue to build the market and hopefully gain share there. We are adding a significant amount of headcount.

It's also spending on clinical trials in the TEG business, the benefits of which we'll see in future years. And then on the plasma side, it's the collection costs essentially for the PCS-two to bring units back to be serviced so we can redeploy them elsewhere. And also the cost, the incremental cost that we incurred to get the PCS-300s out to the field. That's the bulk of the 15,000,000 to 25,000,000

Speaker 8

Okay. And then can you let me know what the what you expect amortization expense to be in fiscal twenty eighteen on a per share basis?

Speaker 2

Amortization, I don't

Speaker 1

In the guidance, Jim, we said that the dollar amount is about the same as the dollar amount this year. So it's not more than a penny or so different from 2017.

Speaker 8

So roughly $0.40 or so?

Speaker 1

Yes, I think it was more like $0.38 or $0.39 in 2017, very similar.

Speaker 8

Okay. And then can you just repeat what I'm sorry, missed it. The platelet sales in the quarter were compared to a year ago?

Speaker 2

Platelet sales in the quarter were down 22% year over year in the fourth quarter.

Speaker 8

All right. Thank you.

Speaker 3

You're welcome.

Speaker 0

Thank you. Our next question comes from Larry Keusch with Raymond James. Your line is open.

Speaker 4

Okay, thanks. Just two more quick ones. Chris, you indicated that you overachieved the cost savings assumptions for fiscal twenty seventeen. Could you walk us through kind of where you came out on that and what's in the assumptions for 2018? And then separately, just an update on where we stand with the TEG trauma indication in The U.

S? Sure.

Speaker 2

Maybe if you're okay with it, Larry, I'll let Bill address your specific question vis a vis productivity 2017 versus 2018 because we took a very specific approach there to get that in and hardwire it as part of our business. My appreciation for Bill's effort and the team's effort there is we've made it part of our operating mindset around setting and delivering on commitments. As it pertains to TEG, what we understand today that candidly I didn't when I joined that the trauma submission followed a path that looked a lot like the cardiology and cardiovascular cardiovascular surgery submission, which was managed jointly but disproportionately by the originator partner. A hard review of that submission and some important questions about the underlying clinical support led us to think that it's actually not going to be as successful as we had originally aspired. So we've spent real time and are spending real time enhancing the quality of the underlying scientific research and clinical support, largely using the existing data set, but just studying it and comparing it in ways that we think will give the regulators a better opportunity to understand the potential value and placement of TEG.

That analysis is actually helpful not only for trauma, but for the subsequent releases that we'll pursue with FDA, which we have elsewhere in the world based on the predicate. It was not the case here in The U. S. So we're working our way through that and we will resubmit as soon as we feel comfortable that we're ready to

Speaker 4

Okay. Perfect.

Speaker 2

And Larry on the productivity comment, based on the prepared comments we had and also in the earnings release, we do have significant spending on the investment side. We've said $0.04 0 to $0.50 So obviously there's inherent productivity in the results we have in order to get our guidance range from $1.55 to 1.65 We do if you could go back the last several quarters, you see we do have one time items related to inventory and product recall costs. So having those not repeat in FY 2017 or FY 2018 helps us get to our $1.55 to $1.65 guidance. But there is productivity in there in the $0.25 to $0.35 range.

Speaker 4

Okay, perfect. Thank you for the clarification.

Speaker 2

Okay.

Speaker 0

Thank you. Our next question comes from Larry Solow with CJS Securities. Your line is open.

Speaker 3

Just a real quick follow-up Just on the departure of Byron Selman, think he was promoted just to Head of Global Markets a couple of years ago. Anything behind that? Or is that just more some managerial changes under your auspices, Chris? Yes.

Speaker 2

It's part of this broader transformation that we're undergoing, right? I have a lot of respect for Byron and his contributions. Byron had over twenty years of experience with Pall Medical, and that filter business had come up through the ranks in R and D and product development and some operational areas. He joined Haemonetics as part of the acquisition, and as you say, was running global markets. The organizing construct and when I talk about customer centric business units, it is just that.

Is a more decentralized structure. It is a flatter and leaner structure. We don't run with a COO and we don't have global markets per se. We have business units and geographic leaders who are joined at the hip and driving our performance accordingly. It is a more traditional structure for a medical device company.

And I think we'll see the benefits, particularly in our hospital business, but across all three businesses, plasma and blood center included from a leaner, flatter, more focused structure with the right talent closest to our customer base.

Speaker 3

Okay, great. Thanks.

Speaker 0

Thank you. I'm showing no further questions at this time. Mr. Simon, do you have any closing remarks?

Speaker 2

Again, thank you for the time today and thank you for the questions.

Speaker 0

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.