Q3 2022 Haemonetics Corp Earnings Call

February 8, 2022

Today's conference is scheduled to begin shortly please continue to standby and thank you for your patience.

[music].

Good day, and thank you for standing by and welcome to the human Medics Corporation's third quarter fiscal 2022 earnings call. At this time, all participants are in listen only mode.

After the Speakers' presentation there'll be a question and answer session to ask a question. During this session you would need to press star one on your telephone. Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Olga Guyette Director Investor Relations. Please go ahead.

Thank you and good morning, everyone. Thank you for joining us for <unk> third quarter fiscal 'twenty two conference call in about cost I'm joined today by Chris Simon Our CEO and Bill Burke our CFO .

This morning, we posted our third quarter fiscal 'twenty results to our Investor Relations website, along with our updated fiscal 'twenty two guidance and the analytical tables with information we'll refer to on this call.

Additionally, we provided a complete P&L balance sheet summary statement of cash flow 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 adhesive product lines acquisitions, and divestitures and the impact of the 50 <unk> week in fiscal 'twenty one.

As in the past, we'll refer to non-GAAP financial measures throughout this call to help investors understand human <unk> ongoing business performance.

Please note that these measures exclude certain charges in income items.

Please refer to this mornings earnings release for a detailed and 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 the anticipated results cumulative 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 <unk>.

Filings with the SEC.

We do not undertake any obligation to update these forward looking statements.

And now I'd like to turn it over to Chris.

Thanks, Olga good morning, everyone and thank you for joining.

Third quarter revenue was $260 million, an increase of 8% in reported dollars and on an organic revenue decline of 1%.

Year to date revenue of $728 million.

An increase of 13% in reported dollars and an organic revenue growth of 3% versus prior year.

Third quarter adjusted earnings per diluted share was <unk> 84.

An increase of 4% and year to date adjusted diluted EPS was $1 93, an increase of 2% when compared with the prior year.

Our third quarter performance exemplifies our agility and resilience as we navigated the pandemic headwind headwinds <unk>.

Our people safe, while providing our customers with solutions and support they depend on.

U S blood and plasma collection and some hospital product lines were disrupted by the impact of the omicron variant, but we believe those effects are transitory. Meanwhile, our hospital business continues to excel with hemostasis management and vascular closure achieving record high quarterly sales.

We made significant progress with our Nexus and persona conversions, which support increased plasma volumes, we met critical R&D milestones and expanded our global commercial capabilities and we delivered additional savings from our operational excellence program that are partially offsetting inflationary pressures and.

<unk>.

Chain disruptions and freeing up resources to fund growth.

We will discuss these accomplishments have contributed to our increasingly strong adjusted gross and operating margins.

Moving on to our business unit results.

Plasma revenue decreased 2% in the third quarter, primarily driven by disruption from Amazon and a $6 million stocking order in the prior year.

Excluding the stock mortar U S plasma collection volume improved 2% on top of strong the strong growth we experienced in the same quarter last year and grew 9% sequentially compared with the historical seasonal improvement of 3% to 5%.

Year to date plasma revenue improved 3% compared with the prior year and was largely driven by 11% growth in U S collections, partially offset by the one time stocking order and prior price adjustments, which have now fully annualized.

Additionally, we have amended our agreement with CSL plasma to allow them to use our Pcs two devices and purchase disposables through December of 2023.

This extension provides CSL the ability to utilize our devices and disposables in their collection centers on a nonexclusive basis, and we are working with them to quantified their volume requirements over the life of the agreement.

We are meeting our Nexus rollout milestones, we have completed the majority of customer upgrades to Max link Dms, we're transitioning the remainder of our major customers to Nexus piece, yes, we have already successfully converted several hundred plasma centers to our nexus platform without interruption to their data.

Collections, and we have the Nexus PCF devices available here in the U S to ensure timely conversion of the remainder of our major customers by mid fiscal 'twenty three.

We are also pressing forward to upgrade customers to our persona technology and expect more plasma centers to be using our personalized pneumogram by the end of this fiscal.

The pandemic continues to highlight the critical role our Nexus system plays in donor recruitment and retention and collection center productivity.

Our technology and our teams are making outsized contributions to help customers accelerate recovery.

Fully integrated Nexus platform, consisting of the Nexus Pcf's device next linked Dms software in our donor 360, App is enabling our customers to benefit from faster procedure time contributing to a 16 minute reduction in average door.

Owner door to door time, improve compliance, including up to 98% elimination of documentation errors as well as increased donor satisfaction. Our in market results demonstrate the owner affinity from a 93% owner preference for Nexus Tcs over the prior <unk>.

Generation device and with our persona technology Nexus customers can also benefit from an additional 9% to 12% average plasma yield per donation.

The breadth of our technology and its impact touches every step of plasma center operations remote donor checking registration screening the plasma collection process issuing donor payments and processing testing and shipping samples close partnerships with our customers and years of experience have given us deep expertise.

And understanding of what drives value in the industry, we serve and we will continue to use this knowledge to develop new products and software applications. We are looking forward to providing additional details about our innovation during our virtual Investor day later this year.

On a macro level, we continue to believe that the pandemic negative effects. One collection volumes are transitory and we remain optimistic about U S sourced plasma predicting the exact pace of the recovery remains difficult due to COVID-19 multifactorial impacts, including the new omicron variant accordingly.

We're updating our fiscal 'twenty, two plasma revenue growth guidance to 8% to 10% compared with our previous guidance of 10% to 20% to reflect the protracted pace of collections recovery through the end of our third quarter.

The end market demand for plasma derived therapies is robust and our customers continue to ramp up to support this demand by investing in R&D expanding their manufacturing capacity and opening new plasma collection centers as the industry recovers from the pandemic, we believe U S sourced plasma collections will return to.

Historical growth rate of 8% to 10% with the potential to grow in excess of that as customers replenished depleted inventories.

Moving to hospital revenue increased 11% in the third quarter driven by continued procedure recovery. Despite challenges posed by hospital staffing shortages and supply chain chain disruptions in Asia Pacific.

The encouraging procedure recovery trend from September continued through most of the third quarter waning in mid December with a rapid rise in Covid cases, coupled with increased pressure from staffing shortages in U S hospitals, Nonetheless year to date hospital revenue increased by 15% primarily due to use of.

Disposables from continued improvements in hospital procedure volumes across most geographies strong capital sales in North America, and new business opportunities in Europe .

We are excited about our growth and expansion in Hemostasis management, our largest hospital product line Hemostasis management revenue grew 18% in the third quarter and 23% year to date, primarily due to adoption of our TEG success devices and increased utilization of cartridges in North America, where we are.

We experienced three consecutive quarters of strong capital sales.

We also benefited from sales growth in Europe , where the clock pro so elastic diagnostic device drove disproportionate growth in our third quarter and year to date results. We are excited to increase our footprint in underserved markets through capital sales and to drive utilization and adoption of our testing protocols and existing count.

Globally.

Cell salvage revenue declined 2% in the quarter as Omnicom dampen procedure volumes in the U S and disrupted supply chains in Asia Pacific.

Year to date revenue grew 5% driven by higher hospital procedure volumes and strong capital sales as we upgrade customers to our latest sell sabre technology.

Transfusion management revenue grew 8% in the third quarter and year to date, driven by both blood track and safe trace TX <unk>.

<unk> impeded our ability to implement new hospital conversions, but we anticipate this will correct going forward.

We remain enthusiastic about the performance and potential of our hospital business and update fiscal 'twenty, two revenue guidance to 16% to 18% growth, including mid twenties Hemostasis management growth.

We are approaching the first anniversary of our acquisition of <unk> medical early results have surpassed our expectations and with the integration essentially complete we are progressing ahead of schedule on all critical milestones.

We had another record sales quarter in vascular closure delivering $24 million of revenue in the third quarter and $67 million year to date.

<unk> vast gauged products delivered meaningful results through accelerated penetration into new accounts and increased utilization within existing accounts. The performance of our vast gate MDT product and electrophysiology was particularly strong aided by the recently granted FDA indication for same day discharge following <unk>.

<unk> for ablation ablation procedures.

We are increasingly confident about this business and increase our fiscal 'twenty, two guidance range to $90 million to $95 million nearer.

Nearly double the revenue generated in the 12 months prior to the acquisition.

Blood Center revenue declined 7% in the quarter and 4% year to date as omicron disrupted U S blood collections.

<unk> revenue declined 7% in the quarter driven by staffing shortages in U S blood centers and unfavorable order timing among distributors when compared with the prior year affecting both capital and disposable sales year.

Year to date Apheresis revenue declined 1% as first half growth from a strong recovery of platelet collections in Asia Pacific and the winning of several new tenders in EMEA was offset by third quarter revenue declines.

Whole blood revenue declined 9% in the quarter and 11% year to date, driven by lower transfusions due to reduced hospital procedures collection center staffing shortages and previously discontinued customer contracts in North America.

Overall, we are confident about the performance in our blood center business and reaffirm our revenue guidance of a 3% to 5% decline in fiscal 'twenty two.

Before I turn the call over to Bill to review, our financial results I want to reiterate that despite the COVID-19 related challenges in the quarter and over the past two years. Our teams remain committed and focused as we continue to build a foundation for transformational growth.

Bill.

Thank you, Chris and good morning, everyone.

As Chris discussed our results today and showed continued resilience in the business.

Our strong revenue performance in hospital.

Specifically in Hemostasis management vascular closure.

To mitigate the impact of a prolonged recovery in plasma volumes. In addition.

Our operational excellence program combined with other cost mitigation efforts, partially offset inflationary pressures.

Loud us to continue to fund investments for long term growth.

In the third quarter, we reported our highest adjusted gross margin in company history of 54, 9% an increase of 350 basis points compared with the third quarter of the prior year.

The adjusted gross margin year to date was 54, 1% an increase of 370 basis points compared with the first nine months of the prior year.

In both periods adjusted gross margin benefited from the addition of the vascular closure business incremental gross savings from our operational excellence program.

And favorable product mix due to a higher proportion of our revenue coming from the high margin and fast growing hospital business.

These benefits were partially offset by inflationary pressures in the global manufacturing and supply chain, including freight and raw material costs previous divestitures and price adjustments.

Price had a positive impact on third quarter results as we recognized additional benefits from upgrading customers to our latest Nexus Tcs and persona technologies and fully annualized previously announced price adjustments in plasma.

Including the exploration of fixed term pricing on a historical Pcs two technology.

Adjusted operating expenses in the third quarter were $83 8 million and.

An increase of $12 8 million.

Or 18% compared with the prior year.

As a percentage of revenue adjusted operating expenses increased by 280 basis points.

And we're at 32, 3%.

Adjusted operating expenses year to date.

Our $253 2 million.

An increase of $52 2 million or 26% compared with the prior year.

As a percentage of revenue adjusted operating expenses year to date increased by 360 basis points.

We're at 34, 8%.

The acquisition of the vascular closure business had the largest impact on the increase in adjusted operating expenses in the third quarter and year to date.

Adjusted operating expenses year to date were also higher due to freight costs and additional investments in research and development as we broadened the project portfolio to strengthen our technology.

Third quarter adjusted operating income was $58 8 million.

An increase of $6 2 million or 12%.

And year to date adjusted operating income was $145 million, an increase of $16 4 million or 13% compared with the same periods in fiscal 'twenty one.

Adjusted operating margin was 22, 6% in the third quarter and 19, 3% year to date representing.

Representing increases of 70 basis points, and 10 basis points, respectively, compared with the same periods in fiscal 'twenty one.

The improvement in adjusted operating margin in both periods was driven by higher adjusted gross margin, including our ability to mitigate inflationary pressures, partially offset by higher adjusted operating expenses.

We affirm our adjusted operating income margin guidance to be in the range of 18% to 19% in fiscal 'twenty two.

We are seeing early signs of stabilization in freight and raw material costs.

Wherever you.

Expenses remain above historical levels, and we expect continued inflationary pressure into fiscal 'twenty, three along with rising labor costs.

We remain confident and continuing to generate additional gross savings with our operational excellence program.

Success of this initiative has largely offset near term cost pressures.

We expect our operational excellence program to generate $33 million in gross savings during fiscal 'twenty, two resulting in $67 million in savings during the first two and a half years of this program.

While savings from this program will continue to generate ongoing efficiency and further benefit our margins. We expect these savings in fiscal 'twenty, two to offset inflationary pressures and increasing labor costs.

The vascular closure business continued to exceed our expectations. This business is on track to deliver revenue in the range of 90% to $95 million.

<unk>, our original expectation of $65 million to $75 million.

Operating income is expected to be accretive to our business this fiscal year compared to 15% to 20 dilution. We originally expected in the first year following the acquisition.

This over keeping continues to be driven by strong commercial execution across the vascular closure portfolio and lower interest expense when compared with the original deal model.

With the first year anniversary of the acquisition in March we will begin to report revenue from this business in our organic revenue growth rates.

The adjusted income tax rate was 21% in the third quarter, and 22% year to date, compared with 16% and 15% in the same periods of fiscal 'twenty one respectively.

The adjusted income tax rate in fiscal 'twenty, one with lower than fiscal 'twenty, two due to the benefit of higher share vesting and option exercises.

We expect our fiscal 'twenty, two adjusted tax rate to be approximately 22%.

Third quarter adjusted net income was $42 9 million, an increase of $1 5 million or 4%.

And adjusted earnings per diluted share was <unk> 80 <unk>.

An increase of 4% when compared with the third quarter of fiscal 'twenty one.

Year to date adjusted net income was $99 million.

An increase of $2 2 million.

Or 2%.

And adjusted earnings per diluted share was $1 93, an increase of 2% when compared with the first nine months of fiscal 'twenty one.

The higher adjusted income tax rate in fiscal 'twenty two.

At a <unk> downward impact on adjusted earnings per diluted share on a year to date basis, when compared with the prior year.

We remain confident in our ability to deliver mid to high single digit growth in adjusted earnings per diluted share and we are tightening our guidance range for fiscal 'twenty two to $2 45.

$2 55.

Compared with the previous guidance of $2 40 to $2 65.

Cash on hand at the end of the third quarter was $237 million up $45 million since the beginning of the fiscal year.

Free cash flow before restructuring and restructuring related cost was $76 million.

Compared with $99 million in the first nine months of the prior year.

The lower free cash flow before restructuring and restructuring related costs in fiscal 2002 was mainly due to higher accounts receivable as revenue continues to recover from the pandemic.

Higher capital expenses were offset by lower inventory as we continue to upgrade our plasma customers.

We have a sufficient quantity of Nexus Pcs devices in the U S to complete the conversion of the remaining major customers with no impact to future cash flow.

We have revised fiscal 'twenty two guidance for free cash flow before restructuring and restructuring related costs to a range of $110 million to a $120 million.

Compared with the prior guidance range of $115 million to $135 million.

To account for the reduction in fiscal 'twenty, two revenue guidance in plasma.

Before we open the call up to Q&A I'd like to highlight a few key takeaways from today's call.

Our business continues to demonstrate resilience and delivered record adjusted gross margin and strong adjusted operating margin despite the challenging macro environment.

Recovery in plasma collections continued but was more protracted than originally anticipated due to the omicron outbreak.

As the effects of the pandemic subside, we believe strong demand for plasma derived therapies and capital investments by our customers will help plasma collections recover.

The hospital business continues to deliver double digit growth led by Hemostasis management, overcoming staffing shortages and uneven procedure volumes in U S hospitals.

The vascular closure business is on track to nearly double its revenue when compared with the 12 months preceding the acquisition.

We are excited about the future prospects of this business and the associated benefit to organic revenue growth and adjusted gross margin.

The implementation of our operational Excellence program is on track and plays a critical role in improving efficiency and helping us mitigate the impact of inflationary pressures in the near term.

And lastly, we are looking forward to hosting our investor day in a virtual format. Shortly after we issued fiscal 'twenty two results and fiscal 'twenty three guidance.

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 Youll need to press star one on your telephone.

To withdraw your question press the pound key.

Our first question comes from Zach <unk>.

<unk> with Jefferies. Your line is open.

Hey, Thanks for taking the question two.

<unk> for US can you provide some color on pricing positive pricing through the quarter and then just going forward with the extensions GSO.

Can you give some color on the expected pricing there or is it kind of in line with historical or is there a premium for that.

<unk> expenses.

Yes, Hey, Zach it's Chris Simon Thanks.

With regards to pricing in the quarter, we've been calling out all year is that we had some legacy pricing one on a specific technology.

Regarding tcs to collections that.

Contract itself is more than six years old.

Expired and we had.

The effect of that that is fully annualized. We also had some legacy Pts to disposable pricing same as annualized what youre seeing now is a positive in what we're calling out going forward.

Is that pricing won't be decided benefit because more collections are being done on the Nexus technologies, we're rapidly converting our all of our remaining customers to Nexus and we've also begun the process and are pressing forward with persona, which is that much more incremental so.

Tailwind or headwind through much of the first three quarters. Some net positive this past quarter decidedly a benefit for us going forward in terms of the CSL contract, but I don't want to comment on individual customers just out of respect for their confidentiality.

What I can say about the agreement just to reiterate what was in our prepared remarks is effectively it is an 18 month extension through December of 2023.

It is nonexclusive after current agreement terminated in June .

We will get a commitment from them on volumes in advance and work to supply them. We're very confident in our ability to do so as we are confident in our ability to convert the rest of our customer base to Nexus in fact, the good thing about the next conversions.

We have all of the devices, we need to drive the conversions.

Actively doing so now which is kind of a part of the pricing question.

We expect to be complete with the <unk> upgrade cycle, both the software and the devices by the middle of our fiscal 'twenty, three and we still hold to that projected timing given the progress we're making.

Got it that's helpful. And then just one quick follow up the CSO.

There is.

Are they fully in Pts two and they will not have any hardware upgrades just wanted to confirm that.

Yes.

Supply to CSL as all Tcs to base, we have converted the entirety of Csl's business that we have with them in Europe to Nexus that was done earlier this year first half of this year.

Got it thanks, so much.

Thank you.

Thank you. Our next question comes from Andrew Cooper with Raymond James.

Hi, Thanks, I just wanted to make sure I had my mute off.

Thanks for the questions.

Let me first just in terms of some of the sand and OUP dynamics Opex was a little lighter than we had thought which obviously is a good thing but was there anything timing related to call out there.

Especially when we think about sort of the implied.

Implied earnings guidance for the fourth quarter anything in particular you'd point to.

Yes, I can take that one Andrew.

Our spending in our third quarter was a little light we were very judicious in our investment opportunities as we started to see the impact of omicron on our plasma collections.

In the fourth quarter is to drive that investment spending back to the levels that.

Our.

Respectable for us.

And those investments will be bolt on the commercial side and in R&D.

Our portfolio is evolving right you saw the the solid gross margin that we delivered in the quarter and a lot of that is the result of favorable product mix, that's coming from our hospital business, particularly in vascular closure and hemostasis management. So we want to make sure that.

We address the opportunities in those businesses that are right for us to go after and continued growth.

And we want to be aggressive in our investments. So that's the primary reason and then you did mentioned something on OSP OSP was another driver of our operational.

Sorry, if our gross margin improvement and we've been fortunate enough to really run a very successful program that is helping us offset.

Inflationary pressures that we're seeing in the business.

Great maybe just to follow up on that last piece on.

On the last earnings call you had called out that 33 pretty much dropping down to even offset versus inflationary cost is that still what you're expecting I know you reiterated reiterated the 33 I just wanted to make sure in terms of sort of drop through if anything's changed.

Yes, that's correct.

And the same comment as we had last quarter.

Okay, Great and then maybe just one more on plasma as we continue to see kind of the impact.

The conversations you're having around these conversions, obviously youre talking about contracting and thinking about what volumes may look like has anything changed in terms of what your customers are looking at here.

Hear different things on donor fees and things like that so I just wanted to get kind of the latest and greatest from you for both the near term and then ultimately long term I think you already said youre expectation to get to <unk>.

Would love any additional color on the quarter.

Yes, Andrew happy to do so I think when we look at it there is clearly a disconnect between revenue and collection volumes revenue was down 2% in Q3 collection volumes were actually.

Up 2% and.

That's against a very challenging comp from the third quarter of last year and I think it is important to be cognizant of what's going on in the macro environment relative to third quarter of last year, there's probably three or four factors that are relative and important here in the.

Third quarter of last year.

The volumes in collections in college towns was a new positive.

Actually those that segment has stayed active in really very little change continuously favorably, but it's on a year on year basis the comparator.

The same lift.

Conversely, the southern border situation is difficult and enforcement of preexisting policy. There has largely kept those centers at a small percentage of what they contribute it previously but numbers and gotten worse not better.

Our customers are working hard to address that but there's been very little progress I think the underlying economics are still a big factor here with government assistance, what we've tracked to US, whereas household average household income and savings rates and how is that trending.

Don't foresee any additional stimulus and we're watching those numbers they've already plateaued, we expect.

Continuing to trend downward, particularly in an inflationary environment, that's typically a favorable.

Set of conditions for plasma collections and then.

Be remiss, if I Didnt mentioned omicron as it affected the collections environment, both the psychology of donors staying home to avoid infection, but also just labor shortages, whether it's back filling in the centers or absenteeism due to Phlebotomist and center operators getting set so.

Same challenges, we're seeing across the rest of the med Tech our customers are working through a bunch of things, we're doing with our software and our remote technology help.

And we're cautiously optimistic going forward, but those are the factors in that certainly influences our guidance.

Our view going forward, the 8% to 10% is a long term growth.

Collection volumes, we have no qualms about that we think it will be higher than that as our customers work to replenish their inventories and we stand ready to help them with the integrated Nexus platform.

Perfect and then if I can sneak in maybe just one last one I think early on.

There was mention of some R&D milestones and sort of progress there and then the answer to a previous question you talked about.

Decrements in R&D. So can you give us a little bit of a flavor for where some of that is going.

And what maybe in particular those milestones might have been just so we can kind of back.

Our roadmap for.

For what's to come.

Sure, Yes, we are.

We're very enthusiastic about our portfolio and the pipeline that we're generating we're working hard to broaden the shoulders, but with new applications, new indications across all three of our primary growth drivers that being plasma vis vis the nexus platform that being hemostasis, both TEG and pro.

No.

And also.

With regards to vascular closure and everything we're doing for vast gate investigate MVP. So our spend is heavily concentrated in those three product areas and we see very good progress with regards to taken the Nexus platform to the next level the only integrated offering.

Software and hardware and now we have an increasing suite of digital applications, which will take us into the next generation.

Talk a lot more about the hospital business when we get together for our Investor day, but we're really enthusiastic about our ability to accelerate that growth and defend our position, where we have leading positions both for vascular closure and for hemostasis.

More to come but we're excited about what we're doing now.

Great I'll stop there thanks again for the question.

Thank you. Our next question comes from Mike Matson with Needham <unk> Company. Your line is open.

Yes. Thanks.

A question on the plasma guidance it seems like it implies high single digit sequential.

Growth to get to the pod.

<unk> mid point.

So just with the normal seasonality and kind of omicron continuing into the March quarter.

Is that mainly going to be coming from pricing them to drive the growth.

Yes, Mike.

You are right to pick up on the difference in trajectory in the June quarter. The reality is we typically see volume declines in the fourth quarter, just given our fiscal fourth quarter, just given the seasonality of that business typically from third quarter fourth quarter, you'd see a downward trend of 7% to 8% last year.

Decline was actually double digits, 12% so admittedly.

Soft comp.

We think this year will be very different based on our implied guidance, which pushes us in.

Into the mid <unk> and beyond in terms of quarter on quarter growth.

We think Theres a couple of things just to reiterate we see stabilizing household income and saving rates last year in December there was $900 billion of new stimulus again in March there was one nine trillion dollars of new stimulus.

Don't anticipate that repeating this year, that's probably the biggest point.

Yes to your question, we clearly see price benefits as we called out earlier as we upgrade all of our customers to the Nexus platform and press forward with persona as well so those those things clearly help us as well as the annualized <unk> that we already called out of Pryor Pcf's to disc.

Discounts and then there are certain level of volume commitments that we know at this point the third of the way through the quarter. So we feel reasonably confident that youre going to see.

Meaningful improvement quarter over quarter, and I think we're watching carefully.

We and our customers respond to the peaking of the omicron variance in how to help get those collection centers up and as productive as possible. So more to come forecasting in this environment remains very difficult, but we feel good about where we sit now and I will close the year.

Okay, Great and then I just wanted to ask another one on the CSL amendment. So it sounds like what Youre seeing is that they're going to come back to you with some kind of forecast or our commitment to a certain amount of volume. So when do you expect to have that information and is that something youll be able to factor into.

To your 'twenty three guidance when you report your fourth quarter, and just I guess as a follow up what should we how should we handle this from a modeling perspective, we're looking at 23 should we just assume for now that they're out of the picture just to be conservative or.

Yes.

It's a dynamic situation to be clear, Mike and I want to be respectful of customer confidentiality. We are in close conversation with all of our customers.

Real time, and so we we get rolling forecast et cetera. The CSL situation is more dynamic for obvious reasons, we will know in advance of our guidance for FY 'twenty, three where we stand with them, obviously continue to change and evolve and I expect it will.

We'll include whatever committed volumes, we have in our FY 'twenty three guidance.

And our intention because shortly thereafter, we're hoping to get together virtually for an Investor day, we'll talk about in our long range plan in that long range plan, we'll give you a clear picture without.

It will include customer commitments longer term, including those that are out so it'll be a cleaner picture 23 will be.

Mixed for obvious reasons.

I just wanted to be very careful about what we can when we can say at this point, we stand ready to serve all of our customers we get in the forecast and the updates and challenging in this environment for sure and I think there'll be even more so for them going forward.

Okay I understand thank you.

Thank you we have a question from drew Ranieri with Morgan Stanley . Your line is open.

Hi, Chris Thanks for taking the question just on CSL I appreciate you can't provide much detail but.

Could you maybe talk about what youre kind of thinking about in terms of dropping through that revenue bolus that maybe the street hasn't expected in their 2023 numbers just curious as to what youre thinking whether youre going to really reinvest that or let it drop through especially given your comments about building a foundation for transformative.

Thank you.

Yes drew thanks I appreciate the question as you can appreciate we're not going to comment on 'twenty three at this point beyond.

What we think is the ongoing recovery, which is clearly underway and plasma collection volumes.

Think for us as a company we think about.

Our value proposition our growth drivers, we're going to continue to view this from a through cycle mindset and make the investments.

We're the market share leader in plasma today, we intend to remain a market share leader in plasma going forward we'll.

We'll do what we can to help our customers recover in the near term because they need the plasma to meet the end market demand.

Going to fight for what's rightfully ours on share and we're very confident as you heard in the prepared remarks about the differential value proposition of the integrated next platform. So that all requires investment.

Any upside around.

Revenue in the pass through EBITDA is just more fuel for that prior I think.

We don't talk a lot about.

In these conversations is what's happening with that hospital business and we now have these two pillars of growth in Hemostasis management.

Set of products that have been around for several decades that are now growing in the mid twenties right in terms of a percentage basis.

We're 80 share leader in that market and we intend to continue to grow that aggressively when we think about <unk> being added to the mix.

There's even higher growth potential around that product as we annualize the acquisition and kind of move forward together with those so.

We have other smaller products in the hospital business that are contributing favorably as well, but those two pillars really drive us and it shouldnt be lost on anybody that when we create at the hospital business whenever that was 354 years ago. It was roughly $100 million in revenue and it wasn't growing today it's.

The return on that investment is quite exciting and we will talk more about that in our Investor Day is we think there is bill highlighted portfolio evolution I think portfolio evolution is something that.

You can talk more about as you think about.

The investment thesis in hemostasis.

Vascular as well and then maybe more broadly on OAP with the gains Youre seeing this quarter and our gross margins are sustainable they reflected product mix. They reflect an OUP. They reflect the good work that our teams are doing to serve our customers consistently well.

There is an opportunity to build on that going forward.

Great. Thanks for taking the question.

Thank you as a reminder, if you would like to ask a question press. The Star then the one key on your Touchtone telephone we have a question from Larry Solow with CJS Securities. Your line is open.

Great. Good morning, guys. Thanks for taking the questions.

A follow up on the on the hospital business.

Courage by the growth and the outlook can you just sort of model the gross margin on those products.

Obviously.

The divestiture closure has really been improving even without vascular closure of the gross margin on those products I think.

Pretty significantly north of the corporate average is that fair to say.

Yes. They are you want to answer that.

Okay, Yes, so Larry.

Rod products sorry.

Yes, we hired in the corporate average right and it's driving.

A lot of the benefits that we're seeing in our <unk>.

Being in our gross margin and our operating margin.

Those those higher Mark we're fortunate enough that those higher margin businesses are the fastest growing businesses that we have in the company right. So we should continue to see these improvements of these benefits in both operating and gross margins.

Alright, and then I didn't catch it.

On the positive side.

Plant conversion to <unk>.

Texas.

That changed at all or any update on that because the rest of your customers.

Now what we had called out Larry as we substantially completed all of the next link donor management software upgrades, that's largely done.

We are neck deep in rolling out.

Crossed collection centers for multiple customers essentially all of our remaining major customers and called.

Called out we have the devices FDA approved oximeter station here in the U S and ready for deployment so.

We'll battle the pandemic like like our customers our day in and day out and we obviously don't want to cause any disruption would be quite successful in avoiding that.

Our current plans have us completing that conversion by the middle of fiscal 'twenty three.

Okay got really Hasnt changed there, Okay, and then just lastly.

I guess on pricing I assume.

Can't really talk too much about this but we should assume pricing is.

Mix on plasma and just in general should be getting better right. I mean, you get it you should be getting some price on exits and then as more customers adopt persona.

Suppose that.

Should be the case as well right, so but fiscal 'twenty four you should have some.

Extra CFL side of it you're pricing should be.

Should be.

Immediately higher than it is today is that a fair statement.

It is a fair statement Larry right. We spent a lot of time in conversations with customers through our trial work through ongoing monitoring which is readily available with an excellent system. We know the effects were having on lowering cost per rider connected with nexus and with persona and we reflect that in the pricing.

And the value proposition I think are converted customers feel quite good about the exchange there and yes that will benefit our gross margins going forward as bill highlighted.

And just last question on suicide.

B just subject but.

I don't think you can comment, but it maybe you did just on pricing and do we assume that that pricing does that.

Greenlee just extended.

From where that pricing was or can you speak to that at all was there a change or not.

It's not the vagaries of individual contracts or something I don't want to get into larger regions. I know you can appreciate.

It's a good agreement for them, it's a good agreement for us.

Fair enough.

I appreciate that okay, great. Thank you for taking the questions I appreciate it.

Thank you and Thats all the questions. We've had this concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.

Hi.

Okay.

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Okay.

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Yeah.

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Good day, and thank you for standing by and welcome to the human Medics Corporation's third quarter fiscal 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone.

Please be advised that today's conference is being recorded I would now like to turn the conference over to your speaker today, Olga Guyette Director Investor Relations. Please go ahead.

Thank you and good morning, everyone. Thank you for joining us for human ethics third quarter fiscal 'twenty two conference call and webcast I'm joined today by Chris Simon Our CEO and Bill Burke our CFO .

This morning, we posted our third quarter fiscal 'twenty results to our Investor Relations website, along with our updated fiscal 'twenty guidance and the analytical tables with the information or referred 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 of the 53rd week in fiscal 'twenty one.

As in the past, we'll refer to non-GAAP financial measures throughout this call to help investors understand human attic this ongoing business performance.

Please note that these measures exclude certain charges in income items.

Please refer to this mornings earnings release for a detailed and 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 the anticipated results humanity cautions that these forward looking statements are subject to risks and uncertainties, including any potential impacts from the pandemic on our results and other factors referenced in the Safe Harbor statements in our earnings release and in our <unk>.

<unk> with the SEC.

We do not undertake any obligation to update these forward looking statements and now I'd like to turn it over to Chris.

Thanks Olga good.

Morning, everyone and thank you for joining us.

Third quarter revenue was $260 million, an increase of 8% in reported dollars and on an organic revenue decline of 1%.

Year to date revenue of $728 million.

An increase of 13% in reported dollars and an organic revenue growth of 3% versus prior year.

Third quarter adjusted earnings per diluted share was <unk> 84, an increase of 4% and year to date adjusted diluted EPS was $1 93, an increase of 2% when compared with the prior year.

Our third quarter performance exemplifies our agility and resilience as we navigated the pandemic headwind headwinds keeping our people safe, while providing our customers with solutions and support they depend on you.

U S blood and plasma collections and some hospital product lines were disrupted by the impact of the omicron barrier, but we believe those effects are transitory. Meanwhile, our hospital business continues to excel with hemostasis management and vascular closure achieving record high quarterly sales.

We made significant progress with our Nexus and persona conversions, which support increased plasma volumes, we met critical R&D milestones and expanded our global commercial capabilities and we delivered additional savings from our operational excellence programs that are partially offsetting inflationary pressures and support.

<unk>.

Chain disruptions and freeing up resources to fund growth.

As you will discuss these accomplishments have contributed to our increasingly strong adjusted gross and operating margins.

Moving on to our business unit results.

Plasma revenue decreased 2% in third quarter, primarily driven by disruption from omicron, and a $6 million stocking order in the prior year.

Excluding the stocking order U S plasma collection volume improved 2% on top of strong the strong growth we experienced in the same quarter last year and grew 9% sequentially compared with the historical seasonal improvement of 3% to 5% year.

Year to date plasma revenue improved 3% compared with the prior year and was largely driven by 11% growth in U S collections, partially offset by the one time stocking water and prior price adjustments, which have now fully annualized.

Additionally, we have amended our agreement with CSL plasma to allow them to use our Pcs two devices and purchased disposables through December of 2023.

This extension provides CSL the ability to utilize our devices and disposables and their complexion centers on a nonexclusive basis, and we are working with them to quantified their volume requirements over the life of the agreement.

We are meeting our Nexus rollout milestones, we have completed the majority of customer upgrades to Max link DNS and we are transitioning the remainder of our major customers to Nexus Pcs, we have already successfully converted several hundred plasma centers to our nexus platform without interruption.

Their daily collections, and we have them excess tcf spices available here in the U S to ensure timely conversion of the remainder of our major customers by mid fiscal 'twenty three.

We're also pressing forward to upgrade customers to our persona technology and expect more plasma centers to be using our personalized nomogram by the end of this fiscal.

And then it continues to highlight the critical role our Nexus system plays in donor recruitment and retention and collection center productivity.

Our technology and our teams are making outsized contributions to help customers accelerate recovery.

Fully integrated Nexus platform, consisting of the Nexus Pcs device next linked Dms software in our donor 360, App is enabling our customers to benefit from faster procedure time contributing to a 16 minute reduction in average door donor door to door time improve compliance <unk>.

<unk> up to 98% elimination of documentation errors as well as increased donor satisfaction. Our in market results demonstrate donor affinity from a 93% owner preference for Nexus Tcs over the prior generation device and with our persona technology next.

Customers can also benefit from an additional 9% to 12% average plasma yield per donation.

On a macro level, we continue to believe that the pandemic negative effects. When collection volumes are transitory and we remain optimistic about U S sourced plasma predicting the exact pace of the recovery remains difficult due to COVID-19 , it's multifactorial impacts, including the new Omicron Berrien Accordingly.

Updating our fiscal 'twenty, two plasma revenue growth guidance to 8%, 10% compared with our previous guidance of 10% to 20% to reflect the protracted pace of collections recovery through the end of our third quarter.

A historical growth rate of 8% to 10% with the potential to grow in excess of that as customers replenished depleted inventories.

The encouraging procedure recovery trends from September continued through most of the third quarter waning in mid December with a rapid rise in Covid cases, coupled with increased pressure from staffing shortages in the U S hospitals, Nonetheless year to date hospital revenue increased by 15% primarily due to use of.

Disposables from continued improvements in hospital procedure volumes across most geographies strong capital sales in North America, and new business opportunities in Europe .

We experienced three consecutive quarters of strong capital sales. We also benefited from sales growth in Europe , where the clock CRO. So elastic diagnostic device drove disproportionate growth in our third quarter and year to date results. We are excited to increase our footprint in underserved markets through capital sales.

And to drive utilization and adoption of our testing protocols and existing counts globally.

Cell salvage revenue declined 2% in the quarter as Omnicom dampening procedure volumes in the U S and disrupted supply chains in Asia Pacific.

Year to date revenue grew 5% driven by higher hospital procedure volumes and strong capital sales as we upgrade customers to our latest cell saver technology.

Transfusion management revenue grew 8% in the third quarter and year to date, driven by both blood track and safe trace TX <unk>.

I'm a crime impeded our ability to implement new hospital conversions, but we anticipate this will correct going forward.

We had another record sales quarter in vascular closure delivering $24 million of revenue in the third quarter and $67 million year to date.

Both vast gauged products delivered meaningful results through accelerated penetration into new accounts and increased utilization within existing accounts. The performance of our vast gate MVP product and electrophysiology was particularly strong aided by the recently granted FDA indication for same day discharge following <unk>.

<unk> for ablation ablation procedures.

We are increasingly confident about this business and increase our fiscal 'twenty two guidance range to $90 million to $95 million nearly double the revenue generated in the 12 months prior to the acquisition.

Blood Center revenue declined 7% in the quarter and 4% year to date as omicron disrupted U S blood collections.

<unk> revenue declined 7% in the quarter driven by staffing shortages in the U S blood centers and unfavorable order timing amongst distributors when compared with the prior year affecting both capital and disposable sales.

Overall, we are confident about the performance in our blood center business and reaffirm our revenue guidance of a 3% to 5% decline in fiscal 'twenty two.

Bill.

Thank you, Chris and good morning, everyone as Chris discussed our results today showed continued resilience in the business as strong revenue performance in hospital.

Specifically in Hemostasis management vascular closure.

To mitigate the impact of a prolonged recovery in plasma volumes. In addition, our operational excellence program combined with other cost mitigation efforts, partially offset inflationary pressures and allowed us to continue to fund investments to long term growth.

In the third quarter, we reported our highest adjusted gross margin in company history of 54, 9% an increase of 350 basis points compared with the third quarter of the prior year.

The adjusted gross margin year to date was 54, 1% an increase of 370 basis points compared with the first nine months of the prior year.

In both periods adjusted gross margin benefited from the addition of the vascular closure business incremental gross savings from our operational excellence program.

And favorable product mix due to a higher proportion of our revenue coming from the high margin and fast growing hospital business.

These benefits were partially offset by inflationary pressures in the global manufacturing and supply chain, including freight raw material costs previous divestitures and price adjustments.

Price had a positive impact on third quarter results as we recognized additional benefits from upgrading customers to our latest Nexus PCF and persona technologies and fully annualized previously announced price adjustments in plasma.

Including the exploration of fixed term pricing on a historical Pcs two technology.

Adjusted operating expenses in the third quarter were $83 8 million.

An increase of $12 8 million or.

Or 18% compared with the prior year.

As a percentage of revenue adjusted operating expenses increased by 280 basis points.

And we're at 32, 3%.

Adjusted operating expenses year to date.

$253 2 million and.

An increase of $52 2 million or 26% compared with the prior year.

As a percentage of revenue adjusted operating expenses year to date increased by 360 basis points and we're at 34, 8%.

The acquisition of the vascular closure business had the largest impact on the increase in adjusted operating expenses in the third quarter and year to date.

Third quarter adjusted operating income was $58 8 million, an increase of $6 2 million or 12%.

And year to date adjusted operating income was $145 million, an increase of $16 4 million or 13% compared with the same periods in fiscal 'twenty one.

Adjusted operating margin was 22, 6% in the third quarter and 19, 3% year to date representing.

Representing increases of 70 basis points, and 10 basis points, respectively, compared with the same periods in fiscal 'twenty one.

The improvement in adjusted operating margin in both periods was driven by higher adjusted gross margin, including our ability to mitigate inflationary pressures parsed.

Partially offset by higher adjusted operating expenses.

We affirm our adjusted operating income margin guidance to be in the range of 18% to 19% in fiscal 'twenty two.

We are seeing early signs of stabilization in freight and raw material costs. However, these expenses remain above historical levels and we expect continued inflationary pressure into fiscal 'twenty, three along with rising labor costs.

We remain confident and continuing to generate additional gross savings with our operational excellence program.

The success of this initiative has largely offset near term cost pressures.

The vascular closure business continues to exceed our expectations. This business is on track to deliver revenue in the range of 90% to $95 million.

Exceeding our original expectation of $65 million to $75 million.

Operating income is expected to be accretive to our business. This fiscal year compared to 15 to 20 cents dilution. We originally expected in the first year following the acquisition.

This over achievement continues to be driven by strong commercial execution across the vascular closure portfolio and lower interest expense when compared with the original deal model.

With the first year anniversary of the acquisition in March we will begin to report revenue from this business in our organic revenue growth rates.

The adjusted income tax rate was 21% in the third quarter, and 22% year to date, compared with 16% and 15% in the same periods of fiscal 'twenty one respectively.

The adjusted income tax rate in fiscal 'twenty, one with lower than fiscal 'twenty, two due to the benefit of higher share vesting and option exercises.

We expect our fiscal 'twenty, two adjusted tax rate to be approximately 22%.

Third quarter adjusted net income was $42 9 million.

An increase of $1 5 million or 4%.

And adjusted earnings per diluted share was <unk> 84, and.

An increase of 4% when compared with the third quarter of fiscal 'twenty one.

Year to date adjusted net income was $99 million, an increase of $2 2 million.

Or 2% and.

And adjusted earnings per diluted share was $1 93, an increase of 2% when compared with the first nine months of fiscal 'twenty one.

The higher adjusted income tax rate in fiscal 'twenty two.

<unk> <unk> downward impact on adjusted earnings per diluted share on a year to date basis, when compared with the prior year.

We remain confident in our ability to deliver mid to high single digit growth in adjusted earnings per diluted share and we are tightening our guidance range for fiscal 2002 to $2 45.

$2 55.

Compared with the previous guidance of $2 40 to $2 65.

Cash on hand at the end of the third quarter was $237 million.

Up $45 million since the beginning of the fiscal year.

Free cash flow before restructuring and restructuring related cost was $76 million.

Compared with $99 million in the first nine months of the prior year.

The lower free cash flow before restructuring and restructuring related costs in fiscal 2002 was mainly due to higher accounts receivable as revenue continues to recover from the pandemic.

Higher capital expenses were offset by lower inventory as we continued to upgrade our plasma customers.

We have a sufficient quantity of <unk> Pcs devices in the U S to complete the conversion of the remaining major customers with no impact to future cash flow.