HAE - NYSE

Good day, and welcome to Haemonetics Corporation's First Quarter Fiscal 2023 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded. I would like to turn the call over to Olga Guyette, Senior Director of Investor Relations and Treasury. You may begin.

Good morning, everyone. Thank you for joining us for Haemonetics' first quarter fiscal '23 conference call and webcast. I'm joined today by Chris Simon, our CEO; and James D’Arecca, our CFO. This morning, we posted our first quarter fiscal '23 results to our Investor Relations website, along with updates for fiscal '23 guidance in analytical tables with information that we'll refer to on this call. Additionally, we provided a complete P&L, balance sheet, summary statement of cash flows as well as reconciliations of our GAAP to non-GAAP financial results and guidance. Before we get started, unless otherwise noted, all revenue growth rates discussed today are on an organic basis and exclude the impact of currency fluctuation and strategic exits of product lines. As in the past, we will refer to non-GAAP financial measures to help investors understand Haemonetics' ongoing business performance. Please note that these measures exclude certain charges and income items. Please refer to this morning's earnings release for details on excluded items, including comparisons with the same periods of fiscal '22 and a reconciliation to our GAAP results. Our remarks today include forward-looking statements, and our actual results may differ materially from the anticipated results. Haemonetics cautions that these forward-looking statements are subject to risks and uncertainties, including the potential impacts from the pandemic on our results and other factors referenced in the Safe Harbor statement in our earnings release and our filings with the SEC. We do not undertake any obligation to update these forward-looking statements. Additionally, in order to protect customer confidentiality, we will not be able to discuss any customer specific details except as disclosed previously. And now I'd like to turn it over to Chris.

[Operator Instructions] Our first question comes from Larry Solow with CJS Securities. Your line is open.

Great. Good morning. Thanks for taking the questions. Chris, maybe you could just give us a little more color on the -- obviously the Plasma growth was the highlight of the quarter. And I think key thing you mentioned about some of the mature centers that have been laggards starting to improve. Is that you know, can you just give us any more, little more flavor on that. And hopefully, that's a sign that, on the economy obviously not been great, but a lot of those signs, the economy and other things should start favoring you guys, and that sense of collection, so maybe you can just give us a little more color there.

Yes, thanks for the question. So from our vantage point, what we're looking at, we obviously take our customers forecast into account and work closely with them on this, we listen to what the experts are saying across PPTA and MRB. The numbers that we've looked at that are proving predictive or measuring for the donor demographic, what's going on with real wages, what's going on with real savings rates and amounts. And then we've added in a third metric around consumer sentiment. And when we look at those things, they're all pointing in a favorable direction for accelerated recovery. And as we said in the prepared remarks, this quarter, and I do think, we've had three sequential quarters of growth above historical averages. So that's a positive trend. It's mostly driven by the pace and the uptake in new centers. The first quarter of this year marked a change where actually the growth in mature centers was greater than the new center openings. New center openings kept their pace, but mature centers really moved in the quarter, and that's with no activity on the southern border. So we look at that and, and we want to be conservative about this. We've had false dawns in the past, right, second quarter of last year, third quarter of the year prior. So we want to be thoughtful about that. But what we're observing is meaningfully different and give us the confidence to raise our revenue guidance in the way we did.

Fair enough. I appreciate the thoughts. Thanks.

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

Hi, Chris and James. Thanks for taking the question. Just maybe to go back to the Plasma guidance for a moment. But just to get it through my skull, the increase that you're seeing in organic guidance for the year this is predominantly driven by market recovery and not pricing. Is that the right way that we should be kind of thinking about that or, and next persona could be in addition to the guidance?

No. So both the results in the quarter and our guidance include meaningful contribution, Drew, from volume first and foremost, but also from price, right. And the pricing is the ongoing rollout of Nexus to customers that hadn't yet converted and upgrades to persona. So the results from those have been fantastic. I think we feel great about the work we're doing with customers. We are fully on track probably a little ahead of schedule to complete the Nexus upgrade cycle, this quarter, second quarter, and then we're in discussions. We haven't included any additional persona contracts that aren't already agreed to in the updated guidance. We've looked at what we have today. We're going to complete the upgrade cycle. That's what factored in.

Got it. Thank you. Maybe just on the quarter's hospital performance. I just wanted to maybe dissect that a little bit more. Vascular Closure, Transfusion kind of came in above our expectations. Hemostasis a little bit behind. But could you maybe go into that segment a bit more? You talked about utilization in TEG and pricing being embedded in North America, but you had a challenging European comp, but maybe just parse out what that national tender might have cost in terms of growth?

Sure. So to start with the overall view, right, we've -- this business continues to deliver, we grew 15% in aggregate in the quarter, it's quite powerful and a nice trend line that's now got some longevity to it, which gave us confidence in terms of raising the guidance for the year. When we look at it, the four product segments comprised here, Vascular Closure by far the fastest growing. As I said in the prepared remarks, nearly $3 billion TAM and all that performance today is driving deeper penetration into our existing U.S hospitals and enrolling new hospitals in our program. And we've made meaningful investments in fellows programs and the like really starting to pay off. So we feel quite good about that. That's the primary driver of our increased revenue guidance for the year. In terms of Hemostasis management, tough comp in the first quarter, right. And we knew that going in. That is both the European tender as you rightfully called out, but also capital sales. And that's probably one of the areas I think we've fared better than some other med tech, med surge companies with regards to procedure rates and staffing of hospitals. We've been in a good place there for the most part. Where we are dealing with some challenges is the overall capital appropriations process. And it's not because our equipment is breaking the bank. It's just a complicated process right now for most of these hospitals as they tried to short the way through the macro environment. So we're there, but it's -- when you're looking at a product that is in that range, a few million of capital sales delaying from one quarter to the next creates an even greater challenge. They've got ground to cover this year, but we feel very confident that Hemostasis management will cover it. And then Cell Saver was flat. That market is fully recovered. We grow with the market, and we will obviously look for opportunities to do better than that in terms of taking share, but it's a more mature play. Transfusion, interestingly enough in terms of order, timing, et cetera, benefited by some things that didn't get done in fourth quarter. So for them to notch a 20% or 21% growth, we feel very good about that. And they have an ambitious goal for the year, they're going to deliver against it. It's a good news story there. It's nice to have them adding to the participation. So high aspirations, we feel like we're off to a good start. It's this puts and takes, but in aggregate we feel quite good about where we're going there.

Great. Thanks. And just to maybe go back to your commentary out of the Analyst Day. I mean, Chris, you were very adamant that you're going to see growth in fiscal 2024. On the top and bottom line, your guidance for this year it's going up. Do you feel confident or even more confident that you'll be able to grow next year given kind of the higher base for 2023? Thank you.

Yes, thanks Drew. When I -- when we look at that collectively, we are essentially measuring the non-CSL Plasma growth rates, the trends we're now experiencing, if we continue those that's even better than we had thought about in terms of earlier attainment of some of the long range plan goals, which is great and will certainly help '24. Hospital continuing to do what it does as it advances as not only the fastest growing, but soon to be the largest business within Haemonetics is a real positive as well. And then we can't control the macroeconomic factors. So that's going to be what it's going to be. But we continue to invest in our operational excellence program that's creating meaningful improvements in our productivity, a lot of that is getting invested back in the business. But we are looking at those investments this year, over the remaining three quarters with an eye towards accelerating those things, those investments that can help us come out of the gate even stronger in FY '24. So, in short, yes, I think we are every bit as confident, maybe more so in our ability to grow each year, top and bottom line over the life of this plan.

Great. Thanks, Chris.

Our next question comes from Andrew Cooper with Raymond James. Your line is open.

Hi, everyone. Thanks for the questions. Maybe first just back on Plasma and sort of the expectations through the course of the year. And I think in the past, you've historically said, the seasonal move from 1Q to 2Q was in that sort of high single-digit, maybe 8% type range. Just curious what you're thinking there and how we should be thinking about the pacing of? CSL potentially having an impact versus what we would normally see in the U.S plasma market? The seasonal move from 1Q to 2Q within that sort of high single-digit, maybe 8% type range, just curious what you're thinking there, and how we should be thinking about the pacing of CSL potentially having an impact versus what we would normally see in the U.S plasma market?

There are clearly big shifts underway. The pace of new center openings, and the uptake of those centers, the pace is unprecedented. And that's where our customers have been highly consistent. If they tell us they're going to open a dozen new centers, they open a dozen, maybe 13 or 14, right, and but they've really done a fantastic job of leaning in and hitting their mark in terms of those centers. And interestingly, even through the worst of the pandemic, the new center uptake pretty much fits the model that we've developed with our customers in terms of year one, year two and year three growth on their way to maturity. So that's all there, it's just a much larger portion of the total volume now because they're opening more new centers and have for the last 2.5, now 3 years. So that piece is a little different structurally, but exciting. We think in terms of the mature centers and the relative seasonality, that'll continue. And our guidance reflects what our customers including CSL have told us about their internal plans in transition, et cetera. So, that's factored in and that hasn't changed from what we talked about last quarter, which was a good quarter for plasma as well or at our Investor Day in terms of our expectations about transition, et cetera.

Okay, great. Super helpful. Maybe just one more on Plasma. You mentioned, you're not including anything beyond what's already signed or contracted for Persona. Can you give us a sense for what proportion of the U.S install base you have -- I guess already on Persona, what proportion you have agreements for and how we should think about the pacing of rollout in terms of that tool throughout the year and into '24 as well.

Yes, as we've said, previously, Persona is a game changer. We're talking about 10% to 12%, additional Plasma yield, on average, for a collection, which is based on an algorithm that ties to the individual donors percent plasma available. And we're building a robust database, certainly now more than 5 million collections on Persona, real world evidence that we believe over time we will show that it's not only a step change improvement in yield, but also a safer collection for all donors involved. And we'll build that database one collection at a time. But we think based on the scientific reviews that we've done, and done with our customers, there's a strong case to be made there. In terms of where we are on the rollout, I'd rather not go through the specifics of it, Andrew. I know you can appreciate that. But we're rapidly approaching a point where more than half of the collections that we're experiencing in the U.S it is unique to the U.S market. More than half of those collections will be done on Persona and that's included in our guidance for the year.

Great. Appreciate the question. I'll jump back in the queue.

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

Yes, good morning. Thanks for taking my questions. So I suspect you're not going to break out the amount of sales that went to CSL in the quarter. But was there any sort of bolus out of that $88 million in the first quarter? And how should we expect that to kind of be spread out to the remaining quarters? Is it going to be pretty even throughout the year?

Yes, Mike, I've been and I know you know the sensitivity on that. Appreciate you acknowledging it upfront. No, CSL has done a good job of forecasting their demand through the first quarter. So the performance in the first quarter was exactly what we anticipated. From CSL, there's some vagaries because of prior buy-ins et cetera. But it's exactly what they forecasted. In our revenue guidance for the year, we've made no change to the previously communicated $88 million in revenue. That's the minimum commitment from CSL. So that's where we stand as of now.

Okay, got it. And then, just from a high-level, you're -- you obviously had great revenue growth and the earnings growth came or I guess EPS came in ahead of expectations, but there wasn't a tonne of leverage in the quarter, considering how much you've been on the top line by. I assume that that's really due to the macro headwinds, but I just wanted to kind of run that by and see if that's the right way of looking at it.

Yes, I'll give you my take on this. James walk through the mechanics of our P&L and the obvious challenges associated with inflation. FX, which is new and different and powerful here from our original guidance. And then obviously, some of the pressures including good things like performance comp. When we step back and look at this, we clearly aspire to both accelerated revenue growth, you're now seeing that and operating income margin expansion. However, we want to be mindful of both macro economic factors as James walked through, I could throw in supply chain disruptions, we've managed to navigate those exceptionally well. But it's not without cost and geopolitical risks, which we clearly have no control over. And for us, China and Russia loom large as markets for our Blood Center business. So that's all in the mix as well as the marketplace factors, right? It's -- we don't run the collection centers and we don't -- hospitals drive procedures based on patient availability. So that's all out there. We don't control that. Our teams have risen to the challenge, they'll continue to rise to the challenge. Feel great about the additional performance based comp that we're paying out as a result of it. But given what we experienced throughout the pandemic, Mike, I think you'll agree, and maybe forgive us if we're reluctant to call the turn just yet in terms of what ultimately passes through.

Yes. No, that's very helpful. Just on the performance comp, I mean, if that's something that would continue, if you continue to have strong performance with that, continue to flow through it every quarter or is it kind of more loaded into the first quarter or …?

No, it would flow through somewhat ratably over the remaining quarters is the way the accounting works for.

Yes. Okay, got it.

It's actually an interesting dynamic -- its an interesting dynamic on that, Mike. Our expenses are pretty evenly balanced throughout the year. However, due to seasonality and the fact that we're experiencing such meaningful growth now on the collection business as well as the hospital procedure business, as that revenue grows you get more passed through on a fairly constant cost base, right. And then there's some nuances in terms of what we pay off of. We have tweaked comp as part of our long range plan so that we overweight revenue versus profit, they're both factored in for the short-term. And then obviously, the long-term is tightly aligned with shareholder returns. But that has an effect as well and that's fine. We're not going to hold our working teams accountable for FX or below the line adjustments did to EPS. They're delivering, and we're happy to compensate them for it.

Okay, got it. And then just one final one on the hospital business. I think everyone kind of understand what's going on with pricing in the Plasma business. But I want to ask about pricing in your hospital business. I think you called out you were getting favorable pricing there. But are you able to get any additional pricing, given what's happening with inflation, the fact that you virtually everything, prices are going up across the board and hospitals are probably a little more accustomed to that these days.

Yes, you're exactly right, Mike. We are looking carefully at that. And we factored some of that into our original guidance. We've revised some of that based on what we now are experiencing in the market. There's challenges associated with it. And what I would say is, the hospital business like Plasma is benefiting from mix, so more very high gross margin. VASCADE for example and Hemostasis, they're the big growth drivers, but and then also the benefits of operational excellence where we have made strides to lower our cost of goods sold, and benefits from the pricing, as you outlined. On the other side of it, we continue to invest and we made investments last year that still haven’t annualized. So, that cost base, particularly on the sales side will go up and we're okay about that. That's -- we're investing meaningfully. The operational excellence program is freeing up funds to let us do the R&D and the sales force expansion that we think is critical to drive growth over time and we're experienced, but now it'll only get better from here.

Okay, great. Thank you.

Our next question comes from Joanne Wuensch with Citi. Your line is open.

Good morning. This is Anthony on for Joanne. Thanks for taking our question. Just circling back to hospital. With the updated guidance, does that include maybe any new indications either for TEG or VASCADE this year? Or is that -- are you seeing that just with sort of deeper utilization and penetration? Thanks.

Anthony, the primary drivers are as we said, it's really is VASCAD. And I'm saying VASCADE for shorthand. It's mostly VASCADE MVP in the electrophysiology space, right. And that growth what we're factoring in is exclusively U.S new and existing accounts adopting the therapy. We are aggressively pursuing additional indications. We are aggressively pursuing market expansion into Europe and parts of Asia as well. So more about that when it comes. We tend to be pretty conservative about not factoring those items in because we don't control them. If they are meaningful, we'll talk about that at the time. But for what we've guided across all four segments as I outlined earlier, it's really what we have in hand and what we believe we can deliver from where we sit with the normal puts and takes around procedure volume and challenges in China for example with lockdowns and such. But all in all, we feel good with what we can see and what we can deliver against that.

Okay. Thank you.

Our next question comes from Michael Petusky with Barrington Research. Your line is open.

Hey, good morning. Great pivot from Investor Day to such a great quarter. Congrats. So a quick question going back to Plasma. Do you guys have an assessment or does the Plasma fractionator is having assessment of sort of how badly sort of the college student donation, part of their business lagged for the past couple of years. I'm just wondering if there's an opportunity with students going back here the next couple of weeks, if there's an opportunity sort of incremental that people aren't maybe completely thinking about, I suspect college is basically completely normalized at this point relative to the past couple of years. I know what certainly improve last year, but any thoughts on that?

Good morning, Mike. Thanks for the question. Thoughtful, as always. College is one of a half a dozen sub-segments we look at, right. We talk about borders, we talk about large urban centers, we talk about smaller metropolitan areas, we talk about suburban areas, we talk about military installations close to a military base. Across the board, they are in recovery. College is certainly participated. They are not back to where they were pre-pandemic. And college is closer than some other segments, but they're not leading the way and they're not there yet. We do think, as we talk to customers extensively about their forecasts that the recovery in college is factored in. But it's a modest segment relative to the total and it is underway, but I think it's going to take a bit longer to get back to pre-pandemic levels in those mature centers.

Okay. And just, I guess, another one then on Plasma. And I felt like you really spoke to this well at the Investor Day, but I'm not sure. This is a concern we hear constantly and I'd love for you to sort of speak to this on this conference call. In terms of the potential competitor, Chris, can you just talk about at a high-level, what you think your ability in terms of being able to compete going forward with a potential competitor in the market, and just any thoughts around that? Because that is probably the number one thing that we hear as far as concerns around this company as an investment idea? Thanks.

Yes, it's completely understandable, Mike. I think there is an overhang from 2 years of pandemic and then prior share shifts. When we work backwards against your aspirations in Plasma, we talk about three factors, volume, share and gross margin expansion. And in terms of volume, I think we broke that out quite explicitly here in the quarter and our go-forward guidance. You see the gross margin at the corporate level, we don't break that out or guide to it at the company level or by individual business unit. But you don't put up a record gross margin in the quarter without having what is your currently your largest business contributing fully there. So that's a reflection that there's real value in our technology, and a lot of excitement about adopting that and making that part of what our customers are aspiring to in terms of growing volumes and replenishing their depleted inventories. When you cycle back to share, I think what we tried to say at our Investor Day is we're the industry leader today. And we'll be the industry leader in a market share base the day the last shipment rolls to CSL whenever that is. We intend to defend that leadership and our primary focus in doing so is the duality of exquisite customer service and support. We have not missed a single order to our Plasma customers throughout all the ups and downs of this pandemic cycle and continuing to advance our innovation agenda. And anybody who listened in and heard Nila talk about, the four dimensions that based on extensive customer -- voice of customer research, yields, speed, compliance and donor set. We are a moving target to say the least, right. We have the best technology and we are doing what we can to meaningfully advance that leadership and customers are recognizing and valuing it. And we think that bodes well for our ability to expand share over our long range plan, and that's what we aspire to do both here in the U.S and outside the U.S as well.

Perfect. Thank you.

Our next question comes from Dave Turkaly with JMP Securities. Your line is open.

Hey, good morning. Maybe it's a quick one on the buyback. That seems like a sizable one. I think it might give you the shadow buying back 10% of the company over time, based on where we sit today. But I love your thoughts on capital allocation, stock under 70 here. What we should think about sort of from a timing standpoint?

Yes, thanks. Thanks for the question, Dave. So yes, it is. We think a substantial buyback and commitment that we're making. When we think about it in the overall context of what we talked about at Investor Day, we talked about generating capital in the range of $2.1 billion over our projected period. So it does represent a significant chunk. But it still allows for us to focus really what we think are two main drivers of organic growth for sure, and investing in some of the technologies that we -- that we're developing right now. And then secondly, of course, inorganic growth, M&A. So there's -- this was a basically a balancing act. We felt like where the price is today. And given some of the dilution that we've had over the past couple of years that made a lot of sense to allocate some portion of our capital capacity to buying back shares. In terms of timing, it's a 3 year period that we have. And we'll be opportunistic, we'll look to see where our stock price is, and also compare that to other opportunities, that we have, and proceed accordingly.

Thank you for that. One other one, I think at the Analyst Day you mentioned the sort of the capacity investments. I think you said something like 5x increase, that's what you're looking for in the out years and you mentioned the new -- I think, a new Pennsylvania facility. But when we think about those numbers, I mean, this is so hospital can address its TAM, is that is that what we're thinking about with sort of that investment, given that it's so under penetrated today?

Yes, there's a couple parts to it, Dave. Let me clarify the 5x. So today, based on our cash on hand and free cash flow and et cetera, we have about $400 million of capacity to put to work however we choose to. Over the life of this LRP, the long range plan in the next 4 years, that increases fivefold to the $2.1 billion that James just highlighted. And we assume within that, that we're going to fund all of our organic growth, which includes not only increasing our footprint on the commercial front here in the U.S and internationally, hospital is a big part of that. But also our R&D projects and the things we're really excited in terms of advancing our leadership. And yes, we -- we've meaningfully invested in our global manufacturing and supply network. The new facility in Pittsburgh is actually in Clinton, Pennsylvania, is part of that. We initiated full operations this past quarter. It is state-of-the-art 200,000 square foot facility, and we think it'll be an important part of driving further increases in product quality as well as capacity to meet the growth that comes, that capacity is both Plasma and hospital. And we continue to invest against them to make sure we can be the business partner that we are and aspire to be over time with our customers in terms of reliability and the resilience, right? For the longest while, it was lean, lean, lean. I think we may have been a little bit ahead of the curve and emphasizing agility and resilience. And we're seeing the benefits in our current performance as a result.

Great, thank you.

Next question comes from Anthony Petrone with Mizuho. Your line is open.

Thanks, and congrats on a good quarter here. I'll have a couple on Plasma and follow-up with the hospital. So Chris, on Plasma, you mentioned the border centers, just maybe a quick update there. And as we look at the long range plan, is it safe to assume that for the bulk of the long range plan, the border centers will potentially be at a steep discount for the good part of that horizon. And then the follow-up on Plasma would be when you look at sort of the performance of past couple of quarters, how much of what we're seeing is fractionators meeting real-time demand versus building safety stock? And I'll have a couple of follow ups.

So, Anthony, welcome back. Great to have you in the conversation. In terms of the Plasma collections along the border, we're not directly involved in that. Some of our largest customers make up the predominant number of those centers, and they have -- as you could expect, their legal and regulatory teams working hard against it. They're cautiously optimistic, maybe more on the optimistic side of that, right? And so we'll be there to supply them if and when the borders begin to join the recovery, that really hasn't happened yet. And when we look at it, things in this market don't move quite that quickly, right. This will be they've largely been out of the market. So they're going to have to re-recruit those donors. Now the economic conditions, as I highlighted to an earlier question are very favorable for that, but it takes time. So as our customers update, the forecast will factor that in. We did not assume a meaningful recovery along the border in this fiscal year. As it pertains to Plasma volumes, we don't have full visibility. We study it hard. And I think there's pretty good evidence in the public domain that during the -- through the trough of the pandemic, our customers need it to meaningfully tap their existing frozen Plasma inventories to keep their fractionation and their customers supplied. So I think they've done everything they can do there. And I think we will be for some extended period, what our long range plan assumes, is really over a multi year period, they will work to drive the recovery. And from our conversations with them, we don't see them pulling off of the accelerated compensation to donors and the new center openings anytime soon. So that's part of what gives us confidence that this recovery will be different than some of the false recoveries that we highlighted earlier with regards to gaining momentum over the life of the recovery. But they've got a long way to go to build back inventories. And I think, a black swan event like the pandemic leaves its mark. And I think all of us will think differently about what are appropriate levels of inventory to supply our customers consistently going forward.

That's helpful. And the follow ups will be, one on hospital, and then I'll actually have one for Jim on margins. On hospital, Chris, at the Analyst Day, there was a commercial effort highlighted 600 key accounts in the U.S. I'm just wondering if there's an update on how many of those targeted 600 or active users of MVP and/or VASCADE, so that would be the first question. And then second for Jim, when you look at the adjusted operating margin target for 2026, high 20s, from where we are currently around 17%. To what extent was -- is the persistence in inflation and perhaps even an adverse currency environment baked into that outlook? Thanks.

Thank you.