Haemonetics Corporation (NYSE:HAE) Q3 2024 Earnings Call Transcript

Haemonetics Corporation (NYSE:HAE) Q3 2024 Earnings Call Transcript February 8, 2024

Haemonetics Corporation beats earnings expectations. Reported EPS is $1.04, expectations were $0.97. HAE isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to Haemonetics Corporation Third Quarter Fiscal 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please note that today’s conference is being recorded. I will now hand the conference over to your speaker host, Olga Guyette, Senior Director of Investor Relations and Treasury. Please go ahead.

Olga Guyette: Good morning, everyone. Thank you for joining us for Haemonetics third quarter fiscal year 2024 conference call and webcast. I’m joined today by Chris Simon, our CEO; and James D’Arecca, our CFO. This morning, we posted our third quarter fiscal year 2024 results to our Investor Relations website, along with our updated fiscal 2024 guidance. Before we begin just a quick reminder that all revenue growth rates discussed today are organic and exclude the impact of currency fluctuations and our recently completed acquisition of OpSens. We’ll also refer to other non-GAAP financial measures to help investors understand Haemonetics’ ongoing business performance. Please note that these measures exclude certain charges and income items.

For a full list of excluded items, reconciliations to our GAAP results and comparisons with the prior year periods please refer to our third quarter fiscal year 2024 earnings release available on our website. Our remarks today include forward-looking statements, and our actual results may differ materially from anticipated results. Factors that may cause our results to differ include those referenced in the safe harbor statement in today’s earnings release and in our other SEC filings. We do not undertake any obligation to update these forward-looking statements. And now I’d like to turn it over to Chris.

Chris Simon: Thanks, Olga. Good morning and thank you all for joining. Today, we reported third quarter revenue of $336 million, growth of 10% on a reported and organic basis, and adjusted earnings per diluted share of $1.04, 22% growth over prior year. Our results underscore our success in driving above-market growth while we are achieving critical milestones in our long-range plan to fuel the transformation of our company. Margin expansion through FY2024 foreshadows the compounding impact of changes in volume and mix, coupled with productivity and operating leverage. We are proud of our accomplishments and enthusiastic about the many opportunities to grow our business moving forward. Through portfolio evolution, operational excellence and resource allocation, we’ve strengthened our leadership in plasma while building our high-growth, high-margin hospital segment to expand our scale and leverage.

Looking at our business unit results, plasma revenue grew 8% in the third quarter and 17% year-to-date, driven primarily by volume. Our collections environment in the U.S. continued to be favorable and disposables – with disposables growing 7% in the quarter and 17% year-to-date. With robust recovery continuing, our operational excellence program helped us ensure delivery for our customers as they continue to collect historically high volumes, further highlighting the need for reliability, donor safety, and yield-enhancing solutions. We are working in close collaboration with our customers to provide solutions that further distinguish Haemonetics as the undisputed industry leader in plasma innovation. The rollout of Persona, our proprietary technology proven to increase yield 9% to 12% on average, continues to gain momentum with more than 25 million collections.

The limited market release of our new Express Plus Technology has been encouraging. We have performed over 50,000 collections that have demonstrated a significant reduction in procedure times, and we remain on track for full market release in early fiscal 2025. Advancements in NexLynk DMS, our bidirectional connectivity software, are improving cycle times, reducing errors and allowing staff to focus on taking care of donors and reducing door-to-door time, a key determinant of donor satisfaction. The combination of Persona, Express Plus, and NexLynk sets a new industry standard for center throughput, cost per liter and donor satisfaction. Due to strong year-to-date results, we are increasing our plasma guidance from 10% to 12% to 11% to 13%.

We remain bullish on plasma longer term, and we are confident in our ability to maintain leading market share while continuing to migrate customers to our latest technology. Blood Center revenue declined 3% in the third quarter and 1% year-to-date. Apheresis revenue was down 1% in the quarter, but grew 2% year-to-date. Both in the quarter and year-to-date, we continue to benefit from increasing Blood Center plasma collections, particularly within newly established plasma centers in Egypt, and strong efforts to increase the collection of red cell units in the U.S. These trends were partially offset by the strong growth we experienced last year and order timing among distributors, particularly in our third quarter. Whole blood revenue declined 6% in the quarter and 9% year-to-date, predominantly driven by lower volumes associated with our decision to rationalize parts of this business, partially offset by benefits from last time buys.

The portfolio and manufacturing network rationalization initiatives we introduced in November are critical for preserving Blood Center’s ability to generate strong EBITDA as we continue to work with our customers to migrate them to alternative products. Due to price benefits and early success with customer migration, we are increasing our revenue growth guidance from a range of -4% to -2% to a range of -2% to flat. Our Hospital business had an especially strong third quarter with revenue growth of 22% as all of our products grew double digits. Year-to-date Hospital grew 17% driven by the continued success of Vascular Closure and hemostasis management. In interventional technologies, which includes Vascular Closure and OpSens products, Vascular Closure grew 28% in the third quarter and 29% year-to-date, driven by continued momentum with new account openings and improving utilization throughout the U.S. We are on track to be in 80% of the target top 600 U.S. hospital accounts by the end of this fiscal year, providing us access to the vast majority of addressable procedures in this market.

This footprint will also provide the foundation for future growth, particularly as we realize opportunities through our innovation and M&A pipelines. Internationally, our products are gaining recognition, contributing approximately 200 basis points of growth in the third quarter. We completed the OpSens acquisition on December 12. This is an exciting milestone for us as we continue to expand our Hospital business with procedure enabling technologies in high growth areas. The integration is underway and we plan to launch both SavvyWire and OptoWire sensor-guided technologies with our U.S. commercial team in April. These products are highly synergistic with our Vascular Closure products and are immediately accretive to revenue and adjusted earnings per diluted share growth with an expected three year ROIC in excess of 10%.

Now moving to blood management technologies which includes hemostasis management and our legacy hospital products, hemostasis management revenue grew 18% in the third quarter and 14% year-to-date, driven by increased capital sales and utilization of TEG disposables in the U.S. and China. Growth in China rebounded in the third quarter more than offsetting previous underperformance in that market earlier this fiscal. We anticipate sustaining our growth momentum as we capitalize on our significantly expanded R&D and clinical capabilities to further develop new and existing products and commercial infrastructure to cover the majority of our strategic accounts in the $700 million underpenetrated total addressable market. The rest of the blood management technologies portfolio, which includes Transfusion Management and Cell Salvage, grew 18% in the third quarter and 6% year-to-date.

Transfusion Management was up significantly year-over-year due to completion of customer implementations for both SafeTrace Tx and BloodTrack, as well as growth in recurring maintenance revenue for both products. Growth in Cell Salvage was driven by strong utilization of disposable kits both in the U.S. and China. In Hospital, we expect continued revenue growth acceleration and reaffirm our previous guidance range of 16% to 18%, which is on top of the strong revenue growth we experienced in prior two years. Our transformational growth plans are working across our businesses and we are raising our total company revenue guidance by 200 basis points to a new range of 10% to 12% to better reflect the year-to-date momentum in plasma and our success mitigating challenges in our Blood Center business.

Now I’ll hand it over to James to discuss the rest of our third quarter results and updated FY’24 guidance. James?

James D’Arecca: Thank you, Chris. And good morning everyone. I’ll begin with our business results and some additional updates to our fiscal 2024 guidance. Third quarter adjusted gross margin was 55.3%, an increase of 280 basis points compared with the third quarter of the prior year. Adjusted gross margin year-to-date was 54.5%, an increase of 80 basis points compared with the prior year. Both the third quarter and year-to-date adjusted gross margins benefited from price, volume and a favorable mix driven by strong sales in Hospital and continued momentum in Plasma. These benefits were somewhat offset by increased depreciation, impacts from foreign exchange and a $6.8 million in cumulative year-to-date charges related to a voluntary product recall, in our Whole Blood business, which was announced earlier in fiscal 2024.

Adjusted operating expenses in the third quarter were $112.7 million, an increase of $11 million, or 11% compared with the third quarter of the prior year. As a percentage of revenue, adjusted operating expenses were at 33.5%. The increase in adjusted operating expenses in the third quarter was due to higher growth investments, higher performance based compensation and, to a lesser extent, higher freight cost. Adjusted operating expenses year-to-date were $314.9 million at 32.6% of revenue compared to last year’s $299.9 million at 34.7% of revenue. The decrease in adjusted operating expenses as a percentage of revenue is driven by growing operating momentum, which more than offset continued investments in our business. Most of these investments were directed toward advancing our innovation pipeline and amplifying market share in our hospital business.

We anticipate that the investments we are making today will continue to expand our operating leverage over the next several years. Adjusted operating income was $73.4 million in the third quarter and $211.9 million year-to-date, representing increases of $14 million and $47 million, respectively. As a percentage of revenue, the adjusted operating margin was 21.8% in the third quarter and 21.9% year-to-date, up 250 basis points and 290 basis points, respectively when compared with the same periods in the fiscal year 2023. We remain confident in our ability to expand our margins. Our fiscal year 2024 adjusted operating margin guidance remains unchanged at approximately 21% and includes the expected contribution from OpSens, which we anticipate to be slightly dilutive to our adjusted operating margin in the near term.

As you heard from Chris, we have big plans for this business and expect it to become increasingly accretive throughout our adjusted P&L in the next several years, particularly as we begin to realize synergies and improve scale. Our guidance also includes $20 million in target gross savings from the operational excellence program or about $6 million in net savings, helping to generate additional efficiency and free up resources that can be reallocated to drive growth. We are one year ahead of schedule to complete our OEP and deliver $116 million of gross target cumulative savings by the end of this fiscal year, with about 30% of these savings directly benefiting our bottom-line. This program helped us drive renewed efficiencies and strengthen our supply chain.

Beyond this program, we will continue to pursue additional opportunities to reduce our costs and further improve efficiency. The portfolio and manufacturing network rationalization initiatives announced in November are just a few examples of our stewardship. The adjusted income tax rate was 25% in the third quarter, the same as in the third quarter of last year, and the adjusted income tax rate year-to-date was 23% and 24% in fiscal years 2024 and 2023, respectively. Third quarter adjusted net income was $53.3 million, up $9.7 million, or 22%, and adjusted earnings per diluted share was $1.04, also up 22% when compared with the third quarter of fiscal 2023. Year-to-date adjusted net income was $157.6 million, up $41.1 million or 35%, and adjusted earnings per diluted share was $3.07, up 36% when compared with fiscal 2023.

The combination of the adjusted interest expense, fluctuations in FX and adjusted income tax had about a $0.09 unfavorable impact in the third quarter and about $0.02 unfavorable impact year-to-date when compared with the prior year. We are updating our fiscal 2024 adjusted earnings per diluted share guidance to be in the range of $3.90 to $4 or approximately 30% growth and our adjusted EPS at the midpoint of our guidance range to better reflect strong year-to-date momentum. Turning now to select balance sheet and cash flow highlights. In our third quarter, cash outflow from operating activities was $0.5 million, and free cash outflow before restructuring and restructuring-related costs was $20.3 million, primarily due to the timing of disbursements, collection delays, which temporarily increased accounts receivable and increased inventory balances.

Cash flow from operations for the nine months was $118 million primarily attributed to higher net income partially offset by higher inventory levels, which were expected to increase throughout fiscal 2024 as we replenish our inventory of the NexSys PCS devices. After taking into account $55 million in CapEx and net of proceeds from the sale of property, plant and equipment we had $68 million of free cash flow before restructuring and restructuring related costs. We are confident in our ability to generate strong free cash flow and we are updating our expectations for free cash flow before restructuring and restructuring related costs to be in the range of $160 million to $180 million in fiscal 2024. Our financial position continues to provide us flexibility to operate our business and execute our disciplined capital allocation strategy.

At the end of our third quarter we had $194 million of cash on hand, down $90 million since the beginning of our fiscal year 2024. In December 2023, we used the combination of $145 million of cash on hand and $110 million of the revolving credit facility to fund the acquisition of OpSens. Our net leverage ratio at the end of the third quarter was approximately 2.4 times EBITDA, leaving us ample room to continue our growth agenda including additional M&A, an organic investments both in the short-term and in the long run. And now I’d like to turn the call back over to Chris for a few closing remarks. Chris?

Chris Simon: Thanks James. As I reflect on the quarter and where we are in our journey, I’d like to reiterate a few points. As we approach the end of our fiscal 2024 and the midpoint of our LRP we are tracking ahead of our growth goals of high-single-digit organic revenue and mid-teams adjusted EPS growth rates. This year we expect to deliver at least 200 basis points of adjusted operating margin expansion despite more than 700 basis points of inflationary impacts and heightened freight cost needed to help combat continued supply chain inefficiencies when compared with fiscal 2022, the starting point for our long range plan. We remain committed to our LRP and as we scale our plasma business, execute portfolio rationalizations initiatives and drive commercial execution in hospital, we expect to see continued expansion in our adjusted operating margins consistent with our long-range plan.

In plasma, we are the company our customers know and trust. We will continue to strengthen our leadership through our value adding technology, continuously setting new industry standards for cost per liter improvements and donor satisfaction. In hospital we expect to more than double our revenue at the end of this fiscal year when compared with three years ago. Subsequently, our goal is to double this revenue again within the next four years, positioning it as the largest segment in our portfolio comparing favorably with the top quartile med-surg sector revenue growth and margin profile. We are optimizing capital allocation and value creation while driving what will be a fivefold increase in capacity to $2 billion by the end of fiscal year 2026.

We are making strategic acquisitions and building an M&A pipeline to sustain our momentum and expand leverage. With a disciplined strategy and a high bar for expected returns we expect to accelerate our portfolio transformation as we launch new products, improve existing product features and further augment our growth with highly synergistic M&A over the next two years. This isn’t just a portfolio transformation; it’s a company transformation, a journey consisting of a set of evolutionary steps to deliver revolutionary results. I’m confident that we have the right plan, the right resources and the right focus to deliver value creation in the next several years and beyond. We are excited about the next phase of our growth. Thank you. We now would like to open the line for Q&A.

Operator: Thank you. [Operator Instructions] And our first question coming from the line of Anthony Petrone of Mizuho Group. Your line is open.

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Q&A Session

Anthony Petrone: Thanks and congratulations on a strong quarter here to the team. Maybe Chris, I’ll start with a couple on plasma and then I’ll go to Jim on margins. On plasma maybe just a state of the union here a little bit on where do you see underlying demand from donors on one hand, but where do your customers sit the fractionators? Just on replenishing their inventories and then maybe a comment just on how we should be thinking about CSL from a phase out standpoint just from the competitor update this week? And then I’ll have a follow up for Jim.

Chris Simon: Thanks Anthony. Appreciate it. So, state of the market, right? I think the supply demand equation in source plasma remains quite robust. From a fractionator perspective they’re continuing to work hard to meet growing end market demand and replenish their inventories, and there’s still a good way to go, really on both sides of that. So we don’t see any abatement in their desire to continue to accelerate collections, and what they’re doing with their centers is really quite powerful. And we’re delighted to be a part of helping enable that with our technology. On the donor side we see no slowdown in donor traffic into the centers. A good chunk of that is economic, obviously for the donor demographic they’re still struggling quite heavily in this marketplace, unfortunately for them.

So it does lead to a stronger desire to augment their disposable income. And again, we don’t see any abatement there. I have read folks talking about the performance of the economy. We’re hoping the economy strengthens as well. But we fully expect to collect high volumes of plasma in good markets and in more challenging markets. In fact, I’ll go back in time to 2018 and 2019, two very good years for the macro economy. Prior to this most recent robust recovery, they were the highest volume years we had ever experienced. So we can collect plasma in good markets and bad. Our customers are doing their part to make that a reality. So we feel quite good about that. With regards to CSL, we’ve orchestrated through the various amendments what will be a smooth and somewhat lengthy transition, and that’s good for both parties.

And so we’re going to continue to execute fully against that, as we do with all of our customers to make sure that they have the supply they need into the future. And I think that will enable us to orchestrate a smooth landing while we continue to do the other things that ensure continued growth in our plasma business.

Anthony Petrone: Helpful. And then, Jim on margins, maybe a revisit on the LRP Bridge, just taking into consideration the complexion in the quarter. So they’re nice jump in, gross margin, ahead of expectations. But overall, OpEx did tick up here beyond at least our model. So is this kind of where we are from a percentage of total revenue standpoint for total OpEx? Is there leverage in OpEx, or does OpEx grow a little bit more from here? Thanks again and congrats.

Chris Simon: Yes, thanks for the question, Anthony. Yeah. On op margin we still see a nice path to our high twenty’s that we initially came out with back when we unveiled our LRP last year. And that’s really going to be driven by three main factors. One is the hospital business really begins to scale, right. And we’re going to gain leverage there because we’re going to be increasing sales with just very modest growth in the cost base. So that addresses I think, your question on OpEx. Will it grow a bit? Yes, but not nearly as quickly as we plan on growing sales. So that will be the biggest factor that helps drive us there. But there’s two other really important points as well. The second one is mix on the gross margin line. We’re going to end up in a position here where we have favorability from more sales, from higher margin hospital products.

So that will hopefully drop down to the bottom line. And then finally, to get there, we also need to work on our manufacturing cost, and we’ll do that in two ways. One with the higher volumes and we’ll gain the better absorption from that. But secondly, we need to continue our operational excellence initiatives that you’ve heard us talk so much about here over the prior couple of years. That doesn’t end when the program end and that continues and we take the learning’s from that and we continue to apply that to reduce the manufacturing costs. So those three factors really is what’s going to get us there.

Anthony Petrone: Yes. Thanks. I’ll hop back in queue. Thank you.

Operator: Thank you. And our next question coming from the line of Larry Solow with CJS Securities. Your line is now open.

Larry Solow: Thank you and good morning. I guess just a follow up on Anthony’s question, just on the plasma growth and CSL. Again, I don’t know how specific you can get, but just in terms of, it does look like your guidance still kind of incorporates a little bit of a downturn in Q4 and I know we were kind of expecting or the market was expecting a little bit of an acceleration in sort of the transition at CSL. So is that kind of indicative of, and I know they have a sales minimum, so does that – is that kind of tapered off, tapered into that into that cure [ph]? Can you give us any kind of color on that?

Chris Simon: Yes. Larry, I appreciate the question. Again, we see robust growth across the board. CSL is participating in that along with all of our other customers. The highest growth that we are experiencing is actually from our customers who were the adopters of Persona because of the yield benefits as well as the gain in productivity from the integrated system. They are by far driving this, and we don’t see any meaningful slowdown there. Normal historic seasonal averages we’re getting back to that, and that’s as expected. The guidance – we’ve raised guidance again in fourth quarter for plasma, and that does reflect seasonality as well as the anticipated ongoing CSL transition, right, and that’s both factored into the guide.