Gerry Gould - Haemonetics Corp. Christopher Simon - Haemonetics Corp. William P. Burke - Haemonetics Corp..

Brian D. Weinstein - William Blair & Co. LLC Anthony Petrone - Jefferies LLC John Hsu - Raymond James & Associates, Inc. David Ryan Lewis - Morgan Stanley & Co. LLC James P. Sidoti - Sidoti & Company.

Good day, ladies and gentlemen, and welcome to the Q1 2018 Haemonetics Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Gerry Gould, Vice President of Investor Relations.

Sir?.

Thank you, Vince. Good morning. Thank you for joining us for Haemonetics first quarter fiscal 2018 conference call and webcast. I'm joined today by Chris Simon, President and CEO; and Bill Burke, CFO. Please note that our remarks today will include forward-looking statements. Our actual results may differ materially from anticipated results.

Additional information concerning factors that could cause results to differ materially is available in the Form 8-K we filed today and in our latest Form 10-K filing. This morning we posted our first quarter fiscal 2018 earnings release to our Investor Relations website. We also posted two tables with information that we will refer to on this call.

Today, Chris and Bill will discuss our strategy and business performance, trends in our commercial markets and elements of financial performance, then we'll take your questions.

Before I turn the call over to Chris, I would like to mention the treatment in our adjusted results of certain items, which, by their nature and size, affect the comparability of our financial results. Consistent with our past practice, we've excluded certain costs and charges from the adjusted financial results, which we'll talk about today.

In the first quarters of fiscal 2018 and fiscal 2017, we excluded restructuring and turnaround charges from adjusted earnings as well as deal-related amortization expense. Also, in fiscal 2018, we excluded the gain we realized upon sale of our SEBRA line of benchtop and hand sealers. Finally, we excluded the tax effects of excluded items.

Further details of first quarter fiscal 2018 excluded amounts, including comparisons with the same period of fiscal 2017, are provided in our Form 8-K and have been posted to our Investor Relations website.

Our press release and website also include a complete P&L and balance sheet and a summary statement of cash flows as well as reconciliations of our reported and adjusted results. With that, I will turn the call over to Chris..

Thank you, Gerry, and good morning, all. At our Investor Day on June 19, we introduced our new management team, provided a comprehensive overview of our strategy and set expectations for growth in fiscal 2019 and beyond. So, this morning, our comments will focus on the first quarter's results and major milestone attainments.

We'll leave ample time for your questions. Our first quarter results met our expectations and were consistent with what we anticipated at the outset of fiscal 2018. First quarter fiscal 2018 revenue was $211 million, up 0.5% as reported and up 1% in constant currency.

We had 4% Plasma revenue growth, 7% overall growth in our Hospital revenues and our Blood Center business substantially stabilized, declining 7%. On an adjusted basis, we earned $17.5 million or $0.33 per share, 32% above the first quarter a year ago as we are benefiting from our ongoing cost-savings initiatives.

We generated $29 million of adjusted free cash flow further demonstrating the ongoing strong cash generating capability of our business and providing flexibility for the investments we are making. As announced last week, our PCS 300, plasmapheresis device, now branded NexSys PCS, received the U.S. FDA regulatory clearance on July 25.

We are pleased with this very positive release and we are encouraged by this major milestone achievement in the context of our broader plans for the new product platform. This clearance is fully consistent with our anticipated timelines and allows us to move forward as planned and communicated previously.

Our development strategy purposefully separated the FDA submission for the NexSys PCS device from the other components of our new collection system. The system consists of the device and its embedded firmware. NexLynk DMS, our next-generation proprietary donor management software, our disposables and our technical service support.

As discussed at our Investor Day, we expect that the benefits of our new platform will include better quality and compliance, increased yields, higher collection center productivity, improved donor experience and, ultimately, lower cost per liter of plasma collected.

Consistent with our plans, we will pursue further enhancements to the new platform, primarily to the embedded firmware and our NexLynk DMS software. Based on our dialog with the FDA, we remain positive about our future development plans and our ability to meet our launch timelines.

Encouraged by the clearance, we are ramping up production of devices and preparing for staged rollout. We are engaged with the trusted third-party manufacturers who have reliably supported our PCS 2 production. We made early investments in production capacity and then we already started building pre-launch inventory.

The NexSys PCS regulatory clearance substantially de-risks our rollout timeline. Our staged rollout consists of customer experience programs followed by limited and then full market releases initially in the U.S. Our plans for launch in other regions are well in hand and we'll follow closely after initial market release in the U.S.

We must be mindful of the magnitude of the change out, not just for us, but for our customers. The phased approach allows us to build upon insights from early customer experience to mitigate implementation risk during full market launch. Rollout necessitates the large scale turnover of our fleet.

And as part of this process, we are working with our customers to optimize their use of our existing PCS 2 devices. The focus on equipment utilization is helping improve capital productivity and ROIC as we ramp down and discontinue production of PCS 2 devices to focus on scaling production of NexSys PCS.

It has been encouraging to see how our customers, our business partners and our teams have rallied to support the development and launch of the new platform. More broadly, fiscal 2018 is shaping up to be a busy year during which we expect to continue to deliver against the milestones that constitute our long-term strategic plan.

Consistent with this plan, we have revamped our operating model and strengthened our capabilities by putting in place a customer-centric organization to implement business-unit specific strategies and our corporate priorities. Our new leadership team is capable, committed and aligned to drive our plans.

In parallel, we are evaluating additional opportunities to better optimize our cost structure. We are committed to further reducing complexity, fixing inefficiencies and improving productivity to free up resources for reinvestment to support future revenue and earnings growth.

Our first quarter fiscal 2018 results provide encouragement that we are progressing towards our stated goals and objectives. Recent growth in Hospital revenues and continued strong corporate cash flow generation are important examples of how we are building long-term momentum.

We are driving transformation through a series of initiatives that span our multi-face, multi-year turnaround. We are optimizing our R&D portfolio to eliminate low-value-added projects while streamlining in line product SKUs to channel resources to the programs and the products with the highest returns.

We are rationalizing our manufacturing network and expanding the use of third-party strategic sourcing partners wherever advantageous to reduce our cost of goods sold. We are pursuing accretive acquisitions to supplement organic growth, improve margins, and expand operating leverage.

We are tapping sales distributors in thinly served markets and managing them better to drive growth and profitability. We are creating performance-based contracts and new business models to better align our value proposition with customer needs.

And we are innovating by expanding product and service offerings through digital solutions and advanced data and analytics. Overall, we are meeting our targets with increasing success and we are reaffirming all elements of our fiscal 2018 guidance. With that, I'd like to turn the call over to our CFO, Bill Burke, to comment further on our results..

Thank you, Chris, and good morning, everyone. Please refer to the two tables we posted to our website with the link in our earnings release. We provided specific revenue and income dollar amounts that derive the percentages I will refer to in my comments. In the first quarter, strong result in Plasma continued.

Plasma revenue was up 4% in constant currency, including a 1% negative impact from the disposition of the SEBRA product line. North America Plasma disposables revenue was up 6% in the first quarter of fiscal 2018.

Growth continue to be driven by strong end-market demand for Plasma-derived biopharmaceuticals, and we remain highly confident in the continued market growth underlying our commercial Plasma Collection business.

We had 7% constant currency growth in our Hospital business on the strength of Hemostasis Management, which remained on our projected growth trajectory. TEG revenue was up 17% in constant currency in the first quarter, accelerating over its fiscal 2017 full-year constant currency growth rate of 14%.

The TEG 6s product offering once again accounted for the majority of Hemostasis Management growth in the first quarter of fiscal 2018. The U.S., Europe and China contributed to accelerating growth.

Also, within our Hospital business, cell salvage and transfusion management revenue grew 2% in constant currency over the prior year first quarter as OrthoPAT and Cell Saver decline were more than offset by improving growth in BloodTrack and other hospital software products.

Blood Center revenue was down 7% in constant currency, a considerably moderated rate from the decline of 14% in fiscal 2017. Platelet disposables revenue decreased 3% in constant currency.

This muted decline is considered an anomaly and entirely attributable to customer order timing in Japan, which made the first quarter of fiscal 2017 unusually low on a comparable basis. Approximately 28% of collections, so above 40% of platelet units collected in Japan, were by double-dose collection techniques in the first quarter of fiscal 2018.

Platelet declines over the full fiscal year 2018 are expected to decline as planned at the outset of the year. Red cell disposables revenue declined 11% in constant currency in the first quarter of fiscal 2018 due mostly to low pricing inherent in previously announced U.S. customer contracts.

Whole blood disposables revenue declined 7% in constant currency in the first quarter of fiscal 2018 as recent moderation in the rate of collection declines continued. U.S. customers have indicated that we should expect this moderating trend to continue over the long term.

We are making solid progress toward our commitment to stabilize, separate and optimize our Blood Center business. This strategy is expected to enable us to preserve operating income through actions taken to rationalize the cost structures of our manufacturing operations and commercial organization while simplifying our business model.

First quarter of fiscal 2018 adjusted gross profit was 43.5% of revenue, down 40 basis points versus the prior year first quarter.

While we did receive a benefit in the first quarter comparison with the prior year from the non-recurring $3 million charge related to the filter recall in fiscal 2017, the benefit was offset by cost related to delays in the expansion of our liquid solutions production capacity that have required us and our customers to obtain alternative sources of supply.

We expect purchases from these alternate sources to continue until we can complete the expansion and produce solutions at the necessary level. Adjusted operating expenses declined $7 million or 9% compared with the first quarter of fiscal 2017 and declined 330 basis points to 31.4% of revenue.

The lower operating expenses resulted from a full quarter of the early fiscal 2017 cost-reduction initiatives and incremental current year productivity, partially offset by investments in Plasma and Hospital business units.

Productivity and continuing benefits of our prior year restructuring activities are still expected to yield $0.30 to $0.40 per share of benefit in FY 2018. In addition, fiscal 2018 anticipated investments include $15 million to $25 million of after-tax operating expenses representing $0.40 to $0.50.

Our income tax provision on adjusted earnings was 27% (14:43) in the first quarter of fiscal 2018, about 320 basis points higher than the first quarter of the prior year, resulting largely from timing of certain tax adjustments and anticipated upward pressure due to a shift in geographic income mix.

We expect our fiscal 2018 tax rate to be consistent with the fiscal 2017 rate. Free cash flow before funding, restructuring and turnaround activities was $29 million in the first quarter of fiscal 2018 compared with $16 million in the first quarter of 2017.

Continued improvements around management of capital contributed meaningfully to the improvement. As anticipated, the strong free cash flow in the early part of the year is important given our plans that capital investments of $55 million to $65 will accelerate as the year progresses.

We remained confident in our initial guidance of $35 million to $55 million of free cash flow. In addition to the $29 million of free cash flow generated before restructuring and turnaround activities, we realized $9 million of divestiture proceeds and $8 million in employee share of program proceeds.

We've repaid $12 million of debt and we funded $3 million for restructuring and turnaround initiatives, net of tax benefit. We finished the quarter in a strong position with $172 million of cash on hand. This balance represents an increase of $32 million since the end of fiscal 2017.

With that, we'll conclude our prepared comments and turn to your questions..

Thank you. Our first question is from Brian Weinstein of William Blair. Your line is open..

Hey, guys. Good morning. Thanks for taking the question. Chris, I was hoping you can give us a little bit more detail on the rollout of NexSys.

How should we think about it in terms of modeling? How are you guys thinking about it in terms of what's embedded in your guidance on both the top line as well as some of the spending that's going to be required?.

Yeah. Look, Brian, I appreciate the question. We spent a good bit of time going through this during our Investor Day. And I would direct you to the materials that are posted on the website there for the details. We're delighted to have received a timely and overwhelmingly positive release from FDA for the NexSys PCS device.

That's really the platform that we're operating off of, and we're rapidly ramping production. We have the initial wave of products on hand to begin our customer experience programs. That'll start in earnest now. We'll progress from those experienced programs to limited and then later full market release, all of which has been laid out.

So, we're in full ramp mode. I think the approval substantially derisked the timeline as we communicated it previously and we'll build accordingly..

Okay. And then on the Plasma market, you guys reported 4% FX and North American disposables I think you said were up 6%. That's a little bit lower than what we would have thought given some of the results we heard from some of the competitors and what we're hearing in the marketplace.

Can you just talk about what that end market looks like now? And with respect to your result, were you guys a little bit lighter than your internal projections or were you in line there? Just any commentary there. Thanks..

And so – it's Bill. On the Plasma results, just remember the impact of the SEBRA divesture. So, Plasma, yes, it was 4.3% and we had a 1.2% impact from the SEBRA divestiture, so we're upwards of 5.5% in the Plasma business, which was in line with our original guidance.

But as far as the end market goes, we haven't seen any changes from what we've had communicated earlier at Investor Day and even before that, so the market still remained strong and the Plasma business is doing very well..

Okay. Thank you..

Thank you. Your next question is from Anthony Petrone of Jefferies. Your line is open..

Thanks and good morning. And maybe just a housekeeping on selling days impact in the quarter. I know, last quarter, in fiscal 4Q, there was a headwind. I'm not sure if there was a tailwind this quarter, so any help there is appreciated.

And then in terms of NexSys, I know at Analyst Day there were some analytics that were thrown out there from sort of beta testing, early testing of some units down the field. Can you give us an update on just some of those initiatives? When do you expect to have maybe some in-center data from other beta test initiatives? Thanks..

Hi Anthony, it's Bill. I'll answer the days question. The selling days in our Q1 were comparable to prior year, so there's not a comparison issue for us prior year. If you are looking versus Q4, it's comparable against our Q4 for FY 2017, although, as you remember, Q4 FY 2017 versus prior year had the comparison problem with the extra week.

But this year there's no issues on selling days year-over-year..

Okay. Great..

Anthony, it's Chris. In terms of NexSys, at the core of our system offering, I'd just go back to some of the material we presented. We are working on with customers in these customer experience programs and will be part of our limited market release, is really to quantify the benefit associated with those four broad pillars.

It's the improved quality and compliance. This is minimizing risk of operator errors, avoiding over and under draws, which are costly and inconvenient and just giving them a documented paper trail for compliance purposes.

We'll drive center-wide productivity in terms of the connectivity and a much more simple guided operation, and our support needs to be business optimization. We will continue to push the frontier on yield attainments, which is something that I think we're quite excited about.

And overall, between the combination of the hardware and the software, a better donor experience, minimize wait times and donor inconvenience and a bunch of things that help improve the quality of the staff/donor interaction that we think will have real benefits to our customers.

As we define those and quantify those with customers, we'll be more transparent. But I want to be clear, we're not going to be – we're not going to disadvantage ourselves competitively or in the price negotiations to come..

Right. And then just last one from me would be how many customers at this point are going through this testing phase? Thanks again..

Yeah. Thanks, Anthony. We haven't finalized the exact number that we're going to put through the process. It will be multiple. I think early on I probably made the comment that I thought this was one where no one would want to go first, but everybody wants to go second.

I guess, thankfully, I've been proven wrong because we now have a good base of our existing customers who are saying we'd like to be in the initial wave to this. We're trying to find ways to accommodate as many of those touch points as possible. The staged rollout gives us the benefit of learning how to implement.

We're confident in the system but how to implement the system in the hands of our customers, and I think a broader touch point there is beneficial to our customers..

Thanks..

Thanks. Your next question is from John Hsu of Raymond James. Your line is open..

Good morning. Thanks for taking the questions. Maybe if we could start on Hemostasis Management, it looks like the revenues came in a little bit less than we thought (23:14). Could you give us any color on that and specifically any updates on timing for the U.S.

trial indication?.

Yeah. John, as far as the results, Hemostasis Management was 17% better than the prior year. That met our expectations internally. I can't comment on the numbers that you had in your model. But we see the continued strength in the business, the growth rates are improving even versus last year.

And based on the guidance we've issued, we expect the business to at least deliver what it delivered in the first quarter and hopefully higher in the next three quarters..

Yeah..

Okay. Great. And then – I'm sorry. And then on Plasma, I just want to be clear. I think, in the release, when you got the FDA clearance, congratulations on that by the way, that you talked about some additional enhancements. And specifically, one of the things that you were talking about at the Analyst Day was kind of a yield enhancement.

And I just wanted to be clear, is that already cleared as part of the NexSys approval or is that one of the additional pieces that you might need further clearances for?.

Yeah. Thanks, John. It's Chris. The way I think about this, we're doing something that's less common I guess in the industry in terms of disrupting ourselves with a new platform and it's no small feat. I think you'd get a handful of these over the course of a career and we're quite excited about it.

But I think the other thing we intend to do in parallel is the incremental but nonetheless meaningful innovation that is kind of the dot 1, dot 2, dot 3 on a new platform. So, we're running that in parallel.

We've already introduced yield enhancing benefits into the marketplace on our existing PCS 2 platform with the new device, the NexSys, we have the potential to take that, that much further. It will involve changes to the embedded firmware, which is something we're in dialog with FDA about.

We also think there's meaningful advances that we can bring forward in our NexLynk donor management software, which is a proprietary software. The actual firmware and the device itself is open architecture or work with anything. But when you work with our NexLynk, it's that much more powerful.

I think the combination of those items is what's really going to drive all four areas of benefit yield included..

Okay. Great. And then last one from me, R&D spending was down nearly $3 million year-over-year.

So, how do we think about the appropriate run rate and some of the factors that kind of drove it down? Do you expect to be kind of closer to 4% of sales? I know you're a little bit higher in (26:01), so maybe you could just speak to that?.

Yeah. So, I'll speak to the quarter results. So, on a GAAP basis, we were down $3 million. $1.5 million of that reduction was because of restructuring activities related to our advanced engineering group from the prior year.

The other $1.5 million is strictly, and Chris actually mentioned it in his opening comments, the review of the product portfolio within R&D. And as we make our way through all the projects in R&D, obviously, the Blood Center isn't one of our focus areas and that's the reduction in our Q1.

Just not spending on these low-profit projects related to Blood Center. And as far as, going forward, John, I think that the – I mean, obviously, we don't guide to R&D line in particular. But, for the year, we will be lowering R&D versus FY 2017..

Okay. Thank you..

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

Good morning. I just have one for Chris and then a couple of follow-ups for Bill. But Chris, I want to understand the regulatory strategy on PCS 300 a little better.

Are you going to pursue specific claims for specific enhancements? Can you get those claims through a traditional 510(k) process? And do those claims matter prior to having pricing conversations with your customers?.

Yeah. So, they do but they probably matter less than the actual experience that customers have and what they believe is the true value associated with our system. So, obviously, NexSys PCS, the PCS 300 device, is the big substantial review.

We purposely follow the strategy where we submitted that device with software that was deemed by the FDA to be substantially equivalent to the software that we use in our PCS 2 devices. That expedited the review and allow for a very favorable and very timely outcome. Many of the enhancements to the embedded firmware are as simple as letter to file.

There will be those that are incrementally more meaningful and/or change the nature of the donor experience, and we'll obviously pursue a 510(k) release for those. But where we sit today, we feel that this has been substantially derisked and reaffirms our confidence around the timeline that we've laid out previously including at our Investor Day..

Okay.

So, no PMA level claims for the product and you don't think you need to have these claims prior to having pricing conversations with customers?.

There are absolutely no PMA submissions involved in this. Additional 510(k) will be very targeted and the customer discussions around the benefit have already begun in earnest as you can imagine..

Okay, very helpful. And then Bill, just two quick financial questions for me. One, gross margins were a little below our expectations. Maybe you can talk about the impact of Plasma mix and/or currency. And then on CapEx, I'm still not entirely clear.

CapEx is pretty in line, free cash flow much better yet you're not changing expectations for CapEx for the remainder the year. So, I'm just trying to kind of understand the free cash flow guidance for the remainder of the year in light of the stronger start to the beginning of the year and your guidance not really being changed. Thanks so much..

All right. So, David, let me address the capital first. So, cash flow, in general, was really strong in the quarter. It's obvious.

We determined that we did not want to raise our $35 million to $55 million guidance as the bulk of the investments that we had spoken about, the build of the PCS 300 in particular and other investments that are P&L related will be backend loaded this year.

As we move through the year, if we see that some of that timing of spending is slipping, then we will raise guidance accordingly. But it was a very, very strong quarter.

It was in line with our expectations and, again, it comes down to this last nine months and particularly the last six months of capacity expansion, and also the PCS 300 on NexSys PCS build..

Okay?.

You okay with that one?.

Perfect..

All right. And then on gross margin, we did have a benefit. I think everyone is expecting the benefit from the $3 million recall charge that we took in the prior year. And without that repeating, you would have expected an uptick in gross margin. There's really three things impacting margins this quarter.

One was we had some unfavorable FX in the quarter. Two, we had a lot of benefit from our manufacturing sites last year, and that benefit just slowed a little bit in Q1. And again, there's no problems there, it's just some timing issues. And then third, we're working through some delays in the expansion of production capacity regarding liquid solutions.

And we incurred some incremental costs related to those delays in the capacity expansion..

Okay.

And Bill, (31:35) in line, can you just give us an update for currency assumptions for the year that may be helpful?.

Our currency assumptions are based on the most current exchange rate as of a couple of weeks ago. It's like June 28 or something like that. So, we don't – our major currencies that impact us are the yen, the yuan and the euro.

And we – first, what we had guided originally, we don't see large changes in foreign currency that would require us to adjust guidance in any manner..

Okay. Thanks so much..

Okay. You're welcome..

Thank you. Your next question is from Jim Sidoti of Sidoti & Company. Your line is open..

Good morning.

Can you hear me?.

Yes, Jim..

Great. On SG&A, that expense was also a bit lower than I expected in the quarter.

Is that something you think kicks up as you get further along in the year with the product launch?.

So, on SG&A, we had originally, at Investor Day, been pretty clear about what the productivity for this year was going to be. We had $0.30 to $0.40 of productivity, some of that being new initiatives in FY 2018. Other part of the savings is the carryover from last year, and that particularly would influence the Q1 results.

I made that clear in my opening comments. It was a good quarter for savings. Do we anticipate more savings going forward? The answer is yes. We're still within that $0.30 to $0.40 range and it's a big savings number that we absolutely think that we can hit for the year..

All right. Thank you..

You're welcome..

Thank you. I see no other questions in queue. I'll turn it to Mr. Simon for closing remarks..

Thank you. So, in closing, I want to thank our customers and our shareholders for their continued trust in us and our business partners and our employees for their continued dedication. Thank you..

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