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 CEO of Haemonetics, with us here today. Great to see everybody 3-dimensionally. Also before we jump in, just a quick disclaimer, but for important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com research disclosures and if you have any questions, reach out to your sales rep. Chris, thanks for being here today. Great that you're taking the time.

And maybe just to first start and you did have some news this morning, but -- and I'd like to get to that. But maybe let's hit on the plasma business first. And really, since the May Analyst Day, you've been discussing the plasma collection volumes are really gaining momentum and you're now seeing recovery across all plasma centers. Can you maybe just talk about what's driving the improvement? Is it an industry level, company level? And maybe just help us better understand kind of the magnitude of the recovery compared to maybe past recoveries trends?

Yes. Thanks, Drew, and thank you for inviting us. We're delighted to be here and have a chance to come and try to reinforce our story. Plasma is a really exciting point for us right now. When we break down our plasma business, we think about growth in collection volumes, we think about our market share, we think about our ability to drive favorable gross margins. And all 3 are trending in a good way for us right now. By far, volume is the biggest piece to your point and I think we're now in our fourth quarter of growth exceeding the historic seasonal growth rates. So we've got increased confidence that this recovery is real. We've had a couple of false dawns. We called up some of those out previously, where we thought there was a turn and then it evaporated. This one feels meaningfully different. And I think, first and foremost, it has to do with donor economics, right? We track really 2 sets of metrics, we look at real wages, and we look at savings rates. And what we're seeing now is while there has been wage inflation, it's not keeping pace with the overall inflation and for our population rent and utilities and gas and food is really what's put them behind and they're falling further behind in that regard. You see that manifest in savings levels and savings rates that are now at or below where they were prepandemic. The combination of those 2 things tends to drive donor propensity to donate. And then I think we've now started tracking a third metric, which is consumer sentiment, which is fully 10% to 15% below the lowest point it's ever been measured at. So that combination has donors in the centers, our customers have done the right thing in terms of compensating them in terms of expanding the number of centers. We have the supply, and we're benefiting as a result.

And maybe just on the centerpiece. I mean through the pandemic, your centers had to pay up for donors. -- like do you have any sense of where that is in the cost for the center?

Yes. Our customers have 2 direct levers to pull. One is the remuneration for the donors. The second is the amount of new center openings because historically, mature centers don't grow. The year-over-year same-store sales, if you will, tends to be pretty constant. What they get through growth is coming off of those new centers. And then they pushed both of those as aggressively as you can. It has led to a higher cost per liter -- cost per liter of plasma is now over $200, but that also plays to our value proposition in terms of productivity and donor set.

Got it. Maybe just on kind of the pricing component for a moment. But you're on track for next conversions by the end of September. I mean we're getting close. Maybe just how should investors be thinking about the magnitude and duration of kind of the pricing tailwinds? Or -- how would you like to kind of talk about that potential benefit?

Yes. So we have the overarching wave that is the rising tide of increased collections. That's coupled with our technology rollout. So a year ago, we focused and completed the next link, which is our software upgrade across all of our existing customer base in North America. This year, the commitment has been really around Nexus. And I'm happy to say here this morning that we have completed that technology upgrade ahead of schedule in the month of August. So now all of our major customers here in the U.S. have been upgraded to the Nexus PCS device. With those upgrades, Nextlink and Nexus comes higher pricing, which is a reflection of the vastly increased productivity of the new device. -- what we have underway currently is an upgrade to the Persona collection technology, which is a proprietary capability set that we've put into the market that tailors the individual donation adding somewhere between 70 and 90 additional milliliters. That conversion is midway. We haven't put a specific number on it for competitive reasons, but we're excited about the progress we're making. And as I said, we're rapidly approaching the midway point, and we'll look for more of that in the remainder of this year and next.

Maybe on Persona or just a follow-up question there. Is the plan for it to be like Nexus where this is 100% conversion of your U.S. installed base?

We started down the path with Persona. This notion of a personalized nomogram. -- maybe just a quick backdrop -- we've for the long time, dating back to the early '90s, the industries follow a set nomogram. And we improved upon that nomogram when we introduced Nexus 3 years ago. Persona takes it to a different level. And our original intent in pursuing Persona was personalized medicine, tailoring the collection and the volumes associated with that collection to the individual donor biometrics. We measure height, we measure weight, we measure the hematocrit to come up with a calculation for how much plasma each individual has in their body, and now let's take a constant percent of plasma based on what we know about that donor. In aggregate, we take more in total, that 70 to 90 ml. We end up taking less from some and more from others, it kind of works out in a very favorable way. But we believe -- and we're now accumulating real-world evidence to show that it's not only a much higher yield which we've talked about, but it's also a safer form of collection as well, safer for the donor.

Got it. Maybe one of the other components you're talking about was just new centers, existing centers. So maybe let's go into that in a little bit more detail. So just the rough math, there's about 1,100 plasma centers in the U.S. that's increased about 7% year-to-date by our math from year-end last year. Just if you're excluding the CSL centers, there's about 800 in the U.S. So maybe just talk about your market share today. It's kind of a question that I continue to get from investors is just where your market share is today? And kind of where do you see your more immediate market share gains?

We are roughly a 70 share of the U.S. market. U.S. market is roughly 90% of the collections between U.S. and Europe, maybe closer to 70% worldwide, if you factor in Asia, China specifically. So we have 70% share of that global market. And whether it's CSL or the other customers, we've -- they've all leaned in and to date, have opened 250 or more new centers through the pandemic. This is something they've done without missing a beat. And what's been very interesting to model and track is those new centers over the last 2 and a half years have performed identical to the way the historic center growth rate was essentially following a 4-year ramp. So as much difficulty as there was rerecruiting donors back into the mature centers previously that did not exist with the new centers. Now what we see and what we've communicated and what gave us confidence to nearly double our guidance for the year is that both mature and new centers are growing. In fact, mature centers are growing faster as they close back that capacity. So -- but when new center opens, it almost immediately follows the existing share that we have with those customers, including over the last 3 years with CSL.

Got it. And as you're kind of thinking about your market share growing here in the next couple of years, are you willing to give up anything to capture share?

So without being in any way overly confident about it, I feel like we have a superior technology that gives us the ability to retain and grow our market share without moving negatively against price. When I joined Haemonetics 6 years ago, our gross margins were in the low 40s, 43% our first quarter of this past fiscal year, we touched 55%, which is a high for us. In our long-range plan back in June, we guided to a gross margin that would be in the high 50s or low 60s, so another 500 basis points plus or minus from where we are. We think the superiority of our technology allows us to do that. When you look at the 4 quadrants that we talk to, Drew, yield, cycle time, e-Connectivity and donor satisfaction, it's unrivalled. I was with our sales team last week, who just returned from a customer conversation, 10% to 12% yield enhancement in an environment where it costs our customers about $200 to collect a leader of plasma. Simple math, it's $0.20 an ml. If we're adding 90 ml, we're talking about a benefit that is in the high teens or better, $18 and $19 is as our customer team said to one of our longtime customers, the other guys could give away their kits for free, you would still be better off collecting with us with Persona. And that's really powerful. There's been other dimensions that have been highlighted. -- cycle time matters. We've taken 16 minutes out of door-to-door time because that's what donors have told us is most critical for them. If they show up at 10 a.m. to make a donation and they leave it noon, it's a 2 hour donation in their mind. If we can shave 16 minutes off of that with better work processes and a better environment in the center, so be it, we're not going to see procedure speed. There's been a lot made of that recently. We talked about this at Investor Day. We have a series of programs underway. We expect to submit for FDA review and approval later this year that will take another 20% off of procedure speed. So we're not going to seed any ground to anyone. And therefore, we don't see this as a trade-off between market share and gross margin. We also had the benefit of mix. And I think we've done a number of things there that factor into our growth going forward. And then we'll probably get into this later, but we have an operational excellence program, which so far is really focused on agility and resilience, but is also meaningfully driving our productivity and lowering our cost of goods sold.

What was that pricing benefit again? Okay. You were talking about some of the new potential new technology for FDA review and kind of the maybe less of an elephant in the room now is just the competition coming with Terumo. So I mean, how are you kind of thinking about your ability to compete against that new technology? And really, what are you thinking about maybe not next year through their rollout, but 3, 4 years down the road?

Yes. We don't take anything for granted. Any time a new runner gets on the track everybody speeds up and delivers, and that's certainly the case here. We don't know a whole lot about our competitors' device. They did a very limited trial talked before about 124 collections. To date, it's best characterized, I guess, it's a limited market release with only one center converting. So there's just not a lot of real-world evidence. I don't want to get drawn into those comparisons because when we talk about Nexus, we're talking about what is now approaching 30 million collections real world. When we talk about Persona, we're approaching 5 million, 6 million collections, real-world data. So it's apples to oranges. What I would say is we spent a lot of time talking with, working with customers about what matters most to them. Comparisons to PCS2 irrelevant for the reasons we just talked about. We've already completed the upgrade cycle so that in the market, all of our major customers here in the U.S. and most now in Europe as well are using Nexus. So Nexus is the comparator. It is the standard. And I think those 4 dimensions will continue to serve us well as we advance our innovation agenda to take that leadership forward.

Got it. Maybe just one last pause kind of question before we go into some other topics. But you touched on this earlier and we all know that you updated your fiscal '23 plasma guidance, the 15% to 20%, you essentially nearly doubled it. The industry is essentially 2 years behind on plasma collection. So maybe help us better understand really all the key factors that are driving your confidence? And I'm just going to add this in, too, is just prepandemic, the plasma business was maybe like $110 million quarterly run rate. Again, if you kind of look over the past couple of years, and that's about $200 million worth of cumulative plasma that's just kind of missing there. So maybe just help us kind of bridge that gap and maybe what the delta is between your prior run rate and your current guidance?

Your assessment is right. It gets complicated because there are mix issues as well. Prepandemic, we were still heavily involved in the liquids business. We've made a decision to strategically exit that business. There's other low-cost, high-quality sources available to our customers, so we don't play in that. So there's some mixed things going on. Software, we were in the middle of an upgrade cycle during the software. So you saw some differential pricing. But if I look back, I look at our first quarter of fiscal '23, which wrapped up in June, the volumes of collection in aggregate were comparable to what they were in the first quarter prepandemic, right? It's always the slower quarter of the year for us. But we -- our customers have driven a recovery to that level. That's what gave us confidence to up the guidance. In the first quarter, the outperformance was both a function of volume and price that we've realized from the new technology. Going forward, we're really extrapolating that volume for the remainder of the year. As I said earlier, we're now in our fourth quarter sequentially where volume collections have increased greater than the historic seasonality. We think that's going to continue. And that was what drove the guidance upward for us. We don't have additional pricing assumptions in there for the Persona technology. If they come, we'll include those in our guidance when it happens but at this point, we're looking at volume, volumes the single biggest driver of the revamped view for this year.

And you probably don't want to get into intra-quarter, but is there anything that's so far here on September 12, giving you more confidence that, that trajectory could be steeper for this year.

Yes. Again, I go back to those macro factors. The world needs more plasma. There's no shortage in demand. In fact, if anything, the demand for IG has increased through the pandemic, and our customers are doing everything they can to respond. So we have a lot of confidence this will continue from here.

Got it. Maybe let's touch on profitability for a moment. And you mentioned the OE program but from a headwind perspective, no company is really immune from the macro, the inflationary headwinds, supply chain. Maybe as you're thinking about what relief could look like, how quickly could that potentially flow through the P&L? How can these -- if you do see a reversal, just how could there be upside through this year and maybe as we're thinking about next year?

When we talk about the macro environment, if I could, I'd break it down between demand and then our cost or our P&L. On the demand side, we have no concern about the broader macro environment. In fact, if you go through our 3 businesses, starting with blood, blood is an incredibly durable source of revenue for us. People are altruistic in this country and across the globe. When they find themselves with more time, they donate and as long as hospitals are open and doing procedures, there'll be demand for blood and a lot of confidence in that business as it always has, will weather whatever storms come. Fully 70% of our hospital business is nonelective. We're in cardiac, we're in interventional cardiology and electrophysiology now and trauma. And prior recessions have proven that our hospital business grows in good markets and in bad as long as the hospitals are open to do procedures, we have a lot of confidence. When I switch over to plasma, as I talked a little bit earlier, plasma has proven to be countercyclical in that regard. And I think we're heading into a period where it should be very good for our customers to be able to replenish their depleted inventories, which is something they're absolutely committed to doing. So from a demand side, regardless of whether we're heading into recession or continued inflation or stagflation, whatever, we feel reasonably confident. It's confident as anybody can that demand will be there. On the cost side, we talked about this. We had 300 basis points last year, 250 basis points this year of headwind primarily coming from inflation. Foreign exchange called I think everybody by surprise over the course of the last year. So those are big factors for us, and we don't have the ability to control for that. We're not as exposed to some. We're 70% of what we do is here in the U.S. So maybe we're a little better off on that dimension than some. Our biggest issue to date has been freight and logistics. There's some inflation in our resins, et cetera, but it's really freight and logistics. We're starting to see some relief there, which is positive and as that materializes, that's a direct pass-through. We are mindful and we'll continue to challenge ourselves to focus on long-term value creation. So if we get some unexpected benefit, yes, some of that will be reinvested in growth. We're absolutely committed to growing not just this year and next year, but through '25 and '26. So it will be a mix, but it's a mix that we think goes from strength to strength from where we sit.

Got it. And just a follow-up here on freight. You're talking that it's getting a little bit better, which is kind of what we're hearing across med tech more broadly. And your guidance, if I remember this correctly, I kind of assumed just steady state of where it was in the past quarter.

Yes, we didn't assume any relief. We didn't assume it got worse either. And a lot of what we're experiencing is we've -- I want to make a shout out to our teams on this. We focused on resiliency, we focused on agility before it got really fashionable. And I think we've seen the benefit of that through the pandemic. Across all of our businesses, we've had the ability to supply our customers regardless of what's been throwing at this. In some cases, we've had to really amp up our freight cost, to put things on air transport, et cetera, because we were caught short or how to get supply from elsewhere in the network. But we've been incredibly resilient. It's expensive. Hopefully, we get a bit of a break from that and that's what we're angling towards, that would be upside from where we sit.

But the 250 basis points this year, the majority of that is inflation and a bit of FX.

And a bit of exact...

Got it. I know you're anxious to answer your question about next year, I'll ask it. Kind of at the Analyst Day, I mean, you were very confident that you can drive both top line and bottom line growth for next year. I mean, it sounds like you're maybe even incrementally more confident on the plasma recovery here today. But maybe just help us kind of walk through the growth drivers for next year. I mean, I think -- the Street is modeling like 2% top line growth for next year, 8% bottom line. You probably don't want to get into that detail, but you can if you want. But just talk to us about the growth drivers for next year.

Yes. So no guide for next year just yet. What I would say a lot has been made of -- we called out CSL to give investors transparency and the sustainability of the remainder of our business, which -- the other 90-plus percent, right? What I think we're talking about here, if I just break it down, we'll go revenue and then we'll talk profit. On the revenue side, what's been communicated, we'll see what actually plays out, $88 million of revenue from CSL this year, zero next year. As that plays out, we've got to cover that gap. The remaining plasma business, based on our revised guidance will be in excess of $300 million, probably close to $325 million in revenue. all of which is at a higher gross margin behind you. That business on current guidance is 15% to 20%. We'll see where that goes for next year, but if I keep the math simple at 20%, you're talking about $60-plus million of revenue right there, $65 million. We don't have anything for the additional upgrades to Persona, but that's obviously high-octane fuel for us and our customers. So there's a fighting chance that plasma could solve for the gap in and of itself on a revenue basis at higher gross margins. We're not counting on plasma doing the heavy lifting because next year, hospital will be both our largest and fastest-growing business. In fact, with the revised guidance there, we were at 16% to 19%, we upped that guidance to '19 to '22, driven disproportionately by Vascade. We're now expecting that business will be pushing towards $400 million in revenue based on that guidance. If that continues to grow, again, high teens or better, you've got a sizable chunk of additional revenue coming through there that again could close the gap. And then when we switch over and we start talking about profitability and how much of that will pass through. And everything I just mentioned is higher gross margin. As it pertains to the bottom line, we're still running very hard on our operational excellence program when we got the notification one and a half years ago that we would have a cutback in our plasma, we revamped that program, added another $35 million of incremental savings to the program. We're at or ahead of schedule on realizing that and I think the only thing that remains to be figured out for us there is how much of it passes through on a gross to net basis, we'll get more clear on that based on the stepping off point for this year. But both top and bottom line -- we feel like we're at a meaningful inflection point in the business and have the ability to grow going forward.

Got it. And I want to make sure that we hit on kind of the vascular closure business too. I mean, the news today that you're -- you received CE mark, but just talk about that business a bit more. I mean what's been driving kind of the overachievement in vascular closure? And how are you kind of thinking about overlaying that with international now?

Delighted to be in the electrophysiology space playing with closure as we do with the Vascade portfolio. That -- as we size it, that's nearly a $3 billion global TAM, total addressable market. And depending on whether we're talking about Vascade or Vascade MVP, we have a really novel and beneficial therapeutic profile that's driving this uptick. Today, 100% of the growth is coming from the U.S. market. We've talked publicly about this before. With the 600 large electrophysiology hospitals that drive the bulk of that business. We started the year with about 300 of those hospitals enrolled in our programs. Today, we're closer to 450. And we think over the course of the next year or year and a half years, we'll get to the remaining 150. But the biggest opportunity is driving utilization within those hospitals. Today, probably none of the 450 hospitals that are customers are at the point where they should be in terms of the full utilization of our closure devices. So meaningful room to run in the U.S. It will still be the disproportionate driver of our growth going forward. It's both high margin and a very attractive business and has a great economic profile to the hospital and to the individual clinicians. 1/3 of that $2.8 billion TAM is international. And if you look at the profile of the Vascade portfolio, it's first and foremost, a do-no-harm type of product. It's a better form of closure. It eliminates some manual and figure-based and some other things that aren't in the clinicians or the hospitals or the patient's best interest. So when we think about the European markets where we have the CE mark approval now or we think about entering into Japan, which is also on the docket for us, these are markets where we should do very well. They won't be the primary contributor for the next kind of interim period, that's still going to come back to the U.S. but we're excited. We're excited to be ahead of schedule there. We're excited to be able to lean in and put some additional girth to that launch program so that we get where we want to be sooner.

Got it. Maybe one additional topic here is just to kind of carry that over is just you have kind of built up this vascular closure sales force, you're heavily focused kind of in the EP space and I'd be curious to just kind of see if anything's kind of change in how you're thinking about M&A kind of going forward and kind of building off that kind of sales force bag over time. And just to add this in but I think maybe last quarter, you talked about a $300 million share repurchase program. But just should we think if you are using that program that M&A targets just aren't there.

So when we think about our resource allocation, I think it's something for a company of our size that can be a meaningful contributor to our growth. Our 3 priorities haven't changed. Organic growth, inorganic growth and then returning capital to shareholders is appropriate to reward them. Organic is still our number one focus. We're talking about hospital and plasma, both high teens or better growers. We're very excited to do the equipment build out to do what we can do in R&D to reinforce that growth. That will remain our first priority. M&A is a close second. And particularly, we just follow the corporate strategy, winning markets, superior position and outperformance as a result. And electrophysiology, checks all of those boxes for us. So we like what we're doing on enabling technology around closure. We think there are other aspects of closure that we don't do today that we can get to organically and inorganically. So that's a top priority for us as well as other aspects of electrophysiology or interventional cardiology because we play at the conversion there between TEG and Vascade. So for us, we like the space a lot. In reality, There'll be more tuck-in type acquisitions in the near and intermediate term as we focus on driving the organic potential -- we did ask for the share authorization. Our focus there, 3 years, $300 million. We just opportunistically taking care of dilution that occurs in a company of our size, when you pay your management team pay for performance, which is all tied to the equity. So it's hygiene, not much more, really.

Got it. I think we only have a couple of minutes left but kind of with that, I just wanted to turn the floor back over to you if you had any closing comments here.

Drew, it's been an interesting run, right? Pandemic was, for sure, a setback. I don't think there's anybody at Haemonetics that feels that we're valued fairly today. I do think it's important on a relative TSR basis, year-to-date, we've had a nice run. And that's -- to me, it's evidence that our message is getting through where I think there may still be a disconnect, as I said earlier around this notion of the inflection point with 4 quarters of above historic growth with hospital now pivoting to the fore and really disproportionately driving our growth with our operational excellence program, ensuring sustainability and outperformance. I feel like we are -- we've already crossed the chasm and it just gets better from here, looking forward to an opportunity to make right on that through delivery, right? And we recognize that. It's got to be delivery, but I feel like we're in a very good place to deliver.

I think we'll have to close it there, but Chris, thanks so much for the time today.

Thank you.