Haemonetics Corporation (HAE) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining today. It's my pleasure to introduce Haemonetics. Today, we'll be joined by Chris Simon, CEO, who will go through a presentation, which will be followed by a short Q&A which will also be supported by James D'Arecca, CFO; and Olga Guyette, Head of IR and Treasury. Thank you.

Thank you, [ Zach ], and thank you to JPMorgan Bank. I was reflecting on my flight out here. This is actually my 20th JPMorgan conference, the last 7 of which have been with Haemonetics. So outstanding conference, and we see great value in being here. So thank you for the invitation.

Good morning, everyone, and we're pleased to be here clearly, and we appreciate those of you here in the room with us, but also those who have dialed in. I'm going to give you a brief overview of the company and our goals. And hopefully, you find it as exciting as we do. Importantly, my remarks will include forward-looking statements and non-GAAP numbers. So our usual safe harbor and risk factors apply. You can refer to our SEC filings for more information. Next slide, please. So Haemonetics at a Glance. For those of you new to our story, the company was found it back in 1971 through most of that 50-plus-year history, we were known as the blood company. Candidly, we've outgrown that title now evolving our business to provide innovative med tech focused on improving care across a range of fast-growing procedures well beyond the original charter. We are currently midway through a 4-year long range plan to generate transformational growth. The plan can be summarized for those who follow us as winning in plasma while accelerating the pivot to higher growth -- higher gross margin hospital segments. We're proud that we were able to do over $1 billion in revenue last year for the first time in the company's history. It's a milestone that we think highlights our ability to continue to build scale and accelerate growth. Next slide, please. Our strategy is rooted in industry leadership. We're focused on winning markets, investing in those areas that we believe support outsized growth and profitability, where we can leverage our deep knowledge and proprietary technology and our focus on customer-based innovation to achieve leading positions in those attractive markets I referenced earlier. We're committed to accelerating revenue and adjusted EPS growth, generating strong cash flow and providing additional growth opportunities and sustaining momentum to our businesses. Diversification is essential to make our business more robust and more resilient. And we are growing responsibly towards a more sustainable and inclusive future. Last year, we issued our first corporate responsibility report, highlighting the steps we are taking to ensure the health and success of our company, our colleagues and the communities we serve. Among other things, we are pleased to report a 19% reduction in Scope 1 and Scope 2 greenhouse gas emissions since our 2018 baseline year. Back at our Investor Day in June of 2022, we presented a value-creation model along with our strategy and goals that's focused on driving these financial attractive returns and value for our shareholders. It consists of 3 broad objectives. The first is to drive above-market growth, consisting of high single-digit organic revenue and mid-teens adjusted EPS compound annual growth rates through FY '26. Growth through the first 2 years of the plan is tracking well ahead of schedule. The second objective is to increase adjusted operating income to more than double the organic growth rate for revenue and achieve high 20s operating income margin expansion. We are fully on track here, although as I'll talk about in a moment, there's been some noteworthy puts and takes as the business has evolved. The third objective is to optimize capital allocation and value creation. With the outperformance we've had on the first 2 objectives, we are again well ahead of schedule, driving what we anticipate will be a fivefold increase in our capacity to approximately $2 billion. So outperformance is a good thing. It has afforded us the opportunity to pull forward growth investments. Past 4 years, we've now allocated more than $1.5 billion of our capital capacity to accelerate our growth trajectory and return value to shareholders. We've invested more than $0.5 billion organically in R&D, operational excellence and commercial expansion, notably in the hospital space. We've also made several strategic acquisitions that I'll highlight here in just a moment, but we're proud of the pipeline of M&A targets that we've assembled that we think can drive both higher growth and potentially create additional opportunities beyond the plan going forward. Next slide, please. So we think these 3 broad value drivers support the transformational growth that we are achieving and aspiring to. Portfolio evolution, right? That's where us being cognizant of expanding our reach and our relevance in attractive and fast-growing markets through organic and inorganic growth. Operational excellence not only reduces complexity and enhances productivity and efficiency, but importantly, it frees up resources for us to make the investments we need to be both more agile and more resilient going forward. Lastly, resource allocation. The ultimate test of any management team. We're using this to create a virtuous cycle where we feel the portfolio evolution, we strengthen our capabilities, and we improve our overall operating leverage by aligning our capital, our people and our focus to win where it matters most. Next slide, please. So this is a slide that provides a snapshot of where we are. And I think it actually tells the story quite nicely in terms of our pivot to more transformational growth. By rationalizing parts of our business that don't fit our long-term strategy and reallocating those resources to winning products and winning markets, we have more than doubled our compound annual growth rate despite the negative disruption from the global pandemic. Our aspirations going forward are to double that compound annual growth rate again over the next several years. Our growth will continue to be fueled disproportionately by 3 products; NexSys, TEG, VASCADE, and increasingly a fourth product, OpSens guidewires that I'll talk more about in just a moment. The legacy blood collection business, especially apheresis, durable source of EBITDA and cash. And as we announced back in December, we're going to continue to take additional steps to further rationalize this business, particularly the whole blood in-line collection products where we think we can both preserve margin and minimize the resource consumption. And conclusion on this piece, I would just say that it isn't just a portfolio transformation. It's a company transformation rooted in a performance-driven mindset and a winning culture. Next slide, please. I'll talk a little bit more about how we're getting this done, and I'll start first with plasma. From our advantage point, there's 3 things you should know about our plasma business. We are the market leader and the company that the industry knows and trusts. We have a robust supply chain and through the pandemic and this year's unprecedented increase in demand, we have consistently delivered for all of our customers. Secondly, the unique combination of our NexSys PCS platform and the NexLynk DMS software offer a powerful and truly distinctive value proposition that drives every aspect of collection performance, most notably translating into lower cost per liter and significantly higher and safer donor satisfaction. Thirdly, our customer-driven innovation, both what we've delivered and what we will continue to deliver are unrivaled. Persona yield stands apart in the market. We're the only ones who have it. We've now done 23 million collections in a commercial setting. And the original premise of 9% to 12% yield enhancement has proven to be spot on. Most recently, we announced the NexSys Express Plus device software and a new proprietary bowl as scheduled, we're in limited market release, and I'm delighted to say that the expected significant reduction in procedure time is progressing exactly as we had anticipated. Finally, we're focused on reducing door-to-door time. It's been a goal of ours since we introduced NexSys some years ago. We have the bidirectional capabilities with our NexLynk DMS software, and we're able to work closely across the industry with our collectors to ensure that they are able to safely reduce door-to-door time while they're also reducing errors and allowing their staff to focus on what they care most about, which is serving donors. So we're committed to this position that we have in plasma. We are going to continue to invest organically and inorganically as appropriate to build out and advance our leadership. Next slide, please. If I switch gears now and just talk a little bit about the hospital business. It is our fastest-growing business and will increasingly -- will soon be our largest business globally. Playing an outsized role in our transformation. And really, it's broken down between 2 broad businesses. The more established blood management technologies, we view that as a $700 million TAM that is significantly underpenetrated, where our hemostasis management portfolio, particularly the flagship TEG 6s is the industry standard. We will continue to drive double-digit growth here by maintaining our leadership position, driving utilization and broadening the shoulders of our product offering to cover more and more procedures. Interventional Technology is the newest addition to the space. It began with our acquisition of Cardiva Medical 3 years ago and has now been bolstered with the most recent acquisition of OpSens. Particularly within OpSens, I'll just highlight one product, the SavvyWire. It's essentially a 3-in-1 pacing pressure monitoring guidewire that vastly simplifies TAVR procedures by reducing wire exchanges and the number of devices that need to be used. This product reduces procedure time and enables shorter patient stays. We're delighted to say that we've closed the OpSens transaction back in December, meaningfully ahead of schedule. Integration is underway as we speak. And we are increasingly convinced these products are highly synergistic to what we are doing with the broader VASCADE portfolio. We expect them to be immediately accretive to revenue and profit, and we are projecting a 3-year return on invested capital in excess of 10%. Let me say that last part again, because we haven't said that publicly yet. 3-year ROIC in excess of 10% on the OpSens acquisition. We believe the work that we're doing here and across both parts of the business and hospital, strengthen our clinical and commercial capabilities such that we can do additional interventional opportunities and products either organically or inorganically to leverage the capability set that we've created. We expect this new interventional business to represent more than $700 million in revenue in approximately 4-year time and to have doubled over that time it's adjusted contribution margin thus accelerate not only the hospital business growth, but the overall corporate growth. Next slide, please. I'll talk a moment about R&D. We are very thoughtful and frugal about how we spend on R&D, but we're proud of the pipeline that we've created. It's focused predominantly on our growth areas, and we are committed, as we said back in June of '22, to doubling new product revenue generated from this pipeline by the end of FY '26. We've made meaningful progress towards the goal. And already at this point, our contribution from new products is in the mid-teens. So we're mid- to high teens. So we're kind of excited about that. We have more than 20 projects in development, 8 products that are on track to launch in the next several years. They're going to be in the names that we've been talking about. There's going to be new assays for TEG 6s. There's going to be expanding VASCADE to different franchise closures with the idea that Haemonetics will rapidly become a one-stop shop for all closure needs. And then, as I said earlier, with NexSys, we're going to be unrelenting in our willingness and ability to invest and continue to advance that platform as the standard of care. Already, the NexSys platform has successfully contributed over 70 million collections in commercial settings worldwide. Next slide, please. So we're also growing and diversifying our portfolio inorganically through M&A, and it will continue to be an important focus. In the past 4 years, we've allocated more than $800 million to M&A, including the most recent acquisition I mentioned of OpSens. We have a disciplined strategy and a high bar for expected returns. Additional tuck-ins in our businesses I've described them, will remain a top near-term priority. And without getting into all the specifics, I'd just say think about 3 things that should define us going forward. We are focused on enabling technologies. We want to find these attractive high-growth markets, but we want to be able to grab assets that fit with what we are doing that make the procedure better, faster, more cost effective. By doing so, we think we can generate significant financial returns often in 3 years or less, as I described with OpSens and strengthen our leadership across the market. We are essentially selling shovels and pick access to miners. The second aspect of our plan for M&A is really this notion that we remain neutral and technology agnostic. Our reps like to describe themselves as [ Switzerland ] in the various laboratories that they serve. We don't actually care beyond physician preference, what therapeutics are being used, our enabling tech helps them do it better. And then thirdly, as anybody understands the story of Goldilocks can understand, we're big enough to resource fully, but we're small enough and focused enough to deliver and out and to execute, and we found a kind of a sweet spot for us in the deals we're doing there. So our M&A pipeline, potential targets are going to provide both growth and diversification for the company going forward and make us more relevant for the markets that we serve. One example that's on the docket that we have talked about publicly before is the investments we've made in Vivasure. It's an Irish-based company that has developed an arterial closure technology, advantageous and TAVR procedures. We think if we're successful with the product that it's going to expand our closure portfolio along the lines I just mentioned and help us meaningfully improve, including our Guidewire technology, to have a more strategic position in TAVR and EVAR procedures. So it's an exciting time. The combination of R&D investments and inorganic M&A, we expect to have something new and interesting to bring to market literally every quarter for the next 2 years. Next slide, please. So by doing this, we're improving efficiency and strengthening our business, and we will continue to fund what we've termed historically as our OEP program. This has been invaluable for us, not only in managing costs but also in improving our resiliency and our agility to respond through the pandemic and through the robust recovery. We are meaningfully ahead of schedule on our OEP program. We expect to deliver $116 million of target gross savings by the end of this fiscal year. So this coming March 31. About 30% of those savings will pass directly to our bottom line. And as I said, this program has changed the way we think about productivity and resource allocation. Going forward, it will be embedded into the fabric of our company and drive our ongoing operational improvements as part of our day-to-day work. Beyond the program, we will continue to pursue additional opportunities to reduce our costs, make us more efficient. The portfolio and the manufacturing rationalization that we announced back in December are good examples of that stewardship at work. Next slide, please. So the specifics around the numbers. What you see here in this first column is the summary information that we put out in June of 2022 with regard to our LRP. Simply put, we are delivering. We've exceeded expectations and raised guidance above our own aspirations for each of the past 8 quarters. When we think about where we are overall, I think we'll talk about a few things. The #1 difference from the plan that we put forth back in 2022 was the pace of the plasma collection volume. We were more conservative. We kind of thought it would be a straight line 8% to 10%, which has been forever the historical norm. We grew 43% last year, and we're on track for double-digit growth again this year. We have consistently delivered when others could not. I think that's built not only goodwill, but it's obviously helped us pull forward a number of our investments because of the free cash flow that business has generated. In parallel with that, we've retained substantially all of CSL's business for the past 2 years. And I think our response, more importantly than anything, highlights the agility and the reliability in plasma collections, I mentioned just a minute ago, not just for CSL, but for all of our customers. And I can tell you firsthand, these are attributes that are critical to our leadership in this industry. And as I said, the free cash flow is not bad either one. The third area where we've had significant outperformance is vascular closure. We are ahead of or on plan on all dimensions. We knew we'd be in substantially 80% of the target top 600 accounts by the end of this fiscal year. That's spot on. What we didn't anticipate was the level of utilization that we're experiencing in our most established accounts. We modeled 35% to 45% on the original deal model. We're seeing numbers well north of 50 and growing, which I think speaks to both the potential of the product and the execution that our team has put against it. The other part of VASCADE's outperformance is the pace of international expansion. While international revenues are not a significant part of the near-term performance for us, the fact that we've been able to establish that presence in Europe and in Japan as quickly as we have, speaks very nicely for the long-term growth trajectory of that product. So we're excited about what comes forward. The one area that's been a negative, as I mentioned earlier, puts and takes, is that we've incurred nearly 700 basis points of external headwinds that we did not foresee in our original plan. Some of these headwinds are sticky, like wage increases around the globe. Others are transitory, like freight prices and the amount of freight we've had to consume to get our products out there through the recovery. So we'll continue to monitor this. We're confident we can get our cost of goods sold and our gross margins back in line, particularly as CSL transitions. We will right size our operations and footprint to better fit the go-forward growth and improve our gross and operating margins as a result. So we remain confident in the LRP. We remain confident in our ability to deliver value while setting us a foundation for sustainable growth. I probably don't need to mention it, but it seems to be in the air. So we don't expect disruptions to our business either from GLP-1s, where we have very, very negligible exposure or the anti-FcRn advancements given the trial readouts over the second half of this year. We remain confident in the long-term growth rates of our business across the board. One of the things I would just say, given the midyear performance that you see highlighted here, I hope it's a glimpse, a glimmer, if you will, of the margin expansion capability of this evolving portfolio. You have volume and mix being multiplied by productivity, scale and operating leverage to produce very powerful results. Next slide, please. So all this outperformance is coming together in terms of our capital allocation, absolutely critical. We kind of improved meaningfully our operating cash flow and our balance sheet liquidity. And we are on track to generate what we think will be potentially approximately $2 billion by the end of fiscal '26 and that will help fund additional venues for growth and create value not originally contemplated in the LRP. We are committed to being good stewards. We will do share buybacks and debt repayment opportunistically, but our primary focus is organic and inorganic growth. Last slide. I'll just summarize by reiterating kind of the motto that we've put forth for this journey that we are on. We're taking evolutionary steps, some big, some small, to deliver revolutionary results and the value creation that we aspire to. The pivot to high-growth, high-margin business at Haemonetics is well underway. We're going to pursue additional opportunities to accelerate it further. So when I look at the company today, as I approach my eighth-year anniversary, I'm more confident than I have ever been about the fact that we have the right plan, the right resources and the right team to get us there. So thank you for your time. James and Olga, if you join me, we'll move on to Q&A.

Thank you, Chris. Great presentation. Again, I'll kick it off with a few questions. I know we have a full house, so I'll leave you guys time to ask some questions. But just to start, I believe that your fiscal year is not the traditional calendar year-end and it goes through first quarter of calendar '24. Could you just provide some guidance into what we should expect for the remainder?

Yes. We're very bullish on the remainder of this year. We have exceeded and raised expectations, as I mentioned earlier, for each of the last 8 quarters. We don't expect that streak to stop anytime soon. No pressure, James. From where we sit, though, the plasma recovery is in full force. And when we talk to our customers, they've been crystal clear, keep your foot on the accelerator. They don't see any slowdown anytime soon. The hospital procedures that were in predominantly concentrated around cardiovascular and trauma and transplant are experiencing really robust growth, not only here in the U.S. but throughout Europe and Asia as well. So we feel really good about that. And we've been cautious about our blood business, but candidly, the blood business has really stepped up, and we expect it to continue to in a way that defines durability and the associated EBIT and cash flow that comes off of that.

Excellent. And then you mentioned that -- I think it was in June of 2022, you had your Investor Day and you presented your LRP. So you've been about halfway through that. You know what has gone well, what hasn't. And how do you expect the remainder of that to shake out?

Yes. As I said during the prepared remarks, right, the #1 positive surprise is the pace of plasma volume recovery. We think about it as an area under the curve story. We had kind of a straight line over the course of the 4 years. 43% last year, 10% to 12% or better this year, but we don't expect that to deteriorate dramatically below the long-term trend. We'll eventually regress to the 8% to 10%. That's demand longer term for the industry, whether that happens next year or 3 years from now remains to be seen. But that's a big source of outperformance. We didn't anticipate retaining substantially all of CSL's business. In fact, we thought that business would transition fairly rapidly over the first half of the plan. So from where we sit, as we kind of round the corner at the midpoint, that transition will likely happen in the second half of the plan now. So again, area under the curve, but very powerful in terms of creating additional funding for us to go out and make the investments that we're committed to making. VASCADE's been lights out, and we obviously hope that with the pairing now with OpSens' guidewire technology that we'll be able to maintain that momentum, but meaningfully ahead of schedule predominantly because of U.S. utilization, faster global expansion than we had originally anticipated as well will be important in the mid to longer term. And then the one negative is the cost base, right? It's 700 basis points of headwind. James and Olga spoke a lot about this in our various earnings calls. We are doing everything we can to mitigate it. But given the demand side has been so robust, we've had to do a lot of expediting, we've had to through a lot of spot purchases. As that mitigates, as CSL transitions, as the business regresses back closer to the mean over time, that cost base becomes significantly more addressable. So we remain confident to do that. But it's one of the key questions we get around margin expansion, how do you get there from here given your cost base. So we think it's largely transitory. We think we have the steps in place to address it, and we'll continue to be vigilant about it. But that's one of the big negative differences.

Understood. I have a few more questions, but I'll open up to the audience if anyone has anything.

I think as investors, we aren't used to hearing companies of your size, so you're therapeutic agnostic. And with the VASCADE acquisition, the electrophysiology is your call point with the OpSens you get some interventional cardiology. How are you able to go to market with such a diverse portfolio and still maintain your cost basis? Is it more of a catalog business or an Internet business? Or how do you get the margins off of that?

Yes. I appreciate the opportunity to clarify it. So I'll use VASCADE as an example, but I think it tells the story more broadly. VASCADE is very well adapted for a set of closure procedures, particularly AFib ablation and then some other things on PCI. So I think one of our analysts got this right when we were describing why we felt we could branch out into a near adjacency like EP and IC. When I say we're agnostic, [ Alex ], we care a lot about the therapeutic outcomes. But whether it is Biosense Webster or Boston Scientific or Abbott or Medtronic's product that's being used, that's a physician choice. We're going to make that closure more efficient, more effective, faster, and we're going to get those patients up in ambulatory and home in the same day. So make your choice, but our reps -- and it is very much a physician detailing activity, our reps typically aren't relegated to lab days because they work across all of the different procedures. And we've had the luxury of being able to ride the momentum those outstanding companies are helping create to drive procedures like AFib and procedures like TAVR and EVAR going forward. So from our advantage point, to say it crudely, we've now built a pipe. That pipe is clinical development, that pipe is clinical market education. It's the commercialization and the follow-through. We now have the ability to take products like OpSens guidewires and put them through that same pipe. They're going either to the interventional suite in most cases, or EP again. And it becomes virtuous for us. It makes our reps more relevant. We need to be there for the entirety of the procedure to begin with. So if we have access, if we have protection, if we have guides, if we have closure, it just makes us more efficient. It is the definition of operating leverage, but from a commercial perspective. And I think what's most powerful about it is the increased reach and relevance we're getting in that interventional suite. It's why we think it will be a $700 million-plus business in 3 to 4 years' time.

I think you mentioned 50% penetration, the 600 VASCADE accounts. Does that mean sort of you're halfway there of like rolling out Cardiva MVP basically everywhere you wanted to have? Or is that the wrong way to think about it?

Let me clarify the numbers, so I want to make sure I didn't misspeak. When we look at the VASCADE portfolio, we're very concentrated. Cardiva before us was very concentrated on the top 600 hospitals here in the U.S. that define 90% of the procedures that are being done. By the end of March, we will be in 500 of those 600 hospitals. The area, which is what we anticipated, right, and we'll go around the last 5 -- the last 100 next year, essentially. The difference in the upside that we're experiencing is because when we assumed an account adopted VASCADE, we thought we would see that in a third, maybe to half of the procedures, the 35% to 45% I quoted. What we are seeing in the top half of our call back, the more mature accounts, is numbers well in excess of 50%. That's a positive surprise. I think it speaks to the utility of the product and the stickiness of it. But we didn't have the courage to put that in our deal model. So when we talk about the valuation and the returns that we've gotten from the Cardiva acquisition, that's the single biggest driver of the success there.

So that's 50% at the top, not everywhere.

No. We see accounts that are 80% to 90%. What I'm saying is it's meaningfully above, right? If I were going to do the model again or advise the person to model, I'd say aim higher, right? Maybe 50% to 70% is a better range to work from.

Can I ask about just the gross margin transition -- the gross margin transition as you go from the plasma business to the hospital business.