Haemonetics Corp (HAE) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Haemonetics conference call.

Please note that during the course of this Haemonetics may make statements that could be characterized as forward-looking and actual results may materially differ from the anticipated results. Additional information concerning factors that could cause actual results to differ materially is available in the company's press release and 10-K.

Mr. Brad Nutter, Haemonetics President and CEOOp will moderate this call. Here is Mr. Nutter.

Thank you, operator.

Good morning. I'm Brad Nutter, President and CEO of Haemonetics and we thank you for joining our call today.

I want to confirm our financial guidance that we set out at the beginning of the year for fiscal year '04. Which is high single digit revenue growth, gross profit in the mid to high 40s, well-controlled expenses, dropping through to modestly improving operating margins, with EPS in the $1.13 range. That guidance is good and we've performed to that guidance.

Today I'm joined by our CFO, Ron Ryan, Lisa Lopez, General Counsel, and , Director of Investor Relations.

We'll be available to answer your questions once we conclude our opening remarks. Our comments today will expand on our press release of this morning.

We'll cover three things today. First, Ron Ryan will discuss our first quarter financial results, secondly I will review my observations of the business and our accomplishments in Q1, and third, I will comment on our plans and priorities going forward.

So for our financial review, I'll turn you over to Ron Ryan.

Thanks, Brad.

As a preliminary note, you remember at the beginning of last quarter we committed to focusing on reported number, which include the effect of currency. This will keep our comments clear, concise, and easy to understand. For those of you who are interested, we do provide a detailed breakout of the effects of currency on the P&L on our Web site.

To summarize first-quarter performance, revenue was $88 million up nearly 8% from last year's quarter with currency accounting for 3.6% favorable. To summarize the disposable revenue increase, bank increased 8%, plasma grew 3%, red cells were up 29% worldwide and 38% in the U.S. Total surgical was up 6% with OthoPat up 31%. This 8% revenue increase was 100% of our internal plans. Gross profits was $40 million up 2% from last year. Gross margin was 44.8% down 240 basis points from the prior year. The lower margin reflects $900,000 of inventory excess amounts to lease provisions. The gross profits of $40 million was 100% of our first-quarter plan. Operating expenses were $31 million up 8% over prior year with the majority of the increase due to foreign exchange. We finished $800,000 or 2% favorable to our operating expense plan. Our operating income was $8 million. This is down $1.5 million from last year primarily due to foreign exchange. We exceeded our internal operating plan by 9% for the quarter. In Q1, we generated a $1 million of operating cost reduction from the customer oriented redesign for excellence or core program. Our goal for this year is $3 million to $4 million of savings comparable to last year. The income tax rate in the quarter was 36% compared with 31% in Q1 last year. Earnings per share came in at 21 cents. Last year, EPS was 26 cents. Tax and foreign exchange accounted for the majority of the negative variance. Again, we over-achieved our plan. Now digging into the revenue line a bit more, we still expect plasma disposables growth to be relatively flat through the year. However, we saw a growth of 3% this quarter. , the plasma market is quite volatile and we have 50% market share. mentioned is only in the sale of collection technology to source plasma collectors.

Recently, a competitor decided to cut collections in fractionation capacity in order to address margin issues. This had no impact on Haemonetics since none of the collection centers that were closed using products. Fifth Dimension achieved it's Q1 revenue plan. We continue to believe their acquisition of 5D, the leading provider of IT systems to the plasma market was a smart move giving us a real opportunity to help customers simplify their business and help us win plasma market shares. 5D will also be our entry point into helping not for profit blood banks operate more efficiently. We hope to comment more on this in the upcoming quarters. On blood bank, our blood bank business is stable, and Haemonetics has the largest worldwide market share at 40%.

We will continue to leave this market. We reported nice growth of 8% in our blood bank business in Q1 with modest expansion in our Asian and Japanese markets. We continue to believe that fiscal '04 blood bank revenues will be flat. Moving to red cells, worldwide red cells disposables growth was 29% for Q1. The important U.S. market grew by 38% while our European market grew slower than planned as developing those markets is providing to be challenging, reminiscent of the beginnings of the U.S. market.

Looking forward, we plan to grow by two new red cell customers per quarter for the remainder of the year and we continue to expect FY '04 growth of 40% to 50%. We will report to you our progress each quarter. To that end, we have continued to make progress with the American Red Cross adding two additional regions in Q1 the Carolinas and the Great Lake region bringing the total to nine regions, more than a quarter of the regions in the American Red Cross system.

Of particular note, I wanted to highlight the American Red Cross' Indiana, Ohio region which uses our double red cell technology on approximately 15 of its Type O donors. As you know, United Blood Service, the second largest U.S. blood collector is Haemonetics largest red cell customer. I'm pleased to report that our technology is now fully implemented in all 19 regions of United Blood Services and we continue to grow penetration at UBS. System wide, our technology is used to collect almost one-quarter of its total blood collection.

My view of this business is two-fold. There are opportunities to continue to add customers and there remain opportunities to expand our business within existing customers. Our technology has now reached mainstream use and is widely accepted by blood banks. To date, we've done over 1 million procedures. Recently, although a new competitor has entered the marketplace, it has had no adverse effect on our business. As a matter of fact, we believe that an additional competitor in the marketplace will accelerate and bring the market to automated collection.

Now, let's turn to our surgical business. Haemonetics cell salvage systems are used by hospitals to recycle and conserve a patient's own blood. Our FY '04 plans are for double-digit growth in this business. Two dynamics will support this growth. First, our traditional cell salvage market is stable and we own 55 percent market share.

Over the past quarter we have won 19 new customers, lost none and have a pipeline of potential new business. Our OrthoPAT product is the only auto-transfusion product in the orthopedic market. End user growth in this business grew 53 percent this quarter. Our plans are to grow 40 to 50 percent in FY '04. As we have largely resolved our supply chain issues, we expect our OrthoPAT revenues to mirror end user growth coming out of the second quarter.

To recap, for FY '04 we expect surgical growth in the double-digits driven by modest growth in our traditional business combined with strong OrthoPAT growth.

Consistent with our P&L, we made progress regarding the balance sheet and cash flow. We entered the quarter with 50 million of cash, 70 million of total debt and 20 million of net debt, all comparable to last quarter. During the quarter we exceeded our plan generating $3 million of operating cash flow. Accounts receivable DSO were 81 days, two days down from Q4. Finished goods inventory turns were 5.1 compared with 4.6 last quarter and 4.5 the previous year.

As for share repurchases, there were none in the quarter as the Board of Directors decided to suspend our automatic share repurchase program in order to reinvest operating cash back in the business. $26 million remains on our repurchase authorization.

Now I'll return the discussion back to Brad.

Thanks, Ron. Let me make a few comments on the performance of Q1.

As I stated at the beginning of the call, I'm pleased with the way we executed to our plan. We're right on plan for sales, gross profit, and are favorable on expenses, and this has allowed positive to operating income. I'm also encouraged that we're above plan regarding EPS. I know this is just the start of the year and certainly we have plenty more work to do. I also recognize our earnings plan is by design loaded towards the back half of '04. However, it's certainly gratifying to be above our internal plans as of the first quarter of the year.

Ninety days ago, when I first had a chance to visit with you at the conclusion of our year-end, I indicated I believed this business had room for growth, and I thought in 90 days, I'd have learned enough to begin to see a path for us to go forward. Now I do begin to see that path, but first let me review what I've learned this quarter.

We have a good brand name and a good global market presence. We are market share leaders in each of our product lines. For more than 30 years, we've been the industry's innovator in each product line we've created. Finally, we're the only pure player in this space, meaning we're intensely focused on products and services surrounding blood collection and separation. We're not a division of a parent corporation, and we can control our own decision-making process.

I want to emphasize my greater appreciation today for our market share position. In each of our product lines, we have phenomenal market share, which I view as a sustainable competitive advantage. For 30 years, we have competed against tough competitors and have prospered, and this is a great base to build upon.

During the last 90 days, I've visited Japan, Europe, and the United States and spent time with our customers. My trips around the world have given me an opportunity to evaluate our leadership team, and I can tell you I'm impressed on all counts.

First, Haemonetics Japan is outstanding under the leadership of Dr. Sakurada. Our relationship with the Japanese Red Cross is very strong and one of mutual respect. The Japanese Red Cross does not reward with a single dollar of revenue any company that is not able to provide world-class quality and service. With more than 70% market share, we have clearly earned this customer's business. This is certainly a strong basis upon which to protect and then grow our business opportunities in the future.

During my visit to Europe, I had the opportunity to visit with a number of Haemonetics key customers who are supported by a fine team in that part of the world. We continue to expand our sales force throughout Europe, and this has really paid off. European revenues are strong. Our sales have increased 23% over last year under the leadership of .

I've also had a number of opportunities to visit customers throughout the United States. From those customers I've learned they have significant unmet needs. They need help regarding regulatory compliance; they need to attract and retain donors; they need to improve their financial position. I believe Haemonetics can be a partner in helping all of our customers with those challenges.

Folks, as I've spent time with our leadership team and, more importantly, spent time with our customers, opportunities have begun to become clear for Haemonetics. Now, you'll remember I indicated at the last conference call that I hoped to begin to share with you the concepts of a future strategy by this summer. I will relate to you the progress we've made towards the development of this strategy.

Haemonetics will create shareholder value by number one, leveraging the existing business with increasing focus on profitability, and number two, we'll begin a review of our core competencies to determine how best to grow our business in the future.

So let me begin by discussing our plans to leverage the existing business and increase our focus on profitability. We have a good business to leverage. We can improve profitability and drive operating results in our current business. And I believe Q1 results demonstrate a clear indication, excuse me, indication of our beginning steps to implement profitable leverage of our existing business.

This organization will accept strong leadership and change. For example, we changed the compensation of our management team to better align our interests with shareholders interests. We did this and received positive feedback from our entire management team.

In the past we were paid bonuses on EPS only. And those bonuses were paid out quarterly. We've changed that. Today, bonuses will be paid out annually on net sales, operating income, and EPS measurements. This is a good move.

We've also changed the compensation program for our sales force. Our compensation package is now more heavily weighted on gross profit, rather than sales. Again, I believe this is good for shareholders.

It will focus on profitability by product line and is a clear indication of our seriousness to align our performance and results with those of driving shareholder value. This change has also been well-received by our sales force and frankly, I think our eight percent sales increase for the first quarter demonstrates that our organization maintained its focus on sales and the customer and at the same time it absorbed a new compensation structure successfully.

We also did a good job of controlling expenses in Q1 relative to our plan. As Ron Ryan stated, we're under budget on our expense plan by three percent with positive drop through, resulting in an over achievement of our operating earns plan.

The message is simple, we've began, and will continue to evaluate, all operating expenses on a prudent basis so that we can deliver on the strategy of driving shareholder value by improving operating performance with financial discipline.

Our results in Q1 are a result of those efforts and I expect that these efforts will continue throughout the year.

In addition in Q1 we began another effort to leverage the existing business. We began a project in which we will evaluate the profitability of each product line within every market throughout the world. I expect this effort to continue throughout Q2.

In summary, we'll create shareholder value by leveraging our existing business with an increased focus on profitability. As I've just indicated, I believe we've made good progress in Q1 and our financial results reflect that progress. You can expect that each conference call I will review the specific actions that were taken throughout the quarter and the financial results of those actions. So far, good progress has been made.

Now let's turn to the second part of what will become an emerging strategy, which will begin with a review of our core competencies to determine how best to grow our business.

I do see our marketplace changing; folks, and I've shared that with many of you. We have seen industry consolidation recently and I believe that this will continue. As you know, around $300 million of our business grows at a modest rate. To become a more dynamic company, we need to also focus on additional growth opportunities.

So the second piece of our emerging strategy as to create shareholder value is to evaluate and then leverage our core competencies. And to do that later this year, we'll begin a core competency review progress. This objective is to validate each of our core competencies so that we might leverage them going forward. Now, I'm not prepared to commit or comment on what we're going to learn throughout this process, additionally, to do well, I anticipate it will take us at least 6 months to complete. However, as we go forward, I'll keep all of you fully informed regarding our progress. It's my hope that through this core competency review process, we'll begin to learn new and different ways to grow our business. And speaking of new ways to grow our business, we recently announced a new partnership. You may remember on our last call, I indicated that I believe that there are organizations that would view our distribution channels and brand names as a significant asset. One of our accomplishments in Q1 with the addition of the product line which is a thermal alarming product for patients after surgery. This company, and it's division, Medical is a good product line and we are proud to provide it to our customers. Our introduction to the product line in the Japanese markets during Q1 has been successful.

During our last conference call, you might remember I talked about being market focused and this is a great example of what I mean. The is a good product line and we do not manufacture it but we can provide it to our customers and provide value to our customers. You know, it's fun to see a company recognize the same thing in Haemonetics that I saw when I joined this corporation, that we had strong market presence in the global market place and we have a great brand name. This equates to a strong distribution channel that others will utilize to bring more products and services to our mutual customers. The message folks is simple. We're committed to finding new and different ways to grow. And in the first 90 days under new leadership, we've done just that. A new product offering that differentiates Haemonetics. So in summary, during our last conference call, I indicated that by summary, I would be able to identify the steps of an emerging strategic process and report on our progress. Hopefully, this report today gives you visibility on Haemonetics future which is to create shareholder value by leveraging our existing business with a focus on profitability and seeking new growth opportunities once we conclude a core competency review process. I'm pleased to report we'd made progress on both of these and I'm pleased to report that steps have been taken and traction has been taken throughout the organization and have been supported by a Board of Directors.

Most importantly, I'm pleased to report that our Q1 performance above our internal plan and a progress has been made to the commitments we've made to you 90 days ago. Now let me turn to our priorities for Q2. As you've seen in our recent press release, we're going to re-organize Haemonetics, and let me give you some background as to why and what we hope to accomplish and the financial impact. Haemonetics simply put, is changing to create shareholder value. By organizing our business around two specific customer bases, we believe we can enhance customer service, simplify our organizational structure, manage more efficiently and effectively, with the improved timely decision making, as well as reduced expenses. Effectively, all of our products really serve two distinct customers. First, many of our products serve the needs of blood donors, whether it's the commercial plasma business or the blood bank business. These products ultimately serve our customers customer who is the donor.

The second business within Haemonetics involves products that are geared towards serving a hospital climate or more specifically the patient. The and OrthoPAT are examples of this product offering.

Today Haemonetics is managed in a broad matrix of functional disciplines. I believe that focusing on and organizing around our customers' needs we'll have a leaner yet more responsive organization that will create value and differentiate Haemonetics in the eyes of our customers. I also believe that we'll improve efficiency and decision-making and the execution to operating plans while, at the same time, lowering our costs.

As I indicated previously, Haemonetics has accepted new leadership and shown a willingness to change. I'm very confident that organizing around two separate operating businesses will be well-received. The senior management team at Haemonetics has spent the last 60 days developing a very, very detailed implementation schedule to effect these changes. I'm confident in our ability to focus on changing our business over the next quarter.

From a financial standpoint, the changes that will be implemented will be neutral for fiscal '04 plans. Our financial guidance for fiscal '04 remains the same. Let me repeat, our annual financial guidance will not change even though EPS will be impacted during the second quarter when we make these changes. In fiscal '05, these changes will have a positive earnings impact.

Some of these organizational changes will be difficult, however, our objective remains clear. We must size, manage and organize Haemonetics to differentiate us in the marketplace. We will better serve the customer and we'll do it in a lower cost organization.

Let me say this. This is the first time you, as well as our employees, have heard this information. The senior management team has been working hard of these plans for the past 60 days. We have just presented these plans to our Board of Directors. We'll be communicating the implementation plans first with our employees and I believe this is totally appropriate. Aside from the information I've presented today, we're not going to be sharing additional information on the reorganization during this call. Instead, I'll commit to you that within the next 30 days we'll share additional pertinent information with you.

I'm very confident we'll be successful in achieving these goals with this reorganization and let me tell you why. Our plans are well thought out and detailed. Our team, including our Board, is committed to the changes we will make. These changes are being made for the right reasons, to increase shareholder value. We are focusing on two separate businesses to better serve our customers. Resource allocation and profitability goals will be clearly identified and easily monitored.

Again, let me remind you, our team has successfully changed compensation in Q1, all the while we've increased sales by 8 percent over prior year. Therefore, folks, we learned to be successful in changing a very sensitive issue, compensation, yet, at the same time, growing our business at planned levels.

Creating two operating units is timely. The risks to make these changes are worthwhile. It is not our intent to make substantial changes to our customer interfacing personnel. These changes will allow us to right size our organization and then thoughtfully grow as we expand our revenue base.

As I previously indicated, we're at the start of a core competency review process. That effort will be somewhat overshadowed in the near term by these Q2 organizational changes. This is one of the reasons that it will take time to do a good job in this core competency review process to determine future goals and strategies.

Finally, I'd like to relate to you that our board of directors has just approved a new requirement that each board member and senior manager must have significant beneficial ownership in Haemonetic stock. For example, I'll be required to own 2.5 times my annual salary in stock. Folks, we made a commitment to drive shareholder value. The strength of our board in this decision is one more example of our commitment to drive shareholder value. Frankly, I'm excited about this opportunity, and I thank our board for its leadership and support in this effort.

So, let me sum up by saying I'm please with our performance in Q1. We're off to a good start. I want to thank our employees for their performance throughout the quarter and their willingness to accept and embrace change. Our new operating structure will create shareholder value and is timely and appropriate, yet will be difficult as we finalize these changes. An emerging strategic process is beginning to take shape. Our commitment is to drive shareholder value, and it should now be apparent based on the actions we've taken over the past 90 days.

Now, operator, I'll open up the floor for your questions. Thank you very much.

Thank you. I will coordinate the question-and-answer session. If you have a question, please indicate so by pressing one, four on your touch-tone phone. I will activate your system. Please give your name and company, and then ask your question. Please note that you will have the opportunity to ask one question and a follow-up question, then will be returned to the queue. The question-and-answer session will last for the remainder of the hour. The question line is now open.

Our first question is coming from .

Good morning, gentlemen.

Good morning.

The reality is that the words don't check what's actually going on. I have a basic comment. I'm fairly nice-sized individual stockholder. When I compare the Haemonetics overall structure to your main competitor, Baxter, I find that gross profits of Baxter are higher - you're , and they're normally. SG&A at Baxter is 21.5% versus 29.9% at Haemonetics. R&D at Baxter is - spending is higher; yours is lower and going down. Your return on invested capital in the '90s was 21; it's now 13%.

So, my basic question is with all the words that you've given, it doesn't seem to check to reality. From what I can see, the organization is over-staffed, over-structured, and really what we need to see is a significant restructuring - moving plants, examining the various structure you have and downsizing. Can you comment on that, Brad?

Sure.

Had a lot of words, but I don't really see anything. And the stock, of course, has reflected the reality that I see - not the reality that you talk about.

Yes, , I'll be happy to comment. First of all, thanks for the question. Having spent a number of years at Baxter, as you know, I'm pretty familiar with that organization and understand how their financial P&L is put together. They are a much more diverse company than we are. We're focused on one part of a business; they have multiple product lines. So, that's a different model.

But in terms of our moving forward, I think the important part is that we've looked very hard at our operating structure; we have looked very hard at our compensation models; we've also looked hard at building a financial model with consistent with our guidance to achieve our plans.

So I think this reorganization, although we haven't shared as much detail with you because we want to share it first with our employees as we go forward over the next few weeks. We have very specific plans to address some of the things that you've identified and I appreciate your thoughts and communication to us on that. And those things are part of our detailed plan that we'll be sharing with you in the next 30 days as we go forward.

In your press release you said there is no cost change. Quote from your press release and the reorganization. So again you're giving us words and what's happening doesn't seem to correlate with the words. When will we see some acceleration and bottom line exceeding the guidance? You didn't exceed it in this quarter, even though you did say that your operating earnings leveraged up, the earnings per share, what you said they would be rather than leveraging up. So I think we need a reality check.

Yes, San, this is Ron. Thanks for that.

Thank you for ...

First of all, the reorganization savings will not be so much realized in FY '04 because there will be, as you can imagine, associated costs such as severance payments. And then they'll fully activate in FY '05, which is our next fiscal year.

Just to comment on operating expense levels over and above the organizational costs, which we're addressing. We were below our own operating plan and expenses for the first quarter. And we expect that continued operating expense discipline to be maintained through the balance of the year without affecting our sowing efforts in order to achieve our earnings objectives.

And I would just add, Ron, as we finalize the implementation of the plan as I indicated in my brief comments and '05 becomes visible, we'll make that information to you in the next 30 days.

Thank you. Our next question comes from James Sidoti of Sidoti & Company.

Good morning, Brad.

Hey, Jim. How are you?

Good. Housekeeping question, on the diluted share count, the number of diluted shares went down this quarter compared to the fourth quarter last year but you had not bought back shares.

Yes, Jim, these are - these are all averages that are based upon previous period share repurchases.

So what do you think a good number going forward for diluted share count should be?

Well we're, we have discontinued for the time being, our share repurchase. So over time absent getting back in the market, you would gradually expect our share count to rise.

Thank you. Our next question comes from of Snider Capital Management.

Hi. This is from Snider Capital.

Good morning.

Good morning. You mentioned that going forward executives will be required to own shares of the company and it seemed like quite a substantial amount. Now, will that money for share purchase by executives come from personal money of the executives or is there going to be lending on part of the company for share purchases.

This is Lisa Lopez. There'll be no lending by the company. This would be all personal purchases by the executives and the directors that are subject to the policy.

And will they - will that - will that money be paid up front or will they - will it be paid, say, five years from now for those shares?

The policy will allow five years within which to get to the required amount and it will be a pay as you go.

Thank you. Our next question comes from of .

Can you talk a little bit about I guess when -- when we'll see some of the severance costs, and then also, I guess if we strip out the one -- you know, and kind of consider those as one time, when -- you know, how fast should this start to flow through the cost out of the equation from the restructuring and reorganizations? Thanks.

Sure. The answer to the question is, Q2 is when you will see it. So, that's when you'll begin to see the impact through the P&L.

OK. Great. And, I guess 30 days is what you said in terms of when we'll see again?

Yes, my intention is to communicate specifically throughout our organization today going forward and we hope to conclude that process and be able to get back to you within that time-frame to give you more specifics into what's been done, how we've progressed and the financial impact this year and in '05.

There are no more questions. Here is Mr. Nutter, with closing comments.

Thank you very much for your participation on the conference call today and you can access our website if you need additional information, and we appreciate you joining our call. Have a good day.