Haemonetics (HAE) Christopher Simon on Q1 2017 Results - Earnings Call Transcript

| About: Haemonetics Corp (HAE)

Haemonetics Corp. (NYSE:HAE)

Q1 2017 Results Earnings Conference Call

August 01, 2017, 08:00 AM ET

Executives

Gerry Gould - Vice President, Investor Relations

Christopher Simon - President & CEO

Dan Goldstein - Corporate Controller

Susan Grieco - Vice President, Finance

Analysts

Larry Keusch - Raymond James

James Francescone - Morgan Stanley

Anthony Petrone - Jeffries

Jim Sidoti - Sidoti & Company

Operator

Good day, ladies and gentlemen. And welcome to the Haemonetics First Quarter 2017 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Gerry Gould, Vice President Investor Relations. Please go ahead.

Gerry Gould

Thank you, Kat. Good morning. Thank you for joining us for Haemonetics' first quarter fiscal '17 conference call and webcast. I'm joined today by Chris Simon, President and CEO; Dan Goldstein, our Corporate Controller, Susan Grieco, Vice President, Finance.

Please note that our remarks today will include forward-looking statements. Our actual results may differ materially from anticipated results. Additional information concerning factors that could cause results to differ materially is available in the Form 8-K we filed today as well as in our recent 10-K filings.

This morning, we posted our first quarter earnings release to our Investor Relations website. Additionally, we posted comments on first quarter fiscal 2017 results. These comments cover much detail pertinent to understanding performance in the first quarter. We made them available in advance so that we may discuss more strategic topics on this morning's call and to proceed more directly to your questions.

On today's call Chris will discuss highlights of our strategy and business performance, important trends in our commercial markets and key elements of the financial performance of the business. Then he, Dan, Susan and I will take your questions.

Before I turn the call over to Chris, I would like to mention the treatment in our adjusted results of certain items which by their nature and size affect the comparability of our financial results.

Consistent with our past practice, we've excluded certain costs and charges from the adjusted financial results which we'll talk about today. The first quarter of fiscal '17 we excluded certain restructuring and other charges and reserves related to cost reduction initiatives we launched during the quarter. The first quarter of fiscal 2016 we similarly excluded restructuring and other charges and reserves.

Also in the first quarters of both fiscal '17 and '16 we excluded deal related amortization expense. Finally, we excluded the tax effects of all excluded items. Further details of first quarter '17 excluded amounts, including comparisons with the same quarter of fiscal '16 are provided in our Form 8-K and have been posted to our Investor Relations website.

Our press release and website also include a complete P&L and balance sheet and a summary statement of cash flows, as well as reconciliation of our GAAP and adjusted results.

With that, I will turn the call over to Chris.

Christopher Simon

Thank you, Gerry. And good morning to all of you. For the past 11 weeks since joining the company on May 16th, I have immersed myself into the Haemonetics business in part by embarking upon a series of listening and learning endeavors.

I've solicited input from our stakeholders, including customers, scientific and medical key opinion leaders, suppliers and other business partners, regulators, employees, and many of you as investors and analysts. This is provided helpful insights and a deeper understanding of the company and its markets.

I'll share some of the learning from that process and how it has influenced the development and implementation of our strategic thinking. But first, I'll give you a brief overview of our first quarter results and remind you as Gerry said upfront, that there is significant additional financial detail in our earnings release and commentary.

Our first quarter fiscal '17 revenue was $210 million, down 2% as reported and flat in constant currency. This was 24% of the midpoint of our full fiscal year revenue guidance range and inline with our expectations.

Strong performances in Plasma and Hemostasis Management, our TEG family of products continued and theses two business franchises delivered over $10 million of revenue growth in the first quarter. They have delivered strong constant currency growth consistently over the past six years and this trend continued into fiscal '17.

Our North America Plasma franchise delivered 15% growth in the first quarter with about half that growth coming from the continuing ramp of liquid solutions. We continue to benefit from growth in the end market for Plasma derived biopharmaceuticals and we continue to advance meaningful innovation to differentiate our product offering, working with our customers to help optimize collection productivity and yield.

Our next generation Plasma collection of software is commercially available in the US market and gaining customer interest. Our new collection device is targeted for FDA submission this fiscal year and commercial introduction in fiscal '18. Together with the next-gen software, it will enable our Plasma customers to meaningfully improve their performance.

Our Hemostasis Management franchise remains an encouraging growth trajectory. TEG disposables grew 17% in constant currency this quarter. Our legacy TEG 5000 device is driving this growth and we are on track for the full US launch of our TEG 6s device later this fiscal year.

We expect our TEG family of products, TEG 5000, TEG 6S and TEG Manager to continue to deliver growth with existing and new customers as we penetrate the global market.

Two key additions to our Hemostasis Management team demonstrate our commitment to providing the resources necessary to realize the potential of that growth franchise, while enhancing our Company's overall medical expertise.

Nancy Bankston has joined our Hemostasis Management team as Director of Regulatory Affairs. She's has a Ph.D. in molecular biology from North Western University and her background includes 11 years of regulatory experience with medical and in vitro diagnostic devices with Abbott and Baxter. Nancy brings extensive experience with US FDA and international regulations across a wide range of medical device and companion diagnostic markets.

Dr. Hardean Achneck, has joined our Hemostasis Management team as Director of Medical. He is a Yale trained physician scientist with current active medical license in the US and Europe. He brings over 9 years of clinical research experience and proven leadership in conducting global multi-center clinical trials leading to successful regulatory submissions, most recently with Hemostemix.

Previously Hardean taught surgery pathology and cardiovascular and metabolic disorders at Duke University Medical Center. Nancy and Hardean will complement our existing team, and help drive the implementation of our plans, including adoption and market penetration of our Hemostasis Diagnostics.

Turning our attention to our other two franchises, revenue declines were $12 million in the blood center business and $2 million in cell processing. Our franchise teams remain focused on simplification of the blood center product offering and business footprint and on launching key product enhancements in cell salvage and transfusion management.

Overall, we reported a first quarter net loss of $0.20 per share on a GAAP basis that included restructuring and related expenses and deal amortization. The restructuring and related expenses were incurred as we started the implementation of our strategic plan in the quarter and the majority was severance.

Resulting savings of $7 million were realized in the quarter after these actions were taken, comprised of $5 million of operating expense reduction and $2 million of cost of goods sold. We are on track to realize the $40 million of fiscal '17 benefits we expected when we announced this restructuring program.

Adjusted earnings per share, which excludes such charges were $0.25. This was 17% of the midpoint of our EPS guidance range and is consistent with our expectations for the quarter.

There are two factors to note with respect to the earnings. First, the benefits to our cost base from the actions we took in implementing our plan began midway through the first quarter. We expect to realize their full benefit in subsequent quarters.

Second, the quarter's earnings were negatively impacted by $3 million or $0.06 per share due to expenses incurred with the leukoreduction filter recall that we issued in June. We executed the recall and took the steps necessary to resume shipping product to customers in early July. We expect a modest negative impact on second quarter revenue and a negligible operating income impact.

We expect to have better visibility in a quarter or two regarding any further impact from the recall. But at this point in time we do not anticipate a material long-term financial effect.

In summary, first quarter revenue and earnings were inline with our expectations and we affirmed our full year guidance. I am completing my initial listening and learning endeavors and he we are moving forward with implementation of our strategic plan.

I would like to shift the focus of the call now to update you on our strategic priorities and how we are implementing our plan. Our strategy is rooted in a set of prevailing beliefs about what creates value in the med tech industry.

First amongst these beliefs is the need for innovation, since good products win in the market and the realization that success is more likely in markets with strong growth and profitability. Long-term success requires both organic and acquisitive growth and sustainable growth is best achieved by a diverse product portfolio.

A lean, decentralized organization construct is preferred and the establishment metrics such as revenue and profit growth, return on investment and cash flow are necessary to measure progress and hold management accountable.

Consistent with these beliefs, we define our strategic intent as follows. First, we intend to compete in winning segments and geographies, those capable of supporting lasting growth in revenue and profitability.

Second, we intend to deliver superior short and long-term operating performance through greater productivity and return on investment. And third, we intend to achieve and maintain the number one or number two market position wherever we compete.

My assessment is that Haemonetics has the potential to be increasingly well positioned in several attractive end markets with products that enhance patient care, while also lowering the cost of that care. We serve world class customers and our products are integral to their success.

That combination is a strategic advantage that should allow us to realize significant longer term value. However, there are challenges that need to be addressed to realize this value.

This is a turnaround and it will take time to restructure the company and achieve lasting success. We realize this and have mapped out a multi-year journey consisting of three broad phases. Stabilize, transform, and accelerate growth.

We are partway through phase one where our aim is to stabilize the company, finalize our plans and deliver near term performance. We expect phase two to begin in the second half of fiscal '17 where he we will take actions to transform the company by right-sizing our remaining operations and focusing on driving organic growth and smaller, tuck-in acquisitions to augment our portfolio.

Phase three is slated for fiscal '19 and beyond and it us where we expect to significantly accelerate growth in what we anticipate will be a meaningfully different company. We will provide more information about the specific details of this plan as the year unfolds. We will also provide milestones and operating metrics for measuring and tracking our progress.

For example, regulatory approval and launch dates, software and product equipment placements, and throughput per device or per account. Regarding milestone attainment, I want to update you on an important addition to our leadership team.

As we announced earlier this morning, Bill Burke will join Haemonetics as CFO on August 8th. Bill brings over 20 years experience gained in finance roles and increasing responsibility with Covidien and predecessor companies.

Most recently he was Chief Integration Officer for the merger of Medtronic. His skills fit well with our needs as we execute our strategy and set our sights on delivering improved performance.

With Bill on board and other changes under way, we aspire to move forward quickly. We have established a clear set of strategic priorities and we are staffing, funding and pursuing those in earnest. I am happy to share these with you and I will discuss them briefly this morning.

As I mentioned, our immediate priority is delivering on our fiscal '17 commitments including both revenue and profit attainment. In addition, we have translated our strategic priorities to a specific set of initiatives that together make up our implementation plan.

There are four broad components of this plan, sustained productivity, organic growth and portfolio strategy, inorganic growth through M&A, and a revamped operating model. The first component, sustained productivity, requires that we solidify and advance initiatives for restructuring and reducing our cost base beyond the current year plan.

We will streamline and focus our commercial efforts and rationalize our product portfolio. This will enable us to reduce our manufacturing cost and optimize our operating income with a particular focus on our blood center franchise.

Next is the achievement of both organic and inorganic growth. This starts with ensuring that our next generation Plasma collection device and our TEG 6S come to the market in the US in a timely manner and generate returns consistent with our investments in them. We have extensive launch plans under way for both of these products.

Understanding the critical role of connectivity in today's medical device world, we recognize the importance of launching our cell saver software enhancements and accelerating blood track adoption. Together, BloodTrack and SafeTrace Tx provide a potential growth opportunity that we expect to capitalize upon. We will also continue to monitor and explore potential opportunities in cell therapy including CAR-T.

Over time, we will pursue value adding, tuck-in acquisitions in our growth business to generate inorganic growth to augment our existing portfolio. Subsequently, we will identify and pursue opportunities to address additional franchise needs and enter immediate adjacencies.

To enable this plan we need to ramp our operating model, revamp our operating model and revitalize our culture. We can greatly improve our chances for success by creating the most appropriate organization, to improve decision making and accountability, including an assurance that our compensation drives the desired management behavior and rewards top performance.

There's a lot to do here. But we have rallied around these initiatives with committed leadership and intense focus. All of these initiatives are important to realizing our full potential, but several are especially critical.

Productivity, blood center franchise optimization, and Plasma Galaxy launch amongst them. These three are receiving heightened attention. The executives on my leadership team have been tasked to lead each of these initiatives in order to ensure visibility and prioritization throughout the organization.

We are revamping our performance metrics and compensation to drive individual and collective accountability for this plan. The intrinsic value of Haemonetics can best be realized only with such an intense focus.

In addition, I'm happy to note that Dr. Jan Hartmann, a long-time colleague whom I know well as joined Haemonetics as Vice President, Head of Strategic Programs. Jan spent five years at McKinsey, where he was an associate principal leading their medical affairs practice. He is an experienced project leader with a proven track record of running complex change programs. He will lead our program management office with an immediate focus on driving the implementation of our strategic plan.

In addition to the milestones and operating metrics that I mentioned, return on invested capital will be a key measure of success and a driver of our capital allocation. We plan to provide a further update with longer term financial plans next quarter, but I can provide a directional overview now.

As we look at our company today, about half of our revenue and operating income comes from our Plasma and Hemostasis Management. However, these businesses consume considerable cash for product development, clinical trials, marketing and capital as we prepare for upcoming product launches.

Our blood center and cell processing businesses are different. The focus there is on stabilizing and generating cash for the corporation. Successfully executing our longer term strategy will result in Plasma and Hemostasis Management representing a significantly larger portion of our revenue, operating income, and cash flow.

It will also drive the growth in our corporate-wide performance against these metrics. It is a shift that we believe has the potential to increase our operating income up to two-fold its fiscal '17 level and our cash flow up to four-fold its fiscal '17 level, with a corresponding benefit to our ROIC. In this way the whole of the company can be worth more than the sum of its parts.

As you may know, a large portion of my compensation package consists of performance shares, contingent upon long-term value creation. One component encourages me to purchase up to $2 million of Haemonetics shares in the open market with my own funds during the first six months of my employment. Upon my purchase of such shares, the company will match them with performance based shares equal to the number of shares that I purchased.

The value of that grant and of all the grants I've received is conditioned upon our company's relative share performance over a three year period. I negotiated this component of my executive compensation because I believe that there is considerable intrinsic value in Haemonetics and I intend to act upon this opportunity during the available period.

We'll close by thanking our employees for their dedication to the needs of our customers and thanking our customers for their continued trust in us. Together, their commitment gives me optimism that we can realize the potential inherent in our company.

With that, I thank you for joining us today and we will proceed to your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question today comes from the line of Larry Keusch with Raymond James. Your line is open.

Larry Keusch

Thank you. Good morning everyone.

Christopher Simon

Hi, Larry.

Larry Keusch

So I wanted to, Chris, start with - you made a comment that your focus will be on business areas that you are number one or number two in, so I thought it might be useful to let us know where you're not currently one or two and maybe broadly how you're thinking about improving those market positions?

Christopher Simon

Yes. Thank you for the question. So defining market segments, we're clearly the number one player both in our broad-based Plasma business and Hemostasis Management TEG. That's not the case for our cell processing businesses or our blood center businesses.

So the plans that those teams are developing are aimed at putting forth a realistic perspective on whether or not it is attainable to achieve a top position in those markets and that's our primary focus there.

Larry Keusch

Okay. Perfect. And then two other quick ones. EMEA revenues were fairly weak, I think down 5% in the quarter. Also there was a comment in there somewhere that you were feeling global price pressure on whole blood. So I'm wondering if you can just walk us – excuse me, through the dynamics in the European markets and then the thoughts around this global price pressure on whole blood?

Susan Grieco

So I'll take that one. The main driver for the decrease that you're seeing in the EMEA region is driven by the Russia CIS market where obviously macroeconomic situations there have impacted our business, as well as some continued inventory management by our supplier.

In terms of the whole blood business overall, we continue to face a reality in terms of the pricing level and are continuing to implement the contracts that we have in place that do reflect those pricing reductions.

Larry Keusch

Okay. Perfect. And then just the last one. So you had the $0.06 of recall expenses in the quarter, which I assume that when you provided guidance were not anticipated, but yet you maintained the guidance for the year. I just want to make sure I'm understanding that correctly?

Christopher Simon

Yeah. I'll handle that one directly. So we definitely saw the $0.06 or $3 million from the leukoreduction in that filter recall. There will be some carry-forward on that. However, we're reasonably optimistic at this point that we'll cover that through business operations elsewhere.

Larry Keusch

Okay. Terrific. Thank you.

Operator

Thank you. Our next question comes from the line of James Francescone from Morgan Stanley. Your line is open.

James Francescone

Good morning. Thanks for taking the question. Chris, just wanted to follow up on the target that you outlined for improvement of operating income and cash flow. Could you clarify over what time frame you expect to double EBIT and quadruple cash flow?

And second, what are some of the, from a conceptual perspective, what are some of the drivers that would make the improvement in cash flow so much larger than the improvement in earnings?

Christopher Simon

Yes, let me start and then I'll invite the team to comment. The strategic plan that we put forth and the financials that I referenced at the end of my statement both pertain to our five year plan. So it's over that five-year period of time, beginning in fiscal '17.

In terms of the differential top line versus bottom line, it's a combination of factors, not the least of which is mix between the different businesses and our ongoing productivity whereby we aspire to be significantly more productivity with a leaner operations, starts with OpEx and general and administrative cost, but it also includes our cost of goods sold and the manufacturing network.

Susan Grieco

And I'll just add to that that as Chris mentioned with the product launches that we have coming up, in particular within our Plasma organization which is our largest as everyone knows, that is a very capital intensive process to launch those projects.

So over that same five year horizon we will be using some cash to launch those products, but then enjoying the stream of cash disproportionately as it catches up after the capital investment is made.

James Francescone

Okay. That's helpful. And then on a p separate issue, can you maybe talk, give us a little bit more color on how the filter quality issue was uncovered, how Confidence that it will not have a material impact going forward?

Christopher Simon

So let me start with that. On the reality of that situation is it dates back fully to one year ago. Those filters are produced in our Fajardo, Puerto Rico plant and there were a set of changes made to the operating line there that led to the issue.

We just have a lengthy supply chain as you can appreciate, so they didn't pass through the supply and actually materialize in the market until earlier this year, midway through first quarter. The actual issue itself and the remedy to the issue actually predated this quarter in its entirety.

James Francescone

Okay. Understood. That's all from me. Thank you.

Operator

Thank you. Our next question comes from the line of Brian Weinstein with William Blair. Your line is open.

Unidentified Analyst

Hi. Good morning. This is Matt LaRue in for Brian. My first question here Chris, is about sort of the long-term footprint and obviously the company just went through a process where in order to. Did some some work in moving manufacturing around. As a part of your plans to reduce the operating structure, is it component to another look at the footprint or where does that stack up as you look at things?

Christopher Simon

Yes. Speaking very candidly, the footprint of Haemonetics is a tale of two very different businesses and we have our growth businesses with increased capacity requirements. We are facing into those realities and optimizing network and we'll add as appropriate our plans as discussed, include the capacity expansion necessary to make that happen.

The other parts of our business are struggling more and in that part of the network we're actually more in a retrenchment mode. We'll face into the realities of that. I think we've begun to do so already.

But I want to be crystal clear about the three broad phases of the restructuring as articulated. The first phase is stabilization. One of the things that's caused us problems in the recent past is the transfer of products between sites and our strong intent is to stabilize and avoid further disruption associated with that TEG transfer.

Unidentified Analyst

Okay. Fair enough. And then the second one is on the blood end markets here and one of the issues the last couple years is been that's a hard end market to get visibility into.

And just wondering if there are things you can do differently to get better visibility into those end markets, both on the transfusion side and with your blood center customers, is that a part of the process as well?

Christopher Simon

It's certainly been part of my listening and learning. I've had occasion unfortunately all through the recall to talk to pretty much all the leading – all of our leading customers in the blood center business. So certainly as part of that discussion we talk about the state of blood collection, the frequency of transfusion and where we see that going.

As you know, it's hard to get pinpoint data around this. Our strong belief, as theirs is, is that the long-term systemic reduction in transfusion rates will continue. We saw some abatement of that earlier this summer. But our sense is that's situational and a point in time and over the longer haul we will see the rates continue to go down and as a result of such need to face into that reality.

Unidentified Analyst

Thank you, Chris.

Operator

Thank you. Our next question comes from the line of Anthony Petrone with Jeffries. Your line is open.

Anthony Petrone

Thanks and good morning. Maybe Chris a little bit on the top line outlook over the five-year time frame. It was helpful to get the outlook for operating income and cash. But anything you care to add in terms of blended top line growth outlook over that time frame and really what will come from organic growth and inorganic growth. And I have one follow-up? Thanks.

Christopher Simon

Thanks. So just for clarity's sake, the bottom line and ROIC and cash flow to the extent I've spoken with them are really focused on our organic plans and very modest acquisitions that would just augment and offset as the inevitable puts and takes in our own portfolio play forward.

Acquisitions will be something separate. We'll talk about that over time. It's not lost upon me the challenges the company has had in the past executing M&A effectively. It's not part of our near term plan. It is something we'll consider as opportunities present but over time.

In terms of the top line, we're still working through that. As I said, I'll be more comfortable with Bill on board and having gone through the details together with our franchise leaders, to give you more clarity perhaps at the end of second quarter.

What I can say is right now the plan is very much focused on driving both Hemostasis and Plasma as discussed, making sure that we have a proper answer, we're excited about the upcoming launches in cell salvage and transfusion management.

If they deliver fully against their opportunity, I think we'll have a much more exciting story to talk about on the top line as well as the bottom line going forward.

Anthony Petrone

Great. Maybe an update, the second question would be on TEG. I guess we haven't had a retooling of that number in a while. The growth has come down here a bit from prior quarter, 17% constant currency growth. Just your updated outlook on TEG and where do you think peak sales are for that product? Thanks.

Christopher Simon

Yes. So I am not prepared to talk about peak sales. But I can tell you we're excited and I think it's very much contingent upon the breadth of indication and the rate at which we can penetrate the top 10 or so markets around the world.

In terms of our specific guidance, we remain convinced and are on track to deliver a full year performance as we guided to back on our May 10th Investor Day. The setback, kind of where we stand with FDA, we still expect approval. We have approval for cardiovascular. We expect the trauma indication approval later this fiscal year. What I'm most excited about is that given where we are today, the performance is with exposables [ph] on the TEG 5000, both in the US and in China.

Anthony Petrone

Thank you.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Jim Sidoti with Sidoti & Company. Your line is open.

Jim Sidoti

Good morning. Can you hear me?

Christopher Simon

Yes. We hear you, Jim.

Jim Sidoti

Can you give uses a little more color on the roll-out of the new TEG system. Is that going to initially go to the existing TEG 5000 customers or are you marketing a different customer for the 6X?

Christopher Simon

We're very much contingent upon the indications that we're approved for, as you can appreciate, Jim. At this point we have the approval in markets outside the US and it will vary by account and by country, depending on our placements.

We are excited to continue to drive the 5000 in parallel. The 6S gives us some degrees of freedom and particularly with the four different cartridges that we'll be able to work into the treatment regime, we expect that to be a pretty robust part of our rollout. It does vary meaningfully from one account to the next and from one country to the next and all ultimately contingent upon the approvals that we receive.

Jim Sidoti

And then can you just give us a few comments on overall R&D spending. You indicated at the Investor Day that investments in the blood center business were going to decline, but the overall number stayed pretty steady with the fourth quarter.

Is that just an increase in spending on Plasma and TEG or should we see declines in that line going forward?

Susan Grieco

That is what the increase in spending was related to. In fact, our whole blood spend on R&D or our blood center spending on R&D was reduced significantly in Q1 to about a third of what it was in Q4.

Jim Sidoti

So how should we look at that overall number going forward? Should that stay about this level?

Susan Grieco

I think it will probably stay about this level as we continue to develop further technologies to support the products that we are launching in our growth franchises and it will stays disproportionately focused on those products that we believe have growth in solid end markets.

Jim Sidoti

All right. Thank you.

Operator

Thank you. [Operator Instructions] And I am showing no further questions at this time. It does conclude our Q&A portion of the call today. I'd like to thank you for participating in today's conference. It does conclude today's program. You may all disconnect. Everyone have a great day.

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