Haemonetics Corporation (HAE) Earnings Call Transcript & Summary

This morning, it's been -- we were just chatting that it's been a while since we last had an opportunity to connect when I think it was right when you took over the first analyst meeting that you hosted at Haemonetics, and it's certainly been a journey since your period as the CEO. And now you're coming up on the milestone at the end of your kind of 4-year LRP and you laid out some of the dynamics of where you thought you were going to land on your FY '26 guidance call and presented some of that information.

But maybe give us some reflection on as you come to the end of that period of time, how you -- what the look back is going to be?

Great. Great. Thanks, David. Just it's been more than a decade since Haemonetics has attended this conference. So thank you. We're delighted to be here and have a chance to tell our story. And I'm excited to reconnect with you given how you spent a good bit of your time and off as an operator at Baxter and Acutus Medical, and I'm sure that helps add perspective to the work you're doing at the bank today. So that's all great. Before I begin, a quick reminder. My remarks will include forward-looking statements, non-GAAP financial measures, usual safe harbor supply. I'm excited to answer your question about the LRP and our performance because we're delivering fully. But I'm going to maybe take half a step back because I think our story can be complicated, particularly for folks that are new to it. And the way I would summarize it is as follows, which is Haemonetics is the undisputed global leader in plasma apheresis, which we view as a durable source of EBITDA, and we think that there's tremendous potential for that business going forward. But there's also systemic risk that's difficult to mitigate. So we've attempted now to diversify in the Blood Management Technologies and Interventional Technologies, which are attractive MedSurg markets where world-class companies are advancing the treatment of chronic disease with favorable reimbursement. We're able to thrive in those markets by concentrating on what we describe as therapeutically agnostic enabling tech that's not being pursued by the companies that are driving the growth in procedures. And that's really the story behind our portfolio evolution and how we're transforming our company, and our operating model around operational excellence and superior results. In short, we've built a $600 million MedSurg business growing well into the double digits while we grow our corporate earnings, meaningful, double digits as well. That's a pretty rare entity. And I think our success in Plasma has helped enable it. With regard to the specifics on the LRP, yes, we sent a bold and audacious set of goals. We said we're going to grow 10% over that 4-year period. We're going to have mid-20s adjusted EPS CAGR, excluding CSL, that we're going to grow our operating income margin 800 or 900 basis points over a 4-year period to the high 20s. We got it at 26% to 27% a month ago and a cumulative free cash flow in excess of $600 million with a return to our historically high conversion ratio. And our CFO commented on the last call in May that we expect that conversion ratio of free cash flow to net income to be in excess of 70%. We're on track to deliver all of that today.

So now because you've added some things I have to go off script here a little bit. But when you talk about systemic risk in the blood apheresis business, is that has to do with sort of the volatility in contracts like the CSL dynamic? Is that -- I know the Whole Blood business you've exited. But on the core Plasma collection business, that's the dynamic that you're highlighting?

For core plasma apheresis, the real exposure is customer concentration. There are 14 customers worldwide, 4 of whom really drive volumes. The business has an added systemic risk, which is concentrated 90%, at least for source plasma here in the U.S. It's a great market. The remuneration is outstanding, but it's a geographic concentration. It's also a unique business model where the capital sits on our balance sheet. We found ways to drive superior return on invested capital in that model. But the combination of those things, and there's really nothing you can do to mitigate that.

Right. And as you fast forward to the end of this year, do you have a sense of like what the business will look like from a mix perspective between Hospital, Interventional, Blood when you kind of get to the end of the LRP and when CSL is out of the numbers?

Yes. We're going to do an Investor Day later this year, where we'll break this all down. But we're living with what is now a transformed portfolio fully 85% of our revenues and at least 100% of our growth come from a small group of core products in Plasma and those Hospital platforms. When you last covered the stock, that number was -- part of that didn't even exist. The Blood Center business alone was approaching 50%. Today, it is 15, so 50 to 15. That's a conscious decision. The hyper focus on these attractive, fast-growing markets.

And are you going to issue a new LRP at the time of that investor meeting?

Yes, we expect to. And there'll be some very familiar themes and there'll be some new themes and things that aren't going to change is the leadership in plasma and the commitment to profitable growth in the Hospital segment. We'll continue to focus on innovation, organic investments, in particular, but some disciplined M&A as well that we can further expand our presence in those attractive markets I mentioned earlier. We see meaningful opportunity to continue and accelerate both top and bottom line growth even off of where we expect to finish this year. So I don't want to give away all of our dry powder for that meeting. But if I were to paint a broad picture, aspirationally, we expect to deliver fully into the top quartile of med tech performance. So high single-digit or better growth in revenue, double-digit or better EPS growth. And typically, the 2:1 ratio is something we aspire to. Our hospital gross margins will be north of 70%. Corporate gross margins will be north of 60% and our combined operating income margin should be north of 30% with robust free cash flow and a healthy conversion. But we'll put the flesh around that later this year and try to make that clear for folks.

I'm trying to get a little more out of you. And that type of high single-digit revenue growth. How do you think that will compare to where the markets you serve are growing?

Yes, I think we can outperform the underlying market growth rates, right, the weighted average growth rates because so much of what we do is underpenetrated. So Plasma is probably the most closely watched and close match. We expect to see mid- to high single-digit growth there. We can do better than that because we're advancing new technology that has clear value to our customers. So there's a price premium. But the near to intermediate term, the share gains we're experiencing will really propel us. If I think about Interventional Technologies, particularly in EP with AFib, you're going to see continued double-digit growth. And we still are only penetrated half of the accessible market. So we'll have utilization on top of that. And then TEG, we joke is the oldest launch product in med tech. But here in its -- approaching its third decade, we are still less than 25% or 30% penetrated in its use cases with a robust R&D pipeline to broaden the shoulders of that. So we expect to grow, for sure, high single digits across them because of opportunities that are in front of us, and that's probably 200 to 300 basis points above market growth.

And I want to go into the segments in a second. But as you think about that ability to sustain above market growth, you are going into categories that require more sales and marketing that I think the legacy plasma business, more R&D intensity, more feet on the street. How do you think about continuing to grow earnings at the rate that you just referenced while making the necessary investments to support that growth?

Our story, the 800 to 900 basis points of margin expansion, which at the risk of belaboring it, when you last covered the stock in FY '16, the gross margin was in the low 40s, 43%, if memory serves correct. We're now into the high 50s and pushing beyond. Our operating income was 13%. Today, if we get -- we double that, we'd view that as performance. So from our vantage point, we do think there's an opportunity to continue to invest purposely. Organic growth is our biggest priority. We like the R&D pipeline that we've put forth. We're probably going to lean into that a bit given the opportunities that are within reach for us now. Our second vector has been M&A with tuck-in acquisitions. We're digesting the most recent acquisitions. I'm sure we'll talk about those in a moment. But from our vantage point, we're going to dial that back and really concentrate on delivering value in those assets. Our story to date has largely been mix driving gross margins. There's been meaningful productivity. There's been a meaningful price, but it's largely a mix story. What you'll see in the second half of this year for us and beyond is an increasing return on operating leverage, where the sales force and the clinical investments we've made will begin to scale and give real outsized returns there as well.

And just last the one 1 on the impending LRP. Sometimes these LRPs, they're laid out for us and then you get some caveat like oh, it's going to be lower in the first year, and it's going to scale throughout the forecast period or the first year, we won't show this margin expansion, but don't worry it's coming in the future. How should we -- are there any sort of considerations you want to make sure you get in front of people before you lay it out formally?

Yes. I think for this LRP that we're completing now the fourth year of it, there was definitely -- it did not come linear, right? We had just at the time, -- we expected a rapid transition of CSL. It took 3 years. That was fantastic. We had the windfall of that in terms of our cash flow, but it really hampered margin expansion. As things evolve, it gets cleaner from this point forward. I think we have much more line of sight and control over the growth that comes. Our expectation is that we'll guide for a 3-year LRP rather than a 4. We'll talk about the beginning and the end. But the reality is we expect it to be PAUSE much more controlled and purposeful given where we are. The way we talk about it internally, we have a base case. This is hand on heart what to deliver, and there'll be a range, call it, 6% to 8%. On top of that, we'll do risk-adjusted opportunities. So we fund them and it's reflected in our margin but we don't put the revenue in necessarily because they're higher risk bets where we're buying on third parties, regulatory, whatever but that ought to add a couple of hundred basis points on top. And then for us, it will be the tuck-in M&A on top of that, which should be another 100 to 200 basis points of growth. Again, we'll try to be very transparent about that. It won't be linear, but it's not going to be a hockey stick where you have to wait for year 3 to see the results.

Got it. Okay. Well, we look forward to tuning into that when the event is announced. Maybe we'll jump into some of the businesses here for a second. You talked a little bit about the hospital segment that grew 12% last year. Maybe help us unpack some of the underlying drivers there and how we should think about sustainability.

I think, again, it's driven in equal parts by Blood Management Technologies and Interventional Technologies. IVT gets all the headline because it's such a robust market and there's lots of really interesting things like the adoption of PFA that are creating kind of positive and negative flows that people want to get under, but I'll start with BMT. And for BMT, it's really a focus on hemostasis management. And while it's a global product, and we're doing quite well outside the U.S., we expect to do increasingly better there, it's a story of U.S. execution on utilization. And we -- that product grew mid-20s last year on the back of the heparanase neutralization cartridge introduction. It's helping us convert existing TEG 5000, the legacy product, it's helping convert those accounts. It's helping drive additional penetration to new accounts and then just utilization, which, again, still hovers well below 50%. So it's a trifecta on BMT. We like Transfusion Management. We'll do well with Cell Saver, but it's really first and foremost about our Hemostasis management, viscoelastic testing here in the U.S. On the other side, with IVT, it's predominantly a story of closure, VASCADE, VASCADE MVP, and VASCADE MVP XL, where we continue to have real success. The latter 2 grew 26% last year and 28% last quarter as we continue to ride the wave created by PFA. That will continue, albeit more moderately as we round out the adoption curve. But again -- and we added probably 600 or 700 basis points of growth from Japan alone last year, but it will continue to be a story of U.S. penetration, U.S. utilization in particular. So those 2 products in the U.S. are the main stay of the growth there. Over on the collection side, it's really share gains and annualization of those price increases that we took last year as we completed what was a long-awaited technology cycle upgrade.

And I want to go in a little bit more on VASCADE because I think there's a ton of interest in that segment, especially given the enthusiasm around PFA. Maybe just to unpack a little bit more the VASCADE strategy and what's contributing to that 26% and 28% growth that you referenced?

Yes. Half a step back, David, we expect hospital will approach 50% of our corporate revenues this year, it guides into the mid- to high 40s. And so we expect to do at least that and is disproportionately driven by those 2 products. When we look at vascular closure, we measure a TAM of roughly $2.7 billion fully $1.1 billion of which is here in the U.S. alone. EP is by far the highest growth vector. It's roughly 1/3 of the total closure with coronary and peripheral, PCI being the other 2/3. But the rapid growth in EP procedures is really exciting. Folks get a bit confused because some of the newer technologies are reducing the number of access sites. We've done a full breakdown of that. In fact, there's 2 pages on our investor website that we published with our last earnings call that breaks this down. We see the aggregate growth in the addressable market in FY '26 for closure at 8.6% on the EP side, 1% to 2% on the coronary side. Today, that's 15%, 15% of what we do. We can do better than that, but the growth is disproportionately going to be on EP.

Okay. And how -- maybe just as you think about other players here like Abbott entering [indiscernible] have a strong closure business. How do you stay competitive as companies like them try to come in as a -- they're going to be the fourth player in the U.S.? That franchise has a history of being not shy to use price as a lever and they certainly have a very broad portfolio. So how do you think about staying relevant as full service line players come into that market?

I think this is where we are benefiting from the investments we've already made. First and foremost, it's to build out the indications and the clinical evidence in support of those indications. So we don't take Abbott or Cordis or Terumo for that matter, lightly in this space. And I think the competitive dynamics are very different if we're talking about AFib versus some of the other procedures. Our value proposition established back during COVID was that MVP, when used for AFib, reduces the time of ambulation from 6 hours to 2 hours. It gets patients out of the hospital, 99 something percent of the time same day. When you're looking at the cost of an AFib procedure and candidly, the benefit to the hospital to be able to do those procedures without needing the overnight stay is incredibly powerful. And so I think that was the value proposition that catapulted us into market leadership. Like I said, we don't take the competition lightly, but our biggest opportunity on closure is the half of all procedures today that are done without an advanced closures, it's either compression or suturing. And I think driving utilization in those at one level, having competition helps because it's more word of mouth and more voice in the market, making it clear, there's a better alternative and then we go head-to-head. And we like our chances competing head-to-head with the available technologies.

Does anyone still suture? Like what's the penetration of closure versus suture use?

Yes. I think suturing is probably the dominant play for the half of the market that doesn't use an advanced closure device. There is some compression. But yes, I think for folks that were trained on suturing that have that as their backdrop, they continue to defer accordingly. We've got a better answer, and we need to do our part to drive the utilization there.

And how about moving procedures into the ASC. This is a topic that also came up when I was with Abbott last week, and they were highlighting the potential for EP procedures to move into the ASC, the need to do more of this under conscious sedation versus general anesthesia, but it would also seem like in that environment, speed to get the patient in and get the patient out would also be a priority. Are you seeing opportunities emerge there for you guys?

Yes. No, absolutely. I think that's -- we're not individually, we don't have the scale or the resources to drive that. This is where I think the metaphor that somebody offered when we first did the Cardiva acquisition is you guys are basically water skiing behind boats that are driven by the likes of Medtronic and Boston Sci and Biosense and Abbott to some extent. And so as they drive into ASCs, there's a different profit imperative, which makes the value prop -- we don't give this product away. It's amongst our highest gross margin, but it's a fraction of the cost of the actual procedure or the reimbursement they've secured against it. So if we can enable it, we have good play in an ASC as well as in the hospital itself.

So obviously, parts of the pipeline you're going to disclose and not disclose for all the reasons, I think that people understand and then your M&A strategy similarly. But if we were to look at some of these procedures, is the right way to kind of assess where you might go next is exactly what's hanging around the hoop? It's in the procedure, but sort of on the side of the playing field, maybe not fully in the case, I guess, is that the best way to assess where you might go next? Is that how your marketing team spend their time thinking about where the other sort of hang around the hoop opportunities are?

Yes, right? We need an attractive TAM that is defined by our therapy. We need a SAM within that, that we believe we can capitalize on. We -- as I said a moment ago, right, we're looking at these attractive areas, but we're therapeutically agnostic. When we pursued OpSens, we knew that the SavvyWire was an outstanding tool to enable better valve placement. We went and talked to the leading valve companies and said, is this your interest because we don't want to waste time. And for our scale of a company, it just doesn't make good sense to pursue something that's ultimately not going to materialize. And we heard back a couple of things. We heard back. It's a great guidewire. We hope you guys get it because in your hands, it will be successful. We're not interested in it because if we have this $800 or $900 Guidewire on a $35,000 valve procedure, we're going to be asked -- to your earlier point, we're going to be asked to bundle it and just give it away for free. So there's no value prop there. And then I think a more nuanced answer, which probably is also true, was we don't want our very well compensated, highly trained clinical reps scrubbing in to use that Guidewire on our competitors' valve. It just doesn't make sense. So this notion of therapeutically agnostic enabling tech lets us -- we're on the dance floor, but we're not getting trampled because we're not in the way of those procedures. In fact, we're enabling them, and we tend to get the access and the support from those other companies as well as the labs themselves accordingly.

I think in this sort of same context we do need -- I do want to touch on Attune. Obviously, temperature monitoring under pressure as RF becomes a smaller percentage of total. I mean that seems to be one of the common themes here is if there is any cost savings in a PFA procedure, it is the elimination of esophageal temperature probe, which isn't that expensive of product. But where -- is that a business that you decide to wind down? Do you focus -- where does this fall in kind of the priority scheme for you?

Look, I think it's important to learn both from your successes and your mistakes. I would characterize the Attune acquisition last year as potentially the right deal at absolutely the wrong time. It wasn't like we didn't know about PFA. We took all the available information including from the leading PFA therapeutic companies that we're forecasting 40% to 60% growth. At the time, Attune had 9% share of all procedures. We knew that if we could essentially double that, this would be a home run in terms of the return on invested capital. What we need for that to be true is for RF to retain at least a 30% stake in the market. And until we have clarity around that, we're not going to double down on that investment. We're going to be thoughtful about it. When you're using RF, adding Enzo ETM is a game changer for a relatively modest price, it makes it completely safe. You avoid the risk of lesions. You don't have to do temperature monitoring. There's no probes and you can move fast, which is what those EPs want. So we'll see where the dust settles later this year on PFA adoption. In the meantime, we're just being very surgical about kind of what we euphemistically call where is Waldo? Where Waldo is the one, a clinician who wants to use RF either in conjunction with or stand-alone, where there's a risk of burning because they're on the back wall. In that case, they need to be using Enzo, it's the right technology. If we can scale that business to something north of 15% market share, we'll still pull it out. But here and now, best I can say is right deal, wrong time. We need to learn from that and move forward.

And is it the same sales force carrying VASCADE and Attune products?

Yes. So I think for Attune, in particular, it's all EP-based. So the folks who are detailing MVP and MVP XL are well positioned to have the Enzo ETM conversation.

And how do you think about that from a quota-setting perspective, to try to keep your reps focused on the right growth drivers but also not letting Attune sort of die on the vine?

Again, what I said earlier has to be true, which is we win or lose on vascular closure in the U.S. The mistake we made with the acquisitions back to back was we distracted our existing team from closure. And that's where we seeded some market share. We had a delay on the product release for XL. It didn't help with PFA. So the combination of those 2 things put us back. We've bifurcated the teams. We are hyper focused. Enzo is an add-on when we know that the doctor has a tendency to use RF, but it doesn't get in the way of the base plan. These -- our teams, like a company succeed or fail on vascular closure.

And I know you made the comment earlier as you think about your LRP and risk adjusting different opportunities. But one of the challenges of a -- of the strategy of watching yourself to other categories that those categories might not grow linearly either, right? PFA adoption is probably the fastest adopted medical device I've ever seen technology. Now -- the other one that took this didn't end well. If you look at coronary stents, for example.

Yes. Drug- stents.

Right from 0 to 90% penetration overnight back to 60%. I don't know if that's going to happen with PFA. It just doesn't seem that way because there's no safety signal, which I think was the issue there. But it also seems like it puts you in a position where you're not totally in control of your own destiny?

Admittedly, that's true. So we're not trying to influence a choice between cryo or RF or PFA. But from our vantage point, what we're observing more broadly in AFib is tremendous earlier diagnosis, more thoughtful diagnosis, just a massive expansion in the treatable population. So from our vantage point, again, we care, but we don't really need to discriminate between whether it's RF or PFA, whether they're doing concomitant therapy or they're doing stand-alone therapy, the issue is, are they -- do they need access? And if they do, there's a play for closure.

Okay. I want to open up to the audience if there are any questions before you kind of go to plasma and then talk a little bit about financials. That's okay. It's a fireside chat. So it's open it. I've know everyone has any question.

It's 9:00 in the morning.

Yes, I know. I know. So I just want to close on plasma on the top line here. Obviously, once CSL is out of the picture, you've reduced -- you are losing, I think, what has historically been your largest customer, one of your largest customers. But should we think about that rebasing to like a 7% growth rate on a go-forward basis on a reported?

We'll provide more color around what we think is the underlying base when we do our Investor Day. But we look at is just a $30 billion with a million kind of therapeutic market. So there's tremendous growth opportunity. If you look at the forecast that the leading players, CSL, Grifols, BioLife, Takeda put forward. They're all talking about double-digit growth of IG-based therapies. So we like the long-term prospects. If you go back and study this over a multi-decade period, there are always ebbs and flows. The current ebb is really a function of increased productivity, much of which we've brought to the market. Now we've done so at a very handsome premium on innovation. So you see that benefit in price. And this year and next, you'll see that benefit in terms of share gains. But we look at a number of factors. We look at the clinical trial work they're doing. We look at the actual use case for alternate therapies like anti-FcRn, which absolutely have a role. But today and probably for the foreseeable future, there -- they tend to be adjunctive therapy given the price differential, which is 50% to 70% higher. So it's pretty clear the way the market is shaping out. We just look -- there's a whole bunch of factors around rates of reimbursement, around a number of new center openings, the number that seems to be a very accurate long-term predictor. As you said, that 7%, 8% is fractionation expansion. And that's what we ultimately track to. That said, we got ahead of this last year and had to be more cautious. We were able to deliver our plan because of our share gains. But this year, we're assuming very modest growth. In fact, really 0% to 2%, mostly backloaded. We will grow meaningfully in excess of that ex CSL. We've guided to 11% to 14% growth and the reason is that is share gains and the continued annualization of our price increases from last year. So we're using what we view as a very temporary pullback in collection demand to accelerate the technology adoption and share conversion. So it's a team that's firing on all cylinders. If I look back 3 years, that plasma apheresis team has met every single objective or exceeded them over the planned period. We have no doubt they'll continue to do so.

And would you say as you get ready to issue the new LRP that this business represents the potential driver of what could be variability across the forecast period?

There's going to be ebbs and flows, but I think we increasingly have line of sight to be able to normalize that. When we started this discussion, plasma was the real workhorse. It was a large -- more than half of our revenue and well more than half of our EBITDA. Today, our guidance for this year, plasma will be 38% of what we do. No one customer will be more than 9% or 10% of our corporate revenues. So we've succeeded in the process of diversifying the business. There will be ebbs and flows. But what we really look for, for this is that EBITDA, that free cash flow that we're using to fund the more stable, more predictable growth in Med-Surg.

And I'll close on a P&L question and then turn it back to you for any closing remarks. But the -- you've seen a huge amount of margin expansion. I mean step function type of improvement in your gross and operating margin. But as you look at exiting this year at a high 50s gross margin and 26% to 27% operating margin, that profile does stand out versus the rest of the space. Most companies at 26% to 27% operating margins have gross margins that are well into the 60s, if not higher. Can you continue to see steady margin expansion without a big step-up in your gross margin?

Yes, absolutely. And I think part of it is understanding the dynamics really of our entire collections business, which, of course, is mostly plasma apheresis. But it's also plasma and platelets on the Blood Center side where our Blood Center customers are looking to replicate the success the source plasma guys have. That -- so we're now operating well north of 50% gross margin in that business. In fact, in our 10-K filings, we tried to break this out more fully to provide additional transparency. And I think what you can see when you look at the plasma business, it's now mid-50s gross margin, but the pass-through is tremendous, and it's just the nature of it. And so that is sustainable and scalable. On the Hospital side, it's been, as I said, mostly a mix story. That's going to transition over. There will still be meaningful benefit from mix, but we're also going to see an uptick in productivity and operating leverage where the investments we've already made in sales force, in clinical development and R&D more broadly are now scaling in ways that will make us much more consistent with the MedSurg group which in combination is what drives what you described. That's how we have a $600 million Hospital business growing double digits as part of a corporation that has delivered double-digit earnings growth year in and year out.

Okay. Excellent. Well, we have a couple of minutes remaining here. So I just wanted to turn it back to you to see any wrap-up or closing remarks. And again, very much appreciate you making the trip and great to have the opportunity to reconnect here.

Yes, David, thank you for that. I think the timing is pretty critical as well. We believe Haemonetics is at an inflection point. And we think this year, fiscal '26 will be defining for us. Three years ago, as we talked in FY '22, excluding CSL, we earned $1.83 a share. We were very public about that. Our actual earnings were $2.58. We said we had $0.75 of CSL. So that June, we issued this current LRP and the targets we've talked about double-digit revenue growth, mid-20s earnings growth, high 20s operating margin. We're in the final year of the plan. We guided last month for this year's results. We obviously don't intend to miss our own guidance. Now that will imply revenue of $1.3 billion, which is a 10% CAGR over the 4-year period. It implies at the midpoint, $4.85 of EPS, which is a 28% CAGR over that period. Said differently, $1.83 to $4.85. It is a $3 increase in EPS over the 4-year period. And that earnings is coming from a portfolio that is more profitable, higher growing, more diversified and better margins than anything that existed previously. We have our challenges. But we've got a clear path forward on Interventional, realigned our sales force and invested in clinical. We are excited about the continued momentum in -- with TEG's success driving Blood Management We look at the technology upgrades and our leadership for U.S. sourced plasma, and we think we've got more room to run there. And margin expansion is on track with meaningful more room to go. So we think we're executing. The strategy is sound. The portfolio and the transforming effects are there. And we've just -- we've got heads down delivering.

Excellent. Well, with that, we're just the time and again, I appreciate you're making the trip and look forward to watching the story from here.

Yes. Thanks, David. Appreciate.