Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Fiscal 2019 Haemonetics Conference Call and Webcast. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for today’s conference, Ms. Olga Vlasova, Investor Relations.

Good morning. Thank you for joining us for Haemonetics Fourth Quarter and Fiscal 2019 Conference Call and Webcast. I’m joined today by Chris Simon, our CEO; and Bill burke, our CFO. Please note that all revenue growth rates that we’ll refer to on this call are in constant currency unless noted otherwise. Our revenue guidance is based on organic revenue growth rate, which excludes impact from currency, product line end-of-life decisions and acquisitions and divestitures. Our remarks today will include forward-looking statements, and our actual results may differ materially from anticipated results. Information concerning factors that could cause results to differ is available in the Form 8-K we filed today and in other periodic filings that we make with the SEC. This morning, we posted our fourth quarter and fiscal year 2019 results to our Investor Relations website. We included fiscal 2020 guidance and posted tables with information we’ll refer to on this call. Before I turn the call over to Chris, I would like to remind you that consistent with our best practices, we have excluded certain charges and income items from the adjusted financial results and guidance. Further details of such items, including comparisons with the same periods of fiscal 2018 are provided within the Form 8-K and have been posted to our Investor Relations website. Our press release and website also include complete P&L and balance sheet and a summary statement of cash flows as well as reconciliations of our reported and adjusted results. And now, I’d like to turn it over to Chris.

Thanks, Olga. Good morning and welcome to today’s call. We are pleased with our finish to fiscal 2019. In the fourth quarter, we delivered 8% revenue growth and 42% adjusted EPS growth to $0.61. In full year fiscal 2019, we grew our top line 7%, driven by Plasma and Hospital, offset by declines in Blood Center due to continued slowing transfusion rates and our decisions to exit unprofitable business. Adjusted EPS for the year grew 28% to $2.39 after growing 22% in the prior year. We received regulatory approvals, launched new products and continued to execute our corporate-wide transformation. We reduced complexity and cost to meaningful expand gross and operating margins while freeing up resources to invest in future growth. These strong results exceeded our initial expectations and create momentum for additional growth in fiscal 2020. We expect to grow organic revenue 6% to 8% and adjusted earnings per share 17% to 26% within a range of $2.80 to $3 with continued improvement in ROIC and robust cash flow generation. We remain confident we will deliver our stated goals of increasing adjusted operating income by two times x and adjusted free cash flow by up to four times in fiscal 2021 as compared to fiscal 2016. Three years into a five-year turnaround, we are fully on track. Our accelerating revenue growth and expanding profitability are evidence that our strategy is sound. I’d like to put our results in the context of six value drivers we shared earlier this year at the J.P. Morgan Healthcare Conference. First, we participate in a robust global plasma market, where we have approximately 80% share. In fiscal 2019, we grew Plasma revenue 15% globally, driven primarily by strong demand for disposables in North America, where our revenue grew 18%. Our guidance for fiscal 2020 is…

Thank you, Chris and good morning, everyone. Before I begin, I’d like to remind you that we have posted tables to our website that include specific dollar amounts and growth rates I will refer to in my comments. We had 7.8% revenue growth in the fourth quarter and 7% growth in fiscal 2019. Plasma revenue was up 15.9% in the fourth quarter and 14.8% in fiscal 2019. North America Plasma revenue was up 17.6% in the fourth quarter and 18.1% in fiscal 2019. In North America, we experienced strong growth in disposables volume, which was in line with the 15% growth in U.S. collections recently published by PPTA for the previous calendar year. In addition to market growth, we realized benefits from NexSys conversions, implemented additional pricing initiatives within our liquid solution product line and had growth in software from the annualizing of market share gains within our donor management software. Hospital revenue increased 7.2% in the fourth quarter and 7.3% in fiscal 2019. Hemostasis management continued to drive growth in Hospital, growing 13.7% in the fourth quarter and 16.1% in fiscal 2019. Strong order timing in China and North America in the first half of fiscal 2019 resulted in a slower growth rate in the second half. On a full year basis, TEG continued to show an upward growth trajectory and acceleration over the lower double-digit growth rate we achieved in fiscal 2017 and 2018. Also within the Hospital business, onetime customer orders as a result of the end of life of OrthoPAT, a product line whose commercialization ended in fiscal 2019, positively impacted results in the fourth quarter. Blood Center revenue declined 4.6% in the fourth quarter and 5.5% in fiscal 2019. Platelets revenue declined 6.1% in the fourth quarter and 1.8% in fiscal 2019, attributable to continued…

[Operator Instructions] And our first question comes from David Lewis from Morgan Stanley.

Maybe Chris, a strategic question for you and then a couple of quick financial ones for Bill. So just first, Chris, just you’ve been very clear about fiscal 2020 Plasma guidance. Sort of what’s embedded in that number? As you think about your 2021 goals of doubling EBIT and free cash flow generation, Chris, we know that 2020 numbers do not imply new NexSys contracts, but can you deliver the EBIT and free cash flow targets you kind of communicated to TheStreet without additional NexSys contracts?

Yes, thanks, David. I appreciate the question. Yes, we’re very confident that what we’ve accomplished over the last two years, what we’re guiding to this year, will carry forward. And you can expect comparable growth rates into 2021 really based on the six value drivers that we talked about. Obviously, Plasma is first amongst them. We take a lot of pride in what we’re accomplishing both with the market, a market that’s growing double-digit and robustly into the future, as well as NexSys and further innovations that we have planned for that platform. But there’s also Hospital, our innovation agenda, the operational excellence and our operating model, not to mention our capital allocation, all of them are important contributors and give us a high degree of confidence in our ability to keep what has been a 20%-plus growth rate going in our earnings carried forward.

Okay. Very clear, Chris. And Bill, just two for you. I’ll ask them both together here in the interest of time. So the first is just balance sheet dynamic in the fourth quarter, Bill, inventories up very materially, much larger than a year ago period and then CapEx was down. I wonder if you’d just walk us through why inventories were up. I think, I understand why CapEx was down, but that’d be very helpful for people. And the second question is on operating margin expansion. Thank you for the disclosure on the drop-through on the CRI. That’s about 100 basis points of margin expansion, but you’re still guiding to more margin expansion in 2020 relative to 2019. There’s still another 200 basis points of expansion which can’t be explained for by the cost reduction initiative. So maybe just walk us through the other drivers of fiscal 2020 margin and how you’re doing on some of the manufacturing and logistical challenges that were seen in fiscal 2019.

That’s a – Dave, thanks. On the balance sheet specifically, in working capital, both on accounts receivable and inventory, we had increases, first, at the beginning of the year. On the AR side, we did have a transition to a third-party provider on collections specifically, and we did have some growing pains as we moved over to that provider. But now we’re seeing a reduction on the accounts receivable. We have no credit issues whatsoever. On inventory, specifically, we’re in a better position today than we ever have been in managing our inventory. As you know, we have the – we had capacity expansion come online in our third and fourth quarters, and we have now the ability to start to ramp up our inventory to meet the demands – the growing demands of our customers in terms of the volume growth in Plasma specifically. And on the second question on operating margin expansion, we are guiding to 19% to 21% margin – operating margins in FY 2020, which is a 200 to 400 basis point expansion. It doesn’t – it’s not totally explained by the Complexity Reduction drop-through that I provided, but we will get leverage also on the revenue growth that we have in the plan. So I think those 2 combined will drive the operating margin expansion in total.

Our next question comes from Anthony Petrone from Jefferies.

Couple on just the moving parts on guidance and maybe one on Hospital. But maybe just some more details on – specifically at the operating margin level. Last quarter, there was freight costs that ran in excess, but there was also installation costs. So I’m just kind of wondering on those two moving parts. How that’s reflected in guidance and in particular, on freight? If there’s no offsets here out of the gate, is that potential upside as you move through the year? And then I’ll have a couple of follow-ups.

So on freight specifically, we did talk throughout FY 2019 about increasing freight costs. Now moving into FY 2020, what’s embedded in the guidance on freight would just be a typical increase due to the volume increases that we’re seeing across the business. They’re – we’re not anticipating any major increase like we saw in the prior fiscal year.

Okay. And just on...

Oh. And then on the NexSys rollout cost. We did obviously have NexSys rollout cost in FY 2019. We are anticipating some NexSys rollout cost. There’s a trickle effect of continuing costs as we move forward. But in the plan, there’s, obviously, only guiding towards NexSys contracts that are signed so the impact of the rollout cost will be far less in 2020 than 2019.

And maybe just on volumes. Can you give us maybe an update as you work with some of your customers, just sort of where Plasma center build-outs are? And understanding is that most of the customers are still planning on increasing centers this year, just where that process sits? And maybe anything OUS on out of the European conference. It sounds like there’s additional center capacity in Europe as well. And then my last one will be on Hospital.

Sure. Anthony, it’s Chris. I think you are right. The industry has meaningful unmet demand for additional plasma collections. We see that in their activity. PPTA has estimated – or the industry trade association has estimated a doubling of collection volumes to 90 million units by 2025. If you calculate off of that, that’s where you hear the 8% to 10% compound annual growth rate. We’re clearly running ahead of that, and the industry is running ahead of that, has done so for the last two years, and we’re guiding that it would happen again this year. So we’re excited by that. The way they are meeting that demand, they really have three levers available to them. They can buy source plasma on the open market from our Blood Center customers. That comes at a significant premium, but they’re absolutely doing so. They can add new centers, which they do. It’s – they’re all committed to that, and we see more of that ahead for FY 2020 and beyond. But as you know and as you would hear from those customers, that’s a three-or four-year proposition – breakeven proposition with a lot of up front expenditure and diminished productivity in that interim period. They can also pay their donors more on a per donation basis, particularly, new donors to attract additional foot traffic. We like the NexSys value proposition as a fourth lever to help them get there. It comes with a lot of benefit. It’s fully variable in their cost structure and significantly better economic return. So we see NexSys as a very powerful tool in helping advance that collection rate, which is – we’re guiding here, is going to be, again, in the low teens going forward. Internationally, it’s still a story of country to country, what their legislative front is and how well they’re collecting, obviously, at significantly slower rate of growth but still growth and growth we’re happy to participate in as we have meaningful share expansion there.

And just on TEG, just an update on trauma.

Yes. So as we’ve – noted last quarter, we’ve submitted the TEG trauma indication for the 6s in North America. We have the ability to use 6s and trauma worldwide outside the U.S. and – our major markets outside the U.S., and we have the 5000 in the trauma suite. We think the cartridge-based 6s is a better site-of-care technology. We submitted our application to FDA. We’re undergoing what’s been predominately an interactive review up to this point, and we’re cautiously optimistic. But obviously, we’ll work with that – directly with FDA.

Thank you.

Thank you. Our next question comes from Dave Turkaly from JMP Securities. Your line is open.

Thank you. I guess, as I look at your guidance and I appreciate the – all the color on the operating margin side, but when looking at restructuring and turnaround, you’ve got reduced complexity and cost. And I was wondering if you might be able to give us a little color in terms of the improvement you expect sort of between the gross margin and in the SG&A line. I mean, do you think you’re going to get benefits that will accrue to both of those that are relatively similar in terms of basis points size next year or this fiscal year?

Thanks, David. We’re not going to – I’m not going to say specifically what the margin improvement is due to gross margin or leverage and operating expenses, but I can just say like we’re always focused on both elements in the P&L, right? We have said though over the 1.5 year since the Complexity Reduction program was announced that upfront, the operating expense savings would be easier to get to than any improvement in gross margin. We have seen improvement in gross margin in FY 2019, and we hope to continue to see it. But as far as the distribution of the 200 to 400 basis points improvement, I’m just going to leave it at that.

I guess just as a quick follow-up. The SG&A component, I mean, can you talk about head count or what – how are you driving savings of that magnitude? I mean, just some color around what – where you’re seeing that. How you’re driving those savings?

Yes. Dave, it’s Chris. I – we try hard internally to separate sales and marketing from general and administrative. They’re all expenses. We want to manage them thoughtfully, but we’ve actually expanded our sales force, particularly, in North America in the Hospital business and to a lesser extent, for the NexSys rollout in our Plasma business. The intention there is to be able to meet and drive and increased demand for our product, and we see good return on that investment, and we’re excited about that. On the G&A front, and we’ve really – that’s been the primary benefactor of our complexity reduction. We have outsourced, we’ve offshored, we’ve streamlined, and we’ve held ourselves accountable for tight standards where we run that roughly with a comparable cost base year-over-year. And as we have a growth in our business overall, we get increased operating leverage as a result of that. It’s one of the – if you think back on where we were, it is my third year anniversary at the company. When I joined the company, we ran at a 13% operating income margin per the guidance that Bill offered this morning in our prepared remarks. We’re looking at 19% to 21%. That is approaching a 50% improvement in that 3-year period, and we’re excited about that and this trajectory. You can build from there.

No. I agree, and that’s why I’ve been looking for a little additional color. So I appreciate that. Last one, you talked about M&A opportunities. I think particularly on the Hospital side, I guess, what your confidence level that you may be able to get something done given where your balance sheet stands today?

Yes. I appreciate that. We try to be very clear about this, dating back, certainly before this but even in the J.P. Morgan Healthcare Conference discussion, our 6th value driver is thoughtful and prudent capital allocation. We have three very clear priorities in hierarchy order: Number 1 is the investment in our underlying business that ranges from R&D to feet on the street street sales force to the device build that we need to meet the ongoing demand and then our markets. We feel very comfortable with our ability to cover that. The second priority is inorganic growth and M&A, and we have a sizable war chest, sizable and growing war chest between our free cash flow and our expanded debt capacity to do what we want to do there. The buyback that we announced this morning is our third component, and that’s really just focused on addressing dilution, current and the future in the market. With regards to M&A, we’re committed to it. I think Hospital is the place you can expect that, but we’re also committed to doing accretive deals, not just any deals. Valuations in the market are high, and we want to be thoughtful about what we step into and make sure there’s an appropriate return. We care deeply about return on invested capital, and we’re going to make sure that comes through on whatever we do in the M&A front.

Thanks a lot.

Thank you. Our next question comes from Larry Keusch from Raymond James. Your line is open.

Great, thanks. So I just wanted to first start with international, and I know there’s a lot of moving pieces there between contract exits, some of the dynamics that you’re seeing in Asia, Japan particularly. But could you talk a little bit about sort of the sources of growth that you think you can mine there? And when we might start to see the international business perhaps begin to step up in its growth rate?

Yes. So let me just aggregate that because we do run it as three global business units. When I think about Plasma, the legislative landscape, Plasma is disproportionately a North American – really a U.S. story. What we’re excited by is with platforms like NexSys out there for the countries that have allowed remuneration for the donations, we do anticipate some level of growth, and we’re there to meet them. These are the same global customers that we serve well in North America, so we’re cautiously optimistic we can continue to drive our 80% share presence there. I think the open question for us on Plasma is some of the emerging markets, China in particular, and we’ll look carefully at that and consider options going forward that as those markets come online, as our core customers worldwide invest more in China, we want to be there and meet them so they can collect on the standard for Plasma collection worldwide. And we think we have the ability to do that. Hospital is already an international market. Our Hospital business is roughly a 50-50 split. It may be closer to 55-45 in the current guide, but that’s just a reflection of individual products and growth and launch. But we very much think about our product, our Hospital portfolio, as three products across essentially 7 to 10 markets worldwide. We think about each of those individual markets as distinct, and I think one of the things that’s fueling the growth in Hospital, right, the growth we had this year, the growth we’re forecasting going forward off of a very modest pace is because it’s truly a global story with international contributing equally. And then Blood Center is even more skewed for us at least towards Asia and Europe where we’ve just had more success. Some of the incremental innovation that we’re doing around platelets and red cell collection is a reflection of our desire to retain what we fought hard to own in those markets with Japan, with Russia, with China and elsewhere in Europe. So we’re excited about the global aspect of that business as well, and I think you’ll see important ongoing contributions there.

Okay perfect. And then, so I just wanted to just check on one item here. So I know that as of February, you were looking for CapEx to be around $150 million to $160 million. It looks like it came in at $119 million, so certainly below your anticipation 3 months ago. So could you talk about what was the difference there versus the prior guidance? And then how are you thinking about CapEx spending in the drivers for 2020?

Yes. Larry, we have a tendency to be a bit conservative when we talk about our CapEx. Sometimes projects just – we all think they’re going to come through and we’re going have the spending on them and sometimes it just gets delayed into the next fiscal year. I think 1.5 years or two years ago, we had the same type of anomaly when we were looking at our capacity expansion to come online a little bit earlier. It’s the same situation now. And that delay from FY 2019 into FY 2020 is reflected in the $100 million to $125 million overall free cash flow guidance. We’re not going to guide – because of that anomaly, we’re not going to guide specifically in FY 2020 to capital right at this moment. Maybe halfway through the year, we’ll provide an update based on the midyear spending.

And does – just on the CapEx. I know, this came up on the third quarter, but just given some of the comments about the non-linearity of NexSys rollout and sort of how that kind of moves forward, just does any of that, again, change from the $150 million to $160 million, or as you look into 2020, again, contemplates some of that more non-linear thoughts around the NexSys rollout and I guess just the thoughts around the guidance capturing kind of what you have today?

Yes. There’s no question that any NexSys builds would be a little bit lumpy depending on the contracts that we do receive. We are comfortable holding a certain level of NexSys devices. Obviously, we have committed to a six to nine month timeline with our customers on devices' delivery. So as we receive the contracts, we’ll hold to that time frame too.

Okay. Great, thanks very much.

Thank you [Operator Instructions] Our next question comes from Mike Petusky from Barrington Research. Your line is open.

Thanks a lot. So just a quick question around Blood Center. That’s the only piece of your guidance that a little bit worse than I had assumed. And I – obviously, I understand the backdrop of falling transfusions. I understand the portfolio shaping that you guys are doing there. I guess, my question is as you sort of look out at that business, I mean, is there a place where you say, hey, we can sort of run with what we have, the assets we have, and this is a sort of a flattish-type top line and we think the margins can sort of hold together? Or is that just a really tough business, and it’s hard to foresee a place where you can kind of – sort of stabilize revenues there?

Yes. Mike, it’s Chris. With regards to Blood Center, you are right. The dynamic that you see in the market, particularly in North America, continued decrease in the rate of transfusions. And therefore, the demand for blood products is, point one, ongoing price pressure driven competitively is an important piece and our unwillingness to continue to perpetuate margin-negative, margin-dilutive business that just doesn’t meet our strategic objectives. So the combination of those things is what’s driven the decline. We set forth a bold aspiration originally to maintain EBIT neutral on that business. That is more challenging given the dynamics on the top line, but we will continue to look at every aspect of that business, including our gross margins and our operating expenditures and how we manage it thoughtfully going forward. I’m cautiously optimistic that there’s a few developments in the market that will further strengthen our competitive position. And as that plays out, I think, we have a fighting chance of getting back to our EBITDA-neutral aspiration. And that’s really the strategic role that it plays for us in our portfolio. As we narrow our focus, we aspire to serve our Blood Center customers exceptionally well on the product lines and the segments where we’re competitive. And that’s what you see in our guidance going forward.

Okay. Thank you.

And I am showing no further questions from our phone lines. Ladies and Gentlemen, thank you for participating in today’s conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.