Haemonetics Corporation (HAE) Q1 2013 Earnings Report, Transcript and Summary

Good morning. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Fiscal Year 2013 Earnings Release Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Gerry Gould. Please go ahead, sir.

Thank you. Good morning. Thank you for joining Haemonetics Fiscal '13 First Quarter Conference Call and Webcast. 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 first quarter and provide an update on the Pall transaction. Chris will review our operating performance for the quarter, annual guidance for fiscal '13, preliminary outlook for fiscal '14 and the impact of the acquisition and deal financing in more detail. Then Brian will close with summary comments. Before I turn the call over to Brian, I would like to mention that 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 have excluded certain charges from the adjusted financial results we'll talk about today. These include costs of completing the acquisition of the Pall Transfusion Medicine business and conducting significant integration activities. In total, we have excluded $6.4 million of net cost primarily for the transaction and integration from our fiscal '13 first quarter adjusted results. Further details, including comparison with fiscal '12 amounts excluded, were 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, as well as reconciliation of our GAAP and adjusted results. With that, I will turn the call over to Brian.

Thank you, Gerry, and good morning, everyone. We're very pleased to report that we finalized the acquisition of the Pall Transfusion Medicine business yesterday. This is an important strategic step for Haemonetics as we enter the whole blood market in advance of the phase launch of our automated whole blood product beginning later this fiscal year. The enthusiastic response from the 1,300 employees who have now joined our company has been very motivational, and the response from our customers has only served to confirm the importance of blood management for their future. This marks an important strategic advance for your company. Shifting to first quarter results, we started fiscal '13 with a solid performance that positions us well to achieve our full year operating and financial objectives. Let me remind you about 2 anticipated items which affected the first quarter's financial performance. You will recall that we benefited in the fourth quarter of fiscal '12 from an increase in platelet and plasma disposables revenue in Japan in advance of a system conversion by the Japanese Red Cross. In Q4 fiscal '12, the JRC purchased almost $4 million of our product that would have normally been purchased in Q1 fiscal '13. This represents a $0.09 per share headwind in the first quarter, which will not occur in subsequent quarters. Adjusting for the impact of that advance purchase, first quarter revenue growth would have been 6% and broad based across virtually all reported categories versus the 3% reported. This is why we remain confident in our ability to achieve our guidance of 4% to 6% organic revenue growth this fiscal year. We also said that we would be using some of the anticipated accretion from the Pall Transfusion Medicine acquisition to invest in infrastructure and identified growth initiatives. And as you would…

Thank you, Brian. First, I'll review the revenue growth that was realized in the first quarter then highlights of our quarterly financial results, our revenue, earnings and cash flow guidance for fiscal '13 and finally, our preliminary outlook for fiscal '14. I'll also discuss financial implications of the Pall transaction. In the first quarter of fiscal '13, setting aside the impact of the fiscal '12 fourth quarter JRC buy-in, every product category, except software, had growth. Plasma revenue grew 2% to $64 million for the quarter. The Japanese Red Cross had accelerated more than $1 million of April plasma purchasing into March in anticipation of a planned system conversion. Aside from the impact of this action, plasma growth was 4% in the quarter and in line with our continued belief that plasma growth will return to a more normal mid-single digit growth rate in fiscal '13, consistent with the long term and market growth rates of the industry. We are affirming our previous guidance of 4% to 6% plasma growth in fiscal '13 and we're very well positioned, with customer contracts covering over 98% of our plasma business through Q3 of fiscal '15. Blood center revenue was flat with the prior year quarter at $49 million, but up 6% after setting aside the effect of the JRC revenue shift in the prior quarter. On that basis, platelet growth was 7% and red cells grew 2% in the flat market as we are succeeding in demonstrating value to those customers utilizing IMPACT. Therefore, we are affirming our guidance of 0% to 2% blood center growth for fiscal '13. In our hospital business, revenue increased 11% to $32 million in the quarter. Aside from OrthoPAT, our hospital revenue was actually up 16% in the quarter. Following the Cell Saver Elite launch, we…

Thanks, Chris. We were especially encouraged with 11% growth at our hospital business this quarter. Strength in surgical and diagnostics disposables, strong demand for the Cell Saver Elite and TEG disposables, record sales of our TEG and Cell Saver Elite devices and the return of OrthoPAT to growth in June and July are all indications that hospital customers are embracing the value of our blood management solutions. Our plasma and blood center businesses are contributing growth. And we are generating growth in areas of strategic importance to us: TEG, emerging markets and IMPACT accounts. These continue to be exciting times at Haemonetics. The acquisition of the Pall Transfusion Medicine business and the planned Hemerus Medical acquisition reinforce our commitment to better blood management and improved blood collection. The acquisition of the Pall business is strategic, providing a meaningful presence in the $1.2 billion whole blood market where we plan to launch new technology and automation beginning later this fiscal year. It also provides us expanded manufacturing capabilities, differentiated products, key customer relationships and for the first time in our 41-year history, control of the production of filters that go into the majority of our disposable products. Now that we're in the whole blood collection market, we intend to collaborate even more with our customers to introduce products that will enhance the whole blood collection process, bringing process improvements to our customers that we expect will lower their whole blood collection cost and improve their donors' experience. The acquisition of Hemerus remains in the near term horizon. We made the first $1 million payment during the first quarter, and we're awaiting FDA approvals of that SOLX enhanced red cell storage solution. Upon each of 2 such approvals, we will make a $13 million payment and we expect these approvals to occur…

[Operator Instructions] Your first question comes from Lawrence Keusch from Raymond James.

This is actually Konstantin in for Larry. So I guess to start off with -- I just want to make sure I understood you guys correctly. So it sounds like, from an EPS perspective, the quarter went kind of in line with your expectations. And I guess as part of that question, I clearly understand the $0.09 headwind from the Japanese revenue that got pulled into 4Q. But that I guess should have been reflected in the Street model. So I was wondering, is the gate -- did the Street just did not get the gating right, just kind of what happened? Any color would be appreciated.

Yes. I think with some puts and takes, we're pretty much where we thought we might be. We did highlight the Japan revenue pull-in into Q4, which obviously gave us remarkably high growth in Q4. And it's possible that we didn't get that into the quarterly guidance that was -- rather, the quarterly outlook that the analysts were preparing. So apart from that, we did give the -- I think we gave the headline last call that we were going to start the investment.

Konstantin, this is Brian. I think I'd say it this way. I mean, we give annual guidance, so there's always going to be that challenge quarter-to-quarter. We try to signal as best as we possibly could about the impact of the Japan Red Cross buy-in in Q4 versus Q1. We certainly signaled our intent to spend in advance of the acquisition closing. You just can't start from a standing still stop when you do something like that. There's a risk associated with that, but I think it was an important calculated risk. We did that. It's going to serve us well. I think the message here is that there's a great deal of confidence on our part about our guidance as we go forward. And importantly, what the investments we're making now are going to mean to our future and that's why we're providing for you a peek under the tent, if you will, to fiscal '14. Our sales, we expect organic sales to tick up a bit and we expect that to continue year-over-year. But importantly, you're going to see that start to return to shareholders with earnings per share growth of about 20% next fiscal year. So that's the message that I think we want you to take from us.

Okay, that's terrific. And then Brian, just kind of on the -- do we think investors think about 2014, can you guys just piece out and quantify what is the expected accretion from Pall? And have you guys state any I guess revenue synergies from Pall? And also just kind of to add on, as we think over the next 2 years before your auto whole blood really kicks in, how should we be thinking about potential revenue synergies from the Pall acquisition?

We have in our outlook and plan considered revenue synergies. We see our global network as a driver of revenue synergies and obviously scale in North America for our existing or shared customers, some of which are in some of the bigger customers in that market. So we baked that in. We're not really prepared to break out the accretion from the deal at this point in our outlook for next year. We feel very confident in our ability to achieve this. But the base business first, is deal accretion we'll get to later on.

And Konstantin, I'll just add that the deal is coming over. We feel good about the last 9 months' audited financials of the business we're acquiring. It has growth rates that are consistent with our base business when you take into account the impact of the JRC buy-in. So it's consistent. We'll give guidance for fiscal '14 next year. We're not prepared to break that out any further. I would tell you that when you make an acquisition of this size, I think we've been prudently responsible in how we've layered that in with expected growth to take off from there as we go into the future. But we'll give that guidance a little more visibility to that as we get into fiscal '14.

Your next question comes from Lawrence Solow from CJS Securities.

I wonder if you could just discuss sort of in general terms how you're looking into your investments and as you head out into '14 and then '15 as you bring in the automated whole blood collector, do you plan on having spent most of your, due to big -- lump sum of your investments upfront before you complete this whole process or is it sort of going to be spread out through that whole process?

I'd answer it this way, Larry. I mean, there's obviously the investment you need to make upfront when you develop a new product. There's no question. Not only in the product, but certainly in preparing the markets for that product. I think we've done a fairly good amount of work on that. We told you about the work we did with outside consultants to help us understand that market better. Frankly, that's what had driven us to where we are today strategically. This acquisition, Hemerus acquisition, I feel very good about the position we put ourselves in. It's like any time you launch a new product, what's that going to mean? We're going to know a lot of things going into it. We're going to learn a lot of things as we come out of it. That will start to happen in the fourth quarter. We're on track with our expectations in the first phase of our automated whole blood product launch. So we'll start to learn that and see what that means. You can see all of this reflected, I think, responsibly in sales that we expect to tick up next year. But I think we're being responsible in that outlook as we look at it today.

Okay. I know you don't want to get into sort of some of the finer details with the acquisition by itself in terms of accretion, but did you give any number -- I bounced out of the call, I got a few balls off me this morning -- on the amortization or the anticipated amortization from the deal?

So we had, on the last call, given an estimate of D&A of $25 million full year, and that's still our estimate.

So you take that -- prorate that over the next 8 months.

Your next question comes from David Lewis from Morgan Stanley.

This is actually James in for David. First, just switching gears a little bit away from the deal, there has been some competitive consolidation, most particularly in your blood center business. And I'm wondering, could you give us any thoughts on what the strategic implications some of those deals among your competitors could be for your business going forward?

Well, I think there's been a lot of activity in this space when you look over the last year. Immucor went to private equity with TPG. You saw Caridian acquired by Terumo. We have now seen Fenwal acquired by Fresenius. So what you're seeing is a lot of interest in this space. I think it speaks to the value of this space. But I also would tell you that I think it gives credibility to the value of the deal that we've just accomplished. We bought, I think, a very, very valuable piece of real estate at a reasonable price. And I think we should feel good about that.

Okay. And then second is, any comment on red cell utilization or blood usage trends in general? It did seem like the red cell business got a little bit better and some of that was related to share and product cadence more than the market. But what's the market outlook there? And how has that been trending over the past couple of quarters?

Yes, the market hasn't moved very much. You've seen some calls for blood, more calls for blood. Some of that has been more driven by activities in blood centers where there's been some strikes and some blood centers have been closed down as a result of that. So it's a less reflection of the demand for blood than it is a decline in the amount of blood donors and the ability to draw blood. Most of that's worked out. So you're still looking at a market that's basically flat. But we continue to grow in that market and I think that bodes well for us. Our technologies are meaningful. And as we bring the Pall acquisition to that market, I think it speaks well for the future.

Your next question comes from Steve Crowley, Craig-Hallum Capital.

You mentioned Hemerus and gave us a bit of an update there. You've done such a good job of selling us on the merits of that product line into the Pall Haemonetics base. I'm wondering how you dealt with that variable in your 2013 and 2014 guidance, the upsell possibilities of Hemerus.

Yes. Steve, we've taken a fairly conservative view of that in our guidance. I mean, this is an emerging technology. It's something that we are incredibly confident about, but it's not something that's been an overwhelming influence in our outlook. There's a lot of fundamental revenue synergies that we think we can drive here, x SOLX and then SOLX is sort of the icing on the cake. And so I don't want to get ahead of the FDA approvals. When we know that and when we start our initial introductions with customers will be the time to start to bake that into the outlook.

And Steve, this is Brian. I'd add this and certainly affirming I think the responsible approach we've taken here. But I would tell you that the response from our customers was, as a result of the announcement of the Pall Transfusion Medicine acquisition and the Hemerus acquisition, was a little more positive than we had anticipated it would be. I mean, we expected it to be well received, but it was even more strongly received, not only in the U.S. but particularly in our -- outside the U.S. markets where the Pall presence wasn't as strong.

Okay. And in terms of the Japanese Red Cross business, you've talked about the distortion. Are you -- have you seen something in the recent monthly trends and orders from JRC, such that you can say their transition, their timing distortions are definitively behind you and you're back to normal? Are you looking more prospectively at that?

No. I mean, it was like a rubber band. It bounced back right back to normal in May and has continued that way.

Okay. And one follow-up...

Steve, we lost you.

[Operator Instructions] Your next question comes from James Sidoti from Sidoti & Co.

Let me just follow-up where Steve was going. Brian, you said that those sales bounced back in May. I assume you mean the end of the month? Or are you saying it was really just April where sales are unusually low?

Yes, it was basically one month of sales that were moved into Q4 of last year. So we saw them bounce back right at the beginning of May. I mean, that first week, you saw it come right back in, so...

And then, was June a normal month?

Yes, both May and June were normal months.

It was actually about 2 weeks of sales, Jim. I mean...

And you do have Steve Crowley with Craig-Hallum Capital.

Sorry for the technical difficulties there. What I wanted to ask you about was OrthoPAT. And to refresh our memory on the seasonality apparently of that business as it declines in the March quarter to the June quarter, I'm trying to understand that, and then I have one follow-up.

I think clearly, there is a decline that typically occurs but quarter-to-quarter comparisons, I wouldn't blame a 3% decline on that. It's a reflection of the prior quarter, prior year's quarter. But what it is, is just our ability to come right back into the market. I feel very good about where we are with that, Steve. We saw that growth in June, up 5%. We saw even more significant growth in July. So I feel very comfortable that the team is back. I think more importantly, what we ought to be looking at here is what's happening in the hospital business. Our hospital business, with OrthoPAT down 3% inclusive in that category, our hospital business is up 11%. We've been looking for that catalyst around blood management. We're looking for the value of IMPACT as a selling tool under blood management. We're starting to see that. That's meaningful. OrthoPAT is going to rebound. It's only going to contribute to that. That's why we have affirmed our guidance in that category of 12% to 15%.

One of the surprises though, Brian, I was referencing is that the business was down sequentially versus what you did in the fourth quarter and since it's a consumable business, I'm having a little trouble understanding why you'd set back before you started to see steady growth.

Yes. That is the seasonality I think you're talking about. That is normal.

And the reason is surgical procedures in the June quarter?

It's more orthopedic surgical procedures which you typically see. You see that third and fourth quarters of ours, which is fourth quarter calendar year, first quarter calendar year, which are typically your strongest quarters.

And you have a follow-up question from Lawrence Keusch, Raymond James.

This is Konstantin again. So I guess I just wanted to follow up and just get your updated thoughts on the state of plasma market. So I think some of Pall's manufacturers kind of suggest that recently that end market demand is really kind of running probably above the 6% to 8% growth that historically the market has witnessed. So just any color would be much appreciated.

Well, what they're talking about is not collections. They're talking about demand for the end-market drugs. As we all know, come back in the supply chain, that gets whipsawed a little bit. They've got up to a 2-year frozen plasma supply that they can manage. So what we are seeing today is pretty much that 4% to 6% growth rate that we talked about before. We feel very good about that. Our forecast would certainly affirm that.

As there are no further questions, I will now turn the call over to Brian Concannon for closing remarks.

Thank you, Tina. What a difference a year makes. One year ago, we were explaining what steps we'd take to address some serious quality issues in our business. We did what we said we would do and today, we're a stronger company for that experience. We've now completed the single largest, most strategic acquisition in our history, allowing us to enter the $1.2 billion whole blood collection market. We have much work to do, but our planning has been extensive and our confidence is high. Our integration teams are already hard at work. We continue to build sales momentum. The momentum is broad based across all product categories. Our hospital products are beginning to contribute meaningful growth as our customers embrace blood management. We had a solid first quarter and we're right about where we would expect to be 3 months into the fiscal year. We're affirming our revenue and earnings per share guidance. We have a good plan, committed leadership and a great team made even stronger with the addition of our Pall Transfusion Medicine teammates. It's now time to execute. We look forward to sharing the results with you at future quarters. Thank you all for your time this morning.

This concludes today's First Quarter Fiscal Year 2013 Earnings Release Conference Call. You may now disconnect your lines.