Good day, ladies and gentlemen, and welcome to the Q3 2019 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 be given at that time. [Operator Instructions] As a reminder, today’s conference call is being recorded.

I would now like to turn the conference over to Olga Vlasova, Investor Relations. Please go ahead..

Good morning. Thank you for joining us for Haemonetics third quarter fiscal ‘19 conference call and webcast. I'm joined today by Chris Simon, our CEO; Bill Burke, our CFO; and David Wilson, President of our Plasma business unit.

Please note that all revenue growth rates that we will refer to on this call are in constant currency, unless noted otherwise. Our remarks today will include forward-looking statements and our actual results may differ materially from anticipated results.

Information concerning factors that could cause results to differ is available in the Form 8-K we filed today and in all other periodic filings that we make with the SEC. This morning, we posted our third year-to-date fiscal ‘19 results to our Investor Relations website.

We posted revised fiscal ‘19 guidance and tables with information that we will refer to on this call. Those tables are within the document entitled Analytical Tables and Supplemental Information to which we provided a link in our release.

Today, Chris and Bill will discuss our financial and business performance, trends in our served markets, our strategy, our complexity-reduction initiative and revised fiscal ‘19 guidance. David will discuss highlights about the plasma market and NexSys launch; and then we will proceed to 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 charges and income items from the adjusted financial results, which we'll talk about today.

Such items included restructuring and turnaround charges, accelerated device depreciation, deal-related amortization expense, asset impairment, and related charges and certain legal charges. In the first half of fiscal ‘18, we excluded the gain we realized upon sale of our SEBRA line of benchtop and hand sealers.

Finally, in all periods, we excluded the tax effects of such items. Further details of third quarter and year-to-date fiscal ‘19 excluded amounts, including comparisons with the same periods of fiscal ‘18, are provided in Form 8-K we have posted to our Investor Relations website.

Our press release and website also include a complete P&L, balance sheet and a summary statement of cash flows as well as reconciliations of our reported and adjusted results. And now, I'd like to turn it over to Chris..

Thanks, Olga. Good morning, and welcome to today’s call. We are making good progress at the midpoint of our turnaround and our performance reinforces that our strategy to create leading positions in winning segments to deliver superior short and long-term results is working.

The Company is in launch mode as our plasma and hospital value drivers propel us forward. The complexity reduction initiative continues to deliver savings and free up resources for growth as we change the way we work to ensure scalable, sustainable business for the future. In the quarter, we grew revenue 6%.

Compared to the same period last year, this is an acceleration of 480 basis points, primarily driven by strong demand for our plasma and hospital products. Adjusted earnings per share was $0.63, which is comparable profitability to the prior year. Bill will talk about the details of the quarter in a few minutes.

Year-to-date, we grew revenue 7% and adjusted earnings per share 24%. Adjusted gross profit expanded by 170 basis points versus fiscal ‘18 and adjusted operating margin was 17%, a 150 basis-point improvement over the same period last year. Plasma and hospital grew 14.5% and 7.3%, respectively, and they're becoming a larger part of our total portfolio.

Decline in blood center revenue were consistent with our expectations as we continued to streamline our product offering and exit unprofitable contracts. Over time, the resulting shift in portfolio mix will have favorable impact on our gross margins.

The complexity reduction initiative and productivity efforts are delivering expected savings and helping to create increased operating and financial leverage. We are generating increased cash flow to fund investment in three areas, sales and clinical support, product launches and performance-based compensation to attract and retain the best talent.

We have had ongoing operational challenges that impact near-term results. However, we are confident in our plans to address these issues to drive sustainable, long-term growth and increased profit. Turning to our business units. We continue to be excited about plasma and the NexSys platform and the value it brings to our customers.

I will turn the call over the David Wilson for an update on the launch and our performance..

Thanks, Chris. One year ago I discussed our plans for the NexSys launch. Today, I want to give perspective on the plasma market and share some of the results we are achieving with our rollout, which are tangible evidence of the advantage of our fully integrated system it’s creating for contracted customers.

For the market, North America plasma center collection volume growth by select customers continues to be the key driver in our fiscal ‘19 year-to-date results.

The underlying demand for immunoglobulin based medicines within our customers’ portfolios is incentivizing them to continue to invest in key aspects of their operations, including the number of plasma centers and plasma fractionation capacity. Published estimates for immunoglobulin drug demand are at or above 8%.

Historic plasma collection volume growth has been about 9% and new plasma center openings have been approximately 12%.

The Protein Plasma Therapeutics Association, the Marketing Research Bureau, our customers and our own forecast model support the projections that the volume of available plasma must effectively double by 2025 to keep pace with clinical demand.

As the market leader, we have invested to expand our disposables production by 50%, and we will continue to expand as appropriate, to support projected industry growth.

Our NexSys platform is a paradigm shift, allowing customers to collect more plasma at lower costs, and we enable that by yielding more plasma per individual collection while enabling more collections per day. Donor safety is at the forefront of our efforts.

The NexSys platform comprised of both the NexSys and NexLynk DMS provide a bidirectional paperless environment, which helps to eliminate the potential for human error.

This digital environment supports both the biometric donor data, determining the operating parameters of the plasma collection device as well as the center operational data necessary to document and track essential aspects of daily processes.

Haemonetics’ capability to offer both the machine and the donor management software gives us unique capabilities and insights to innovate and safely support our customers’ needs. Our experience in the field and our customer benefits are powerful.

We have now converted approximately 20% of our North American install fleet to the NexSys PCS device and have six months of real-world experience at scale. We have demonstrated across more than 100 centers we have converted, in many cases overnight, that we can reliably restore them to full operations in less than 10 hours.

This is mission-critical for our customers who are collecting at unprecedented rates and cannot risk disruption in center productivity. Our rigorous attention to detail pre-rollout and our donor center experience programs enabled us to prepare all aspects of center conversions in advance, enabling the seamless transitions.

Now, with over 2 million NexSys collections completed, we continue to refine our offering including customers training and service, device and software maintenance, and as necessary, component upgrades. Converted centers are benefiting from the capabilities of the new platform.

Pure plasma gains per collection with the YES technology have yielded on average the indicated increase of 18 to 26 milliliters, about 3%. In a sample set of over 0.5 million NexSys PCS collections with YES technology, the average gain was 23 milliliters, which was expected, given the biometric profile of the North American donor population.

In addition, a recent sample at an early adopting customer shows approximately a 20% reduction in donor door-to-door time. Notably, we are seeing a decrease in plasmapheresis process times, which accounts for about one-third of the increase in center throughput. The other two thirds are pre and post-lobotomy.

For a busy center with waiting donors, this will correspond to meaningful increase in volumetric productivity without increasing the number of collection devices.

Increased donor retention is a goal for our customers, and the positive impact is the NexSys platform experience on donor satisfaction is foundational to sustain growth at established centers. One of our key learnings has been the critical importance of DMS software to our customers.

While we have the ability to offer our NexSys PCS as an open architecture device, we believe that most customers will want to operate NexSys PCS with the accompanying NexLynk DMS in order to fully realize the immediate and future benefits of our fully integrated bidirectional platform.

Unlike device conversions, software platform upgrades take months. Fortunately, we began that process over two years ago and are advance phases of upgrade or installation across our existing DMS customer base. We have demonstrated that we can sequence customer conversions as device first, software first or parallel pathway.

Software first is emerging as the preferred pathway to seamless activation of the full NexSys platform. In closing, we have established NexSys as our flagship platform. It is designed for seamless upgrades which our R&D teams are actively pursuing to further improve yield, center productivity and donor safety.

It’s truly an exciting time to be at Haemonetics..

Organic growth; targeted M&A; and share repurchases. In the quarter, we completed our $260 million share repurchase program to address prior and ongoing dilution. Our fiscal ‘19 plans are on track and we are committed to delivering short and long-term results.

Our teams are working hard and we are making strides to become a fast-growing med-tech company capable of outpacing the market. Thank you. I will now turn the call over to Bill..

Thank you, Chris and David, and good morning, everyone. Please refer to the tables we posted to our website with a link in our earnings release. We provided specific revenue and income dollar amounts that derive certain percentages I will refer to in my comments. All revenue growth rates I will discuss compared with the appropriate prior year period.

On that basis, we reported third quarter and year-to-date revenue growth of 5.9% and 6.7%, respectively. Plasma revenue increased 16% in the third quarter and 14.5% year-to-date. North America plasma, which accounts to about 80% of plasma revenue, was up 20.7% in the third quarter and 18.3% year-to-date.

North America plasma growth included disposables revenue growth of 19.2% in the third quarter and 17% year-to-date. Revenue growth in the third quarter accelerated compared to the first half of fiscal ‘19 as NexSys pricing and strength in liquids benefited results.

We believe that our plasma business will continue to see strong revenue performance and we reaffirm our fiscal ‘19 guidance of global plasma revenue growth to be 14% to 16% and North America revenue growth to be 17% to 19%. Hospital revenue increased 4.5% in the third quarter and 7.3% year-to-date.

Within hospital, haemostasis management grew 9% in the third quarter and 17% in the first nine months. This lower rate of growth in the third quarter was partially caused by order timing in China and North America that we experienced in the first half of this fiscal year.

While we continue to develop many of our markets, revenue fluctuations are expected within the capital sales cycle and the associated ramp of disposable usage.

We considered these impacts in November when we updated our haemostasis management fiscal ‘19 guidance to a high-teens percentage revenue growth rate, and we are reaffirming this guidance today. Continuing on to the other part of the hospital business, cell processing revenue increased by 1.4% in the third quarter and 28% year-to-date.

Excluding OrthoPAT disposables, a product whose commercialization will end this fiscal year, cell processing revenue grew by 4.1% in the third quarter and 3% year-to-date. Cell processing growth in the third quarter was driven by strong performance across all geographies in transfusion management software such as BloodTrack and SafeTrace Tx.

We remain confident in the performance of our hospital business and reaffirm our fiscal ‘19 revenue guidance to be in the range of 6% to 9%. Blood center revenue declined 9.2% in the third quarter and 5.8% year-to-date.

This higher rate of decline compared with the first half fiscal ‘19 was expected and was driven by the timing of strategic contract and product’s exits in whole blood including order timing associated with these exits. We continue to expect the revenue decline within our blood center business of 3% to 6% and reaffirm our fiscal ‘19 revenue guidance.

We are reaffirming our overall fiscal ‘19 revenue expectations for the total Company at 6% to 8% growth over the prior fiscal year. Adjusted gross margin in the third quarter was 47.3%, down 30 basis points compared with the prior year.

We benefited from complexity reduction savings and pricing initiatives, collectively driving a 290 basis-point improvement to our gross margin. Offsetting these benefits were product mix, higher NexSys PCS depreciation, higher freight and logistics costs, inventory charges primarily related to impact from poor quality and currency.

Adjusted gross margin year-to-date was 47.6%, improving a 170 basis points compared to the prior year, primarily driven by the factors that drove the next favorability we saw in our third quarter results. Adjusted operating expenses in the third quarter were $74.2 million, an increase of $4.5 million or 6.5% compared to the prior year.

As a percentage of revenue, adjusted operating expense in the third quarter increased by 20 basis points to 30%. Adjusted operating expenses year-to-date were $219.4 million, an increase of $15.4 million or 7.5% compared to the prior year.

As a percent of revenue, adjusted operating expenses on a year-to-date basis were 30.5%, essentially the same as the prior year. There was four specific factors driving increased operating expenses in the third quarter and year-to-date, which more than offset the savings from our complexity reduction initiative.

First, we had ongoing investments required to support the rollout of the NexSys PCS devices; second, we continued sales and marketing investments of hospital to further penetrate and expand our markets; third, we had higher equity and other performance-based compensation as we continue to transform our company culture; and fourth, we had increases in freight costs due to increasing volume, higher carrier rates and inefficiencies in our logistics planning.

Third quarter adjusted operating income of $42.7 million increased $900,000 or 2%, while adjusted operating margin of 17.3% was down 60 basis points. The third quarter adjusted operating income was impacted by gross margin dynamics as well as the higher operating expenses we just discussed.

Although operating income growth was lower than the results in the first half, on a dollar basis, adjusted operating income in third quarter was our highest operating income in more than three fiscal years.

On a year-to-date basis, adjusted operating income of $122.3 million increased by $18.3 million or 17.6%, while adjusted operating margin of 17% improved to 150 basis points compared to the prior year.

In summary, while accelerating revenue growth and complexity reduction savings drive meaningful margin expansion, we continue to make strategic investments to support our growth. We are encouraged by the operating income growth and leverage we have experienced in our year-to-date results, and we are committed to achieving our longer term objectives.

Our income tax provision on adjusted earnings was 16% in the third quarter compared with 18% in the third quarter of the prior year. The year-to-date income tax rate on adjusted earnings was 17% compared to 24% in last year's first nine months. These lower tax rates were due to the full-year impact of U.S.

tax reform and higher share vesting and option exercises, which were immediately deductible for tax purposes. Third quarter fiscal ‘19 adjusted earnings per diluted share was $0.63, an increase of $0.01 or 2% compared to the prior year’s third quarter.

Year-to-date fiscal ‘19 adjusted earnings per diluted share was $1.78 compared to a $1.44 in the prior year, an increase of $0.34 or 24%. Our expectations are intact for fiscal ‘19, and today, we reaffirm our guidance for adjusted operating margin of 16% to 18%, and adjusted earnings per diluted share of $2.25 to $2.35.

We remain on track and also reaffirm our expectation to realize $80 million of savings from our complexity reduction initiatives and the run rate in excess of $40 million at the end of fiscal ‘19.

We continue to make significant [Technical Difficulty] approximately $0.40 to $0.50 of earnings per share that are funded with our complexity reduction savings. We incurred $2 million of restructuring and turnaround expenses in the third quarter of fiscal ‘19 and $7 million of such expenses year-to-date.

Cumulatively, including amounts in fiscal ‘18, we have incurred approximately $44 million of the $50 million to $60 million restructuring and turnaround expenses anticipated by our complexity reduction initiatives. These expenses were excluded from our adjusted earnings.

Free cash flow before restructuring and turnaround costs was $58 million year-to-date compared with $113 million in the same period of fiscal ‘18.

The lower free cash flow in the first nine months of fiscal ‘19, higher investments related capital expenditures and inventory including the deployment of NexSys PCS devices and expansion of plasma disposables production capacity. We finished our third quarter with $155 million of cash on hand, down $25 million from fiscal ‘18 year-end.

Capital expenditures are included in our fiscal ‘19 cash flow projections at $150 million to $160 million, up from $75 million in fiscal ‘18. Capital expenditures include the completion of capacity expansion at plasma manufacturing facilities to accommodate anticipated volume growth and production of NexSys PCS devices.

We are encouraged that the operating income leverage we have seen as a resulted in increased free cash flow. This has enabled us to increase our free cash flow guidance to $65 million to $75 million from the original guidance of $25 million to $50 million. In the third quarter, we completed our $260 million share repurchase authorization.

During fiscal ‘19, we repurchased $160 million of our common shares, and when combined with the previous $100 million repurchase from late fiscal ‘18, a total of 3 million of our common shares repurchased at an average cost of about $87.

Our share repurchase program was used to address recent dilution, however, further dilution from existing share-based compensation programs has and will continue to offset this benefit. We appreciate you joining today, and we will now proceed to your questions..

[Operator Instructions] And our first question comes from David Lewis of Morgan Stanley. Your line is now open..

I’ll just ask two questions here, some right upfront maybe on the plasma side.

Chris, just to speak forecasting plasma acceleration fiscal ‘20 for the business, how do we think about plasma in ‘20 as it relates to the market and NexSys contracting, can the plasma business accelerate next year? And then, Bill for you, just seeing significant investment in the business, still deep into ‘19, where are we on the pace of investments and how should we think about this level of investment heading into next year? Thanks so much..

With regards to the growth in plasma, as David outlined in our prepared remarks, we are working hard to keep up with robust demand in our market. We’re not in a position today where we are guide on fiscal ‘20 but we feel quite good about what we’ve put out there for the current year and how will finish here in this quarter.

And longer term, we’ve spoken about 8% to 10% growth in collections based on the end-market demand, the expansion in fractionation capacity, the addition of new collection centers, and our success in the market, both with PCS and with NexSys. We feel quite good about our ability to deliver that long-term growth..

Okay. David, on the second part of your question on the investments. We are still tracking at the $0.40 to $0.50 investments that we committed to at the beginning of the year. Now, I think your question is on those investments, how much are they sustainable or repeatable going into FY20.

A lot of the investments that we’re making this year are what we classify as depreciation related to the capacity expansion that we are making for plasma as well as we deploy the NexSys devices. We have incremental depreciation on those devices. We are also incurring rollout costs as we start to place the NexSys PCS devices.

So, there is a timing element of the devices rolling out versus the benefit associated with that rollout and those costs. We’re continuing to invest in R&D and we see that going forward.

In this year, we do have the dynamic of -- on the hospital side of the business, we invested last year in sales and clinical specialists that we’re seeing annualization of those costs, but in the P&L, obviously those costs will remain as we move forward..

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

Congratulations on the sixth ring up of the New England, although a little asterisk on the Saints loss to the Rams, but we could debate that another day. Maybe just a couple of questions on plasma in particular for the implied fourth quarter guidance. And so, it seems like there is a big swing factor.

So, year-to-date, you're trending certainly within range. But, if you kind of guide 13% to 16% for the year, you can kind of swing from below the low end of the range to above the high end of the range.

So, what are the swing factors in plasma for the fourth quarter, particularly in volumes and placements in NexSys, and I'll have a follow-up question? Thanks..

Yes. Anthony, it's Chris. Let me comment and if David wants to add further to that, it's -- we feel good about the range. We're trying to get -- it's always challenging at this point in the year. We don't issue quarterly guidance for all the reasons we've talked about in the past, but inevitably we do when we reaffirm our third quarter performance.

But, way we are thinking about it, it varies quite dramatically from one customer to the next. What we’ve -- we have constant dialogue with them about this, where are they, how are they thinking about their quarterly needs as well as the ongoing rollout of NexSys PCS and all the associated offerings hardware, software and our services.

So, that all factors in. As you would have seen in the quarter and Bill detailed in the prepared remarks, we have both organic demand, we have pricing, we have benefit on liquids, we have benefit on software. The combination is what gives us confidence. We'll be very -- we're very confident in the range we’ve put forth..

And then, the follow-ups would be on freight and logistics, maybe for Bill, like how much of that can be offset going forward and how much of that sort of sticks certainly into fiscal 4Q, but maybe does that bleed into fiscal ‘20? Thanks again..

So, overall, on the freight costs, we are seeing increase in our percent of freight costs to revenue. So, that neutralizes the volume impact.

We are in the process now of really going through and analyzing the data in terms of where the rising freight costs are coming from as well as looking at the inefficiencies that we have in our logistics planning processes, and we're looking for quick wins that we can address immediately and get some benefit, not just in Q4, but also in FY20..

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

Great, thanks. Based on your commentary of the North American fleet conversion, I guess, our back of the envelope calculation might be something like 1,500 new systems. I'd love to just get any color on that math. And then, obviously, the 10-hour conversion for the machines is impressive. You mentioned the software first sort of being a preference.

I'm just curious if that -- it would make potentially that sort of a placement, number we referenced earlier by quarter, sort of a more likely ramp or rate, as we look forward, given that some are choosing to install that first..

Thanks, David. I'll let our David speak to the sequencing and the timing and how that plays out. In terms of quantifying the progress on the launch, we felt it was important back at -- last summer to communicate, we had moved into commercialization. We wanted to give you a sense as we will continue our macro progress.

I would like to walk back some of the detail about individual devices or centers over time. Candidly, I think if we give you a rough kind of how many collections we'd be able to back into what you need, track our progress, without betraying either confidentiality or putting ourselves at competitive disadvantage.

So, we want to be transparent, but not to the point where it conflicts with confidentiality. And I think going forward we'll probably talk in general terms about just total volume of collections, which gives a good measure of our progress as well as the reliability of the device in a commercial setting..

Yes. As I said, we can convert, we've demonstrated that we can convert center -- the machines in a center overnight, less than 10 hours. Software is different. It does take months. It begins with installation, configuration, validation, customer reports.

So, all of our customers are in various stages of either upgrading or converting to our various platform. And I can tell you that we're heavily engaged with all of them on their individual strategies to get the software converted.

As I mentioned earlier, to really take advantage of the full NexSys platform, having both our DMS NexLynk software and our NexSys PCS connected, really supports the value prop around plasma yield, center productivity, safety compliance and overall donor experience. We are seeing the validation of that.

So, heavy planning upfront, execution and follow-through, both with machines and software, and we're well-positioned to move exactly at the place that our customers request..

Got it. And congrats on the FDA -- the filing on the TEG side, but just to sort of try to get a little more color there. I think you said order timing in China and North America.

I was wondering, any color on the 5000 versus 6s or any other color you could give in terms of, obviously 9 is not a bad number, but based on the growth rates we've seen lately, it does look like a little step down. I see you reiterated the year. So, you're comfortable, it's coming back.

But, I'd just like to get any color you'd be willing to give on why that sort of happened this quarter. Thank you..

I think, in any given quarter, you are going to see that jump around a bit. That is just a nature of the market. We like the 5000 a lot but the 6s is a superior product. And for all the markets where we have the broader indications there, we are upgrading and converting.

It is the disproportionate driver of our growth trajectory, both for TEG but also for hospital. But, that ties us to the vagaries of the capital purchasing cycle.

And we can see a few devices literally in one quarter versus the next or as was the case here for China, I said distributor contracts and the associated volume requirements against that will move us meaningly from one quarter to the next.

We feel quite good about the annual guidance and maybe even more so about the long-term growth trajectory of the TEG product, again propelled by the success..

And our next question comes from Brian Weinstein of William Blair..

This is actually Andrew Brackmann on for Brian. I wanted to follow up on the previous question on the NexSys rollout. In the past, you kind of have seen like maybe the rollout wasn't as linear as the Street may have been expecting.

So, I guess, when you are getting pushback from customers, is it more around price or is it around that I guess perceived operational burden of bringing on a new system during this heightened demand of plasma collection? Thanks..

I would say all the above. And the one piece I would -- comment I would make about contracting per se is it's a bit more complicated than we probably go on into the detail in the past. We have disposable agreements; we have software agreements; we have in some cases liquid agreements; and we have services agreements.

And we don't generally break those out. They're frequently but not exclusively tied to the underlying platform. Certainly, NexSys gives us the ability to open up those discussions in an appropriate way.

But, contracting isn't binary, and the sequence and the timing, as David discussed, will vary in ways that probably won't be intuitive or obvious outside in for obvious reasons..

And then, just one quick follow-up.

Any update on the competitive front that you're seeing in plasma?.

Yes. We've said all along that we welcome innovation-based competition in Plasma. We think what we're doing here, as David articulated, is a paradigm shift. There is meaningful, meaningful value to be created for our customers.

And with the leadership position that we've enjoyed in the market, if our competitors follow our lead and manage accordingly, I think it just bodes well for a healthy end market and our ability to continue to innovate and compete on innovation going forward, which is really our intent..

[Operator Instructions] And our next question comes from Jim Sidoti of Sidoti and Company. Your line is now open..

So, I know you're reluctant to get into too much detail regarding the quantity of units that you're rolling out.

But, can you just give us a sense -- as we look into the fourth quarter and into fiscal 2020, what the acceleration will be? Will it be 20% more next year or 25% or -- can you just give us some idea how fast you're going to accelerate the rollout?.

I know you appreciate this. We're not of guide for FY20 today. We reaffirmed guidance for FY19. I will say this.

We remain highly confident in our ability to succeed with NexSys, probably even more or so now, based on the growing evidence of the value to our customers, the proven reliability, and our demonstrated ability as David highlighted to transition platform seamlessly. All that said, it is a paradigm shift, and that may take time.

What I would say is, we will be patient because we are quite appreciative of the value we’ve created and the potential of that platform going forward..

Thank you. And that concludes our question-and-answer session for today. 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..