Haemonetics Corporation (HAE) Q4 2012 Earnings Report, Transcript and Summary

Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 FY '12 Earnings Release Conference Call. [Operator Instructions] I will now turn the call over to Gerry Gould, Vice President, Investor Relations. Please go ahead.

Thank you, Chris. Good morning. Thank you for joining Haemonetics First Fiscal '12 Year End Earnings Conference Call and webcast. Today, we will cover the financial highlights of fiscal '12, provide guidance for fiscal '13 and discuss the 2 transactions that we announced yesterday. I'm joined by Brian Concannon, President and CEO; and Chris Lindop, CFO and Vice President of Business Development. Please note that our remarks today include statements that could be characterized as forward looking. Our actual results may differ materially from the anticipated results. Additional information concerning factors that could cause actual results to differ materially is available in the Form 8-K we filed this morning, as well as in our 10-K and 10-Qs. On today's call, Brian will review the business and financial highlights of the fourth quarter and fiscal year '12, as well as key business and strategic elements of the 2 transactions. Chris will review our operating performance for fiscal '12 and annual guidance for fiscal '13, provide an overview of the intended deal financing and highlight financial implications in more detail. Then Brian will close with summary comments. Before I turn the call over to Brian, 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 charges from the adjusted financial results we'll talk about today. These costs -- these include costs of restructuring and transformational activities in our research, manufacturing, supply chain and software organizations. We have also excluded $1 million of net income in the fourth quarter and $3.1 million of net costs in fiscal '12 for European customer claims for HS Core Plasma, net of partial insurance recoveries; and $4.5 million of costs associated with the 2 transactions we announced yesterday such as legal and other professional fees associated with our due diligence, as well as costs for preliminary integration planning activities. In total, we've excluded $6.1 million of net cost from our fiscal '12 fourth quarter adjusted results and $17.7 million of net cost from our fiscal '12 adjusted results. Further details, including comparison with fiscal '11 amounts excluded were included in Form 8-K and have been posted to our Investor Relations website. Our press releases and website also include a complete P&L and balance sheet, as well as reconciliations between our GAAP results and our adjusted results. With that, I'll turn the call over to Brian.

Thank you, Jerry, and good morning, everyone. With the completion of fiscal '12 now behind us, I believe history will judge this year as one of the most important in our 41-year history. We began the year having to deal with 2 significant quality issues that initially tested us and ultimately strengthened us as we restructured our quality and regulatory organizations, and embarked on a plan designed to enhance the quality culture in every aspect of our business. And we finished the year in negotiating 2 significant acquisitions, one of these being the largest in our history. We believe these deals will provide a critical foundation for further growth and accelerate the company's whole blood strategy that we've implicated. They provide an established market presence and differentiate offerings resulting in the ability to serve our customers with a broad portfolio of blood and blood component collection products. In short, we've accomplished much over these past 12 months but we have a lot more to do. These are very exciting times for Haemonetics, the quality issues are substantially behind us. With the 2 deals we announced yesterday, Haemonetics will be even better positioned to realize our vision and deliver greater value to our customers and our shareholders. So let me start by telling you about our fiscal '12 finish and the progress we continue to make with blood management. And then I'll speak to the strategic value of the acquisitions and how this will further strengthen Haemonetics as the global leader of blood management solutions for our customers. We finished fiscal '12 with a solid fourth quarter. Revenue grew 10% and adjusted earnings per share were in line with the expectations we provided last quarter. Revenue growth was broad based as all reported categories saw growth in the quarter led by…

Thank you, Brian. First, I'll review the broad-based revenue growth that continued in the fourth quarter, then highlights of our quarterly and full year financial results and finally, our revenues, earnings and cash flow guidance for fiscal '13. I will also discuss financial implications of the 2 planned transactions. In fiscal '12, every product category except hospital had growth and hospital, aside from OrthoPAT, grew 4%. This top line strength is encouraging in light of the quality-related challenges we overcame during the year. In fiscal '12, we surpassed our full year revenue guidance of 6% to 7% growth, realizing 8% top line growth on the strength of 10% growth in the fourth quarter. Plasma revenue growth continued to put pressure on margins, leading us right where we expected to be on the bottom line for the full year. Some product categories outpaced our expectations a bit while others delivered what we expected. So let me talk about these in more detail. Plasma revenue grew 13% to $62 million for the quarter. We saw some second half improvements in our Japan Plasma business after declining in the first half. The Japanese Red Cross accelerated $1 million of April Plasma purchasing into March in anticipation of a planned system conversion. Additionally, collection volumes in the Commercial Plasma business in the U.S. were robust again in the fourth quarter. Plasma revenue grew 14% in fiscal '12. We continue to believe that our Plasma growth will return to a more normal mid-single digit growth rate in fiscal '13, consistent with the long-term end market growth rates of the industry. We are very well-positioned with customer contracts covering over 98% of our Plasma business through Q3 of fiscal '15. We and our customers have the stability required to respond to any catalyst in the plasma…

Thanks, Chris. Our recent quality issues are substantially behind us and we have realized solid organic growth throughout fiscal '12. We grew 10% in the quarter with Plasma, Blood Center and hospital businesses all contributing growth. And we continued to generate growth in the areas that are strategically important to us -- TEG, emerging markets and IMPACT accounts -- as our blood management solutions are delivering positive value to our customers. I said it earlier: these are exciting times at Haemonetics. Several years ago, we unleashed a bold vision of blood management borne out of our success in the commercial plasma industry. We began working with our blood center and hospital customers to implement blood management solutions, focus on reducing costs and improving clinical outcomes. We developed and launched new products like IMPACT Online and the Cell Saver Elite to help our customers better understand their blood usage and to consider more effective methods of salvaging a patient's own blood. We made acquisitions like Haemoscope that expanded our blood management capabilities by providing clinicians with a diagnostic test that helps them better understand the patient's clotting factors. And Global Med technologies that expanded our software suite, allowing us to connect blood centers and hospitals electronically. Over the past 6 years alone, we've made 11 acquisitions and launched 10 new products. In the last half of fiscal '12, we were able to turn our attention back to our opportunities for acquisitive growth. The acquisitions of Pall Corporation's Transfusion Medicine business and Hemerus Medical should serve to reinforce our commitment to better blood management for the transfusion medicine community and to improve collection techniques to the blood component collection industry in general. The acquisition of the Pall business is strategic in that it allows us to have an immediate and meaningful presence…

[Operator Instructions] Your first question comes from the line of Steve Crowley with Craig-Hallum.

A couple of questions, one on the Plasma business and then one on the acquisition. In terms of the Plasma business, I missed the number that you gave us for the Japanese Red Cross move us in business into fourth quarter from first quarter. But I'm also interested in, you've typically given us a breakdown of how the growth was driven volume, price, market share. Can you give us a bit of a feel for that for the Plasma business?

Yes. The number for Japan was $1 million in the quarter for Plasma, $2.5 million for Platelets. And we've not given the breakdown this year for the Plasma business in terms of share price and volume because there really hasn't been any significant share changes. And our pricing has been pretty consistent throughout the year taking advantage where there was opportunities for PPI and CPI, and of course, there weren't very many of those. So this has pretty much been organic growth.

And did the performance in the fourth quarter reflect the pricing on the recently renewed contracts or is that still in front of you?

It's mostly in front of us, Steve.

Okay and then in terms of the acquisition. The Pall filtration or blood collection business and the Pall package was pretty darn profitable. I think they have talked about $60 million of operating profits. You've alluded to an EBITDA number that's generally consistent with that. I think at first blush, we look at the financing cost that you just mentioned and I think struggle a little bit with how this isn't more materially accretive to your financial picture. You gave us some details and you've kind of trained us that we should take you literally when you tell us something is either going to be not accretive or modestly accretive. So I guess I'm looking for confirmation of that. And the numbers that you gave us about integration costs and addition of inventory costs on the first turn of inventory, you said those are excluded from your comments about it being neutral. I just want to make sure I understand what you're telling us.

A lot of questions there. But yes, I guess the overarching question is I believe what we say. We anticipate it will be around neutral in year one. So there's a few pieces in there, Steve. One, as I mentioned, this is a carve out. We're going to have to build some infrastructure around it to accommodate it within our business infrastructure. And our total investment there, it will be around $10 million and that's an ongoing investment of all packs. We are also taking this opportunity to make some investments in our business to accelerate our strategic goals both in whole blood but also in other areas such as TEG and our emerging markets. And that's incorporated into that thought process that we've talked about. And yes, we have and we are anticipating just the act of physically integrating this business into our business to have around $20 million to $25 million of nonrecurring costs, and an additional amount of inventory markup that will follow in purchase accounting, which will hit our P&L, probably -- likely in one quarter but maybe in 2 in -- during fiscal '13 post acquisition because we're going to get a certain amount of finished goods inventory. And we don't know precisely what that amount is because it's going to be the balance of the date of acquisition. And when we know that and go through the process of valuing it at sort of a distributor margin type model, we'll be able to tell you exactly what that will be in the quarter to 4 months following the acquisition closing.

Your next question comes from the line of Jim Sidoti with Sidoti & Company.

First, a follow up the -- you mentioned that Japan, they pulled some sales in because they're redoing some of their programs. How will the restructuring they're doing there impact you going forward? Are they switching away from your product or are they switching more to manual collections or -- what's that about?

No, this had nothing to do with shifts in technology. This had to do with computer upgrade. And so in advance of that, they were just being prudent and they moved the number of weeks of inventory out of April into March. So we'll see the impact of this: $1 million in Plasma, $2.5 million in Platelets. We'll see this impact in fiscal '13 and it will be in the first quarter. So we'll see a lighter first quarter by about 3.5 million in the top line as a result of that but that is built into the guidance we've provided this morning.

All right and then just another follow-up to where Steve was going. It sounds like if you take the incremental EBITDA that you should get from this deal, even if you add in another $10 million of operating cost, when you look out into fiscal 2014, it's hard to imagine how this can't be extremely accretive to your EPS. And I would imagine that 12% operating income guidance would be not valid for fiscal '14.

Yes and Jim, that's why we've said, let us get through this transaction. It's a carve out at the highest level. We know that those can be a bit complex. We're clearly being prudent in looking at what's that going to take to take to complete, confirmatory due diligence over the next several months. And that's why Chris laid out a plan for you to say, we're going to come back to you and tell you exactly what this means, not only for fiscal '13 once we close these deals but what is it going to mean for fiscal '14 as well. We know that you're looking ahead and you should as are we. But I want to make sure we don't get ahead of ourselves in that respect.

Your next question comes from the line of Larry Solow with CJS Securities.

Just a quick question, just on Pall, Pall excuse me, how have they progressed over the last few years in terms of the, I think you mentioned there, about a 15% market share. Has that been sort of pretty sticky in the last few years? Gone up? Down?

Yes, their business has been growing a in fact I think they disclosed around 5% growth in the reported 6 months for this year. And that is essentially obviously higher than the growth rate at the end market is share gains. They have some new products that they're driving, particularly in North America, that are helping their business to grow.

Okay. And then just a question on your [indiscernible] business. In terms of your -- the 2 initiatives or the -- excuse me, the 2 issues you had in '12, it sounds like those are pretty much resolved with the OrthoPAT and the HS bowl. Do you expect any lingering, at least negative impact in the early, in '13 before it's fully resolved or is that -- before it completely washes out?

Yes, we have to complete the recall and that's why we say substantially complete. And that has certain metrics that need to be met for the FDA. But no, we have built into our guidance the expectation for any elements from the fiscal '12 quality issues. And those are primarily in the infrastructure to support this business as we go forward. That goes to the comments we've made about this is a stronger, better business as we go forward and that's what we mean by that.

Your next question comes from the line of Scott Gleason with Stephens.

I guess, Chris, just to start off, when we look at the $60 million in EBITDA from this Pall Corporation segment, can you give us a sense for kind of what the ongoing depreciation and amortization expense kind of looks like?

Yes. Obviously, it's modeling based on preliminary evaluations. But think about around $25 million.

Okay, great. And then just a second question. Can you break out or I guess can you give us a little bit more color on what's going on within Japan with this inventory build up? And what of this kind of planned system conversion?

Yes, it is nothing more than the Japanese Red Cross being prudent and they've gone through a system conversion. So in advance of that system conversion, they wanted to ensure they had sufficient inventories on hand because they would not be able to make those inventory purchases electronically as they typically do. They've gone through their system conversion. They have already begun repurchasing inventories at normal rates as we've gotten into the later part of April.

Your next question comes from the line of James Francescone with Morgan Stanley.

First, I was hoping you could expand a little bit on your assumptions around the whole blood automation market opportunity, and specifically, how it relates to Pall's existing business. I'm not sure if this is the right way to look at this but if Pall is selling supplies for 8 million collections of their revenue base that works out to about $25 per collection. What do you think the revenue opportunity for your whole blood solution would be? And would that be incremental to Pall's $25 per collection? Or would Pall's existing services be captured in that?

Yes, it's a detailed question and we'll provide more guidance as we moved forward. I think it's -- maybe inappropriate to talk too much about how our strategy and Pall's will result in transaction-specific value creation. But I did say that we anticipate this helping us to gain share because what we're delivering through automation and obviously, automation encompasses the delivery of a consumable. But when we deliver it through automation it will add significant value to our customers in terms of their all-in cost of collecting blood and we would anticipate extracting some of that value in our pricing. And therefore, as I also said in my comments, we anticipate if we execute on this properly that will actually expand the size of the market opportunity, which today is sort of measured in terms of these single-use consumables.

Got it. And then second, is there anything else you can tell us on the SOLX technology and specifically, how it relates to your existing whole blood automation portfolio.

Yes. It's every whole blood kit that is sold today and I think I'm stating -- making a true statement in the world that, has a red cell survival solution in it. There hasn't been much evolution of those survival solutions in 20 years. And so the claims that have been submitted to the FDA and the data that accompanies those that relates to very expensive clinical trial that the folks of Hemerus have done and done -- it appears to have been done very well based on our review of it, is that when you look at old red cells that are transfused, generally, the body has the tendency to expel them very, very quickly because they're deformed. And what SOLX, one of the claims that SOLX has, which is probably the most differentiating, is that with all blood cells, there's a much better 24-hour survival of those red cells. Which is to say when you mark the red cells and put them into a human being and go looking for them 24 hours later, they're still there, which is not true of some of the conventional or not as true, let me say, as some of the conventional current solutions that are used in the market. So we think it's an interesting play on red cell storage, which is a key concern for our customers.

Yes, and I'd say this on top of this, James, there's more and more interest in the industry on the hospital side about the age of red cells and the freshness of the red cells. And it is certainly a challenge for our blood center customers to address that without new technologies. And that's what excites us about this is that we feel we're putting ourselves in a position to not only establish a presence in the whole blood collection market. Ahead of what we think is a pretty neat, creative innovative automation that we'll bring to that market but we also bring a new technology that will be able to address the freshness of red cells at a time when our blood center customers are being asked more about that.

At this time, we have no further questions. I'll now turn the call back over to Brian Concannon for closing remarks.

Thank you, Chris. I started this morning by saying I believe fiscal '12 will be viewed as a pivotal year in the history of Haemonetics. We've strengthened the company in many ways as we addressed some significant quality issues. Yet despite these challenges, we realized solid revenue growth of 8%. We announced 2 important acquisitions that, when complete, will provide us immediate access into the $1.2 billion whole blood collection market. We have much left to do to close these acquisitions and we recognize that you will have many questions. We'll be prepared to provide greater insight into the strategic value of these acquisitions during our Investor Conference on May 10. And we'll provide you greater insight into the economic value when we complete the transactions later in the second quarter. Today, this is clear. Our customers are recognizing our value in blood management. We are seeing solid revenue growth as more customers turn to Haemonetics to help them reduce cost and improve clinical outcomes. And the acquisitions we announced yesterday will only strengthen our ability and build on our commitment to blood management at a time when our customers need us most. We have accomplished much but there is still more work to do. We're ready for this challenge. We hope you'll join us at our Investor Conference on May 10, when we'll share more details with you about how we're strengthening our position as the global leader in blood management solutions for our customers. Thank you all for your time this morning.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.