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

Anthony Petrone - Jefferies LLC David L. Turkaly - JMP Securities LLC John Hsu - Raymond James & Associates, Inc. David Ryan Lewis - Morgan Stanley & Co. LLC Lucas Baranowski - Craig-Hallum Capital Group LLC.

Good day, ladies and gentlemen, and welcome to the Q4 2018 Haemonetics Corporation's Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. And as a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to Mr. Gerry Gould, Vice President, Investor Relations. Please go ahead..

Good morning. Thank you for joining us for Haemonetics' fourth quarter and year-end fiscal 2018 conference call and webcast. I'm joined today by Chris Simon, President and CEO; Bill Burke, CFO; and Carter Houghton, President of our Hospital Business Unit. 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 other periodic reports and filings that we make with the SEC.

This morning, we posted our fourth quarter and fiscal 2018 results to our Investor Relations website. We included fiscal 2019 guidance and posted two tables with information that we'll refer to on this call.

Those tables or pages two and three within the document entitled Analytical Tables and Supplemental Information to which we provided a link in our release. Today, Chris and Bill will discuss elements of our financial and business performance, trends in our served markets, our strategy, our Complexity Reduction Initiative and our fiscal 2019 guidance.

Carter will discuss highlights within our Hospital Business. Then, we will take your questions. Before I turn the call over to Chris, I would like to mention the treatment in our adjusted results of certain items which by their nature and size affect the comparability of our financial results.

Consistent with our past practice, we have excluded certain costs, charges and income items from the adjusted financial results which we'll talk about today. In the fourth quarters and fiscal years 2018 and 2017, we excluded restructuring and turnaround charges and certain one-time charges resulting from U.S.

tax reform from adjusted earnings as well as deal-related amortization expense and non-cash impairment charges. In fiscal 2018, we excluded the gain we realized upon the sale of our SEBRA line of benchtop and hand sealers and a legal charge. Finally, we excluded the tax effects of excluded items.

Please bear in mind that fiscal year 2018 Haemonetics revenue and Plasma business unit revenue include no material SEBRA revenue. By comparison, the fourth quarter and fiscal year 2017 included $1.5 million and $6.5 million of SEBRA revenue respectively.

Today, unless otherwise noted, we will cite organic revenue growth which excludes the impact of the SEBRA divestiture and excludes the effects of currency.

Further details of fourth quarter and fiscal 2018 excluded amounts, including comparisons with the same periods 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 included 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'd like to turn the call over to Chris..

Thanks, Gerry. Good morning and thank you all for joining us today. We had a solid finish to fiscal 2018, delivering full-year revenue and earnings within our guidance.

We are pivoting from transformation to the accelerated growth phase of our turnaround and we remain committed to our strategies to compete in attractive segments, achieve leading position in our markets and deliver superior performance.

Our fiscal 2018 performance, coupled with our fiscal 2019 plans, give us confidence we are on the right path to our 2021 goals of increasing adjusted operating income by 2x and adjusted free cash flow by up to 4x. Turning to our financial results, in the fourth quarter, revenue was up 2.4% and flat in constant currency.

Performance was driven by our largest growth segments, particularly North America Plasma and worldwide TEG. Adjusted operating income decreased 2%, adjusted net income was up 14% and adjusted earnings per share were $0.43, up 10% over fourth quarter last year. Two main factors affected performance in the quarter.

First, we made investments in R&D and hospital commercialization to prepare for growth as well as paying a special discretionary bonus to hourly employees who were not otherwise eligible for our incentive program.

Second, we experienced operating challenges that resulted in diminished productivity, inventory and equipment obsolescence and the Acrodose product recall. Looking at our full-year financial performance, we grew reported revenue by 2%. The Plasma business exceeded and Blood Center met our expectations.

Hospital performance was mixed with strong performance in North America, offset by International.

Through our ongoing productivity efforts and disciplined capital allocation and working capital management, we delivered full-year adjusted earnings per share growth of 22% to $1.87 and we grew free cash flow, before restructuring and turnaround, well above our expectations.

Fiscal 2018 was a successful year as we focused on reorganizing and transforming our company. We launched our Complexity Reduction Initiative, strengthened our talent base and received key regulatory clearances in our Plasma business. Nowhere was changed more pronounced than in our business units. I'll begin with Plasma.

Organic revenue was up 10.5% in the quarter and 7.1% for the year with solid growth in disposables and software, especially in North America. We have made significant progress advancing our NexSys PCS platform.

In March, we received FDA and CE clearances for the NexSys PCS enhanced embedded software with YES technology, a yield-enhancing solution that enables increases in plasma yield per collection.

The clearances allowed us to begin contracting discussions with customers about the value of the integrated platform, which includes the NexSys PCS device, the NexLynk DMS donor management software, disposables, technical support and service.

We are making progress with our customers and contract negotiations are informing our manufacturing build which is well underway. We are engaging a second supplier to allow flexibility in our inventory ramp-up to support the phased launch of NexSys PCS.

As previously communicated, we continue to expand manufacturing capacity of our disposables lines to keep pace with demand in the market. We are continuing our plasma donor center experience programs, which now have included collections with YES technology.

The programs are validating the value proposition of the platforms' components and highlighting the benefit of a fully integrated paperless system. These programs are also informing the preparations necessary for donor centers conversion to the new system.

We are increasingly convinced that this synergistic combination provides a powerful platform for disruptive innovation. Our goal continues to be to help our customers to increase plasma yield per donation, improve collection center productivity and throughput, ensure the highest safety, quality and compliance and enhance the overall donor experience.

We remain optimistic about the commercial launch of NexSys PCS this summer and we are working with customers to keep pace with their growth aspirations for the year ahead.

Turning to the Hospital Business, a year ago, we formed this BU to better capitalize on key growth segments of the market by driving focus, building needed capabilities and developing winning strategies. Carter Houghton leads the business unit and I would like to turn it over to him for an update on the actions we are taking here..

Thanks, Chris. I wanted to spend our time today talking about the role of the Hospital Business, it's performance in fiscal 2018, and our strategy for the business in fiscal 2019 and beyond. I joined Haemonetics in December 2016 and I'm excited about our plan for value creation as well as the potential of the Hospital Business.

Our three business lines, Hemostasis Management, cell salvage and transfusion management serve common customers through a diverse product portfolio that offers both clinical and economic benefits.

Each business provides meaningful growth opportunities, but ultimately our success is dependent on rapidly growing both Hemostasis and transfusion management while reclaiming leadership in cell salvage. Fiscal 2018 was Hospital's first full year as an independent business unit.

We grew revenue 5% in constant currency, which compares favorably to last year's 2% growth rate. Hemostasis Management and transfusion management grew double digits, offset by a decline in cell salvage, partially due to OrthoPAT. Our performance in North America was strong with growth in all three product lines.

Our International performance was below expectations and ultimately the reason we missed our guidance as it makes up nearly half of our Hospital business. However, we made changes to our International organization and strategy earlier in the year. And as expected, we have begun to see an uptick.

Our revenue growth rate in International increased in the second half of the year, largely due to our performance in key markets that will drive most of our future International growth. Looking forward, we see significant opportunities for the Hospital Business Unit, but growth requires investment.

In fiscal 2018, we funded an expansion of our sales teams as well as new R&D programs to build clinical evidence and expand our portfolio. The sales force investments we have made are having a positive impact on our business. We are also focused on expansion in key geographies and continue to implement tailored go-to-market strategies.

Our success selling our full suite of products globally has been mixed, but we are successful in select markets which gives us confidence that with the right strategy and team, we can replicate that performance in all of our markets. Our R&D investments are focused on clinical trials and product development. Let me give you a few examples.

We are conducting multiple clinical trials across the Hospital business. Importantly, our U.S. trauma trial is progressing, and gaining FDA clearance will be an important milestone for increasing utilization of TEG 6s. In addition, a Haemonetics-sponsored BloodTrack study was recently completed and the results will be presented later this fall.

This quarter, we are launching two new products, TEG Manager software version 4.0 will enhance the TEG users' experience and offer a new feature, Interpretation Guidance. This feature will enable clinicians to simplify and customize clinical alert messages for each TEG parameter.

In addition, the Cell Saver connectivity solution taps into the need for hospitals to have wireless connected devices. It enables the transfer of blood salvage procedure and device data from Cell Saver Elite to a hospital's EMR system.

Lastly, we are creating a highly differentiated portfolio, particularly in Hemostasis Management and transfusion management and have a number of line extensions late in the development cycle with plans to launch in the coming quarters.

Due to their longer timelines, most of these activities won't begin to have an impact until fiscal 2020, but we are building momentum and remain excited about the prospects for the business. Finally, we are committed to adding new products inorganically and have been assessing a number of opportunities.

Most of our effort has been spent looking for products in our existing or adjacent markets that would be complementary to our current portfolio and would be favorable to top- and bottom-line performance. And now, I will turn it back over to Chris..

Thanks, Carter. Continuing on to our Blood Center business, importantly in fiscal 2018, we continued to manage this business for profitability in an environment of declining revenues, which, for us, included exiting unprofitable contracts as we further stabilize the business and separate it from our other operations.

In the quarter, revenue declined 13.3%, as anticipated, and contributed to a 7.5% decline for the year. We remain focused on aligning with our customers' needs and meeting their market realities. Our strategic priorities for the Corporation overall reflect our pivot from transformation to accelerated growth.

In addition to delivering near-term results and meeting our planned milestones, we are reducing complexity, improving operating performance and product quality, maximizing existing products and launching new ones, advancing our innovation agenda, pursuing targeted business development and developing our people.

I'd like to highlight several of these priorities. The Complexity Reduction Initiative is helping drive our transformation and is on track to deliver the targeted $80 million of savings. As planned, the savings impact was minimal in fiscal 2018, but we expect more than half the savings to materialize in fiscal 2019 and the remainder in fiscal 2020.

We are committed to addressing the underperformance in manufacturing and global supply. As part of Complexity Reduction, we have launched a series of initiatives to reduce cost and improve operations while furthering safety and product quality.

Programs underway already include the next wave of network and SKU rationalization, strategic sourcing and procurement, designed value or product teardowns, and a corporate-wide product quality initiative.

We have created a dedicated program support office to oversee these projects and we are recruiting key talent, including additional design and sustaining engineers as needed. Today, we announced that Dr. Said Bolorforosh will join the company in the newly created role of Chief Technology Officer.

His depth and breadth of experience developing medical hardware, software and disposables, improving quality and reliability, and building global med-tech businesses make him a valuable addition to our leadership team at Haemonetics.

He will report to me and oversee research, development and medical and clinical affairs as well as work with leaders in QA/RA, manufacturing and business development to champion our innovation agenda and ensure we have the right products, processes and people to energize our portfolio.

Key innovation agenda activities that he will oversee include launching a pipeline committee to guide investments and governance, building out our existing growth platforms, partnering with business development and licensing to source inorganic growth, liaising with our Scientific Advisory Council to further technological advancement with the medical community, pursuing new efforts in digital to improve product offerings with data and analytics and attracting, retaining and engaging scientific, engineering, medical and clinical talent.

To properly support our accelerated growth priorities, we have refined our capital allocation plans to fund three broad types of investments, organic growth, acquisitions and share buybacks to reduce equity dilution. Bill will outline our planned debt refinancing to increase our borrowing capacity and flexibility later in the call.

In conclusion, while we have more work ahead of us to reach our fiscal 2021 goals, I am confident in our strategies, our plans, our people and increasingly our progress and momentum. Therefore, we are guiding for both top and bottom line growth in fiscal 2019.

We expect revenue growth of 3% to 5% and adjusted EPS of $2 to $2.30 or 15% growth at the midpoint of that range. Thank you. Now, I'll turn the call over to Bill..

Thank you, Chris, and good morning, everyone. Please refer to the two tables we posted to our website, with a link in our earnings release. We provided specific revenue and income dollar amounts that derive the percentages I will refer to in my comments. As we identified, all revenue growth rates I will discuss are organic.

We had 0.8% revenue growth in the fourth quarter and 1.8% in fiscal year 2018, in line with our revenue guidance. For the year, revenue in Plasma exceeded our original guidance, Blood Center met our guidance expectations and Hospital fell below the guidance range.

Strong results in Plasma continued as revenue was up 10.5% in the fourth quarter and 7.1% in fiscal year 2018. North America Plasma accounts for about 80% of total Plasma.

In the fourth quarter, North America Plasma had revenue growth of 14.2%, including some benefit from a comparison with the prior-year quarter that was lower than normal due to customer order timing. Plasma revenue outside of North America declined 1% in the fourth quarter.

For fiscal 2018, North America Plasma revenue had 8.5% growth and the remaining Plasma business grew 2.2%. We remain highly confident in the continued market growth underlying our commercial plasma collection business, which continues to be driven by strong end-market demand for plasma-derived biopharmaceuticals.

Hospital revenue increased 4.9% in the fourth quarter and 5.4% in fiscal year 2018. Hemostasis Management grew 11.9% in the fourth quarter and 13.6% in fiscal year 2018. This growth was the second consecutive fiscal year with growth in the low-teens and included double-digit percentage growth in North America, China and EMEA.

Hemostasis accounted for 94% of the overall growth in Hospital in fiscal 2018. Hemostasis Management has exciting potential beyond its recent growth levels and continues to warrant investments to accelerate its growth.

Also within our Hospital Business, Cell Processing revenue increased 0.7% in the fourth quarter and 0.5% in fiscal year 2018, an encouraging turnaround given previous declines in the business.

We have informed our customers that we will be ending commercialization of the OrthoPAT product line within Cell Processing, a product line that declined $3.6 million or almost one-third in fiscal 2018. Aside from the OrthoPAT disposables, Cell Processing revenue grew 4.3% in fiscal 2018 and notably, the overall Hospital Business Unit grew 8%.

Blood Center revenue declined 13.3% in the fourth quarter and 7.5% in fiscal year 2018. Our latest guidance in February was correct in anticipating that fourth quarter Blood Center revenue would approximate second and third-quarter amounts.

In fact, revenue declined 13.3% due to an unusually strong prior-year fourth quarter resulting from customer order patterns. Our fiscal year 2018 Blood Center decline of 7.5% was in line with our expectations for a considerably moderated rate of decline from 14% in the prior year. This decline includes exits from business mostly outside the U.S.

that no longer met our profitability objectives. Platelet disposables revenue declined 4% in the fourth quarter and 5.3% in fiscal year 2018, attributable to continued adoption of a competitor's double-dose collection technology in Japan and volume declines in EMEA.

Approximately 33% collections, so 50% of platelet units collected in Japan were by double-dose collection techniques in the second half of fiscal 2018. Double-dose collections are expected to increase modestly in fiscal 2019. Red cell disposables revenue declined 5.4% in the fourth quarter and 9.8% in fiscal year 2018.

Both periods were impacted due to customer share loss. In the full year, lower pricing inherent in previously announced U.S. customer contracts contributed to the decline.

Whole blood disposables revenue declined 24% in the fourth quarter, primarily due to customer order timing in Japan and exits from unprofitable business arrangements outside of the U.S. The fiscal year 2018 whole blood decline of 6.9% shows a continued moderation in the rate of collection declines that we expect will continue over the long term.

Fourth quarter fiscal 2018 adjusted gross margin was 45.6%, up 260 basis points due to favorable product mix, foreign currency and lower non-cash inventory charges. Once again, the performance in the fourth quarter in manufacturing and supply chain did not meet our expectations and pressured gross margin.

Fiscal year 2018 adjusted gross profit was 45.9%, 120 basis points above the prior year. Similar to the fourth quarter results, favorable product mix and lower inventory charges drove gross margin higher. However, we fell short of our fiscal 2018 operating efficiency goals from cost savings.

We remain focused on stabilizing performance in this area and we have included anticipated benefits in fiscal 2019 as part of our Complexity Reduction Initiative. Adjusted operating expenses increased $9.3 million or 13.2% compared with the fourth quarter of fiscal 2017 and were higher by 320 basis points at 33.9% of revenue.

This increase was a direct result of the anticipated acceleration of investment spending in R&D and SG&A in both Plasma and Hospital. R&D spending was $3 million higher than any other fiscal 2018 quarter.

In the fourth quarter, we also had increased stock-based compensation and accrued for the payment of the discretionary bonus previously mentioned by Chris. On a year-to-date basis, adjusted operating expenses increased $2.8 million or 1% compared with the prior year and improved by 40 basis points to 31.3% of revenue.

Incremental productivity, including benefits of our fiscal 2017 restructuring activities and initial fiscal 2018 Complexity Reduction savings, enabled us to make fiscal 2018 planned investments with a minimal increase in operating expenses.

Adjusted operating margin of 11.7% was down 60 basis points compared to the fourth quarter of the prior year, as accelerated investments outpaced benefits from cost savings, product mix and favorable currency. Fiscal year 2018 adjusted operating margin increased by 150 basis points to 14.5%.

Our income tax provision on adjusted earnings was 11.6% in the fourth quarter of fiscal 2018, significantly lower than 22.2% in the fourth quarter of the prior year. Our fiscal year 2018 tax provision on adjusted earnings was 21%, 500 basis points lower than 26% in the prior year. These lower tax rates were due to the impact of recent U.S.

tax reform and continued favorable geographic income mix. Additionally, we had nearly a 2 percentage point benefit in fiscal 2018 related to a high level of stock option exercises in our third quarter, which were immediately deductible for tax purposes.

Fourth quarter fiscal 2018 adjusted earnings per share of $0.43 increased by 10.3% compared to the prior year. Fiscal 2018 adjusted EPS was $1.87, an increase of 22.2% over prior year and near the midpoint of our most recent $1.80 to $1.90 guidance range.

We had three specific items in our adjusted earnings in the fourth quarter netting to approximately $0.07 negative impact. We accelerated investments to support our future growth. We had a shortfall against our anticipated manufacturing and supply chain performance and we experienced a benefit from the lower tax rate.

In the fourth quarter and fiscal year 2018, we incurred approximately $5 million and $37 million respectively of the $50 million to $60 million restructuring and turnaround expenses anticipated by our Complexity Reduction Initiative.

These $37 million of fiscal 2018 expenses consisted largely of severance costs and were excluded from adjusted earnings. Free cash flow, before restructuring and turnaround costs, was $162 million in fiscal 2018, a 43% increase compared with $113 million in fiscal 2017.

The combination of improved operating results, disciplined asset management, strong working capital performance and favorable timing of capital expenditures, some materializing in fiscal 2019 instead of fiscal 2018, enabled fiscal 2018 to be another very strong cash flow year, well above our expectations.

Our inventory levels decreased by about $16 million or 9% in fiscal 2018 compared to fiscal 2017. We had improvements in our demand planning process as well as lower production levels than normal of PCS2 devices in anticipation of the NexSys PCS commercial launch.

In addition, we realized proceeds of $9 million from the SEBRA divestiture and $40 million from employee share programs. We paid $100 million for share repurchase, we repaid $61 million of debt and we funded $13 million for restructuring and turnaround activities, net of tax benefit.

We finished fiscal 2018 with $180 million of cash on hand, an increase of $41 million from the prior year. Turning to fiscal 2019, our guidance is for a 3% to 5% constant currency revenue growth and adjusted earnings of $2 to $2.30 per share.

The revenue guidance we provided for the company in total and the business units individually includes both volume growth and favorable pricing, but excludes any impact from currency. Our guidance for Plasma revenue growth is 7% to 10%.

As noted in the earnings release, that guidance includes 10% to 14% growth in North America, which compares with approximately 8.5% organic growth realized in fiscal 2018.

Similar to prior years, we include in our Plasma business unit guidance about $40 million of non-commercial revenue derived from selling plasma collection kits to Blood Center customers, primarily outside North America. There is virtually no growth related to the $40 million, which has 100 basis point negative effect on guidance for Plasma growth.

Our Plasma revenue guidance contemplates the commercial launch of NexSys PCS this summer. We anticipate a successful rollout and have included the initial deployment of NexSys PCS devices and related depreciation expense in the guidance.

The ramp-up of the commercial launch is expected to occur throughout the second half of fiscal 2019 and its benefit on an annualized basis will be much more pronounced in fiscal 2020. We expect 5% to 8% revenue growth in Hospital in fiscal 2019, including double-digit growth in Hemostasis Management.

Similar to fiscal 2018, growth in Hospital will be driven by Hemostasis Management and, in particular, TEG 6s devices and disposables in North America, EMEA and Asia. Our fiscal 2019 guidance for Blood Center revenue is a decline of 3% to 6%. We are anticipating continued modest declines in transfusion rates and single-dose platelet collection trends.

The Complexity Reduction Initiative we announced during fiscal 2018 continues to progress as planned. We affirm our expectation for $80 million annualized run rate of savings by the end of fiscal 2020, implying a full benefit in fiscal 2021. We expect to be at a run rate in excess of half of that $80 million target by the end of fiscal 2019.

So, we have included a gradual ramp-up to that level of savings in our fiscal 2019 guidance with elements of savings in both, cost of goods sold and operating expenses. We intend to make significant investments supporting and enabling revenue growth acceleration and margin expansion as contemplated in our long-term strategy.

These investments represent approximately $0.40 to $0.50 of earnings per share and are funded with our Complexity Reduction Initiative savings. In our Plasma Business Unit, we will incur increased expenses related to the rollout of NexSys PCS devices as well as the collection, repositioning and disposition of PCS2 devices.

Our Hospital business requires continued investment in operating expenses for the build-out of our sales force and the expansion of clinical and health economic studies.

We expect adjusted operating margin, which grew 150 basis points to 14.5% in fiscal 2018, to expand by 150 basis points to 350 basis points in fiscal 2019, increasing our adjusted operating margin into the 16% to 18% range.

In the most recent two fiscal years, we experienced a number of difficulties in our manufacturing and supply chain, including the inability to complete a liquid solutions production line expansion, inventory obsolescence and product recalls.

These matters held back our operating margin performance and in providing guidance for fiscal 2019, we have recognized their possible continuance.

The increase we expect in adjusted operating income in fiscal 2019 is expected to drop through to net income as the changes in interest, taxes and share count will likely net to no adjusted earnings per share impact. Interest rates are rising and debt service requirements are upcoming in fiscal 2019.

Approximately $200 million of debt is due in fiscal 2019. We are planning a refinancing of our corporate debt and expect expanded capacity, improved flexibility and lower annual principal repayments. We have included increased interest cost in the fiscal 2019 guidance in anticipation of this refinance.

Our fiscal 2018 income tax rate of 21% on adjusted earnings included nearly 2 percentage points of benefit from stock options exercised during the full year and one quarter of benefit from tax reform.

So, we view 24% to 25% as a normalized fiscal 2018 tax rate and we expect fiscal 2019's income tax rates to be lower than that normalized rate as we receive a full fiscal year benefit from tax reform.

During the fourth quarter of fiscal 2018 and the subsequent period through yesterday, we completed an initial $100 million accelerated share repurchase program within our $260 million authorization. As a result, approximately 1.4 million of our common shares will have been repurchased.

While we expect the authorized share repurchase program will address recent dilution, there will be further dilution from existing share-based compensation programs. On a 3% to 5% constant currency revenue increase, our guidance is for fiscal 2019 adjusted earnings per share in the range of $2 to $2.30.

Our strong cash-generating activity is expected to continue in fiscal 2019 and along with $180 million of cash on hand will enable us to fund needed investments. Capital expenditures are included in our fiscal 2019 cash flow projections at $150 million to $160 million, up from $75 million in fiscal 2018.

This capital outlay anticipates the completion of capacity expansions at Plasma manufacturing facilities to accommodate the next several years' volume growth as well as the production of NexSys PCS devices.

Including these capital investments, our adjusted free cash flow, before restructuring and turnaround cost, is expected to be $25 million to $50 million in fiscal 2019. We appreciate you joining today. We will now proceed to your questions..

And our first question comes from Anthony Petrone of Jefferies. Your line is now open..

Hi. Thanks and good morning. Congratulations on the strong year.

Maybe, Chris, maybe I'll start just sequentially getting some questions on the incremental spend in SG&A for fiscal 4Q and how much of that is going to be continued investments whether on the SG&A side or R&D in NexSys and how much of that actually was one-time and will not be repeated in the first few quarters? And then, I have two follow-ups.

Thanks..

Thanks, Anthony. With regards to SG&A, you know my bias around that separating out sales and marketing from the G&A. Our G&A continues to see improved productivity and reduction on a percentage basis.

The investments we're making in sales and marketing are a combination of R&D as well as sales and marketing, additional feet on the street both in North America and a change in our go-to-market model globally to have the appropriate support for those products.

In addition, we're anticipating a continued ramp of support required for the NexSys PCS rollout. Many of these are ongoing. They'll annualize, but they are built into our model going forward.

So, the R&D is kind of one-time and that will play through largely a combination of last year FY 2018 and the current year FY 2019, but the sales piece will stay with us, given it's just a larger footprint and a deeper penetration of those markets..

The follow-up should be on Plasma and capital allocation. So, you know it sounds like, if I'm not mistaken, the limited market release trials at this point are all completed. So, maybe just an update there. And then, it sounds like the timing from last quarter that you announced in terms of initial benefit being sort of in the calendar 3Q timeframe.

So, next quarter, it's sort of still on track. So, maybe just a reiteration on timing for the next couple of quarters. And then, lastly, just a lot of commentary on business development, how active is the BD pipeline? What are the expectations maybe over the next 12 months in terms of capital allocation between acquisitions and buyback? Thanks..

Sure. Let me break those down. In terms of NexSys PCS rollout, we are fully on track. No changes from our prior guidance. We expect the benefit associated with the commercial launch to be largely second half FY 2019 event for us and beyond of course. In terms of the customer experience programs, they are actually ongoing.

What we've found is, as we stated in our prepared remarks, there's a number of benefits. Customers get first-hand experience with the broad array of benefit associated with NexSys.

They are, in particular, working through the additional yield-enhancing solutions and the implications that has not only in their collections, but also in fractionation processing, which are important things to work out in advance of commercial launch.

And collectively, we're working through the changes that are required, standard operating procedure, protocols, to be able to run at full speed with NexSys PCS, which is an exciting part of what we're doing. So, they'll actually continue throughout FY 2019 as different customers are prepared to engage.

In terms of business development, capital allocation, Bill spoke a bit in his prepared remarks about this. We think about our capital requirements in three broad tranches, roughly equal in size.

We have a series of investments we need, be they plant, property and equipment to meet the expanded capacity, be they device manufacturing in TEG and Plasma and then kind of the operating expense increases that are associated with the growth in those businesses. That's kind of the first tranche. The second piece is M&A and inorganic growth.

I think, we now feel like we have stabilized the company's base platform and are prepared to actually step up our inorganic growth activities.

That will largely come into function, as we've said previously, of building out our growth businesses directly or immediate adjacencies and we'll continue to look opportunistically for things that would be a natural fit where we believe that we could be a natural owner for and achieve disproportionate results with the assets.

So, it's real and I think we're now prepared to actually make it a priority moving forward. I think the third piece is, as you referred to it, the share buybacks and our intent there. We had approval from the board to do the first $260 million of that.

That is entirely related to reducing and maintaining the equity dilution for our existing shareholders. So, ongoing process, more work to be done there, but that's the way we think about the three broad streams of capital..

Thank you..

Thank you. And our next question comes from Dave Turkaly of JMP Securities. Your line is now open..

Hi. Good morning. Just on the donor, the center programs, I was wondering if you could give us a little color about – maybe how some of them have progressed and maybe sort of how many of these you've already embarked on.

I know you said they're still ongoing, but sort of what percent of your customers are involved in it and just any color, any feedback in terms of how you think those programs are going?.

Dave, we're in active discussions with all of our customers in North America and increasingly now internationally as well about the NexSys PCS and what it will mean for them going forward. The customer experience programs are very much dictated by the customers' readiness to begin the actual program.

Some of them are programs that we have initiated, because we're working through refinements with the new device. Others are then working on their SOPs as I mentioned previously in the prepared remarks.

So, we're not going to comment on where individual customers are, how many have gone through, but there's a high degree of interest and, I think, if anything what we have discovered to our surprise pleasantly is that more time with the device is a really positive dimension to this.

We talk very specifically about the platform and the four quadrants of value yield-enhancing solutions, center throughput, compliance and paperless oversight and then the overall donor experience. I think we've been a bit soft in discussing that latter piece and the effect it actually has on our center.

What we're finding from experience programs is really quite a meaningful change in the dynamic of a center when NexSys is in place and I think more customers having that experience is to everybody's betterment..

And then, you mentioned the label you got in March.

I'm just curious sort of how that compare to what your expectations were and how does that it help in terms of these customer experience programs? And I'm sure yield improvement is a pretty big driver, an important factor for the collectors, but, yeah, I'd love your thoughts on sort of how that came in, first what you thought and how it's having an impact in the market..

We were quite pleased with both the timing and the results of the release from FDA. We got exactly what we had asked for. It helps that we were in early and ongoing discussions to that regard with the agency, but we got exactly what we wanted, user manual, label, directions for use, exactly we had hoped for.

The experience programs that we are conducting now by and large include the yield-enhancing solutions, which, as I said, is helpful both in terms of the actual experience which is being fully met, but also the implications for fractionation which are an important thing to work through jointly with our customers.

And as you stated, the 18 to 26 additional ml is quite real for them and has the associated benefit in their fractionation..

Thank you..

Thank you. And our next question comes from John Hsu of Raymond James. Your line is now open..

Good morning. Thanks for taking my questions. Chris, maybe if we could start on the revenue guidance for fiscal 2019, by our math, it does imply an acceleration to high-single-digit growth in fiscal 2020 and 2021 kind of in relation to your longer-term targets.

So, can you just talk about your level of confidence to driving that revenue acceleration?.

Yeah, John, we're not prepared to talk about anything beyond FY 2019 at this point. We are enthusiastic about the momentum we see in our underlying businesses.

And as those businesses represent a larger proportion of what we do and as they gain momentum internally, we feel quite good, which is why we see the early stage of growth acceleration in that 3% to 5% in constant currency that we're forecasting..

Okay. Great. And then, just one on timing of expenses or the savings from the Complexity Reduction Initiatives, it sounds like those are going to kind of ramp throughout the year.

So, I guess how should we think about the progression of savings and margin associated with that in fiscal 2019?.

Yeah. Hi, John. It's Bill. So, in fiscal 2019, obviously, we began to execute the Complexity Reduction program and we did see minimal savings in 2018.

And in 2019, what we're planning for is an acceleration of those savings that will generate up to or exceeding $40 million, which is half of the amount that we committed to on a run rate basis by the end of the year. So, that does imply more in the back half than in the first half of the year..

Okay. Great. And then, just maybe last one on gross margin fiscal 2019 versus fiscal 2018 as far as the progression what you expect. And then, also as part of that, how much of pricing benefit is baked into the Plasma and Hospital growth that you talked about? Thank you..

So, on gross margin, we're not going to guide specifically. We don't guide on the gross margin line, but in FY 2018, we did see an improvement in gross margin. And as part of Complexity Reduction, we've said that there are target areas within our operations and supply chain that will benefit from the Complexity Reduction Initiative.

And our expectation is that the operation and supply chain group will deliver those savings according to our plan..

Okay. Great. Thank you..

And what was the second part of the question? Pricing, yeah....

Just the pricing benefit baked in..

Yeah. We're not going to talk specifically about what the pricing element is in the plan. But again, just with Chris' comments that he made before, all the timing is in line with what we expected for Plasma and we expect a successful launch of the NexSys PCS..

Okay. Thank you very much..

Thank you. And our next question comes from David Lewis of Morgan Stanley. Your line is now open..

Good morning. A few questions. Bill, could we just start with here on costs and I want to kind of focus on Plasma with Chris.

Bill, for fiscal 2019, can you just talk about the timing or cycling of spending for SG&A and CapEx first half versus second half? Because it was pretty polarized and I don't think I caught the answer to the question on – I know for the cost restructuring initiative, you are not going to discuss sort of the relative drop-through of that spending.

But now that we're here in fiscal 2019, I wonder if you could share how you are thinking about how much of that is reinvested versus dropping through to the bottom line. So, those two things on cost, then I had a follow-up for Chris..

Yeah. So, I'll just reiterate one part of the comment that I made before which is half of the $80 million savings, so $40 million is expected by the end of FY 2019 on a run rate basis. So, there will definitely be a ramp as we move through fiscal 2019. Now, in the prepared comments, we did say that we are planning to reinvest $0.40 to $0.50.

So, $30 million to $40 million or so of those Complexity savings back into the business. And again, that would be in the Hospital business with the investment in the sales force and the clinical studies and health economics. And then, also on the Plasma side, there is significant cost to roll out the device and gain the benefits from NexSys PCS.

And in terms of the capital, we've been spending about $75 million per year on capital. In the guidance that was provided for our free cash flow before restructuring and turnaround, we have essentially doubled that amount going into fiscal 2019 in preparation for the rollout of the NexSys PCS..

Okay. And then, Chris, just on Plasma, a few questions here. The first is just what drove that relative momentum into the fourth quarter? It was the strongest Plasma number in six to eight quarters, so relative momentum into the fourth quarter. And what's the market assumption for Plasma growth heading into 2019? And I had one more..

So, the relative momentum for us in fourth quarter is a combination, David. There's clearly baseline growth in demand, particularly in North America, where all of our major customers are aggressively pursuing additional collection volume to meet their fractionation demands.

We're obviously participating quite directly in that and we benefited as a result. There's minor effects around the order timing. That's fine. We also have the added benefit in fiscal 2018 of our software contracts that have played through, which are both more revenue and more attractive revenue for us.

So, we're benefiting by the combination of those factors. In terms of market growth going forward, we're looking – again, talking specifically about North America and kind of a high-single-digit growth rate for our fractionation customers.

And then, we'll participate directly in that and we did bake some price into our guidance going forward as you noted..

Okay. But if market growth is upper single-digits, it does feel like the guidance for fiscal 2019 actually doesn't have a dramatic amount of price embedded in the North American market.

Is that a fair way of thinking about it?.

I would just say it this way, David, the pricing for NexSys PCS is largely a North America second half fiscal year phenomena. So, it gets muted by that. I think the overall guidance is global guidance and although we are concentrated in North America, we still have close to $100 million of revenue from that business outside the U.S.

The growth rates external to the U.S. are far more reserved than what you see in North America, and what you've been getting from us in guidance is a blended rate..

Okay. And then, Chris, just lastly, I think there's a perception that certainly you have a customer contract sometime mid-year, but should we think about it as one customer contract or a series of customer contracts around mid-year? And most of customers you're talking to have anywhere from 70 to 120 facilities in the U.S. market.

So, what are you hearing from them in terms of how quickly those facilities can be upgraded to the extent you have an executed contract? Thanks, so much..

Thank you, David. So, we've said from the outset that we will go just as fast as our customers are prepared to go, but, of course, no faster. And I think flawless implementation is key, particularly given the ongoing demand that they have for collected plasma. So, we'll have multiple discussions.

We're not going to talk about individual customers per se for reasons of confidentiality and competitive intensity, but I can imagine a spectrum, some will want to go all at once, others will want to take a staged approach and we need to be prepared to accommodate that full spectrum and the nature of the implementation will look different.

In some cases it will be turnkey support provision from us. In other cases, they really just want the device and an opportunity to craft their own procedures and it's much more hands-off and we can approach either and that's kind of been factored into our plans..

Great. Thanks so much..

Thank you. And our next question comes from Matt Hewitt of Craig-Hallum. Your line is now open..

Thanks for taking the questions. This is Lucas Baranowski on for Matt Hewitt here at Craig-Hallum. Last year, at your Investor Day, you talked about how you expect to be in over 600 Plasma centers by 2021.

Could you tell us how many you're in right now and if that's still where you think you're going to get to?.

Sure. Look, as we are in over 600 centers today, we enjoy something north of 70% share of the market and we would anticipate with the rollout of NexSys PCS that our aggregate share volume will at least hold constant. So, now, the number of 600 centers goes up simply because our customers are expanding their center count to meet collections.

We think there is an opportunity for NexSys to playing a vital role in helping them do that in addition to their own center expansions, but I think a number of north of 600 is reasonable..

Okay. That's helpful. And then, in your prepared remarks, you also talked about some of the headwinds from the double-dose platelet collections in Japan. That obviously those have been headwinds for a while.

Are there any geographies other than Japan where you see that becoming an issue?.

So, I think Japan is really the final market geographically for that to play out. Certainly, the pace of change was different in North America versus EMEA versus Asia and then Japan specifically, but for us, it largely played out across the other geographic markets, at this point, with Japan being kind of the remaining step.

And as we guided to, we see relative stability in the Japanese market now which is more a reflection of the patient population than anything else..

Okay. That's all I had..

Thanks, Lucas..

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Chris Simon for any closing remarks..

Thank you all for joining us today. Look forward to speaking again shortly..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Everyone have a great day..