Haemonetics Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Humanetics First Quarter Fiscal 21 Conference Call and Webcast. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star and then one on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star and then zero. I would now like to hand the conference over to your speaker today, Mr. Dan Goldstein, Vice President Corporate Controller. Sir, you may begin.

Good morning, everyone. Thank you for joining us for Haman Addicts' first quarter fiscal 21 conference call and webcast. I'm joined today by Chris Simon, our CEO, Chad Nickel, our president of Blood Center, and Bill Burke, our CFO. This morning, we posted our first quarter results to our industrial relations website, including analytical tables with the information that we will refer to on this call. Additionally, we provided a complete P&L, balance sheet, summary statement of cash flows, as well as reconciliations of our GAAP to non-GAAP financial results. Before we get started, unless otherwise noted, all revenue growth rates discussed today are on an organic basis and exclude impacts from currency, strategic exits of our plasma liquid solutions business, acquisitions, and divestitures. As in the past, we will refer to non-GAAP financial measures throughout this call to help investors understand Hamanetics' ongoing business performance. Please note that these measures exclude certain charges and income items. Please refer to this morning's earnings release for details on excluded items, including comparisons with the same periods of fiscal 20 and a reconciliation to our GAAP results. Our remarks today may include forward-looking statements and our actual results, may differ materially from the anticipated results. Hamanetics cautions that these forward-looking statements are subject to risks and uncertainties, including the potential impacts in the COVID-19 pandemic on our results and other factors referenced in the safe harbor statement in our earnings release and in our filings with the SEC. We do not undertake any obligation to update these forward-looking statements. And now I'd like to turn it over to Chris. Good morning, everyone, and thank you for joining. We continue to live in extraordinary times, and today we will give perspective on the impact of the COVID-19 pandemic on our performance, and we will provide our view of the strength of our markets and the effectiveness of our strategy. Our response to the crisis prioritized safety, business continuity, and cash preservation, allowing our manufacturing, supply chain, and customer service to avoid disruptions. We remained fully operational in all of our markets across all of our product lines. We chose to build inventory to safeguard against pandemic-related stockouts and to prepare for recovery. Importantly, our through-cycle approach kept our turnaround on track. We are executing as planned and laying the foundation for continued growth. For example, we recently completed our third annual all-employee survey, and the results showed exceptionally strong morale in spite of challenging circumstances. Our value drivers are intact and will propel us through recovery and the new normal. Let me provide a few highlights. Despite current marketplace challenges, plasma and hospital remain attractive markets with significant growth potential. I will talk about how we see them recovering in a few minutes. We are making meaningful progress on our innovation agenda. with Nexus platform advancements in the stasis management clinical programs and software development and digitization. We are a year into our four-year operational excellence program. We remain on schedule, pursuing strategic sourcing, lean, and network optimization, including select investments like a new Pittsburgh site to support U.S. plasma and hospital disposables. Our recently announced transactions show our intent and ability to execute growth-oriented M&A. We are committed to pruning and augmenting our portfolio, and we continue to prioritize allocating capital to growth investments, leveraging our strong balance sheet and free cash flow. Immunetics is well-positioned to adapt and thrive, bringing important technologies to healthcare providers, donors, and patients. we fully expect to recover to pre-COVID-19 levels and growth trajectory. The timing is uncertain based on the pandemic and our customers' response to the crisis, but the effects expect through the end of fiscal 21. Let's turn to our results. Today we reported first quarter fiscal 21 organic revenue decline of 16% and a decrease in adjusted earnings per share of 43%. The pandemic was the main driver of the plasma and hospital revenue declines, as well as the blood center revenue increase. Plasma revenue declined by 35% in the quarter, primarily due to a 38% decrease in North American collections compared with the prior year. Factors negatively influencing collection volumes throughout the quarter included stay-at-home orders, limited public transportation and border travel, college campus closures, and reticence to donate. As the quarter progressed, stay-at-home orders were lifted, social distancing precautions were established, and the continued need for plasma donations was well publicized. However, depressed collection volumes have persisted. Along with lower collection volumes due to the pandemic, software revenue decreased in the quarter because of a one-time benefit in fiscal 2020. Our work to convert customers to the latest version of NexLink remains on track, as we have seamlessly shifted to remote collaboration and implementation support. We deployed our technical support resources to help customers manage through social distancing challenges. R&D rapidly created a cloud-based software application, enabling donors to register at home and streamline the pre-collection process with enhanced safety, efficiency, and convenience. The Nexus platform continues to deliver value, 11 million nest collections yielding 250,000 incremental liters of plasma. We are advancing meaningful innovation, including assessing the expanded use of donor biometric data and analytics to personalize donations to safely collect more plasma. While collection volume in the current environment is a challenge, We remain confident about the strength of the plasma end market, and we expect a return to historic collection volume growth rates. The underlying demand for plasma-derived medicines has not changed, and our customers will need to accelerate collections to replenish depleted plasma inventory. There is also growing excitement about plasma's potential role as a unique therapeutic agent for the treatment of the virus. We fully anticipate that our plasma growth will improve as part of a protracted recovery. The exact timing is uncertain based on the pandemic. We will continue to do everything possible to help our customers create a more robust new normal to avoid disruption to the supply of plasma-derived drugs. Longer term, we are aware of potential new treatment alternatives like FCRN within the autoimmune segment. but there are important questions about clinical utility and relative benefits, in addition to hurdles to approval, pricing, and commercial scalability. Meanwhile, there are thousands of plasma clinical trials underway for primary immune deficiency and autoimmune disorders. We believe there is room in the market to allow for new entrants without materially reducing the prospects for 8% to 10% collection volume growth over time. Moving to hospital, revenue declined 4% in the quarter, primarily due to COVID-19-related procedure declines, hospital resources being diverted to critical ICU needs, and restricted access for sales teams. The impact was felt mostly in China and North America, with some recovery in both markets during the quarter as restrictions in China eased compared with the prior quarter and U.S. hospitals began to resume procedures. China grew approximately 90% sequentially from the fourth quarter of fiscal 20 due to a lower comparator caused by the pandemic's impact earlier in the calendar year. However, first quarter fiscal 21 revenue was still down 26% against the prior year quarter due to a combination of COVID-19 and distributor order timing. Hemostasis management revenue was up 2% in the quarter due to record capital sales, primarily in the UK, Italy, and North America. The high volume of capital sales was primarily due to strong selling activity that occurred in our fourth quarter, as well as sales to hospitals to research coagulation in COVID-19 patients. Our European business delivered double-digit growth on the strength of PEG capital sales, which helped offset lower disposable usage due to procedure volume declines in China and North America. Disposable revenue started to recover in the second half of the quarter as the U.S. economy reopened and hospital procedure volume increased in our largest market. While not included in our organic growth rate, revenue from ClotPro, which we acquired in April, added 50 basis points to hospitals' reported growth rate for the first quarter. Transfusion management revenue was up 5%, primarily due to strong growth from blood track as we were able to successfully close on several deals in the UK, Italy, and North America that had been in our fourth quarter fiscal 20 pipeline. Blood track growth was partially offset by declines in SafeChase TX as limited access to hospitals during the first quarter impacted our ability to perform new installations. Self-salvage revenue was down 19% in the quarter, primarily due to significantly lower procedure volumes. In addition to suspended elective procedures, non-elective procedures and trauma-related incidents declined significantly due to social distancing and various global lockdowns during the quarter. Unlike other areas of hospital, self-salvage is more sensitive to all procedure declines, so we did not see the same level of recovery in this business during the first quarter. Despite the current challenges, we believe the long-term trajectory of hospital remains strong. It is a billion-dollar opportunity that is still largely under-penetrated. We participate in critical, fast-growing areas like cardiology and trauma. We have a robust development pipeline, and we will continue to benefit from improvements we are making to our go-to-market approaches to strengthen our presence in TEG, clot-pro, and transfusion management. The end market demand for these products will continue to normalize as procedures return to pre-COVID levels. In the nearer term, regions and individual hospitals will be impacted differently by resurgences in the associated procedure impact and capital constraints. Elective and non-elective volumes will vary, and we are watching these developments closely, particularly in North America and China, which comprise 65% of hospital revenue. Our hospital customers are navigating these challenges such that we expect sequential quarter-over-quarter improvement in procedure volumes with a return to normal levels by the end of our fiscal year. And now I'll turn the call over to Chad, who will talk about our blood center business. Thank you, Chris, and good morning, everyone. Overall, we believe the underlying fundamentals of the blood center business have not changed, and we are committed to supporting our customers as they work through challenges and utilization in market dynamics in today's unique environment. Amid these unprecedented challenges, we continue to make strides in reshaping our blood center portfolio through three recent transactions. First, the divestiture of our blood filter manufacturing operations in Fajardo, Puerto Rico, and supply agreement with filtration expert GBS will help us improve quality while pursuing our asset-light approach. This transaction was another step in Blood Center's role in operational excellence. In addition, we announced the sale of our U.S. blood donor software to GPI and the divestiture of our hospital and blood bank software used primarily in France to Avonex. Each of these organizations were selected based upon their capabilities and ability to meet the evolving needs of our customers. These transactions advance our strategy to enhance our focus on our core disposable and equipment products. In the quarter, blood center revenue was up 2% on the strength of favorable order timing as blood collectors and distributors made large stocking in response to the pandemic, particularly in Europe and the Middle East. Blood is a collection-based business that differs from commercial plasma because of lower dependence on the U.S. and recovery correlates to improved COVID-19 trends and reopenings in the EU and Asia, coupled with the population's willingness to donate altruistically in times of crisis. We're able to support these requirements in a challenging market due to our efforts over the last few years to optimize the blood center business, including simplifying our portfolio through product rationalization, our sales and operations planning processes, and realizing the benefit of our customer-centric business unit structure. Aporesis revenue was up 7% in the quarter, primarily due to favorable distributor order timing, as well as continued plasma growth in Japan and other markets. The plasma growth is a positive signal that our strategy to support global blood center customers as they become more focused on source plasma collections is generating value. Aporesis growth was reduced by a competitive loss we previously called out in fiscal 20, resulting in a full $4 million impact in the quarter. Additionally, we are actively engaged in supporting customers in convalescent plasma collections in over 25 countries. While we believe the revenue upside is limited, we are committed to doing our part to support the collection of this therapeutic throughout the pandemic. We feel that if volume requirements continue to grow, We are uniquely capable of deploying large quantities of capital equipment and disposables to meet variable short-term demands. Whole blood revenue was down 6% in the quarter due to a double-digit decline in North America, partially offset by favorable distributor order timing in Europe and the Middle East. North America revenue declined due to lower collection volumes caused by COVID-19 and previously discontinued customer contracts. The discontinued contracts also led to a double-digit software revenue decline in the quarter. Despite the strong first quarter performance, we expect that the benefits of the high stocking orders may reverse in the future as customers' risk aversion returns to normal along with safety stock levels. While hospital procedures have resumed, it will take time for procedure volume to revert fully to pre-COVID-19 levels. which may temporarily reduce the demand for blood products in fiscal 21. Blood Center remains a strategic lever for haemonetics. We remain committed to portfolio rationalization as well as our goal to support enhanced product quality and services for our customers while preserving our cash-generating role for the company. And now I'd like to turn the call over to Bill. Good morning, everyone. Chris and Chad have already discussed revenue, which was 47.2% in the first quarter, a decline of 400 basis points compared with the prior year. The primary drivers of this decline were related to impacts from lower revenue and higher operational costs related to COVID-19. There were also incremental costs to safeguard the health and welfare of our employees and our manufacturing and supply chain, as well as customer-facing employees. However, we were able to partially offset these downward effects with productivity savings from the Operational Excellence Program, cost containment actions, and the portfolio decisions to exit liquids. Adjusted operating expenses in the first quarter were $63.7 million, a decrease of $7.8 million, or 11% compared with the prior year. As a percentage of revenue, adjusted operating expenses were 32.6%, an increase of 280 basis points compared with the prior year. Lower adjusted operating expenses were due to a combination of productivity savings and the cost containment measures implemented to partially offset the negative effects of COVID-19 on revenue and in our manufacturing and supply chain costs. These cost containment actions included restricting travel, reducing nonessential spending, delaying hiring, and reducing some compensation-related items. In addition, we also had lower research and development costs in the first quarter of fiscal 21 compared with the prior year, mainly due to savings related to our operational excellence program and slightly lower spending related to COVID-19. These reductions in costs were partially offset by modest investments. We will continue to invest in our business with a bias towards organic growth and innovation that will continue to expand our commercial capabilities. As a result of the performance of our adjusted gross margin and our adjusted operating expenses, the first quarter adjusted operating income was $28.5 million, a decrease of $22.9 million, or 45%, compared with the prior year. Our adjusted operating margin was 14.6% in the first quarter, a decline of 680 basis points compared with the same period in fiscal 20. Our adjusted income tax rate was 4.3% in the first quarter, compared with 10.4% in the same period of fiscal 20. The rate was abnormally low in the first quarter of both fiscal 20 and 21 from the benefit of higher share vestings and auction exercises that are not expected to repeat in future periods. We anticipate that the fiscal 21 adjusted tax rate will be 16 to 17%. Our first quarter adjusted earnings per diluted share was $0.46 compared with $0.81 in the prior year, a decrease of $0.35 of 43%. The decrease was due to the progression of the pandemic and its adverse impact on our first quarter revenue, gross margin, and operating margin. We remain committed to our growth objectives and have not changed our investment thesis related to our innovation agenda. We continue to review our financial modeling that evaluates different financial impacts to each business unit using varying scenarios based on the anticipated pace and timing of the recovery. While the current environment remains extremely uncertain, we are prepared to implement additional measures or change the course of action on those initiated if necessary. In August of 2019, we announced the multi-year Operational Excellence Program designed to deliver $80 to $90 million of annualized savings by transforming the way we source, make, and deliver our products. While the Operational Excellence Program builds on the Complexity Reduction Initiative, it is designed principally to transform our global manufacturing and supply chain organization. This program began providing benefits in the second half of fiscal 20, and we anticipate that it will be substantially completed by the end of fiscal 23. We remain committed to delivering $80 to $90 million of savings and estimate that the majority of the savings realized will drop through to adjusted operating income by the conclusion of the program with the return of the business back to historical levels. We are pleased with our overall financial health, including our liquidity position, and we continue to pursue our goal of preserving cash. In April, we drew down $150 million on the revolving credit line, which increased our existing cash on hand at the end of the first quarter to $276 million. We have an existing credit facility of $700 million that does not mature until the first quarter of fiscal 24, with the majority of the principal payments weighted toward the end of the term. Total debt outstanding under the facility at the end of the first quarter was $529 million, split between our remaining term loan balance of $319 million and borrowings under our revolving credit line of $210 million. Our EBITDA leverage ratio remains low, and we have an additional $200 million remaining on our revolving credit line, which includes a repayment on the revolving credit facility of $60 million subsequent to the end of the first quarter. Free cash flow before restructuring and turnaround costs was $11 million in the first quarter of fiscal 21 compared with $5 million in fiscal 20. The higher free cash flow in fiscal 21 is a result of $36 million from improvements in work and capital management, primarily due to lower inventory growth, improved accounts receivable collections, and the absence of a one-time accounts payable decrease from the prior year related to the timing of payments to one of our third-party service providers. The working capital improvement was partially offset by a decrease in adjusted net income. At this time, we do not foresee repurchasing shares in the first half of fiscal 21 with the $325 million that remain on our current share repurchase authorization of up to $500 million. In summary, I'd like to conclude with some closing thoughts. Business continuity, employee safety, cash preservation, and a through-cycle approach will continue to be our priorities. Our manufacturing and supply chain remains fully operational, and we are committed to our operational excellence program and related savings. We withheld issuing fiscal 21 guidance due to the continuing uncertainty remaining about the pace and timing of the recovery which we believe will be protracted. We remain confident in the longer-term strength of the end markets that we serve across our three business units, including 8% to 10% annual plasma collection volume growth over time. Our recently announced portfolio moves signal our increased desire and ability to execute our strategy, and we will continue to focus on M&A. We are confident that our disciplined and thoughtful approach to financial decisions and capital allocation priorities, coupled with a strong liquidity and balance sheet, will enable us to emerge from the current environment as a stronger company. And now I'd like to turn the call back to the operator for Q&A.

As a reminder, to ask a question, you will need to press star then 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from David Lewis of Morgan Stanley. Your line is open.