Q1 2022 Haemonetics Corp Earnings Call
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Good day, and thank you Chris.
What kinds of the human ethics first quarter fiscal 2020 day conference call.
At this time all participants are in a listen only mode.
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Today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Olga <unk>. Please go ahead.
Thank you good morning, everyone.
Thank you for joining us for human at Inc. First quarter fiscal 'twenty two conference, calling back Cat I'm joined today by Chris Simon Our CEO and Bill Burke our CFO.
This morning, we posted our first quarter fiscal 'twenty results to our Investor Relations website, along with our updated fiscal 'twenty two guidance and the analytical people with the information that we'll refer to on this call.
Additionally, we provided a complete P&L balance sheet summary statement of cash flows as well as reconciliations of our GAAP to non-GAAP financial results and guidance.
Before we get started unless otherwise noted all revenue growth rates discussed today are on an organic basis and exclude the impact of currency fluctuation strategic exit the product line acquisitions and divestitures and the impact to the 53rd week in fiscal 'twenty one.
As in the past, what we refer to non-GAAP financial measure throughout this call to help investors understand human ethics ongoing business performance.
Please note that these measures exclude certain charges and income items.
Please refer to this morning's earnings release for details on excluded items, including comparisons with the same periods of fiscal 'twenty, one and a reconciliation to our GAAP results.
Our remarks today include forward looking statements and our actual results may differ materially from anticipated results.
<unk> cautions that these forward looking statements are subject to risks and uncertainties, including the potential impacts from the pandemic on our results and other factors referenced in the Safe Harbor statement in our earnings release and in our filings with the SEC.
We do not undertake any obligation to update this forward looking statement.
And now I'd like to turn it over to Chris.
Thank you Olga good morning, everyone and thank you all for joining.
Today, we reported organic revenue growth of 6% and adjusted earnings per share up 50 cents up four cents four 9% compared with the first quarter of the prior year.
We are encouraged by our overall performance despite the impact of the Covid pandemic, we are trending favorably and anticipate continued improvements in plasma collection volumes strong procedure recovery is fueling outsized growth in our hospital segment in the blood Center market is resilient.
I want to share some updates about how we are evolving our approach to managing the businesses to meet our growth commitments Chad.
Chad nickel has been named President global plasma and Blood Center businesses, Chad as a business builder, who has been an integral part of human outage for 12 years his vast knowledge of our products and our markets across the globe make him uniquely qualified to lead this business under Chad's leadership, we can leverage our expertise in.
<unk> and donor management to achieve a broader global footprint.
David Wilson will be leaving human ethics, and I would like to thank him for helping us build a world class team that will continues to deliver excellence to our customers.
Two years ago, we unveiled our operational excellence program to improve quality and service by transforming the way, we source make and deliver products are.
Our goal was to achieve $80 million to $90 million in gross savings by the end of fiscal 'twenty three.
I'm proud to share that despite the headwinds of the past two years, we are planning to meet our savings target and save an additional 35 million by expense extending this program through the end of fiscal 'twenty five.
This will further strengthen our financial health and help offset losses from the anticipated transition of C. S. L. In fiscal 'twenty, three rising inflationary pressures and the effects of the pandemic expanding the program allows us to take a fresh look at our operations identify new opportunities and make new investments in sustainable solutions that.
We'll have a positive impact on our daily operations customer support and longer term financial performance, we look forward to sharing more insight into our long term plans at our virtual Investor Day later this year.
Finally, we announced earlier this week Boy Johnson has joined our board of Directors Lloyd brings significant financial management International operations and business development insight. Additionally, Ellen Zane has been elected chair of our board. These updates reflect payment ethics ongoing commitment to refreshment diversity and augmenting our experienced.
Pace now on to the business units.
Plasma revenue increased 6% in the quarter as the pandemic and the associated government subsidies continued to have a pronounced effect on the U S sourced plasma donor pool.
North America disposables revenue increased 3% in the quarter driven by improvement in collections volume, partially offset by price adjustments, including the exploration of fixed term pricing on a historical P. C. S. Two technology enhancement.
Sequentially U S sourced plasma collection volumes declined 6% compared with about 6% seasonal improvement historically as additional economic stimulus hindered recovery.
Plasma collections in Europe showed continued recovery in the first quarter, specifically in the Czech Republic, and Hungary, driven by fewer COVID-19 related restrictions and plasma center growth.
We had double digit growth in our plasma software revenue in the quarter supported by additional recovery in plasma collection volumes and our donor 360, App, which enables plasma donors to register at home and streamline the preselection process with enhanced safety efficiency and convenience.
Software as a strategic lever for our customers and we continue to invest in value, adding innovation support their recovery and growth.
Next link as a key enabler and differentiator for Nexus and we believe our combined technologies offer the most benefit to our plasma customers through improved collection yield.
Foster and more efficient center operations improve compliance and donor satisfaction as we emerge from the pandemic the sustained increases in available donors. The operational benefits of Nexus P. C. S. Integrated with next link D. M. S will be a valuable tool to help collection centers accommodate greater donor traffic.
Collection Center conversions are on track as we plan to upgrade our customers to the latest version of next linked the M. S. Software later this year and complete the transition of our major customers to Nexus piece, yes devices by mid fiscal 'twenty three.
We've made significant progress with our partner persona technology and early adopters are benefiting from an additional 9% to 12% plasma yield per donation.
There are positive feedback and real world data validate the value proposition of our technology and confirm that there is no impact on repeat donations and doing all the donor deferral rates.
We anticipate additional persona conversions in the second half of our fiscal 'twenty two.
Okay.
The demand for plasma derived medicines remains strong and our customers continue to take steps to recruit and retain donors as the industry recovers from the pandemic. We expect a return to the long term, 8% to 10% growth of U S sourced plasma collections, and we see potential to grow in excess of that as customers strive to replenish.
Platelet and plasma inventories.
As we approach the midpoint of our second quarter collections have improved 21% compared with a 14% improvement in the first quarter.
This increased growth is consistent with the high end of our fiscal 'twenty two plasma guidance, we remain vigilant about potential disruptions caused by new Covid variance and recent reinforcement of the U S border policy, but we anticipate strong plasma collection recoveries in the second half of the year and affirmed fiscal 'twenty two organic revenue growth.
15% to 25%.
Moving to hospital revenue grew 26% in the quarter, primarily due to continued improvements in hospital procedures driving increased utilization of disposables strong capital sales in North America, and new business opportunities in Europe. We saw continued recovery across all of our key markets.
Although recovery trends outside of the U S for uneven due to concerns about new COVID-19 variance and slower vaccine distribution.
Hemostasis management revenue grew 31% in the quarter U S led the charge with growth in the adoption and utilization of TEG disposables and strong instrument placements. We also increased market share in Europe, including the award of a new tender for the use of our plot pro technology acquired in fiscal 'twenty one.
Cell salvage revenue was up 27% in the quarter with double digit growth across all of our key markets growth was supported by continuous recovery in procedure volumes and capital sales as we continue to upgrade our customers to our latest technology.
Transfusion management grew 11% in the quarter, primarily driven by strong growth in safe trace TX as we completed new accounts installations in the U S law.
Blood track also shows significant growth in the U S with a slight decline in international markets as new Covid concerns delayed implementation.
We affirm our expectation for 15% to 20% organic revenue growth in hospital, and cleaning, including Hemostasis management organic revenue growth in the mid twenties.
This growth rate assumes hospital procedures continued to improve throughout the year and will be fully recovered across all geographies by the end of fiscal 2022.
Our newly acquired best gauge vascular closure business delivered $22 million in revenue in the first quarter exceeding our expectations.
With vast gate products delivered meaningful results through accelerated penetration into new accounts and increased utilization within existing accounts. We are enthusiastic about the continued growth of this business supported by greater procedure volumes higher diagnosis rates increased hospital efficiency and an overall move to standard of care we are.
Also expanding internationally by securing regulatory approvals and developing go to market strategies for faster and broader penetration.
We are increasing our fiscal 'twenty, two revenue guidance from $65 million to $75 million to $75 million to $85 million as we look to accelerate additional growth through further investments.
Blood Center revenue declined 6% in the first quarter.
<unk> revenue declined 3% in the quarter was impacted by unfavorable order timing and loss revenue from the previously announced customer loss included in our first quarter fiscal 'twenty one results.
We are encouraged by the resilience of this business and the altruistic nature of blood donors.
Platelet collections in Japan fully recovered although that growth was partially offset by a reduction in plasma collections due to prolonged COVID-19 related state of emergency.
We also experienced strong market demand for platelets in China, driven by our expansion in tier two markets.
Whole blood revenue declined 14% driven by lower collection volumes and discontinued customer contracts in North America, our expectations for the blood Center business are unchanged and our fiscal 'twenty two revenue guidance is a decline of 6% to 8%.
I'll now turn the call over to Bill.
Thank you, Chris and good morning, everyone.
Chris has already discussed revenue so I will start with adjusted gross margin, which was 54, 7% in the first quarter.
An increase of 750 basis points compared with the first quarter of the prior year.
Our adjusted gross margin benefited from the addition of vascular closer devices from the cardio cardio medical acquisition as well as favorable mix from our remaining product portfolio.
Our business has continued to recover from the effects of the pandemic.
In manufacturing and supply chain, we had improved operating efficiency due to higher volume and lower expenses related to the pandemic.
We also continued to drive savings from the operational Excellence program.
These benefits were partially offset by previous divestitures and price adjustments.
Adjusted operating expense in the first quarter were $87.1 million, an increase of $23.4 million or 37% when compared with the prior year.
As a percentage of revenue adjusted operating expenses increased by 550 basis points and we're at 38%.
The acquisition of Cardica had the largest impact on the increase in adjusted operating expenses.
Also affecting the increase were higher variable compensation spending beginning to return to normal levels.
An increase in freight costs and higher research and development expenses to strengthen our technology.
Our first quarter adjusted operating income was $37.9 million, an increase of $9.4 million with 33% compared with the prior year.
This improvement in adjusted operating income was driven by higher adjusted gross margin, partially offset by the increase in adjusted operating expenses.
Our adjusted operating margin was 16, 6% in the first quarter.
An increase of 200 basis points compared with the same period in fiscal 'twenty one.
As our business continues to recover from the pandemic and we continue to generate additional savings through the operational excellence program.
We anticipate increased leverage in adjusted operating margin.
We affirm adjusted operating margin guidance for fiscal 'twenty, two to be in the range of 19% to 20%.
Our adjusted income tax rate was 24% in the first quarter compared with 4% in the same period of fiscal 'twenty one.
The adjusted income tax rate in the first quarter of fiscal 'twenty one.
Normally low due to the benefit of higher performance share vesting.
We now expect our fiscal 'twenty, two adjusted tax rate to be 22%.
First quarter adjusted net income was $25.4 million up $1.7 million or 7% and adjusted earnings per diluted share was up was 50 up 9% when compared with the first quarter of fiscal 'twenty one.
The adjusted income tax rate in the first quarter of fiscal 'twenty, two had a 13th downward impact on adjusted earnings per diluted share when compared with the prior year.
Our vascular closure business and exceeding original expectations and we expect this business to be net neutral to adjusted earnings per diluted share in fiscal 'twenty, two compared with our original expectation of 15 to 20 dilution in the first year following the acquisition.
We expect this performance will be driven by stronger commercial execution and difference in capital structure, when compared with the original deal model and will allow us to generate additional resources to fund growth investments across the company.
Today, we announced a revised operational excellence program with total gross savings of $115 million to $125 million debt will deliver $80 million to $90 million in gross savings by the end of fiscal 'twenty, three which is in line with our original expectations with an additional 30.
$5 million in savings by the end of fiscal 'twenty five with the return of volume back to pre pandemic levels.
We expect the majority of the savings realized to benefit adjusted operating income by the end of fiscal 'twenty, three and about half of the total savings passing through by the completion of this program in fiscal 'twenty five.
The exact pace of the operational excellence program savings and net impact on adjusted results will be communicated with our guidance for each fiscal year.
Additionally, we expect to incur 95 million to $105 million in.
Structuring and restructuring related costs over the course of this program.
In addition to updating the total estimated growth savings for this program, we accelerated the pace of these savings in fiscal 'twenty, two and now expect this program to deliver gross savings of approximately $33 million, an increase of $11 million or 50% when compared with our previous guidance.
Due to increasing inflationary pressures and investments in manufacturing, we anticipate about 25% of these savings will benefit adjusted operating income in fiscal 'twenty two.
We expect fiscal 'twenty two adjusted earnings per diluted share to be in the range of $2.60 to $3.
Cash on hand at the end of the first quarter was $173 million a decrease of $19 million since the beginning of the fiscal year.
Free cash flow before restructuring and turnaround costs was $2 million.
Compared with $11 million in the same quarter of the prior year.
The lower free cash flow before restructuring and turnaround costs in fiscal 'twenty two.
It was due to higher accounts receivable as our revenue continues to recover from the pandemic.
And higher capital expenses, primarily related to the operational excellence program.
Partially offset by lower inventory growth.
We affirm our previous guidance and continue to expect free cash flow before restructuring and turnaround expenses in fiscal 'twenty two to be a $135 million to a $155 million.
Our capital allocation priorities remain unchanged and we continue to prioritize organic growth followed by inorganic opportunities and share buybacks in the short term, we will focus on investments into core capabilities and technology that make our products distinctive before we open the call up to Q&A I wanted.
We reiterate the key points that we hope you take away from today's call.
First quarter results show encouraging performance across our business supported by strong procedure recovery in our hospital business business resilience of blood donors and blood centers and initial rollouts about persona technology in plasma.
We believe there are no structural changes in the underlying demand for our products and we continue to anticipate full recovery across all of our businesses by the end of fiscal 'twenty, two but the exact pace of the recovery, particularly in plasma Rooney remains the biggest variable included within our affirmed guidance.
The recently acquired <unk> vascular closure technology is exceeding our expectations with strong revenue growth and increased leverage delivering no dilution to adjusted earnings per diluted share. One year ahead of the original deal model.
This business strengthens our market position expands the market opportunity and further enables our portfolio to capitalize on the market recovery ahead.
We remain committed to delivering value for our customers and our shareholders as we pursue growth strategies to maintain market leadership to develop innovative products in partnership with our customers and to drive productivity and efficiency of scale with an expanded operational excellence program.
And lastly, our team has been working diligently on updating our long range plan and we are looking forward to sharing it at our virtual Investor day expected near the end of discount a year.
Thank you and now I would like to turn the call back to the operator for Q&A.
Thank you as a reminder to ask a question you will need to press star one on your telephone.
Charlie a question Chris the County.
Please stand by while we compile the Q&A roster.
Our first question.
Comes from the line of Anthony Petrone with Jefferies. Your line is open.
Thanks, Good morning, everyone. A couple of questions on plasma in the guidance and then I'll have follow up on car Diva.
On some of the.
Plasma data points that are baked in the guidance as well as the performance in the quarter, maybe just a little bit more detail on.
What is baked in there for specifically volume recoveries.
And then any thoughts on how you're reflecting the restrictions at the U S. Mexico border just an update there would be helpful. And then I'll have a few follow ups.
Yes. Thanks, Anthony appreciate the question with regards to performance.
How it tracked through our guidance.
We're bang on for what we expect it to see year to date, we had 14% volume growth in the first quarter, we've seen 21% through.
As of the end of last week, so almost 40% of the way through our second quarter and that's really what we anticipated. We're now at a point, where we're tracking to the high end of that 15% to 25% range and that's because we're experiencing more of the recovery now of course, we're vigilant as are our customers with regards to.
New Covid variance regards to any further concerns that that might lead to anything.
Anything that would tamp down demand.
You mentioned the situation of the Mexico border.
The enforcement of that policy is definitely.
A tractor to collections there for us in aggregate is probably not more than a point of growth.
100 basis points, if you will across our growth trajectory. So it's not zero, but it's not a major factor for us.
We're watching the situation carefully.
We feel like what what's happening in the environment, what our customers are doing to re recruit their donors is all very powerful and it gives us grounds for cautious optimism.
And so just to be clear the bridge between the sort of 6% organic.
In fiscal <unk>, and then trending towards the higher end of the 25.
You certainly have a view for continued volume improvements, which it sounds like you are seeing in July.
Also on the upgrade front.
Is there anything baked in there as well last quarter you mentioned.
There is an upgrade cycle, obviously, but for both next Lincoln Nexus she'll just kind of.
As we trend toward that higher end of the 15% to 25% range just the complexion of continued volume improvements versus upgrades.
Yes, you're exactly right, we have a lot of growth loaded into the second half of this year. So its ambitious in that regard, but that's track to our models and what we see with the waning stimulus effect et cetera.
Upgrades are.
Part of that forecast and we're seeing that really across all three of our offerings as we communicated in the prepared remarks.
Continued progress on next link next link in software in General was a real plus for us.
It used to be a year to date in terms of the volume recovery there.
Nexus Tcs on track despite the challenges of doing it but it's all in the context of a pandemic and particularly where some of our most high volume geographies are getting hard hit by the Delta variant in Covid.
Nonetheless, we have been able to keep our people safe.
<unk> worked closely with customers to do the upgrade cycle.
And we're excited.
About what persona means here and have factored that in to the growth over the second half of the year as well so.
Nothing simple or straightforward about it Anthony but we feel quite good about what we're able to do jointly with customers to keep that progress.
I'll sneak the last one in on card Diva ahead of expectations there.
Just wondering the complexion between just general EP volume improvements versus the original forecast.
Versus say just expansion of the vast Gabe franchise into new centers. Thanks, again, I'll get back in queue.
Yeah. Thanks, Anthony Yes, we're very very excited about car diva and basket, both basket and MVP exceeding expectations. This is a product line that did.
Mid forties last year last calendar year.
With cardio, we were able to collectively deliver $22 million in revenue in the first our first quarter alone. So we are very excited about the recovery and the trajectory and what that team has been able to do and it does just hyper focused on our largest customers here in North America.
What we're seeing is both penetration into new customer accounts, new hospitals and increase utilization in our existing customers and the combination of those two across <unk> and MVP is what's driving that performance. So we're excited it's allowed us to make additional investments in the product.
We think that'll continue to bear fruit as.
That product progresses.
Thanks again.
Thank you. Our next question comes from language with Citi. Your line is open.
Hey, this is Anthony on for Joanne Thanks for taking our questions I have two my first hemostasis management had a strong quarter.
This quarter could you sort of parse out where that strength is coming from is it still sort of these research hospitals and labs are buying tied to study COVID-19 patients or is that increasing utilization.
Yeah, Hemostasis management grew 31% in the first quarter, it's truly outstanding growth a lot of that is benefiting from the increased procedure volume no doubt.
You can take from our central product in that regard.
<unk> is disproportionately driving that growth, although we've had growth in every geographic segment.
It's a combination of new device.
Sales as well as much higher utilization per device.
I'm sure. There is some testing still going on related to coagulation COVID-19 patients to come vast majority of the growth is just core.
Treatment for all of our indications, it's a combination of cardiac surgery and cardiology more broadly it's trauma.
And increasingly it'll be interventional cardiology.
Pushing to that so.
Strength across the board certainly driven by the U S first and foremost.
Great helpful and then my second.
What has surprised you either positive or negatively about uptake and then could you just give some more commentary on how the integration is going thanks.
Yeah ill start with the integration because I think that's a real success story here to be able to bring that team on board and.
Simulate them in preserving everything that theyre doing have been doing exceptionally well, Jon Russell and that group built a really high performing team and we're benefiting from that leadership, we brought them in and I think we.
We feel quite good we've been able to do so without disrupting so that team hasn't missed a beat and now what we're doing is leaning in and helping them focus and make the investments that are necessary to drive sustained growth going forward. So.
We watch this we got word yesterday actually.
From FDA that we're now approved for same day discharge for atrial fib, which just adds more fuel to that fire and will now allow us to continue that growth trajectory going forward. So they've done a lot of things right. We are benefiting from that I think the smooth and.
The rapid integration.
Is it whereas has really helped we're also pushing hard outside the U S. Now to get the registrations in place and to build the go to market models that will enable us to replicate that performance in other markets around the globe.
We're excited about for sure.
Thanks.
Thank you as a reminder to ask a question at this time. Please press Star then one on you touched on telephone.
Next question comes from Mike Matson with Needham <unk> Company. Your line is open.
Yes, thanks for taking my questions wanted to ask about.
Free cash flow so.
Just given.
The decline.
Compared to the first quarter of last year.
Is it.
What's your confidence level in that guidance.
Is it more realistic to now expected to be at the lower end of the guidance range for the year.
Hi, Mike It's bill so on free cash flow.
No. We're we're confident that we.
We will be within that 135 million to $155 million guidance that we put out there the cash flow is down a little bit from.
From last year, and it's a combination of a well.
We have higher.
Our accounts receivable than we did last year as our revenue has begun to return. So it's I mean, it's good news right, but you are going to see an increase in your balance sheet net accounts.
And inventory, we have actually seen.
Lower growth in the inventory.
In our first quarter this year than last year and then the last element that's really affecting net debt lower cash flow is our capital expenditures have begun to return to.
Normal levels here and in the first quarter, but again, where we're confident we wouldn't have put the 135 to 155 out there I'm not going to say, specifically, what we're going to.
Fall within that range, but we feel good about it.
Okay. Thanks, and then.
I don't know if you've given us any guidance on a GAAP basis. If you include.
We include all the restructuring and kind of one time stuff in there, but do you expect free cash flow to be positive at once here.
On a GAAP basis, not excluding that sort of stuff.
For the year, yes for the year sorry.
We would expect it to be positive for the year, yes.
Okay, Alright, and then.
What are the things I've heard some of your larger customers talking about is trying to collect more plasma outside the U S over time.
I'd imagine you saw the opportunity to capture that business, but I just wanted to get.
Your thoughts on that and see if there is.
What that means to human ethics, if anything.
If that does in fact increase.
Yes, Mike it's Chris.
<unk> discussion topic I think it has gained more momentum in the Covid period.
One of the things we communicated previously is that we've helped.
More than 25 countries around the globe over the last year step up the collection of convalescent plasma initially in response to Covid and then more broadly.
General medical self sufficiency, and I think that.
You know that that's really opened a number of these markets up in kind of drawing attention to.
The Overdependence industry describes it on the U S market, specifically there are still only five <unk>.
Outside the U S where donors are remunerated for their plasma collection and that's that's a challenge there are legislative challenges as well, but as our customers lean into that and help local markets open up we'll we can take pride in being right there to work with them one of the benefits of combining our blood center.
And plasma operations and the way that we have is we're more attuned to those opportunities, we're better able to coordinate internally in response to customer request and I think the international growth is a real opportunity for us going forward in an area, where we can continue to grow and surprised positively.
Okay, great. Thank you.
Thank you once again as a reminder to ask a question at this time. Please press Star then one on you touched on zone.
Our next question comes from Joe Rainey Aerie with Morgan Stanley. Your line is open.
Hi, Good morning, Chris Bill Thanks for taking the question.
Just on the quarter here I think you grew 6% organic in plasma and I think I heard you mentioned collections grew 14%. So I'm just trying to better understand kind of the delta there between those two numbers was that was that price but.
Would love some more color there. Thank you.
It's true that there's a range of factors, obviously, we're talking about comparisons over prior periods, we did call out.
Price adjustments.
We've talked specifically about those in the prepared remarks, it's a combination of legacy agreements, including.
For the Pcs to technology, where we had a specific operation had been priced into a contract that was time bound and expired. The other thing. We're experiencing is which is quite a positive as volumes return a number of our contracts are volume price specific so it's a volume in.
Increase there's slight.
Decrease in the pricing so it's a good thing, but you'll see those variability.
Quarter on quarter basis. So.
None of it pertaining to the new technology or new contracts. It all has to do with debt those prior agreements.
Okay understood. Thank you.
And then just on the Nexus conversion by mid fiscal 'twenty. Three is there any way that you can maybe you don't Wanna discussed this but frame that in terms of your overall installed base because it just mentioned.
You mentioned you expect the complete transition of your major customers, but just trying to get a better sense of how we should think about the ramp in terms of your installed base versus first customers. Thank you.
Yeah sure I appreciate the question.
You wanted to drill down on that for reasons of customer confidentiality would prefer not to talk about the specifics beyond what we've already guided to.
Thanks, Chris.
Thank you and I'm currently showing no further questions at this time.
This concludes today's conference call. Thank you for participating you may now disconnect.
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