Haemonetics Corporation
Q4 2021 Earnings Call Transcript

Published: 13 May 2021

[Operator:]

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2021 Haemonetics Corporation Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Olga Guyette, Investor Relations. Thank you. Please go ahead.

[Olga Guyette:]

Thank you. Good morning, everyone. Thank you for joining us for Haemonetics fourth quarter fiscal 2021 conference call and webcast. I'm joined today by Chris Simon, our CEO; and Bill Burke, our CFO.

[Chris Simon:]

Good morning, everyone, and thank you for joining today. Before I get into our results, I want to review the news we announced a few weeks ago. In April, CSL Plasma notified us that they do not intend to renew their US supply agreement for the use of our PCS2 plasma collection system equipment and the purchase of plasma disposables that expires in June of 2022. We were informed that CSL's decision was not based on the level of service or quality of our products, but rather reflects a change in internal strategy that was made some time ago, presumably before they had experience with NexSys and Persona. We are disappointed by CSL's decision, but it does not change our commitment to the plasma market and our technology to improve collections. The NexSys and Persona value propositions are strong, supported by real-world data and real-time customer feedback, and we are excited about what this platform means for our customers.

[Bill Burke:]

Thank you, Chris and good morning everyone. I will begin by discussing our fiscal 2021 actual results followed by our fiscal '22 guidance. Chris has already discussed revenue, so I will start with adjusted gross margin, which was 50% in the fourth quarter, a decline of 30 basis points compared with the fourth quarter of the prior year.

[Operator:]

Thank you. Our first question comes from Anthony Petrone with Jefferies. Your line is open.

[Anthony Petrone:]

Thank you. And couple of questions to start on guidance and then I'll shift to plasma. Maybe starting with earnings guidance out of the gate, maybe just a recap of what is baked in for the Cardiva dilution to the earnings line in fiscal 2022? That would be the first question. And then offsetting that how much gain, are you getting from the restructuring? And then perhaps maybe to round out the earnings question, you referenced price several times. So how much price erosion is baked into the earnings line? And then I have a couple more on plasma.

[Bill Burke:]

Hi, Anthony, it's Bill. I can take your first one there. So on the guidance, your first question was on Cardiva. We have $65 million to $75 million of Cardiva revenue in the guidance. It's in line with what we had in the deal model. It is -- there is dilution included in the EPS numbers. It's -- we haven't disclosed exactly what that's going to be and we're going to stay away from the exact dilution that's in there. But it is slightly dilutive both on the operating income level and in EPS. Your second part of the question, I think it was related to the…

[Anthony Petrone:]

Yeah, the earnings, yeah, how much is baked in for restructuring gains and then offsetting that to what extent is price impacting earnings?

[Bill Burke:]

Yeah. So our -- let me just give you an overview of our Operational Excellence Program. So through the end of fiscal 2021, we recognized $34 million of gross savings with about half of that dropping through to adjusted operating income. In FY 2022, we're anticipating an additional $22 million of gross savings. And we stated that about less than half of that can drop through to adjusted operating income because there's inflationary pressures and some investments in manufacturing that we've netted into the -- or against the gross savings. But in total, the $56 million of gross savings will be 60% to 70% of the overall program savings through the end of FY 2022.

[Anthony Petrone:]

Okay. And then just pivoting to plasma, maybe a little bit on the 15% to 25% organic guide. Just to splice that what's in there for COVID headwind? It sounds like that's still lingering certainly through the first half. But you also referenced last quarter contract wins as well as in today's prepared remarks. So how much headwind is baked in there from a basis point standpoint offset by contract gains? And I'll just go to the last one in for Chris. Just maybe high level on the strategic comments today we have a new competitor coming in Terumo. I'm just wondering if you could provide a little bit more detail on the strategic thoughts that are going on internally and some potential countermeasures at least as you look at how the landscape is shifting here early on? Thanks.

[Chris Simon:]

Yes. Anthony why don't I -- do you want to start first?

[Bill Burke:]

Yeah. I'll take the plasma guidance question. So the range that we provided was 15% to 25%. And what's included in the range there and is most impactful in the guidance is the pace of the recovery related to the pandemic. And coming out of Q4 we still have seen some weakness. Chris mentioned it in his remarks that we haven't seen really a recovery coming out of the fourth quarter. So through this -- throughout Q1 and FY 2022 so far, the volumes have still been down versus the prior year. So that's reflected in our guidance. And at the low and high end of the guidance there are just slightly different assumptions on the recovery. So at the low end of the guidance, we have recovery not beginning until late in the second quarter and then accelerating throughout the back half of the year. In the high end of the guidance, we're a bit more optimistic and we are assuming that we see volumes recover earlier in the second quarter. In both cases though, we do expect that coming out of FY 2022 on a run rate basis that we would be at/or above the volumes that we were experiencing back in fiscal 2020. And then one other thing that is affecting the guidance range early in the year in FY 2021, we referred to a stocking order of about $6 million. And that stocking order has about a 3% or 4% impact, a downward impact on the guidance range this year.

[Anthony Petrone:]

Okay.

[Bill Burke:]

Okay?

[Anthony Petrone:]

Yes. Thank you.

[Chris Simon:]

Yes. So Anthony on your questions regarding a longer-term perspective, we remain very bullish on 8% to 10% growth in collection volumes to meet the demand for IG worldwide. Clearly, the pandemic has depleted inventories, so we fully expect that they are -- our collection customers to drive higher volumes of collections as they did in prior years pre-COVID to make up for that gap. So we don't see any structural change. We're excited about this. The actual recovery in the third quarter of last year is a good reference point in that regard. When we look at that recovery clearly stimulus is the single largest factor, and as Bill just articulated, it's just difficult to know exactly when the influence of stimulus is going to wane. So what we're forecasting is that mid to latter part of our second quarter with robust recovery into the latter part of the year probably offsetting seasonality, or any other changes you would otherwise expect. So we fully anticipate, but we think it's going to be delayed. We overlay on top of that what we're doing with our portfolio, which we remain very confident in the value proposition of that portfolio. The NexLynk DMS conversions continue full stride. We expect to have that completed by year-end. As I mentioned in the prepared remarks that is for most of our customers a precursor to NexSys. All of those customers are -- have agreed to adopt NexSys either US or globally with the exception of CSL. So those conversions are underway. They begin increasing in earnest on the other side of NexLynk. And we expect to have our existing base converted to NexSys by midyear 2023, right? So, we're enthusiastic about that and we are overlaying Persona with its 9% to 12% yield on top of that, which again we described previously is a game-changer in terms of excitement within the industry. So from our vantage point, we double down on technology and innovation and drive that adoption through the market paced by our customers whose first second and third priority understandably is recovery from the pandemic.

[Anthony Petrone:]

I’ll get back. Thank you. Thanks.

[Operator:]

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

[Larry Keusch:]

Great. Thanks. Good morning everyone. I guess, I have two questions here. First for Chris. Look, Chris, I think part of what's reflected in the stock price is concerns from investors that you sort of got blindsided by what CSL wound up doing with its contract and the potential for other customers to move in that direction. So I'm just curious as to your thoughts as to again how you fit into the equation here. And what can you tell us, I guess, specifically about the contracts and perhaps some longevity that could give people some comfort that this can't necessarily change three months from now?

[Chris Simon:]

Yes, Larry. So we're in constant dialogue with our customers conducting business reviews planning for recovery. All of those customers, as we've said, with the exception of CSL, though CSL has agreed to adopt in Europe and that's underway, all of those customers have agreed to adopt NexSys, right, in the US or globally. And the conversations we're having with them is about how to make that roll out as minimally disruptive as possible for their ongoing business given the heightened urgency around recovery. So we're under contract, we feel great about what the competitive position of the product and what it means for them. They're excited about the adoption and that's what our conversations are focused on.

[Larry Keusch:]

And Chris just a quick follow-up on that. When you talk about deployment of NexSys into your customers, can you help us understand sort of how broad that is within those customers in terms of the agreements and the deployment there? And can you even provide any sort of -- even at a high level some thoughts on the longevity of your contracts to help give investors some comfort that there's some runway here? And then I have a…

[Chris Simon:]

Larry, I want to stay away from specific conversations around customer contracts. It's confidential and proprietary. And candidly in a tightly contested market like this it's just not helpful, right? So as a general course, we don't talk about individual customers. We're not going to talk about the details of those contracts. What I can tell you is that the change out of a network is no small feat for us for our customers. So the agreements we have in place cover all of the existing PCS2 devices and the associated disposables in the US or globally as mentioned. I don't think we or our customers take those change-outs lightly. It's predicated upon a belief on the value proposition of the product first and foremost, and how it will enhance their collection capabilities, the yield, the cycle time, the connectivity and the donor satisfaction. And then, I think increasingly, it's predicated upon our commitment to innovation and technology. We're not in any way shape or form resting on our laurels. Through the pandemic, we introduced not only Persona, but the Donor360 app, that's having meaningful benefit for all of our customers, when we rolled it out industry-wide. We're not backing off of our technology. We'll double-down and we have through the pandemic and beyond.

[Larry Keusch:]

Okay. That's really helpful. And then I guess for Bill, just trying to again wrap my arms around the guidance for fiscal 2022. I'm wondering, Bill if you can, just sort of help bridge the operating margin assumption that you've got in the guide that 19% to 20% versus the 2020 operating margin which was closer to 22%? Just trying to understand the downward pressures there from what you achieved in 2020 to the guide for 2022.

[Bill Burke:]

Yeah. Thanks, Larry. The largest contributors of the difference between FY 2020 and our guidance for this year would be first and foremost is the plasma volume, right? We all know that plasma volume is highly leveraged at the operating margin level. So when plasma is off, we're not -- we said we would be at the end of FY 2022 run-rates equal to FY 2020, but we'd still for the year be down. And that's putting pressure on the operating margins. The second piece is the Cardiva dilution. And then, our operating expenses are I would call it neutral. And I want to say that, because we are in the process of getting back our operating expenses to levels where they were in FY 2020, after being significantly down in FY 2021 because of our cost-containment efforts.

[Larry Keusch:]

Okay. And just as we try to dial in the right operating expenses here can you help us think a little bit about Bill, -- again, I know you said that Cardiva would be dilutive but can you help us think a little bit about the incremental OpEx, that's coming through on that acquisition? Thanks.

[Bill Burke:]

Yeah. So I would -- when you look at our Q4, in FY 2021 that could essentially be your starting point for expenses, give or take. And then, when you look at Cardiva right, we know -- we said $65 million to $75 million of revenue. So use a mid-point apply somewhere in the 75% margin range. And if we're negative on the operating income line you can back into an expense amount that gives you an idea of where you should be.

[Larry Keusch:]

Great. Thanks very much. Appreciate it.

[Bill Burke:]

Yeah. You got it.

[Operator:]

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

[Larry Solow:]

Great. Good morning. Thanks for taking my questions. Just a couple of follow-ups on the Cardiva piece, first, I thought when you guys made that acquisition it was going to be sort of I think $0.10 to $0.20 dilutive in the year. Is that in the first year? And most of that, I anticipated at the time was going to be interest expense which was before you did the convert so can you help me just bridge that? Has that changed at all? I guess you're not -- I gather you're no longer giving that guidance. You're not giving specific guidance on Cardiva. So it seems like the operating expenses are higher than initially thought, or could you just give a little more color on that?

[Bill Burke:]

So Larry, the revenue range is similar to what we provided. And you're correct …

[Larry Solow:]

Right.

[Bill Burke:]

…on the EPS range what we gave initially. We subsequently have done the convertible debt offering which did remove some of the interest expense related to that.

[Larry Solow:]

Right, right.

[Bill Burke:]

…But still on the operating income line, we are negative. We're anticipating the amount on operating income to be negative. But we'd probably be at the -- on an EPS basis we'd be at the lower end of the range that we had provided before on the EPS line.

[Larry Solow:]

Okay. And then, just to clarify on Plasma. So Chris, it sounds like you're pretty confident that, by the end of fiscal 2023 the majority if not all of your customers will have converted to NexSys with the exception of CSL, who in theory wouldn't be a customer then anyhow, in the U.S. at least, I should say. Is that correct?

[Chris Simon:]

Yeah. With your clarification that, we are under contract with CSL for Europe, and that conversion has already begun and we intend -- both, parties have communicated their intent to honor the contract which is a long-term agreement.

[Larry Solow:]

And the number this year it sounds like you probably -- timing-wise maybe you get some conversions at year-end. But I guess and you mentioned in the guidance, maybe at the high end of that plasma range you're putting in a little bit of conversion there. Is that sort of...

[Chris Simon:]

Yeah, that's exactly right, Larry. We've got to continue to power through which is …

[Larry Solow:]

Right.

[Chris Simon:]

… challenging in a pandemic environment. The NexSys -- NexLynk, DMS software upgrades we've done well with that. We continue to do well with that. We anticipate completion as scheduled by the end of this year. For anybody who's converted we are actively moving on the NexSys PCS. And the pace of that conversion is really as it has been from the outset dictated by our customers. We stand ready to go and they need the plasma. So anything we can do to pull that forward, we'll take advantage of. But our guidance reflects the likelihood that both, the recovery itself and the conversions are a second half event and into 2023.

[Larry Solow:]

Right. Okay. And then just shifting gears lastly, just on the cost structure. I know you're not ready to sort of give your outlook for fiscal 2023. But, Chris, obviously, you've done a great job in rightsizing the company since you came five or six years ago. Just from a high level, I guess, it's a two-part question. On the Operational Excellence Program, getting that remaining $25 million to $35 million targeted savings, which maybe is a little bit lower now, because of inflation, is that going to be an achievable number still? Because I know part of that, sort of, $80 million to $90 million was predicated on volume gains in plasma. So, clearly, you're not going to get -- yes, go ahead. Thanks.

[Chris Simon:]

What I would say about the program, Larry, is we're really proud of what that team has done. It's not just global manufacturing and supply, its R&D, its quality assurance, it's our business services. Collectively, they've made tremendous strides, despite whatever the world has thrown at them.

[Larry Solow:]

Sure.

[Chris Simon:]

We did take a view at that, which said, we're going to capitalize on high volume and throughput businesses. That's changed somewhat, as a result of CSL's decision. So that team is in the process of reexamining what are the levers that we can pull intelligently. The first priority of that initiative is to ensure continued world-class product quality. And we're not going to compromise that. The second priority is world-class customer service. We're not going to compromise that. We then look at the savings, what we've signed up for to date and the pass-throughs, et cetera. That's hard wired. What we intend to do and what Bill explained, I think, in his prepared remarks is, we will now step back with the adjusted volume that will begin in our FY 2023, with the loss of CSL's US PCS2 supply agreement. When we look at that, we'll figure out what OEP needs to become as a result of it. And as you said, I think, this is a team through complexity reduction, through OEP, through the cost management during the pandemic, that's demonstrated their commitment to being good stewards financially. And we're going to continue to do so here, but we're not going to do it in a way that's going to compromise our leadership position in the markets where we compete.

[Larry Solow:]

Absolutely. Okay, great. Got it. I appreciate the color. Thanks so much.

[Chris Simon:]

Thanks.

[Operator:]

Thank you. Our next question comes from Mike Matson with Needham & Company. Your line is open.

[Mike Matson:]

Yes. Thanks. So with regard to the NexSys upgrades, you're saying you expect those to be completed by mid, I think, fiscal 2023? And so is that right? And then, what is your expectation around Persona? Is that going to be kind of beyond that? Is that like another upgrade on top of NexSys, I assume?

[Chris Simon:]

Yes, Mike, you have it exactly right. It's mid-2023, the fiscal 2023. And the Persona discussions are going great. We're having those in parallel. I think different customers will view the upgrade to Persona differently. There's a series of clarifications, tests, et cetera, given the magnitude of the change for them. So we're working our way through that. What's reflected in our guidance is the contracts we've already reached. And as we get closure and pull some of the additional opportunity in, we'll communicate through our guidance accordingly.

[Mike Matson:]

Okay. Thanks. And then, I don't know if you need to answer this, but just with regard to the stimulus program, I mean, there's the cash payments, but there's also the extended unemployment that I think goes through September. So do you have a feel for whether it's the just the cash, one-time stimulus payments versus the added unemployment payments that have caused the pressure on the collection volumes? And because it is unemployment, I mean, we're looking at, like, September time frame, but if it was the stimulus then could occur earlier or maybe that's why your guidance is so wide and you're uncertain about the timing.

[Chris Simon:]

Yes, Mike. That is a driver of the 15% to 25% range on our guidance for growth in revenue on plasma and it's really a function of when does that kick in? And you are right, there are multiple components of this, whether we're looking at the federal dollars or the state dollars, whether we're talking about one-time payments, whether we're talking about the weekly unemployment additional subsidies. There's even provisions for tax credits that get factored in, beginning mid-year in our calendar year. So it's a complicated confluence of different factors. We've worked hard to model that. We're having conversations, obviously, with our customers about that to understand their perspective and how much of that's reflected in the forecast they submit to us. At the end of the day, what we're trying to get to is, what is disposable income, what is household savings rates net of all this. And I think we had some good learnings from the past year. And while, I think, we struggle to be precise in the forecasting of it, in both directions, candidly, I think, we've learned a bunch. And that's reflected in the range that we've put forth.

[Mike Matson:]

Okay. Thanks. And then, I just had one clarification question on the -- this PCS2 tech enhancement pricing issue. Can you maybe elaborate on that a little? I didn't understand what that was. It sounds like it's some sort of headwind on pricing on the legacy PCS2 units or something.

[Chris Simon:]

Yes. There is -- it's a legacy agreement, long-dated agreement that was sunset here just recently and it's just a change to -- there's an enhancement we made. We got priced for it at the time years ago. It was a time-bound agreement and the agreement has expired.

[Mike Matson:]

Okay. And is that all the customers or just one customer?

[Chris Simon:]

It was with one customer.

[Mike Matson:]

Okay, got it. Thanks.

[Operator:]

Thank you. Our next question comes from Drew Ranieri with Morgan Stanley. Your line is open.

[Drew Ranieri:]

Hi Chris. So, you talked before about your focus on M&A to really diversify the portfolio. You've also completed several divestitures strategic exits just get out of lower-growth lower-margin businesses. So, as you kind of look ahead and I know there's still a lot of unknowns here, but do you feel more compelled to prune the portfolio in greater magnitude just give yourself maybe more flexibility or to drive further growth and profitability enhancements?

[Chris Simon:]

Yes. Drew I appreciate the question. I think from our vantage point at one level, this doesn't change anything, right? We are focused on growth organic, inorganic, shareholder value creation long-term. We still have aspects of this portfolio that are probably not part of the future of this company. And intelligently and thoughtfully when we can do so in transactions that are value-creating we'll address that, right? In the interim, we are highly focused on delivering full value for our customers across all of our customer base. So, I'm impressed and pleased by what the team was able to get done this year the divestitures that we called out in terms of very antiquated software in our US Blood Center donor market and some stuff that was very isolated for Europe. Just -- we are highly committed to software as a growth lever for the company as our customers demand it. But those programs were just not bad, right? They're very antiquated. I think similarly the divestiture of the Fajardo manufacturing facility for whole blood filters we were able to transition that to a world-class supplier who will do great things with this and we got back operating agility in our manufacturing network. We'll continue to look for those type of opportunities for sure. In terms of the acquisitions, we've been busy, right? And we've done a bunch of things culminating in Cardiva. There was a discussion earlier about Cardiva and I think could potentially get lost in all of this because of our reporting. We are very pleased with the work so far to integrate and assimilate, right? We closed the transaction in March and we have been full steam ahead. We've gone out of our way to avoid any disruption to that business. And the results that we have seen through the first three months of the year clearly are evidence of that. This is an exciting opportunity. It's a jolt of energy not only to the Cardiva team, but also to our own hospital business unit. And I think you're seeing that in our results in terms of the pace of recovery and the growth therein. So, electrophysiology, interventional cardiology, exciting growth segment for us and we really like our chances of what's happening with the VASCADE portfolio.

[Drew Ranieri:]

Got it. Thank you. And actually on that topic just touching on your outlook for Cardiva for fiscal 2022 I see your guidance is $65 million to $75 million. I know you mentioned that they did about $8 million in March given your financials. But I just kind of want to better understand kind of the run rate there. I mean it sounds like it's over a $20 million quarterly run rate. So, can you just help us better understand in the context of your $65 million to $75 million guidance? And then fiscal 2022 is it more focused on kind of going deeper in existing accounts with Cardiva or are you thinking more of commercialization across a broader account base? Just getting -- trying to get a better sense of the commercial investments in the year. thank you.

[Chris Simon:]

Sure. I understand the question. The -- from our vantage point, right, we've spent a lot of time in diligence. We put together what we think is a very robust deal model the $65 million to $75 million is a direct take from that. And it's early days. We're excited by what we see. We understand if you annualize that March number you get to a different place. We're not ready to do that yet, right? This is a rapidly growing product. It grew 50% year-over-year last year under Cardiva's leadership. And we need to spend a little bit more time with it to truly understand the forecast and the growth potential. As we learn more we'll share more and if need be adjust accordingly. From what we're seeing, the primary benefit is twofold. We are -- that team is hyperfocused on driving penetration in the top 600 US based interventional cardiology and electrophysiology hospitals, right? And there's some back and forth around this and geographic expansion. But the bottom line is that team is executing in a very powerful way against the opportunity that's right in front of it. And we see a lot of excitement there. In parallel, we are looking for opportunities to augment that and pull aspects of the plan forward where that presents itself. That's something we're going to be talking about more in the coming months across our entire portfolio in part with response to changes in the plasma landscape. So we will seek out opportunities to do more and to do it sooner. And Cardiva will be a place that we look for that type of opportunity. But what we're excited about is what they're doing with the resources they have. We think we can do more with additional resources. What you don't see in the results, but is equally important is the investments that our combined teams are making clinically and more broadly to build out our footprint and our potential outside the US. So I think that will come to fruition. When we have a chance to sit down and talk more broadly about the portfolio we'll provide additional clarity. That's a result of the diligence and the early work together with the Cardiva team. But it's exciting. We're delighted to have them on board and they're delivering accordingly.

[Drew Ranieri:]

Thanks for taking the questions.

[Operator:]

Thank you. Our next question is a follow-up from Anthony Petrone with Jefferies. Your line is open.

[Anthony Petrone:]

Thanks. Just a couple of quick follow-ups on cadence in Plasma. First would be just on CSL. They have the one year option extension to June 2023. I'm just trying to kind of run through that scenario. When would they have to sort of indicate to the company that they would have to sign on for that? And maybe what are your thoughts on the probability that they resign for 2023? And then the last one on Persona. It sounds like discussions are ongoing. I mean when we think about upgrades to Persona and timing, is there a potential for any in fiscal 2022 or do you think that's a beyond fiscal 2023 event? Thanks again.

[Chris Simon:]

Yeah. Thanks, Anthony. In terms of the agreement with CSL, we communicated a lot about that, so I'll stay on that because we have spoken about it. The agreement has one additional extension that is at CSL's discretion. They would need to notify us in writing by the 31st of December of this year, if they intend to go beyond June of next year. And they have one more of those extension periods available. In terms of likelihood of that, it's a question best directed at CSL. In terms of persona, we have included a handful of signed agreements and planned rollouts some of which have already happened, some of which will happen over the course of the year. We are obviously in discussion with -- we are in discussions with others and we would be -- obviously we'd be excited to pull those forward. In some cases, it's very straightforward; in other cases, there's important underlying science in terms of handling a bottle. That is a third larger understanding the implications for fractionation given the higher yields and testing which we've done what the customers need to do because there are fractionation formulas with regards to the higher -- what is the protein concentration. We are working collaboratively with our customers through all that. The pace of it makes it a little difficult to predict. But as we reach closure on those and pull them in some of which we would hope will happen in FY 2022. That's what pushes us towards the upside of our guidance. And if it goes beyond that we'll talk about that then.

[Anthony Petrone:]

Thank you.

[Operator:]

Thank you. And I'm currently showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.