Haemonetics Corporation (HAE) Earnings Call Transcript & Summary

Welcome, everyone, to day 1 of the Morgan Stanley Healthcare Conference. I'm Drew Ranieri, one of the medical device analysts here. It's my pleasure to have Chris Simon, President and Chief Executive Officer of Haemonetics with us here today. And there's a significant amount to talk about. But before we jump into it, just a quick disclaimer. But for important disclosures, please see the Morgan Stanley research disclosure website at morganstaley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. But Chris, thanks for being here today. I really appreciate it for -- and thank you for your time.

And I just want to start off this morning maybe on the Plasma business and kind of where recovery stands. So recovery in plasma collection continues to be kind of -- continues to lag, especially in your first quarter. However, you reaffirmed your guidance for fiscal year 2022. Just -- your guidance really assumed kind of a varying rate of recovery pacing and speed. But at this point, how are things playing out? You noted previously that fiscal 2Q was really a key driver or pivot point kind of in the low and high end of your guidance range. But how should we think about it today? And maybe what are the drivers of recovery? And how much visibility do you have in that for the back half of the year?

Great. Drew, thanks. Appreciate the opportunity to be here today. Thanks for inviting us. A couple of parts to your question, so let me address them in sequence. In terms of our guidance for FY '22, the primary thought there, regardless of whether we're at the low end of the range or at the high end of the range, we anticipate a full recovery in plasma collection volumes by the end of the fiscal year to at or above our FY '20 source plasma collection volumes. The real distinction, as you highlighted, is how things progress really from this point forward in the year, with the low end of the range being a more protracted recovery and the high end being a more robust one. There is a second component to the forecast, which has to do with price. We anticipated that price adjustments would create a temporary headwind in the first part of the year. We also anticipate that price increases will become a meaningful tailwind as we convert additional plasma centers and -- to NexSys and Persona as the year progresses. So in terms of where we are. We are seeing additional improvement in plasma collections now to the mid-20s growth versus last year, which is a significant improvement over what we communicated at the end of our first quarter, where we were in the mid-teens, 14%. So we're seeing the uptick. It's measured, but it's appropriate. And we think that we're going to see further increases as the year progresses, particularly as we get beyond economic stimulus and unemployment benefits, we get into the holiday season and yet we still have kind of the economic environment we're currently operating in. So there are challenges for sure. And we imagine we'll get into some of them. There's some things going on at the southern border that are creating difficulties for our customers, and we're keeping a wary eye on variants and outbreaks, et cetera. But there's a lot of good news, too. Anything, we're operating near college campuses, with college back in session and students on campus has been a real positive. Europe continues to be a source of strength. And in fact, markets like Czech Republic and Hungary are actually full recovery now and are actually adding new growth beyond where they were pre-pandemic. So there's challenges, there's risk. The good news is we have really good visibility, to your question. Plasma centers generally don't hold a lot of inventory. So we have great visibility into the order pattern and that they actually have on hand. And we have ongoing dialogue. Our forecast is a reflection of the forecast they submit -- required to submit to us. So to the extent that any of us have certainty here, we're in it together, and we're managing accordingly.

Got it. So I think on the last call, you mentioned like quarter-to-date, collection volumes were around 21%. So that was a marked improvement from what you saw in the first quarter. I mean is it fair to say that you're at least seeing that continue into September?

Yes. We saw a 14% year-over-year growth in our first quarter. It's growth, but it was pretty modest, right? At the point where we read out in August, we had seen that increased 20%. We're now looking at 24% or 25%. So the uptick continues as we expect it should. It's modest, but it's there for sure.

Got it. That's encouraging. And how do you think about kind of the rising COVID cases? We have new variants affecting really kind of the additional recovery in plasma collections. I mean is there any additional risk at this point to your 15% to 25% growth guidance for fiscal '22? And just to layer in this question -- sorry, there's a lot here. But just any concerns on the Mexico border? Any more detail you can share there? I know it was maybe a 100 basis point headwind on the business. But how is that situation playing out?

Yes. In terms of COVID, we're obviously paying close attention to doing whatever we can to help our customers keep their centers safe and fully operational. To date, as unsettling and uncertain as it is, we've not seen a meaningful impact to collection volumes. In fact, there's very little correlation as we've modeled it between case counts and collection volumes in centers that are operating in those locales. What we do see is a meaningful effect on stimulus, and now stimulus and the associated unemployment benefits have run their course. In fact, beginning of this week was the first time where we've been beyond the federal stimulus across all 50 states. So we're monitoring it closely. We expect that will have a meaningful impact. And as those benefits wrap up, there is continued economic hardship in the economy to start of a new academic year. You've got the upcoming holidays, as I mentioned. We think that we'll see continued robust improvement beyond typical seasonality, which is usually a positive for us at this point in the year as well. So we're assuming that all combined for increased donor traffic. The situation at the southern border is exactly as you described. There is recent enforcement of an existing U.S. policy that essentially prevents Mexican citizens from entering the U.S. for the purpose of donating plasma. And it's a smaller number of centers. It is, as you said, about 100 basis point headwind to our growth forecast. But we will do whatever we can to help PPTA and the rest of the industry address that. A number of our customers are working quite diligently on this. So we'll see where it goes. We don't have any proprietary insight beyond where it stands today.

Got it. Got it. And just maybe to move on to NexSys and Persona for a moment. But you mentioned earlier in the session, just pricing benefits in the back half of the year. But how should we think about additional NexSys and Persona conversions? You've mentioned before a few of your customers have already converted to Persona. I mean should we assume that all of your customers will be on Persona in the very near future? And just really how will you convey progress so that investors can really kind of gauge where you're at in the conversion process overall?

Yes. Thanks for the question, Drew. We are really excited about NexSys with Persona. Early adopters of the technology are benefiting by an additional 9% to 12% yield improvement as well as additional plasma center efficiencies that come with the platform. So we fully expect additional conversions in the second part of the year with a meaningful impact to our financials. Persona is a step change, and customers need to assess and prepare accordingly. We're supporting their technical and medical reviews, the validation process that's required and any other necessary operational changes to handle the larger volume bottles, et cetera. So it is more than worth the effort, but there is effort there. And we're convinced that NexSys with Persona is the best solution for collection center productivity broadly defined. And there's never been a point where this is more critical than during the recovery. So our customers realize this. We'll continue to support them as they move forward with conversions. And as you said, we generally don't announce individual customer conversions. We've participated with some customers who chose to make a press release or an announcement about their adoption, which is great, but basically, we'll reflect it in our guidance, and it is reflected in our guidance as we go forward into the second half of the year.

Understood. And this might be a silly question, but given the plasma collection is down still kind of across the U.S. I mean, are more customers attracted to converting to NexSys or Persona now to minimize any of the logistical challenges? Is that kind of a reasonable thought? Or would you kind of still expect conversion to be more gradual over the coming quarters and years?

Yes. We think it's a really powerful lever to accelerate an already robust recovery. And when you measure whether it's the 9% to 12% yield or the much improved cycle time, door-to-door, processing donors faster, it's the assurance that comes with the e-connectivity that makes it feel completely validated and regulatory approved. Or whether it's just a better experience for the donor to get them excited about coming back more frequently and staying active in their donations for a longer duration. We think all of the above, and it's an important tool as our customers strive to replenish much depleted plasma inventories.

Got it. Got it. And maybe one last question on Plasma before we move on to the Hospital business. But on the last quarter call, you announced that you made some organizational changes in the business. But how will that change your overall Plasma structure or business strategy? I think we might be having an Analyst Day coming up in -- towards year-end potentially. But just will we hear more at the Analyst Day? Or could we expect to hear more about the Plasma strategy as recently as the next call?

So I guess it's yes and yes. We put Chad Nikkel on point for meeting the Plasma business unit. Chad's been with Haemonetics for 12 years. He served in multiple leadership roles across the organization. He has deep knowledge of our markets, strong relationships with our customers and expertise with plasma collection globally, that I think make him uniquely qualified to lead our efforts to partner with customers and pursue new growth opportunities, including those outside the U.S., which will be increasingly important for us going forward. As you say, we're going to have an Investor Day after our second quarter earnings call later this year. And we definitely want, as part of that, to put forth a revised and updated strategic plan that we'll share fully as part of that discussion, Drew.

Got it. Understood. Let's move on to the Hospital business and just start with the pace of recovery for a moment. So the business benefited from just additional procedures coming back in your first fiscal quarter. But to some degree, there was an easy comp there. But how are you thinking about the pacing of recovery in the Hospital business kind of throughout the rest of the year? And just similar question to where we were with Plasma is just with the Delta variant, kind of how are you thinking about that playing out in your guidance?

Yes. Look, we're excited and encouraged by what we're seeing in Hospital. We had an exceptionally strong first quarter. U.S. procedure volumes, in particular, recovered nearly fully, maybe off just a little bit in trauma where we're probably at 90% recovery versus the other areas of the business that are equally essential, but we saw more of a full recovery. And I think we had some added benefits, in particular in Europe, where we won a new government tender for the ClotPro technology that was acquired when we bought enicor 1.5 years ago. So in that regard, it was a really good quarter, a great start to the year. The comps do get tougher, to your point, as the recovery in hospital procedures continued throughout FY '21 for us. However, we expect growth to continue to our FY '22, supported by additional recovery for sure and procedures outside the U.S. where to date the recovery has been a little bit more uneven. So I think as the rest of the globe steps up and kind of returns to some semblance of normalcy, our business will benefit there accordingly. I just say, the COVID variants, the continued outbreaks are a concern. We're watching it closely, talking to our hospital customers and making sure that they and we can stay safe in the process. But we're mindful of it. We've definitely seen some effect. I think it affects our 4 hospital segments each differently. But to date, it's been a relatively modest effect, and we've been able to compensate for it by new growth. So, so far, so good.

Got it. And as we don't have much time, I can't go into every Hospital segment. But just specifically on vascular closure. I mean the business delivered $22 million in revenue in the first quarter. I think that was -- maybe I'm misremembering, but pre-acquisition, I think the asset was in the mid-$40 million for the prior year. So kind of what's been driving the outperformance? I mean is it more geared towards new account openings? Or just are you having more success penetrating existing accounts with VASCADE and VASCADE MVP?

You are recalling it exactly right, Drew. I think the team has done 3 things well from the outset of the acquisition dating back to January, February time period. They avoided disruption. They're focused exclusively on execution. And we're investing selectively. We're justified. And when I think about the avoidance of disruption, it essentially left the Cardiva commercial organization intact under its existing leadership and moved those over and incorporated those in and reported directly to Stu Strong, who runs our Hospital business unit. Everyone involved. It's crystal clear about the deal model drivers and the criticality of winning in the top U.S. EP hospitals. That's a whole range of opportunities here. We'll talk about those maybe. But winning in those leading U.S. institutions is first, second and third priority. We're doing everything that the team needs to be done to ensure that we can deliver and the organization's hyper-focused on that goal and the support requirements. I think the other thing we're doing that's really helped not only accelerate into the curve here, but also has helped with morale, which is we're making good on our intentions to invest behind the success that we're experiencing. So adding critical sales and clinical support resources, broadening our reach and driving greater utilization. It's not just opening up the new accounts. It's actually driving greater utilization within the account. And that's true not only for MVP with the electrophysiology point, but it's also been true for VASCADE on interventional cardiology as we've kind of broadened our footprint. So lots to be excited about there, including the recent regulatory release for same-day discharge.

Got it. And just on the same-day discharge approval, I mean having gone to VF symposium before in HRS, I mean -- and talking to docs, I mean that was a really compelling feature potentially for MVP. So I mean when we kind of look at the $75 million to $85 million guidance for vascular closure, I mean does the same-day discharge, is that already embedded in there? Or could that actually accelerate growth and provide maybe some upside to the guidance that you called out earlier?

So we fully anticipated the approval. We were delighted it came as early as it did. But it's clearly factored into the revised guidance that we've offered. We look at it. And there was certainly a lot of buzz about this on the floor at HRS. VASCADE MVP is the only closure device that has the indication, and the clinical work that we did, we put forth 3 perspective and 1 retrospective multicenter study, evaluating both the safety and the efficacy of VASCADE MVP to enable the same-day discharge of AF ablation patients. And so we have near perfect results, over 800 individual patients. It's -- when you talk to the clinicians, there's just a ton of excitement and buzz about that. Only more heightened because of COVID, right? So electrophysiology, unfortunately, took a meaningful downturn during the pandemic because people were afraid to go into the hospital and get their Afib checked out. Now we're able to help advance and give clinicians a high degree of confidence that if medically appropriate, those patients will go home the same day. And I think that opens up the aperture a bit. We're seeing benefit from that. It is factored into why we were confident to guide up. And we'll talk more about this story and how it evolves. We want to give ourselves a little bit of time to continue to learn and move up the learning curve on what is an incredibly exciting market segment and product portfolio.

Got it. And then just on kind of the commercial drivers there for a moment. You've called out a few. But how much effort or planning are you putting into pushing this product internationally? I mean where are you in that potential process?

Yes. When we -- as I said, the early stage of this, the success that you're seeing, the results that we're putting forth are really driven by penetration of the largest accounts in the U.S. However, in parallel, we've taken meaningful steps to expand the regulatory front and leverage Haemonetics' existing infrastructure, commercial and otherwise, to take the product internationally. Some of that work predates the acquisition, but we've tried hard to lean into that, particularly from a regulatory front and are actively advancing the approvals and the eventual commercialization outside the U.S. Japan should be an outstanding market for us, as will Western Europe. And so we're leaning against that. That will be an important next tranche of growth that will come on the heels of this. I think in parallel, there's really a third set of efforts, which is around expanding the portfolio, seeking out new indications, looking for a broader application of the technology. So stay tuned, but we're excited about the opportunities to expand the portfolio, both geographically and from a therapeutic use perspective.

Got it. It sounds like we might hopefully hear something at the Analyst Day on some of those initiatives. But maybe let's shift to profitability for a moment and really kind of touch on the expanded operational program that you announced. Just -- it's now $115 million to $125 million in gross savings by the end of your fiscal 2025. That was -- I think, the original program was $80 million to $90 million by the end of fiscal '23. So you found another $35 million in savings. Just a couple of questions here. Is the incremental $35 million specifically related to your efforts to offset some of the CSL transition? And maybe what else has changed in your program? And how should we kind of think about the pacing of the program and drop-through rates evolving over time?

Yes. I appreciate the question around that, Drew. Operational excellence has always, from the outset, it was intended to be a holistic multiyear effort designed to improve quality and reduce costs, primarily cost of goods sold, which is not an area that we had a lot of progress with previously. The original program did not anticipate the global COVID-19 pandemic and the resulting reduction in plasma disposable volumes. It didn't anticipate additional headwinds such as the increases in freight and resin costs that we've encountered. And it certainly didn't anticipate the loss of the U.S. CSL disposable contract and the volume there in. So what we have done over the past 6 months is we've doubled our efforts on operational excellence. We're very proud of the fact that we're able to recommit to the original target, say, this range of $80 million to $90 million, as you highlighted. And we have gone to identify additional opportunities to help offset all the issues that I was just lamenting, right? And in addition to that, by extending the program out, we'll pick up for those approximately another $35 million in gross savings. The new goal was to deliver the total of $115 million to $125 million by the end of fiscal '25. And we expect that fully half of those savings will be benefiting our adjusted operating income. So it's a revamped program. It's looking beyond the impending loss in volume. It's the delayed nature of the recovery that's currently forecasted, et cetera, and putting that all back together. There's no small feat to get back to the original $80 million to $90 million, and then actually add the additional $35 million on top of it. But there's a whole lot of things happening below the water line to make that a reality, along with improving the product quality and service delivery.

Got it. And we only have a few minutes left, and I want to hit on another few questions. But just specifically for your fiscal 2022 EPS guidance at $2.60 to $3, you left that unchanged. I mean it is a wider range than you've historically provided before. But you announced the updated operational excellence program. There's no dilution anymore from Cardiva. So why not raise your EPS guidance? I mean should we just view this as being conservative just given some of the backdrop here from a macro environment? Or are we missing something?

So Drew, you're not missing anything. The pandemic, in our view, is evolving into an endemic and the impact of the recovery in various markets and segments will reflect that. We're striving to be realistic in the base of significant and unprecedented uncertainty. And while it may seem a tad counterintuitive, we're also looking at this as an opportunity to pursue through-cycle investments where they present themselves. So you highlighted OEP and the gross savings and the pass-through, absolutely the case. But doing what we're doing there requires additional investments, investments that will make us leaner and more purposeful going forward, but do need to be invested in now and as a first plus to offset the inflationary pressures on sterilization and raw materials, et cetera. Our performance with Cardiva is exciting and meaningful for the reasons we've highlighted. But it also -- the most important thing for us is that it frees up additional capacity, additional resources to make good on pulling forward additional hospital-based growth investments in electrophysiology and intervention cardiology, 2 big growth areas for us. So we're taking advantage of that. The guidance in the range reflects that in an otherwise very uncertain state.

Got it. And just from a -- maybe a longer-term perspective, we have, again, the Analyst Day coming up, but maybe this is more of a preview-type question. But how are you thinking about kind of the short-term and long-term future of Haemonetics? And maybe what are you telling investors? Kind of, do you see the company is still a growth company or accelerating growth company or gearing more towards the profitability side? Just any perspective there would be helpful.

Yes. There's a lot there, Drew. And I think that will be the primary focus of our Investor Day. I would just direct our investors back to the 6 value drivers that we had teed up, whatever it is now, 2.5 years ago. And I won't do a forced march through all 6 of those, but I will highlight a couple for you, right, which is to say, for Plasma and all of this, to be clear, across all 6 drivers, we are focused on growth, first and foremost. And within growth, folks know we're going to do our part to expand margins intelligently, but it is disproportionately about revenue growth to your question. I think there's a second goal, which is diversification. And we're doing things that will make the business more robust and give it added measures of stability going forward. And then I think there's a third piece around sustainability, in the broader sense of the word and look forward to talking about all 3 of those things over the coming months. But on Plasma, we're excited about what we see as the ongoing uptick in volume recovery. There's a lot that's been put out there about this, but the simple point I would make is anything that wasn't collected during the pandemic will need to be collected in the weeks, months and quarters going forward to make up for the depleted inventory. In terms of market share, I think a lot's been made of this. We understand that we need to earn our way with customers every day. we're committed to doing so, and have a lot of confidence that we will be able to not only maintain but expand our market leadership going forward. We see exciting opportunities in Plasma for geographic expansion. And I know there's some consternation about pricing and what the market will bear. We're committed to fair value for innovative technology. Our customers value and respect this. That's reflected in all of our contracts. And I think our customers are quite pleased with the value proposition. So Plasma is Plasma. We're excited about it. We're committed to it. We will double down on it. I'll hit Hospital just for a moment to say it's becoming a powerful source of growth and diversification for us going forward. That will only become more true as we scale our operating performance. So we're excited about that. And then I guess the last thing I would leave you with is around capital and resource allocation. I think one of the things that we hope Cardiva and enicor demonstrate is we're always going to be committed, first and foremost, to organic growth and the opportunities we see there. But now inorganic growth is becoming an additional capability and a mindset to create growth and value. And as we demonstrate that, as we put wins on the board there, hopefully, we'll get the ability to leverage our balance sheet and our income to be able to do more of the same going forward, which has us really excited.

Great. Thanks for that perspective. And sadly, we've kind of reached the top of our session here, Chris. But thank you again for joining us today. We really appreciate your time.

Drew, thank you. Appreciate what you guys do. Take care. Bye-bye.

Thanks. Thanks, everyone, for listening.