Haemonetics Corporation (HAE) Earnings Call Transcript & Summary

Hey, everyone. How's it going? My name is [indiscernible]. I cover medical devices and supplies here at JPMorgan. I'd just like to introduce Chris Simon, CEO of Haemonetics.

Thanks, [indiscernible]. Good afternoon and welcome. We're obviously very pleased to be back at JPMorgan, especially here in person after the time away. So I'm excited to provide you a look at where Haemonetics is today, where we are headed, including some unique opportunities that will enable an even greater impact across the markets we serve and help us deliver significant value, both for customers and ultimately for shareholders. My remarks here today will have forward-looking non-GAAP numbers involved. So typical risk factors apply. You can refer to our SEC filings for any more information or questions you may have. Back in June, we shared our updated long-range plan for transformational growth. Strong performance this year to date is evidence that our plan is working, and we are recovering and gaining momentum essentially across all of our businesses. Haemonetics was the top-performing med tech stock in 2022 on a total shareholder return basis. Why? First off, plasma, seeing record growth and margin expansion. We completed our technology upgrade cycle back in the second quarter ahead of schedule and grew 52% through the first half of this fiscal year. Our NexSys devices with the Persona technology are enabling our customers to collect record volumes of plasma, helping them replenish inventories from historic lows and meet increased patient demand. In hospital, the essential nature of our products, combined with our focus on commercial execution and expansion, is helping drive outsize growth that will become the norm for us going forward. Despite macro pressures, customer staffing shortage, budgetary constraints, we continue to penetrate new accounts and increase our market share, laying a foundation for sustainable growth as we increase utilization of our products. Our resilient supply chain and flexible global manufacturing network have allowed us to realize financial and competitive benefits from serving customers when, frankly, others couldn't. We continue to move ahead with our innovation agenda, advancing our pipeline and investing in new growth venues to further strengthen our trajectory. We are committed to providing our customers with cutting-edge technology that is targeted at meeting their most pressing needs. We remain focused on improving productivity and processes across the company. Our operational excellence program is enabling business continuity, supply chain resiliency and operating agility, allowing us to meet customer demands without interruption. Accelerating savings are also tapping -- are also helping to migrate some of the near-term macro pressures that we and all in the industry are facing. Along the way, we've strengthened our top team. And we have an organization that is, at least over my last 7 years [indiscernible] as engaged and as motivated as we've ever seen. So we're very excited about where we are and where we're going from here. It's an exciting time for us, and we're comfortable this momentum will continue going forward. As I said, 2022 was a very good year for Haemonetics. We're cautiously optimistic that 2023 will be that much better. A slide that I used back in the Investor Day discussions in June. Our strategy is rooted really in 3 pillars that will drive transformational growth. We focus on winning markets, top quartile potential markets across the med tech industry. We insist that we achieve a leading position defined as #1 or #2 in the markets where we compete. And we are committed to delivering superior returns in both near and long term. We achieved this by focusing on 3 specific goals. The first goal is growth, top line, bottom line, return on capital and free cash flow. In particular, revenue growth is what's new and different and focused on as part of our story going forward. Our second goal is diversification. We're talking about portfolio evolution. We're looking at customers, markets, geographic footprint and different and diverse business models, which will help make what we do more robust going forward, and lead to our third goal, which is sustainability and the long-term health of the company and the communities we serve, investing in talent, diversity and inclusion, and managing environmental, social and governance risks so we can continue to deliver for patients, donors and customers. Our value creation model is aligned with our strategy and goals and is focused on driving attractive financial returns and value for our shareholders. The first objective is to drive above-market growth, consisting of high teen -- high single digits organic revenue and mid-teens adjusted EPS compound annual growth rates through the end of FY '26. Our second objective is continued margin expansion, and we expect growth in adjusted operating income and adjusted diluted EPS to be more than double the organic growth rate for revenue. Let me say that again. We're expecting high single digits revenue growth, and we're expecting that our margin expansion will drive the adjusted EPS and our operating income to twice that rate. The third objective is to optimize our capital allocation. As we're increasingly successful across those first 2 objectives, we wind up driving a four or fivefold increase in our capacity to something in excess of $2 billion, which we [indiscernible]. The value drivers that are behind this are enduring. They haven't changed, at least over my tenure. And that's powerful in the consistency with which we're approaching it and the execution that we're putting against it. The first 2, plasma and hospital, are our growth engines. They represent more than 70% of our revenue today, and they are contributing disproportionately to our growth and margin expansion going forward. The innovation agenda and the inorganic growth help expand opportunities in our core markets. They strengthen our leadership positions, and they establish new avenues for growth and diversification. And then operational excellence and resource allocation, improved productivity, freeing up funds to invest in the highest return initiatives that we can identify. I'm going to go into each of these 6 in a bit more detail. We'll start with plasma. Our leadership in plasma is indisputable. We're a trusted partner to our customers with a unique understanding and ability to deliver technology and services that drive value in the industry. Three things you should know about plasma. First, it's an $800 million total addressable market that we believe will grow consistently 8% to 10% over the long term, and clearly, based on our experience year-to-date is growing much higher in the near term as the industry recovers. Second is we pride ourselves on consistent delivery. Despite the challenging macroeconomic environment, plasma collections recoveries has been robust through a best-in-class global supply chain for -- that we use to serve customers as they strive to grow their collections at unprecedented levels to not only replenish [indiscernible] inventories, but meet rising end market demand for the products. Third, our commitment to innovation. We are the only provider that offers a total solution able to effectively meet customers' needs to safely maximize productivity. We completed our planned technology upgrade to NexSys and are actively pursuing the conversion of our customers to Persona, now accounting for nearly half of our NexSys collections. The Persona value proposition is powerful. It allows for individualized collection levels that are specific to each individual donor. Our proprietary methodology safely yields enough additional plasma to exceed the total cost of goods supplied by Haemonetics. Let me say that again. Our proprietary technology is able to safely yield enough additional plasma to exceed the total cost of what we charge customers for our integrated offering. The cost per liter improvement available through our integrated platform is unrivaled. Our system delivers, on average, a 10% reduction in cost per liter attributable to the throughput and yield benefits that are unique to our system. I'll switch gears and talk a bit about our Hospital business. It is our soon-to-be largest and fastest-growing business, and it will significantly advance our presence in underpenetrated markets that represent nearly $4 billion in global total addressable market. Our Hospital business will play an outsized role in acceleration of revenue growth over the life of our long-range plan, and it is a rich source of inorganic opportunities for growth. With growth comes scale and renewed margin expansion. Two leading platforms drive our Hospital growth. Hemostasis management and viscoelastic testing rapidly gaining momentum and a $700 million TAM in areas such as cardiology, cardiac surgery, trauma, liver transplant. There's ample room for continued growth in these segments as the market is significantly underpenetrated. We're focused on driving in core clinical segments where we can leverage additional clinical information, clinical data, translate that clinical education coupled with a meaningfully expanded clinical and sales force that are actually driving the uptake in our products. We're also addressing geographic market-specific needs and expanding our diagnostic capabilities to all consistently deliver double-digit growth. Vascular closure is our most recent addition and now is our actually single fastest-growing product segment chasing after this nearly $3 billion TAM. With a unique closure technology and first-mover advantage, we are well positioned to capitalize on the opportunities within the underpenetrated and fast-growing EP and IC markets. Our commercial efforts are focused on the top 600 centers in the U.S. Not even 2 years after acquisition, we are making significant progress with expanding our share and increasing utilization of our products in these core accounts. We will penetrate the majority of them not later than FY '26, strengthening our presence in EP and IC and providing sustainable revenue growth. In parallel, we're developing go-to-market strategies for international expansion and evaluating inorganic opportunities in the large-bore closure market. We received CE Mark fully a year ahead of plan, and that's enabled us to begin commercialization in Europe later this fiscal year. And we also announced in our last quarterly earnings call that we made a strategic investment [indiscernible] Medical that could expand our TAM into the attractive, fast-growing, large-bore closure market. Our innovation pipeline is focused on expanding our market leadership and enabling long-term plasma growth and long-term profitable growth. Newly developed products should contribute approximately 25% of our revenue over time. When I think about our innovation agenda and our pipeline a bit, in plasma, we're focused on maximizing yield and the quality of the plasma collected. We're talking about and working with our customers to actively improve center productivity and enhance the donor experience. And we're advancing connectivity and compliance vis-a-vis our NexLynk proprietary center software. In the process, we're also introducing new digital tools aimed at engaging the donor throughout the process and building additional retention and loyalty to our customers. In hemostasis management, we'll continue to build on our technology, expanding into new indications, into new geographies and critical areas of care. And in vascular closure, we have a significant opportunity to expand [indiscernible] new technologies and new procedures in small and mid-bore. We'll also pursue line extensions to meet requirements of the newest generation treatments in arterial closure. Portfolio evolution remains a priority as we increase our focus on M&A. We have a disciplined strategy and a very high bar for expected returns and execution. We are seeking hospital opportunities similar to Cardiva, where we can quickly scale up with differentiated market-leading technology and deliver robust financial returns. [indiscernible] is the intersection of our innovation agenda and our inorganic growth priorities, focused on enabling technologies in our core markets, products that establish strategic position in adjacencies and help accelerate our growth. [indiscernible], as I mentioned, should enable large-bore closure, expanding our TAM by $300 million approximately in fast-growing procedures like TAVR and EVAR. The early stage clinical data shows an impeccable safety profile and the potential to meaningfully improve health outcomes over time. If I turn now to operational excellence and resource allocation. Operational excellence is at the center of everything we do. It has become an enabler of our resilience and agility throughout the pandemic and continues to serve us through recovery. We began focusing on and improving our resilience prior to heading into the pandemic. We improved both product quality, and we heightened our focus on innovation. We rightsized our manufacturing footprint, and we regionalized our distribution and supply chain, in particular, helping to avoid many of the supply chain disruptions that have plagued the industry. We also completed our move to a new manufacturing center of excellence just outside of Pittsburgh, Pennsylvania. OEP is on track to deliver $115 million to $125 million in gross savings by the end of fiscal '25. It's already by the end of this fiscal year program that $96 million in savings. These savings have helped mitigate macroeconomic pressures. While we see a relative stability on things like inflation and foreign exchange, we'll continue to see increased efficiency in our business and more direct benefits to our operating margins. The growth of our businesses is generating strong operating cash flow and increasing our balance sheet liquidity. Over the LRP, our capacity expansion will exceed $2 billion based on this plan. Our capital allocation priorities remain unchanged. Allocating resources to accelerate growth and create value through high impact, high return on investment initiatives such as expansion of our commercial capabilities, building out of our innovation agenda, including organic R&D and outsourced R&D where it makes sense and, of course, returning cash to stakeholders via share buybacks or paying down our debt optimistically as appropriate. I guess in closing, what I'd like to do is just repeat something I said back at our June Investor Day. This is a very exciting time to be at Haemonetics. And I have never, in my 7 years tenure, been more optimistic about our prospects. Let me say that again. It's an exciting time. And on an individual level, I have never been more optimistic about our prospects. Perhaps for the first time since the pandemic, we shared in detail what we've been up to and where we're heading. We've not been hunkered down, riding out a storm, but instead planning and laying the foundation for a fundamental transformation of our company and its businesses. Change is designed to achieve breakout growth, renewed margin expansion and sustainable diversification. We're doing this by strengthening our competitiveness and capitalizing on opportunities in plasma while accelerating our pivot to higher growth, higher-margin innovative hospital-based opportunities and improving productivity through operational excellence. As I said earlier, investors took notice of 3 consecutive quarters of solid delivery as providing evidence for the soundness in our strategy, and we've been rewarded in terms of total shareholder returns in 2022. Understandably, questions do persist. Can we grow next year? Is the growth in margin expansion projected in our long-range plan truly achievable? I guess I'd answer it this way. We're outperforming meaningfully in a very difficult environment. We have raised our fiscal '23 guidance twice now year-to-date and are currently projecting roughly 10% growth over a successful fiscal '22. Plasma revenue, excluding CSL, our largest customer, will still be approximately $350 million this year. The current guidance against that business for this fiscal year is 30% to 35% growth. We don't see any abatement on the horizon. And those projections do not include something we're working very hard to do and to expedite, which is a conversion of the remainder of the market to our proprietary Persona technology. Hospital revenue is actually larger than that, projected to be at about roughly $380 million this year. It has grown in the mid-teens each of the last past years, and this year is forecasted to grow 19% to 22%. Again, it's a high gross margin business, and we don't anticipate meaningful slowdown on the horizon. Operational excellence will deliver another $20 million to $30 million in gross savings over the next 2 years. And if we see any abatement whatsoever in these macro factors, we'll see an improved gross to net ratio within that. So we're watching the horizon carefully, but we like our chances and what we've been able to accomplish so far. Plasma recovery, rapidly growing hospital, OEP productivity combined for true value creation. Regarding the long-term margin expansion, I think it's important to understand and quantify the pivot to these higher-growth, higher-margin hospital-based businesses. It's a pivot that is well underway. And as we take and leverage our current outperformance, we'll look for opportunities to accelerate that pivot. It's why I coined the phrase back in June that our LRP is a series of evolutionary steps to achieve revolutionary results. With that, I'll leave it, a chance for your questions. Thank you. I'm going to be joined by David [indiscernible] from our Investor Relations team and James D'Arecca, our CFO.

Well, thanks so much, Chris, for that introduction. I guess just to kick things off, I want to start with some near-term trends, specifically staffing and inflationary pressures that you've seen across the business. Just wanted to get a sense of how things are trending in fiscal third quarter. And how does this change your outlook, if at all, for the balance of the year?

Yes. Sure. Maybe I can handle that. So hi, everyone. James D'Arecca, CFO. Yes. So on the inflationary side, we certainly have seen some relief, I'll say, in particular, in the freight area. I think that you probably heard that across the industry now. Some of those challenges logistically, all the cargo ships sitting off of California and the empty box cars, all that is working its way through the system, and we're definitely starting to see some lower rates for freight. That said, for us, things like wages, those went up during COVID, but those haven't similarly have not gone down. So I think we're going to be having to live with those for a while. On the overall trend for us, we had a year that we were not expecting to be as good as it was. Our revenue grew a lot more than we thought at the beginning of the year, and our production was planned for that level of revenue. And because of that, we had to, on the production side, go out into the spot market for things like sterilization for certain components and parts. And in the pre-COVID year, you can get away with that. You might pay a slight premium. But now you can't. And so we've been experiencing headwinds from, I'll call, those unplanned spot type purchases, which has increased our costs. But it's, I'll call it, a good problem to have because our revenues have also been similarly affected because they're going up much more than we thought. So on balance, we'll take it. Over time, that will work its way through the system. And then longer term -- and I guess everyone can make their own predictions on inflation. Hopefully, though, we'll start to see it abate here towards the end of the calendar year of '23. And in our long-range plan, we took the approach that you're never going to be back to pre-COVID levels. Maybe we'll get some relief in the back 2 years, but we don't have us returning back to anything near what pre-COVID costs looked like.

Great. And then also just given your hospital-centric business model and the current economic backdrop, I was just wondering if you could talk more about how the company has performed during prior recessions and your expectation for kind of the future if that were to come to fruition.

Yes. If I could, just I'm going to open the aperture on that and talk about really all 3 businesses, and I'll do the first 2 quite quickly. So on our blood collections business, that is as durable as it gets. The -- it's a very altruistic community, almost regardless of what happens. Volunteer donors turn up. We've seen that. There's critical blood shortages that need to be addressed worldwide, but it's not for lack of donor willingness. So we view the returns from that business, particularly where we've been able to step in and supply where our competitors cannot, is quite robust, and we feel good about that regardless of what comes next in the macroeconomic environment. Plasma, by all accounts, at this point is inversely correlated. And so any economic storm is serving to increase donor traffic into the centers. Our customers are doing everything they can to drive that demand. And so we feel really optimistic as referenced by our current guidance. When we turn to hospital, we -- originally, we were describing that in the early days of the pandemic as elective, nonelective, particularly with the addition of electrophysiology-based procedures. That's not really an accurate definition. We've talked about it as essential. And I would argue that all 4 of our product segments in the hospital business are essential, and we've seen that. There's no shortage challenges, and we are reliant upon the hospitals being open and able to do the procedures. But throughout the last 2.5 years, where that's been the case, we've succeeded nicely. There will be challenges with capital. We're not at the same price thresholds as some of the most expensive hospital-based capital. But when those systems are jammed up, we suffer the consequences. We've got an excellent team on the ground that's been able to work through it. At this point, I think it's really down to potential geopolitical risks in some countries where their hospital systems aren't well-functioning at the moment. And until that gets abated, we'll have to manage accordingly. But particularly in the U.S. or in Western Europe, we feel really good about our hospital -- the essential nature of our hospital products.

And also just kind of taking a step back, you did provide a fantastic introduction of some of the growth drivers. But I guess just for the audience, if you could specify or zero in on a few that support your LRP, that would be great.

Take the first comment.

Yes. Sure. So for the -- for our LRP for the long term, several different areas. Certainly, in the Plasma business, there's -- right now, this environment where the fractionators have been trying to replenish their inventories, which had gotten quite low during the COVID period. So they're looking to increase their inventories. And right now, they have a donor environment, which supports that. So with the inflationary pressures, with the U.S. economy anyway tiering on recession, that drives donors. So there's an opportunity there because, on the one hand, the fractionators need to collect more than even end demand if they want to increase their inventory in their safety stocks. And we see that as a longer-term phenomenon. You're not going to fix that in a year. It's going to take a little time. Now how you exactly draw that curve, I think, is subject to debate, but we still see some great conditions there overall as we move forward. Plus, the end plasma IgG continues to grow. There's more people being diagnosed who require IgG therapy. And so the end-user demand is robust as well. So we feel confident that Plasma is going to continue to grow through our LRP plan, and there's a lot of tailwind behind it. Shifting over to the hospital side. Again, as -- if you listened to -- what Chris was talking about, very promising. We're in markets that are growing, high double digit, mid-teens to up to 20%. And they will -- those will continue to drive our growth. We're in excellent areas within the hospital. And we think that, that will -- certainly, the hospital business is going to grow to be even bigger than our Plasma business, maybe even as early as next year. So that will continue through our projection period, but it's an important part of our story because not only does that growth help on the revenue line, it also helps quite a bit on that operating margin line and on the gross margin line because the hospital products are more profitable than our Plasma business. So as Chris was saying, a lot to be excited about, a lot that's going to propel us into the future. And if we make the right investments and deploy our capital properly, that will only just turbocharge that growth as well.

Yes. If I could pile on there, a bit of a role reversal here between the 2 of us. But to James' last point, right, what we've been talking about here and fueling growth, it's organic, and it is funded in the existing long-range plan. What we're talking about on the backside in terms of capital allocation is the potential to generate in excess of $2 billion of additional capacity that we will put to work both through organic and inorganic to drive growth above and beyond what's been communicated here. And we're more than optimistic about our ability to do that and the opportunities that are presenting themselves, particularly in this environment, for us to lean in and generate additional returns.

Great. Also, if -- I'd just like to open it up to the audience. If anyone has a question, feel free to raise your hand. You can come around at the mic. It's okay. I can also keep going. So I guess let's just turn to kind of how you bridge or how you're thinking about bridging fiscal '23 with '26 LRP. And specifically, your number -- your LRP numbers anticipate a pretty kind of significant improvement in margin and diluted EPS. So just wanted to get a better sense of what the drivers are behind that. And then also, if you could talk about what gives you confidence in your EPS expansion in fiscal '24 as well and some of the drivers there.

Sure. So if I dial it back, right, the long-range plan that we communicated in June over a 4-year period was looking at high single-digit revenue growth. We've talked a lot about the underlying drivers there, three big product families, NexSys, TEG or hemostasis management and VASCADE drive the lion's share of that growth. As we do that and we experience improvement in our operating margins through OEP and scale, we wind up growing our operating margins in the mid-teens or better. So the combination of those things will result in a P&L at the end of FY '26 that is approaching, if not in excess of 60% gross margin and in the high 20s or better in our operating margin. So that's a really powerful combination. And I think when you step back from it and you appreciate just how much contribution these high-growth segments and how much more of our total company they will represent at the end of the long-range plan, the economics, that financial P&L starts to come into focus. The challenge is I tried to lay those out for FY '24, we don't see the growth that we're currently experiencing across any of our major segments abating in FY '24. In fact, there's real opportunity for us to lean into that. There'll be challenges. There'll be business that will go away, and we'll have to manage through that. But from where we sit, the current guidance has 10% growth year-on-year, and we're going to look to build on that top and bottom line. So it's not without challenges, but we said this back in the LRP discussions in June. We're going to see growth in each of the years of our long-range plan, including next year regardless of what happens with our customer base.

Great. I think we had a question over here as well. If you just -- mic. May I ask you how are your revenues roughly geographically distributed between America, Europe and so on?