Q3 2020 Earnings Call
Ladies and gentlemen, thank you for Sina might and welcome to the Haemonetics third quarter fiscal year 2020, <unk> earnings Conference call. At this time all participant lines are in listen only mode. After the speakers presentation. There will be a question answer session. So that's a question. During this session you would need to press star one on your telephone please be advised to today's conference.
Accordingly, if your Carney first assistance. Please press star Zero I would now like to have a conference over to your speaker today.
Okay got yet Investor relations. Thank you. Please go ahead ma'am.
Good morning, Thank for joining us for Haemonetics third quarter fiscal year 20 companies going back out.
I'm joined today by Chris Simon, our CEO and Bill Burke our CFO.
Today, well discuss your third quarter in year to date fiscal 20 resell.
Revenue growth rates are on an organic basis inexpert impacts from currency pratik tend to find decisions and divestitures.
I remarks today will include forward looking statements interim actual results may differ materially from it used to be resolved.
Information concerning factors that could cause results to differ is available on form 8-K, we filed today and periodic filings that we make with the FCC.
This morning, we posted our third quarter and year to date fiscal 2000, <unk> results are Investor Relations website.
We included updated Pease go 20 gardens and posted in the Lady good table with the information that would refer to on this call.
I would like to remind everyone that consistent with her best practices have excluded certain charges in income items from the adjusted financial results in garden.
Detailed and excluded items, including comparisons with the same period. The fiscal 19 I provided misinforming came in both the Investor Relations website.
Additionally, our press releasing backside include a complete piano balance sheet summary statement of cash flows as long as reconciliations of our reported and adjusted results.
And now I'd like to turn it over to Chris.
Thanks, Good morning, everyone and thank you for joining.
Haemonetics delivered strong third quarter and year to date fiscal 20 performance as our value drivers are powering revenue and earnings growth.
Our multiyear turnaround plans are on track and.
We are building momentum great long term value.
We grew revenue, 8.2% in the third quarter, an 8.3% year to date with all three of our business units contributing meaningfully.
Third quarter adjusted earnings per share was 94 cents up 49% from the prior year quarter and up 47% year to date due to revenue growth and margin expansion.
Adjusted operating income margin expanded by 570 basis points year to date as we continue to achieve productivity benefits strengthen our product portfolio and remain disciplined with our spending.
Moving to our business units.
Beginning with plasma.
Revenue grew 12.9% in the third quarter and 14.5% in the first nine months in North America, We grew 13.3% in the third quarter and 15% in the first nine months.
Underlying demand for plasma based medicines remains strong and we're seeing a second half rebounding collection growth to the high single digits. The majority of our customers showed good volume gains in the quarter, especially in the U.S. while volumes in Europe have also increased over the course of the year.
We also benefit from pricing software upgrades and competitive conversions.
Next is continues to live or across all four dimensions of its value proposition yield enhancement collection efficiency donor safety and overall satisfaction.
We completed an additional 1.5 million, yes collections since our last call, bringing the total to approximately 8.3 million procedures, yielding over 190000 extra leaders of plasma, notably Nexus customers group collections at twice the rate of our other customers in the third quarter.
Okay, and they achieved meaningful improvements in device turn rates and donor satisfaction.
We remain confident plasma its underlying market growth and our ability to help customers safely and efficiently collect more plasma.
We are investing an incremental and transformational innovation across all components of the Nexus platform.
Our donor management software as a key enabler of Nexus next link Dms has established itself as the industry standard and our software market share is rapidly approaching our device market share.
Earlier this year, we made a strategic decision to divest our Union South Carolina liquids facility and rationalize our product portfolio to exit the rapidly commoditizing margin dilute of liquids business.
We expect a negative revenue impact of approximately $2 million in fourth quarter as result of this decision.
Overall, we are encouraged by the uptick in customer collection volumes and our Dms share gains. Therefore, we are reaffirming plasma full year revenue guidance for fiscal 20 of 13% to 15% and anticipate growth will be at the lower end of the range.
Next up is hospital revenue grew 11.4% in the quarter and 9.9% year to date.
Ted continue to drive our performance growing 20% in the quarter on improved utilization market share gains and new product launches such as the TEG success platelet mapping cartridge and the U.S. trauma indication.
We also benefited from pricing and investments in sales force U.S., our largest tag market globally delivered exceptionally strong results in the third quarter.
Year to date take grew about 17% with all major markets contributing.
We are excited about our recent acquisition of the underlying TEG success technology previously license from core amid this allows us to pursue our new growth channels outside the hospital, such as outpatient clinics and also helps improve profitability.
Transfusion management grew mid teens in the quarter and year to date with both Bloodtrack and Safetrace TX contributing.
We continue to support the launch of the next generation of Stakes trace T X I remain optimistic about the growth of our software solutions in the hospital information systems market.
[noise] cell saver disposable showed some improvement in the quarter, but cell salvage continues to be a laggard due to vagaries and the capital equipment sales cycle that distort quarterly comparisons we are continuing to drive improvements in product performance and sales execution in this area.
Overall, we are building momentum in our hospital business. Therefore, we are reaffirming full year revenue guidance for fiscal 2008 of 11% to 13% and expect expect growth at the lower end the range.
Turning to blood center revenue was up 0.6% in the quarter and declined by 0.5% year to date.
If rhesus revenue was up 2.8% in the quarter and 2.2% year to date.
The main growth drivers for order timing in a situation, Japan, where our customer faced shortages due to technological difficulties with the competitors product.
Our team was proactive to ensure our customer had product to meet demand improved market share from this situation.
And continued success in the global rollout of our Universal Platelet protocol were partially offset by higher double dose collection rates, particularly in Japan.
Whole blood was down 0.2% in the quarter and down 3.4% year to date.
Favorable order timing in Japan, and EMEA in the quarter were offset by the ongoing decline in whole blood utilization rates in North America.
Addition, blood center software it was down double digits in the quarter and year to date due to previously discontinued customer contracts.
We expect higher blood center declines due to unfavorable order timing in the fourth quarter and a competitive loss of Athree says business to lower cost of sources of supply.
This business was historically higher margin, but the market is compressing and we chose not to compete on price alone.
We expect a revenue impact of approximately $2 million in the fourth quarter and $17 million in fiscal 21.
Overall, we're taking action to further stabilize blood center performance. Therefore, we are reaffirming full year revenue guidance for fiscal 20 and expect to be at the better end of the 4% to 6% decline due to strong year to date results.
Collectively our business units delivered robust performance and we remain committed to executing against our customer centric growth strategies.
The launches of Nexus TEG success, Safetrace, TX and the Universal platelet protocol are propelling us. Therefore, we expect total company revenue growth for fiscal 2000 <unk> to be at the midpoint of our guidance range of 6% to 8%.
Now I'll turn the call over to Bill.
Good morning, everyone. Our adjusted gross margin in third quarter was 52.1% improving 480 basis points compared with the prior year. This expansion reflects benefits from productivity savings.
From both our complexity reduction initiative and operational excellence program improved product mix and pricing.
We also had higher depreciation costs related to both Nexus device placements and expansion of our plasma production capacity, which were more than offset by the benefits I just highlighted.
Adjusted gross margin yesterday was 52% improving 440 basis points compared to prior year with essentially the same factors influencing result, as in the third quarter.
Adjusted operating expenses in this third quarter were $73.4 million, a decrease of 1% compared with the prior year.
As we continue to leverage our operating structure operating expenses were 28.3% as a percentage of revenue or 170 basis points lower than the prior year, we realized productivity savings from our cost savings initiatives.
And had lower research and development costs, mainly as a result of project timing.
Partially offsetting these items were continued investments in sales and marketing as we expand our hospital sales organization.
Adjusted operating expenses year to date were $220.1 million essentially flat when compared with the prior year.
As a percentage of revenue adjusted operating expenses year to date were 29.3% of revenue down 120 basis points versus prior year.
Similar to our third quarter, our year to date results were favorably impacted by productivity savings and lower research and development costs.
Roughly offsetting these benefits were investments in sales and marketing.
Third quarter, adjusted operating income $61.6 million increased by $18.9 million or 44% compared with the prior year.
Adjusted operating income year to date was $170.8 million, an increase of $48.5 million or 40% compared with the first nine months of fiscal 19.
Adjusted operating margins were 23.8% in the third quarter, and 22.7% year to date and expansion of 650, and 570 basis points compared with the prior year respectively.
While we remain disciplined with our spending the majority of our adjusted operating margin expansion came from our improvements in gross margin.
We remain confident in our efforts to improve our operating performance and raised our fiscal 20, adjusted operating margin guidance to be approximately 22%.
Our third quarter adjusted income tax rate was 17% compared with 16% in the prior year.
The third quarter adjusted income tax rate was higher than our first half as the benefit of shared testing and option exercises were lower in the third quarter compared with the first half the year.
Our year to date adjusted income tax rate was 14% compared to 17% fiscal 19.
This lower tax rate was due to high higher share vesting and option exercises in our first half fiscal 20 results.
Our third quarter adjusted earnings per diluted share was 94 cents compared with 63 cents in the prior year, an increase of 31 cents or 49%.
Adjusted earnings per diluted share year to date was $2.61 compared with $1.78 in the prior year.
An increase of 83 cents or 47%.
Our year to date adjusted earnings per diluted share included a net benefit of eight cents from the lower adjusted income tax rate and lower share count, partially offset by higher interest expense.
Our year to date performance has enabled us to increase our fiscal 20 adjusted earnings per diluted share guidance to a range of $3.30 to $3.40 from my previous guidance range of $3.10 to $3.20. This revised guidance implies 38% to 42%.
Growth in our adjusted earnings per diluted share when compared with fiscal 19 and represents the highest growth since we started our turnaround in fiscal 17.
Free cash flow before restructuring and turnaround costs was $95 million in the first nine months of fiscal 20, compared with $58 million in the first nine months of fiscal 19, primarily driven by higher income and lower capital expenditures, partially offset by higher working capital in.
Fiscal 20.
I will working capital cash outflow was $81 million year to date.
Despite an $11 million cash inflow in the third quarter.
The majority of the working capital increase was related to high inventory balances, which included the continued manufacturing of Nexus devices.
And the build in our disposable safety stock levels.
Due to strong cash flow and our year to date results, we were able to increase our free cash flow before restructuring in turnaround guidance for fiscal 22 at new range of $125 million to $150 million compared with the previous guidance of 102 $125 million.
In the third quarter fiscal pointing we entered into an accelerated share repurchase agreement that resulted in the repurchase of approximately 436000 shares for $50 million.
Coupled with the share repurchases, we executed in the first half fiscal 20, we have repurchased approximately 1.5 million shares for $175 million at an average price of $118 per share under the current share repurchase authorization.
We finished our first nine months of fiscal 20 was $126 million a cash on hand, a decrease of about $43 million from fiscal 19 year end.
Once again, we are pleased with the quarterly and year to date results. Our revenue growth operating margin expansion and EPS growth reflects strong execution and improved efficiency of our operations.
And now I'd like to turn the call back to Chris.
Thanks, Bill when a close by reinforcing a few points about our performance and growth trajectory.
Third quarter and year to date growth are evidence of the strength of our business unit strategies and the value our products bring to the market.
Complexity reduction in operational excellence, our multiyear restructuring efforts are additional value drivers that are having positive impact on the organization and our panel to make revenue growth and margin expansion sustainable.
We're rationalizing our product portfolio to focus on the products end markets that meet our strategic goals prioritizing investment and allocating capital to strengthen the core capabilities and technologies that make us distinctive we are committed to profitable growth and we act from a position of strength.
We are excited about how our people our championing these efforts and about how success is transforming our organization, we have momentum and we are using it to drive value creation.
Accordingly, we are increasing our fiscal 20, adjusted operating margin adjusted EPS and free cash flow guidance.
We also reaffirm our fiscal 21 aspiration of doubling fiscal 16, adjusted operating income and quadrupling fiscal 16 free cash flow before restructuring and turn around.
Thank you for joining today and I will turn the call back to the operator for your questions.
As a minus ask a question you need to press star one of your telephone to withdraw your question press the pound <unk>. Please stand by what we've compiled acuity roster.
Our first question comes from Anthony Petrone with Jefferies. Your line is open.
Thanks, Good morning, and congratulations on the on a go quarter here.
Maybe Chris and Bill just to start with with just some guidance question just the the bridge from.
On the first nine months through the ended the year and just the implied guidance for fourth quarter, you know both on the topline and margin side is it sort of implies.
You mentioned, Chris little bit of a slow down at the top line, but also from a margin standpoint by our mass something in the range of 200 basis points of a lower margin versus the third quarter should just a little bit of color on the bridge there and on a couple of follow up thanks.
Hi, Anthony it's Chris Thanks for that let me start with.
The revenue breakdown and then I'll turn it over to build to talk through the margin implications.
You know, we typically don't guide quarterly preferring instead to focus on longer term value creation. However, we do aspire to give the markets full transparency our year to date number of 8.3%. We think is obviously robust and speaks to the underlying value added products.
If we've got it to the midpoint of our.
Six to eight point range, you can back solve for that pretty straight forward, a what's driving the difference in the fourth quarter.
Really all three businesses have a role so for plasma we have benefit it meaningfully from the annualization from the Nexus contracts, which will annualize at this point in the year, we have gone through a process to help upgrade and convert customers to our next blank software platform.
Form, which is a onetime benefit that in some cases will not repeat and then as we called out on our prepared remarks, you made a choice not to compete.
Going forward in the Commoditizing liquids play so we've taken that out and we called out about $2 million implication for fourth quarter.
In the blood center business that by enlarge the number one factor is order timing, it's the nature of the business its contractual it's lumpy and that continues we've we've seen that previously.
We also have a specific challenges associated with a customer loss, where we chose not to compete on price alone as we called that out in our prepared remarks at the 2 million dollar ahead.
Hospital as a positive and they continue to show robust growth and momentum, which will help us get them back into the range, but they're really the factors on revenue and obviously revenue first and foremost implies the implication for margin, but I'll, let bill talked about the details of that.
Hi, Anthony spill.
And so our adjusted operating margins in the quarter were 23.8%, which for Haemonetics is an all time high and for the year, we're at 22.7%.
And that 22.7% is up almost a 600 basis point improvement versus the prior year now if you look back to an fyseventeen were up almost like a thousand basis points in our operating margins over the course of those three or four year period.
We are we did up the guidance to about 22%.
And when you really look at the margin you know you're talking about like $2 million matters a point on the operating margin. So if we have some investments in a particular quarter that the timing is off in slide into the next quarter. It can be a swap of.
Upwards of 2% just on that $2 million when you look at quarter to quarter. So yeah. It's implied that there's a slight margin moved down in Q4, but longer term, we're not concerned that thats reflective of where operating margins going to be.
That's helpful and maybe the fobs here would be one on plasma just.
Anything you're seeing there on hygiene shortages, we we pulled out the latest ft notices on drug shortages. So any update there you can share and and then just to clarify below margins you know how much of the benefit.
That we've seen year to date is from the second restructuring program, where the the gross savings I believe are 80 to 90 million. That's the target over the next few years, just how much of that has been realized to date. Thanks again.
Yeah, I think it's Chris Thanks, we're encouraged by what we see on.
Organic growth in plasma collection volume as we heads is suspected would happen we see a rebound more towards what we believe is the long term historical average, which is now in the 8% to 10% range, we'll see high single digits in the second half, which gets us fully back into.
Our forecasted range. So we feel great about that theres lots of puts and takes from one customer to the next given variability that exist, there and contracts and tenders et cetera that they compete for.
With 80% share that tends to normalize out I'm, not entirely, but but mostly and quarter to quarter, but we feel very good both short and long term about that and we feel great about the role that Nexus is playing and helping enable those connections.
Anthony on the 570 basis point operating margin improvement you could say that two thirds of that improvement is due to the combination of both the complexity reduction initiative and the operational excellence program savings.
Thank you somewhat.
Thank you. Our next question comes from Larry <unk> with Raymond James Your line is open.
Thanks, Good morning, everyone I'm just started out on on plasma or could you just help us understand the difference between the 9% disposables growth in that 13% for that category.
Yeah, Larry it's Chris so good good growth on the organic side in terms of collection volume at any point in time, we also participate in liquids, which were backing away from now we still have contracts in place, we're not going to leave any customers in the large but we don't have a preferred.
Dietary advantage, there and the customers understand that mm.
We will seek sources. Accordingly, we also have software software is really lumpy as you know the accounting standards. There have evolved and we have challenges in terms of quarter over quarter and when we recognize things.
In addition, we are involved in services and support it looks different in the U.S. than it does elsewhere in the world, but the combination of those things will contribute and along with some annualization effect make up for the relative difference that you see moved includes continued loot include that in our overall forecasting.
Okay. So that the message is however, the underlying demand of a 10% 8% to 10%.
You still feel good about and you know obviously, you're you're looking for high single digits index disposals growth in the second half that right now.
That's exactly right, Larry we actually feel excellent about it and we feel axle out the role that Nexus is playing making that happen or nexus customers grew at twice the rate of our other customers in the quarter and their collection volume.
Okay Perfect and then two other quick one Chris you alluded to in your prepared comments I get a pipeline a against access.
Sounds like it could be software driven.
Any any comments around.
Around that and the timing there and I guess I'll just ask for Bill quickly.
Again on on the on the inventory in the working capital to it looks like inventory increases did decelerate. If my math is right in the third quarter, but again I'm just trying to understand.
Again, what's behind the inventory I think again as you mentioned it it's really the excess capital bills, but.
How should we think about a that inventory number going forward.
[laughter] Leyritz, Chris on the you're on the innovation front right. So we have a robust innovation agenda. It's one of our core value drivers for the company, we have product roadmaps across all of our products for Nexus, we think about that across four dimensions theres the device itself.
There are is the software which is not the device includes the embedded software separately, we have our donor management software offering next link.
In addition, we have our kits, which is bowl bottle and harness the plastic disposables that are the core of this and then we have services, which includes data and analytics and tech support in customer service, we are challenging ourselves to innovate across all of those I do think that software as we called out in our prepared remarks.
Software as having the most immediate and positive effect our software share. We now have 12 of our 14 customers in North America on our software all of whom are upgrading to next link and we're in the process of a further innovating there that gets us.
75 share of the procedure volume one our software and we are committed to continuing to innovate small and large to make that the standard for the industry.
And Larry on the on the on the inventory, yes. We we've continued to have an increase I think most of the increase in that inventory balance happened in the first six months. This year. So you did see a flattening out of the the build in inventory and again the building inventory was a combination of both nexus devices and a building.
Our safety stock levels, we were at a very low safety stock level, and we felt that up to a reasonable level now now that we've hit that.
That level of disposable inventory that we're comfortable with we've obviously you don't see an increase in in the balance there.
Now going going forward. If he could you can consider us to be reverting back to what we have seen historical and inventory you're not going to see the same type of build that we've seen over the last nine months.
Okay perfect. Thanks, guys appreciate it.
Yes. Thank you. Our next question comes from Dave Turkaly with JMP Securities. Your line is open.
Great. Thanks.
The comment the.
Next is customers grew at twice the rate of others.
I guess I'd love to get your thoughts on [laughter], if that surprises you at all and then I'm sort of what that implies.
As you look at sort of your market share and some of these other customers convert.
Could we see.
Disposables group.
You know I don't know a double the rate you're seeing today, if if if you continue to convert folks.
Dave. Thanks I appreciate the question I think what your we're observing is again another aspect of the of the adoption cycle of the Annualization right. We worked very hard.
With our early adopters to make the seamless and and as positive experience as possible.
We're confident in our ability to help customers do that.
That said, it's meaningful change, particularly when they changed the device and the Dms software as they have so in doing so there's a complete new set of standard operating procedures and a learning curve that comes with an eye. The comment is more about the customers who have converted and the learning curve benefits that they are experiencing.
To extrapolate that to the entire customer base would be a bit of a reach and probably not something that I'd be comfortable doing from where we sit today that said when we look at those 8.3 million collections. The 190000 additional leaders collected the.
20% plus reduction in cycle time, the 90% improvement in compliance for under and Overdraw dolls, and the spike in donor satisfaction. It gives us confidence that the nexus value proposition in Israel.
Great and as a quick follow up I know the notice that you bought some IP I think around the tag on the hospital side.
And there was a comment about maybe moving beyond the hospital setting I was just curious if you might add any additional color on that thanks.
Happy to Dave Yeah, we're excited about tag, we're seeing growth rates that approximating, 20% here, a really nice acceleration, particularly at this stage in the products lifecycle. The transaction that we announced in the quarter was we bought out the remaining rights from core I met the original originator of the product we've had a really.
Positive long term relationship with core amid but the buyout that helps improve our profitability in the near term we've eliminated the royalty and payments there in but really what it does for US is it opens up the potential scope of use we can take this now the outpatient clinics, we can take it to mobile.
Settings show, So think emergency care think or mobile stroke units et cetera, all of where we're seeing demand for you know our form of of the take diagnostic and so elastic testing, which we think over time has the potential to expand the total.
Today associated with that product.
Thank you.
Thank you. Our next question comes from David Lewis with Morgan Stanley. Your line is open.
Hi, This is mason on for David Thanks for taking my question. So we're starting to see some of the OE P. savings as expected just talk about how you're feeling about their trajectory of those savings over the next couple of years are they still looking ratable or more back half loaded and I guess is a quick follow up margins inflected pretty meaningfully in fiscal 20, I should that tamper.
Down a bit in fiscal 2001 or should we think about margin expansion is kind of similar cadence.
So in operational excellence, we are seeing early savings we know we started the program in.
We announced the program in August or so.
I'm not going to talk specifically about the ramp by year.
But when we issued guidance for at fly 21 in May well be more specific in our.
May earnings call on what the OE piece savings are in our guidance.
And yet you know you you mentioned that comment about it being more backend loaded we haven't said that specifically what we've said is that a lot of these savings are related to the manufacturing and supply chain portion of our business and those savings may take a little bit longer to get to just because of the nature of what has to be done to attain.
And those savings, but again, we'll be more clear and in May.
And then on the on the margin improvement.
I'll speak operating margins, specifically, you know, we're really confident and where we are at the 22% for this year and given the operational excellence program that is out there.
We should continue to see improvement all else being equal in the business.
Great and then just as a quick follow up can we just confirmed that the two largest fractionators customers are now using next link.
No we're not going to talk about individual customers just out of respect the privacy for those customers Mason I. Appreciate the question I know, it's important to the investment thesis but.
We're just not going to go there. Thanks.
Right. Thank you.
Thank you once again, ladies gentlemen, if you wish that's question at this time. Please press Star then one our next question comes from Mike Mattson with Needham and company. Your line is open.
Good morning, Thanks for taking my questions I'm.
Just wanted to ask about 2020 fiscal 2001, I know, you're not giving guidance at this point, but streets modeling about 250 basis points of operating margin improvement it looks like.
It seems to me that you probably get there just with the restructuring and some underlying leverage without any benefit of any additional large contracts for Nexus. Just can you give me your thoughts on that.
Yeah, Mike your won't.
Won't be a surprise right. This is our third quarter earnings call. We are focused on delivering whats right in front of us and finishing this year with all the appropriate intensity and and velocity that's implied by our guidance.
The only thing and we're prepared to say about F. why 21 is that the original five year aspiration of doubling operating income and quadrupling free cash flow as it relate it back to fiscal 16 is an aspiration that we intend to me and deliver on beyond that will talk in may.
Okay. That's fine and then just on the hospital sales channel can you maybe talk about the latest investments, you're making there and whether or not you've been adding reps.
Yeah, we so we've made a series of investments there it relates back to our innovation agenda. We're really excited by what we're seeing the trauma setting we got that indication approved from Sta earlier in the year and need for North America for U.S. excuse me in a in the U.S. team has really embraced that we.
Have a the platelet mapping cartridge, which is available now globally and as help close some competitive product gaps, particularly outside the U.S. The combination of those two things and essentially a 50% expansion in our commercial capacity. We have both your traditional sales representatives account managers and we have clinic.
Specialists that are quota carrying but I'm really focused on education, and helping drive utilization and what we're seeing more so than in any prior period is a meaningful uptick in that utilization, which gives us confidence that.
We're building the right capabilities commercially for hospital and we're building the relevance of our product base, which I think helps us get.
Get comfortable with the acceleration in growth rate that we see even at this stage in the product cycle. So.
More to come and I think there candidly is more we can do outside the U.S. as we refine this we have a new head of that business unit globally and I think we're just now beginning to see the full potential of that customer centric global model.
Great. Thank you.
Thank you and I'm currently showing no further questions at this time, ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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