Haemonetics Corporation
Q3 2009 Earnings Call Transcript

Published: 2 Feb 2009

[Operator:]

Good morning ladies and gentlemen and welcome to the Haemonetics Third Quarter Fiscal Year 2009 Earnings Review. (Operator Instructions). At this time please let me introduce Alicia Lopez, Vice President of Corporate Affairs for Haemonetics. Please proceed ma’am.

[Alicia Lopez:]

Good morning. Thank you for joining Haemonetics Third Quarter Fiscal ’09 Earnings Webcast. I am joined today by Brad Nutter, Chairman and CEO; Christopher Lindop, CFO and Vice President of Business Development, and Brian Concannon our Chief Operating Officer. Please note that during the course of this call we may make statements that could be characterized as forward-looking. Our actual results may differ materially from the anticipated results. Additional information concerning factors that could cause actual results to differ materially is available in our press release. On today’s call Brad Nutter will review the highlights of the quarter; Chris Lindop will review our operating performance and Brian Concannon will talk about global market trends and key strategies. Now before I turn the call over to Brad, let me remind you that as we shared last quarter, we will be leveraging our website more often as a means of disclosure. Of course we will continue distributing press releases over the wire for significant material information, but in addition our website contains industry news, presentations, and fact sheets which are available only there. You can register on our website to have this information automatically sent to you via email. Okay, let me begin. A few items that affect our comparative financial results

[Brad Nutter:]

Thanks, Alicia and good morning everyone. Once again I am extremely pleased with our quarterly and year-to-date results. In the quarter revenue grew 16% and operating income increased 20%. Gross margin increased 90 basis points to 50.4% and operating margin grew 50 basis points to 16%. Earnings per share are $0.64, up 10% year-over-year. This is the second consecutive quarter of strong double-digit growth and we continue to achieve positive drop through with expanding gross and operating margins. Year-to-date revenue was up 18%, operating income is up 30%, and earnings per share are up 18%. We are very well positioned to achieve the high end of our annual EPS guidance and we are increasing our annual revenue guidance. I am very proud of our consistent strong performance. Now as I met with investors this past quarter, not surprisingly, I was asked about current market forces and their potential impact on our business. These questions were basically focused on three area’s

[Christopher Lindop:]

Thanks Brad. Well le me say at the outset that I am extremely proud of our results. We are well positioned with our year-to-date performance to achieve the high end of our annual guidance, even as we continue to invest in the long-term success of the business. Now let me move to the revenue growth drivers and highlights of the income statement and balance sheet. Our third quarter reported revenue growth of 16% breaks down as follows

[Brian Concannon:]

Thanks Chris and good morning everyone. Chris just mentioned two key points

[Brad Nutter:]

Thanks Brian and let me thank Haemonetics employees for their outstanding efforts for the third quarter. I am very proud to be able to represent this team to you, our shareholders. As you know, this will be my last investor call as CEO as I transition in April to become your Executive Chairman. To our shareholders, let me thank you for the opportunity to lead your company. This has been a very rewarding experience. I am proud of our results over the last six years and strongly believe the company is positioned to make the next six years very strong indeed. I will look forward to focusing my attention on board governance as your chairman and I will continue to work closely with the Haemonetics leadership team on strategy and our blood management solutions vision that Brian and Chris have talked about. Our leadership transition is going very well. We have continuity in our people, our annual operating plan, and our long-term strategic plan. The playbook that has served us so well over the past six years isn’t going to change. In a marketplace of financial turmoil, Haemonetics consistent performance, strong balance sheet, and improving margins, are a result of excellent execution to our strategic plans. We have had six years of excellent performance and we are positioned with a strong, experienced management team to lead us going forward. A strong plan to which we are confident we can execute. And, an economic environment that favors Haemonetics value propositions to our customers. As I have said before, I am proud of our results over the last six years and strongly believe that the company is positioned to make the next six years more productive for you, our shareholders. With that, let me turn the call over to your questions.

[Operator:]

(Operator Instructions) Your first question comes from Lawrence Solow from CJS Securities.

[Lawrence Solow -CJS Securities:]

Congratulations on another good quarter Brad and congratulations to the CEO and I am sure with the management team you have built we expect a seamless transition. I just have a couple of questions. First of all on plasma, could you maybe talk about kind of the revenue outlook? With 12% expected growth in collections would you expect over the next 12 months, even though you have been taking market share, to at least achieve a number kind of in the mid single to the mid double digits? My second question would be what your cost outlook is? With the Pittsburg facility, I think, near completion would you expect some further improvement in plasma margins specifically?

[Brad Nutter:]

As we look out, and as we have talked about in the past, we have some pretty good visibility with our customers as this market is consolidated and our position with four of the five collectors of plasma. We believe that this is a business that will continue to grow in the mid teens, minimally, over the next couple of year. As it relates specifically to the margin we have done a number of things that will improve the profitability of our business. Our new automation is now on line, as we burn that in, in Pittsburg, and we qualify that equipment over the fourth quarter. We expect that to provide us some benefit, as we have talked about before. Our contracts that are driven by CPI and PPI have escalated, so nominal impact there. And, we have launched our express product which we expect to be a benefit for us, particularly as we are more aggressive in the focus of that going into FY10. So, I think those are the factors I would consider.

[Brad Nutter:]

I would also add that, as you know, we got the approval from the board a couple quarters ago to launch a commercial plasma manufacturing facility out west. That will be in Salt Lake City and we are really working hard to get that up and operational. Again, that will be another opportunity to better serve our customers out in that part of the country.

[Operator:]

Your next question comes from David Lewis from Morgan Stanley.

[David Lewis -Morgan Stanley:]

Brad I have a picture of the stock chart over the last five years in front of me, so once again congratulations on creating a dramatic amount of shareholder value, you and the team.

[Brad Nutter:]

The team has done a great job and will continue to do a great job David, thank you.

[David Lewis -Morgan Stanley:]

My first question is following up on the plasma comments. I mean you are basically forecasting to Brian’s comments over the next 12 to 18 months growing 500 or 600 basis points faster than the market. Can you just give us a sense of how you had the visibility on that type of, sort of, out performance? Are we talking about across all of your customers or are we talking about one specific customer that is driving this type of market share gains?

[Brad Nutter:]

It is generally across all customers, David. We have really good visibility with the commercial plasma customers. As we know there are a limited number of customers in this market. We have those contracts where we are the primary provider of devices and disposables, plus our IT program. As we have our integrated IT systems in with a lot of these key customers we get grate visibility from their demand all the way through. So, we are able to build that into our modeling and that is why Brian and Chris are so confident that this will continue to be a double-digit grower going forward.

[David Lewis -Morgan Stanley:]

My other strategic question is not quite a tale of two cities here, but the plasma business is so dramatically strong, but the next strategic vision for the business blood management whether it be TEG or surgicals is sort of a little weaker than expectations and has been for a couple of quarters. Is not the time, given that margins are headed in the right direction, you have a dramatic amount of plasma growth, to dramatically reinvest in blood management to try to get that business in a position next year where it may need to be if plasma is going to decelerate? Have you considered reinvesting more dramatically?

[Brian Concannon:]

The answer to that question is not only are we investing, but we are also providing for a different focus. One of the things we have not had a lot of discussion about is the changes we have made in our patient business to provide a greater focus in the orthopedic area. Today we have 14 dedicated resources specifically on the OrthoPAT to focus on this part of our business. This is the pull side of the business and we believe that we need to be able to drive that business in that sense. As it relates to TEG, TEG is growing well for us. As that continues to grow well for us we believe that will continue to be a growth driver for us as we move forward. The focus will be, if we are disappointed in our growth results in one area, it would be the OrthoPAT, but we continue to remain bullish about what this can represent for us and it’s a key pivot point in the hospitals that will really drive the adoption of our blood management solutions.

[Brad Nutter:]

Brian, I would address one part of David’s question a little bit more in detail and that is, as you know, when Baxter spun out Fenwal they had a long-term contract that they were going to continue to use Fenwal’s equipment over a five year period. Fenwal has been an independent company owned by the Texas Pacific Group and other investors over the last two plus years. Given the fact that Baxter is one large contract that we don’t have we would anticipate looking forward to an opportunity of serving Baxter’s business in the next three years. So, that would be a growth opportunity well past that 24 months that Brian and Chris are talking about and it is a very large contractual opportunity for us.

[Operator:]

Your next question comes from Steven Crowley with Craig with Hallum Capital Group LLC.

[Steven Crowley-Craig-Hallum Capital Group LLC:]

You talked a little bit about your automation efforts in the plasma business. One factor that would appear to be on the horizon of helping you on the cost side, lower input, lower petroleum based raw material prices, and I am wondering to what extent over what time frame they might play into your equation.

[Christopher Lindop:]

We are already beginning to see some of that in our negotiations with our customers. Of course our prices didn’t go up as much as the cost proportionally, with the cost of raw petroleum and they hadn’t come down as much either. But, we are already beginning to get some of those advantages in our cost structure. As Brain said, the equipment is coming on line, down in Pittsburg today and hopefully we will start to see the benefits of that as we trend out through fiscal ’10.

[Brad Nutter:]

I would add that, as you know, this is an area of our business that we don’t talk a ton about, but we have a great focus there and that is the cost of parts of our business from a manufacturing standpoint. We have had great success over the years of taking costs out year-over-year. It is a part of our planning process. It is a part of our planning process that will continue and in fact, we are going to continue to look at ways to focus on procurement specifically and how that might help us going forward.

[Steven Crowley-Craig-Hallum Capital Group LLC:]

Okay and in terms of follow up, a couple of things you have touched on, both express and that upgrade and the adoption of that upgrade. I am wondering where you are at this stage, where you think you could be a year? Then also on OrthoPAT and some of the focus you have put on that product line, when did you put these people and when have you made some of the changes to increase the focus on the product line there?

[Brad Nutter:]

I would share that Express is relatively new. It was launched over the last quarter. As a matter of fact, we are working with Baxter and a few select centers on the Express product line. That is a new opportunity for us. It is not a big piece of business, but it is an opportunity to engage in sharing with them our total capabilities in plasma. I will let Brian comment on the other part of your question.

[Brian Concannon:]

Just to expand on that further Steve, as Brad indicated, this is a very early adoption. We have had some successes. We have put this out in some pilot sites to make sure we understand how the product works. Is it driving the benefit to our customers? Is it getting the results we expected? The bottom line is, is we feel good about that. We will grow this further as we go forward in a broader launch in the first quarter of fiscal ’10.

[Operator:]

Your next question comes from Joshua Zable from Natexis Bleichroeder Inc.

[Joshua Zable:]

Brad congratulations and thanks for everything. I know a bunch of people have said it before us, but congratulations for all your hard work and kudos for building up a team that, I think, all of us have a ton of confidence in. To get to my questions here, can you clarify the comment you just made about a new commercial plasma center in Salt Lake City. Can you just give us a little bit more details when that is going to be up and running? If you just started it, what you think that will do for you guys other than obviously better service, maybe on the manufacturing side or cost side etc…?

[Brad Nutter:]

We anticipated about 90 to 180 days ago the need to get into expanding our commercial plasma manufacturing capacity. As you know, we have one plant in the United States and so as part of making sure that we can go to our plasma customers and have the continuity of supply we really felt that we needed to build out a separate operating platform, if you will, or manufacturing plant servicing west of the Mississippi river. We looked at a number of locations and selected Salt Lake as a great geography for us to have a new plant up an operating and the time frame is about 18 months.

[Joshua Zable:]

Have you guys started building it already?

[Brad Nutter:]

We are just in the process of looking for leased space versus building out a building, number one, so it will be a leased, low cost kind of model which is very similar to the model we have in Pittsburg. We will be taking an automation line that we are just getting up and operating in Pittsburg. We are validating that now. We have done a number of runs on that automation line. We will be building that out in Salt Lake as an automated facility as well. So we will improve our manufacturing capacity substantially and with that, because there will be automated lines, we see margin improvement in both the Pittsburg plant and the Salt Lake plant.

[Christopher Lindop:]

And Joshua, just to follow up on that with a bit more granularity, once we get into the site we will use it as a western distribution center which has logistics efficiencies as far as that we will get a benefit from in fiscal ’10 and then the manufacturing will come on line after that. We will be really a duplicate of the manufacturing automation that we’re building in and bringing in, in Pittsburg today.

[Brad Nutter:]

Josh, Chris brings up a great point. That distribution site will not only be just for commercial plasma, but it will be distribution for other products as well. We think there will be a distribution cost savings with that plant, plus you will have distribution capacity; so it is on cross multiple product lines.

[Joshua Zable:]

Great, and then I have a couple of questions on the P&L here. Chris I know you mentioned there might still be somewhat of a miner tailwind on currency. I know you mentioned sort of on the other expense line it was higher due to volatility. If you could clarify that, such as should we see higher other expenses going forward offsetting or does it depend on the volatility? Then on the SG&A side, on a percentage of sales it keeps improving on an absolute basis going up still with your sales growth, which is fine. I am just trying to gauge how we should really think about it. If we should sort of see that 32%, I know you talked about 60% in total so that seems to make sense, but even going forward it is sort of at that level where it sort of should stay.

[Christopher Lindop:]

That is a complicated question. Okay so, yes we have a little bit of currency tailwinds on the top line in Q3 and we see a modest currency tail wind in Q4, like about 1%, maybe less. In terms of the volatility affect, really you have got to go to the month of October and look at the relative interest rate environment between US, Japan and Europe and see those sort of spread contracting radically. So, what ended up happening for us was the revaluation of the points in our forward contract gave us a big negative hit in other income. We don’t necessarily expect that to impact us again going forward, it is just one of those very unusual effects of the volatility that we saw. In terms of going forward, we are going to maintain that discipline of the 60%, 65% of gross profit dollar growth being invested and therefore the balance being dropped through the bottom month.

[Operator:]

Your next question comes from James Sidoti with Sidoti & Company.

[James Sidoti-Sidoti & Company:]

Brad, can you make some comments on the Fenwal settlement that came across Friday?

[Brad Nutter:]

I will ask Alicia, who coordinated our efforts on that, to make a few comments Jim.

[Alicia Lopez:]

Jim, I want to be clear that this is not a settlement. I am, frankly, delighted to report that on Friday a jury in our Boston Federal District Court here returned a verdict in our favor that the double red cell collection of our only competitor infringes a Haemonetics patent. The jury awarded damages in that case of about $15.7 million. Now to be clear, the verdict is subject to appeal and there is no immediate impact on our financial statements, so will just have to see how the process plays out.

[James Sidoti-Sidoti & Company:]

Based on this verdict though, will you go the next step and try and get Fenwal out of this market completely?

[Alicia Lopez:]

I don’t want to comment on that, because it is part of an ongoing legal process.

[James Sidoti-Sidoti & Company:]

All right, but that is an option it sound like?

[Alicia Lopez:]

That is an option.

[Operator:]

Your next question comes from Anthony Petrone with Maxim Group.

[Anthony Petrone:]

In terms of the body languages given the economic backdrop into plasma, collectors here are expanding collection capacity. Is there any language that they may slow that process down given the backdrop? Secondly, are there any outcomes regarding CLS Talecris, what would be the implications either way for the company?

[Brad Nutter:]

First, in terms of strength of the market I think you are exactly right, that this market is going to continue to be strong. Frankly, when we look at the beginning of the year, our original guidance was 15% to 20% growth and we felt very comfortable about that. As we have seen the strengthening of the market, we have performed significantly better than that. So our ability to work with the plasma fractionators and have them predict their business, they are just seeing, and you can see it with Baxter and CLB, Octapharma and other organizations, they are doing a tremendous job in this marketplace. They are really playing catch up as are we and we are seeing strong growth, so we anticipate that going forward. I don’t want, nor would Brian or Chris, want to get ahead of ourselves and suggest that for the next year we are going to continue to grow at 25%or 30%, but I think that this will be a strong growth market. Baxter is in Phase II clinicals on IVIG with an application for an Alzheimer’s, Octapharma is doing some work on that as well. Ultimately we see this as a strong growth market going forward. It is our largest business and I think what you will see in the future is commercial plasma. We’ll focus on gross margin in the next couple of years. Not only are we going to see good sales growth, but we are doing a number of things, as these guys have talked about, to really improve the margins of our biggest business as well.

[Christopher Lindop:]

Absolutely we are and that includes the manufacturing expenses that we have talked about and distribution efficiency.

[Brad Nutter:]

As well as Express and the price increases on the contracts and those contracts are going well. The last part of your question was the CLB and of course Talecris. Those are two existing customers of ours. We have been pleased to serve them as their primary vendor. They are coming together. We expect that that is going to be sometime in the next five or six months that that would go through all the regulatory process and we don’t have anymore clarity than that as to when that would all come together, but ultimately, since we serve both customers that will be good for us.

[Operator:]

Your next question comes from Daniel Owczarski with Avondale Partners.

[Daniel Owczarski:]

Can you talk a little bit more about Japan? I mean was that a higher growth rate than what you were expecting and what seemed to go right there?

[Christopher Lindop:]

Sure, I mean Japan there are a lot of good things going on there. We had a big equipment quarter which bodes well for future utilization of disposables. It is always a market share balancing in terms of the equipment fleet that the GRC has. We had a good performance in plasma. There are very, very good, strong market conditions for plasma over there and currency helps us, so all of those things went with us in the Japan business.

[Brad Nutter:]

I would also mention Dan, that we have seen great balanced growth in all geographies. North America is up 21%, Asia is up 21%, Europe is up 17%, Japan 11%, although we, as Chris indicated, some of that currency. The fact is, this is the first time in a long time that we have seen all of our geographies all growing double digits, so that is a tremendously strong aspect of our business when you consider that more than 50% of our sales are outside of the United States. We like that balanced growth. North America has done that for four years in a row, but it is nice to see both Asia and Europe do it two years in a row.

[Daniel Owczarski:]

Okay and then as far as red cells you had talked about that may be still a little bit below what your targeted growth rate of what double digits, 10% or so. What can you do specifically there to kind of bump up that growth rate in red cells?

[Brian Concannon:]

We continue to remain confident in our ability to get to a 10% growth rate in this business. What we have seen is, as we have put this Symbol out there, we have seen with the hot plasma market that the Symbol adoption has not been what we had hoped it would be because of not having a plasma protocol on that device. But, we have seen increased strength in our MCS product which does have a plasma protocol, so that bodes well for us as we go forward. We believe that this is a market that can be grown 10%. Our focus is there to drive that at 10% and we believe that as we continue to emphasize our blood management solution, connecting hospitals and our blood banks together, we can have an impact as we go forward there as well.

[Brad Nutter:]

I would make one additional comment. Brian has talked about the MCS that platform that really drives a lot of red cell growth as well as Symbol, but when Alicia was talking about the patent infringement, that product line, Alex, is a product that has had displacements over the last 12 months in the marketplace of 55 Alex and we have placed 143 placements of our technology. So, whether it is Symbol or MCS the important part is that we have two product platforms that will allow us to grow in a marketplace with two different kinds of platforms to meet the needs of our customers. That uniquely positions Haemonetics to serve their needs.

[Operator:]

Your next question is a follow up question from Steven Crowley with Craig-Hallum Capital Group LLC.

[Steven Crowley:]

I just wanted to come back around and ask you again; on the OrthoPAT you had mentioned that you had placed some more focus and some people specifically on the OrthoPAT. I am wondering when you did that, and what kind of fuse you think there is to some benefits? Then I have a question about M&A opportunity set. What are you seeing in these roiling seas in terms of opportunity for you to add to the business?

[Brian Concannon:]

I will take the OrthoPAT question and I will turn that over to Chris for the M&A. With respect to the OrthoPAT, we did this over the last quarter, so those announcements have now gone out, and our selling organization is focused. I think that they will settle into that in the fourth quarter and I expect that to really benefit us as we go into fiscal year ’10. We are pleased that year-to-date we have added 154 OrthoPAT devices out there and in total we have got over 2,900 devices being use by our customers today. Again, this is a business that we feel does have the ability for further penetration, further growth and we feel good in its ability to grow in the 10% t0 15% range as we look to the future.

[Christopher Lindop:]

On M&A, no real change there. Just to recap, we are modeling M&A at sort of a 1% to 2% contributor to our growth rates over a 5-year strategic planning period. That means we are not looking at real big companies, we are looking at companies that are tuck ins. We have a very sort of strong strategic discipline, a map if you will, of what we are interested in and where we are going to go to get it and so we are not opportunistic. So, when you see roiling markets, you may see opportunistic acquisition activity. You wouldn’t see that from us. You will see us sticking to our game plan. Being very disciplined and hopefully bringing forward a list of acquisitions that when we tell you we have done them you will go ah ha, that makes sense!

[Steven Crowley:]

Does the environment we are dealing with make it easier to execute the strategy or does it add to the degree of difficulty?

[Christopher Lindop:]

I think it probably makes it a little easier, although I don’t want to say that in front of Brad and Brian or it will affect my bonus, so…Obviously it makes it a little easier. People view the benefit of being associated with a large mother ship that is kind of has the same strategic focus and say yes, maybe now is a good time to do it. Hopefully that will continue and we will be able to build a great company focused on blood management solutions.

[Operator:]

As there is no time for further questions, I would now like to turn the call over to Mr. Nutter for closing remarks.

[Brad Nutter:]

Thank you very much, operator. These are very, very difficult capital markets, all of you are aware of that. Yet, Haemonetics consistent performance, strong balance sheet, and improving margins are a result of excellent execution to our strategic plans. I firmly believe that we are positioned with a strong, experienced management team to lead us going forward, a strategic plan to which we are totally confident that we can execute upon, and an economic environment that favors, most importantly, our value proposition to our customer. As I go into my new role with the company as your executive chairman, I will look forward to seeing you on May 14 at our annual investor conference here in Braintree. Thank you very much.

[Operator:]

Thank you for your participation in today’s conference. This concludes the presentation.