Haemonetics Corporation (HAE) Q4 2019 Earnings Report, Transcript and Summary

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 reflective of our leadership share in plasma worldwide and the underlying industry growth in North America. We continue to see market growth above historic rates driven by an industry striving to double collections to 90 million leaders by 2025 and meet the rising demand for plasma-based medicines. NexSys is the platform best positioned to support this industry growth. And we have compelling real world evidence that gives us confidence in our value proposition and our continued progress towards upgrading customers to the new system. Customers have now completed over 3.5 million YES donations. The device is performing exceptionally well having enabled converted customers to safely collect more than 80,000 extra leaders of plasma. We are pleased about the design quality and our proven ability to manufacture, program, install and activate devices at scale. In parallel, we continue to upgrade our donor management software customer base to NexLynk. There’s a growing body of data that our system drives a paradigm shift in Plasma yield, center productivity, donor safety and satisfaction, contributing to about a 10% reduction in the cost to collect a leader of plasma. For those customers who have converted, the economic and operational benefits are meaningful. Customer feedback has been very positive about the innovative new technology and our accompanying customer service and technical support. Based on the system’s performance to date and the evidence we are accumulating, we are more certain than ever about the value of our platform. We are engaging all of our customers in dialogue on the NexSys platform value proposition, and we are confident that NexSys will solidify its position at the industry standard in plasma collection worldwide and strengthen our position as a value-added partner. Second is our Hospital business where we delivered 7% growth in fiscal 2019, including 16% in hemostasis management. Our performance was driven by commercial execution, new pricing strategies, rapid growth in TEG disposables and increased BloodTrack adoption globally. All areas of Hospital are expected to contribute to growth in fiscal 2020, which is a critical year with anticipated product launches across the portfolio. TEG 6s continues to reshape the fast-growing, advanced viscoelastic testing segment. Our engineers are developing integrated software solutions to increase market share in transfusion management. We are in the early launch stages of SafeTrace Tx Version 4 and expect a full market release later this year. Cell Salvage is poised for further improvement with the Cell Saver Elite+ deployment increasing in targeted geographic regions. Hospital will benefit from increased focus having end-of-life non-strategic products, like OrthoPAT, as we reshape our portfolio for growth and market leadership. We are excited about Hospital and the impact our teams are having helping change the standard of care in what we believe is a $1 billion market. Our products help healthcare professionals to improve the quality of the medical care they provide while also lowering the total healthcare cost. We are unlocking the Hospital business unit’s full potential as a growth engine by evolving from three smaller product segments to one larger, more synergistic and relevant business with TEG as its centerpiece. Third, we continue to invest in our innovation agenda. In Plasma, we are innovating the NexSys platform, including the device software and disposables. Through experience with early adopting customers, we are assessing the expanded use of donor biometric data and analytics to personalized collections, not only making them safer but also exploring the potential to collect more pure plasma. Advances in TEG innovation will continue throughout fiscal 2020, including a four-channel platelet mapping cartridge. We also continue to innovate selectively in Blood Center with opportunities for attractive near-term returns, such as the Universal Platelet protocol in Russia and China as well as a constantly – concentrated platelet protocol in Japan to help us gain share of both single-dose and double-dose platelet collections to support our customers' drive for maximum efficiency. As recently announced, Dr. Claire Pomeroy joined our Board of Directors and will serve on the newly formed technology committee to help champion our innovation agenda. Claire is the fifth new Director to join Haemonetics' Board in the past three years as we are committed to renewal and diversifying the expertise of our membership. Fourth, our redesigned operating model is focused on customer-centric business units, incentivized to drive superior execution of well-defined strategies. Our model puts the right structure, products and processes in place for a sustainable, scalable business. And while it’s early days, our fifth value driver, operational excellence is helping us to become more productive. In fiscal 2019, we drove 160 basis points adjusted gross margin improvement through a combination of product mix, price and complexity reduction. We continue to rationalize our product offerings and have seen significant benefits, including better inventory management. Our Complexity Reduction Initiative has reduced cost and freed up resources to invest in growth, such as our Hospital sales force, Plasma disposable manufacturing capacity, new devices and talent. We are creating operating leverage across our P&L and offsetting higher-than-expected manufacturing and logistics costs. In fiscal 2019, we improved our adjusted operating margin by 260 basis points. Prior to initiating this turn around in fiscal 2017, Haemonetics' adjusted operating income margin was 13%. Today, we are guiding to 19% to 21% for fiscal 2020, about a 50% improvement. Although, we have shown improvement in gross margin and operating margin, we have additional opportunity to improve product quality and lower our cost of goods sold. We are committed to earning a better return across our portfolio and our asset base, including making strategic decisions about the products we source and manufacture to create a more flexible and agile infrastructure. Our operating and financial leverage fuels our sixth driver, capital allocation. We expect meaningful capacity expansion in our strong free cash flow and debt facility. This allows us to allocate resources in a disciplined manner to grow the base business, augment our portfolio through M&A and offset equity dilution. To that end, we announced a new $500 million share repurchase program. And now I’ll turn the call over to Bill for more on our performance and guidance. Thank you.

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 adoption of a competitor’s double-dose technology in Japan, partly offset by favorable order timing we saw in the first half of this year. Whole blood revenue declined 1.2% in the fourth quarter and 9.3% in fiscal 2019. About half of the decline in whole blood we saw in fiscal 2019 was due to the annualization of impact from intentional business exits that no longer met our strategic objectives. The remaining half of the decline was due to slowing transfusion rates, additional pricing pressures and international markets and quality issues in the first half of fiscal 2019. We continue to transform our portfolio and expand gross margins. Our fiscal 2019 adjusted gross margin was 47.1% in the fourth quarter and 47.5% in the full year. When compared with fiscal 2018, our adjusted gross margin expanded 150 basis points in the fourth quarter and 160 basis points for the full year. This expansion in gross margin both in the fourth quarter and fiscal 2019 was due to improving product mix, pricing, our Complexity Reduction Initiative and currency. Partly offsetting these benefits were higher depreciation and freight costs. Adjusted operating expenses in the fourth quarter decreased $4.6 million or 5.8% compared with the fourth quarter of fiscal 2018 and were lower by 390 basis points at 30% of revenue. For fiscal 2019, our adjusted operating expenses increased by $10.8 million or 3.8% when compared with fiscal 2018 and were lower by 90 basis points at 30.4% of revenue. This reduction in operating expenses as a percent of revenue was a direct result of improvements in productivity as well as favorable year-over-year comparison due to onetime investments in the prior year. We also continue to make investments to improve organic growth of Hospital and Plasma and higher performance-based compensation and freight expense. Our adjusted operating income increased by 56.7% to $42.8 million in the fourth quarter and increased by 25.7% to $165 million in fiscal 2019. Adjusted operating margin for the fourth quarter and fiscal 2019 was 17.1%, improving by 540 basis points compared with the fourth quarter of the prior year and improving by 260 basis points compared with fiscal 2018. Our income tax provision on adjusted earnings was 21.6% in the fourth quarter, significantly higher than 11.6% in the fourth quarter of fiscal 2018. The income tax provision in the fourth quarter of fiscal 2018 included a year-to-date catch-up adjustment for the discrete benefits associated with the initial implementation of U.S. tax reform and certain favorable shift in geographic income mix. The benefits from both items continued in fiscal 2019 but were more evenly distributed on a quarterly basis throughout the full year. Our fiscal 2019 tax provision on adjusted earnings was 18.2% or 280 basis points lower than fiscal 2018 primarily due to the benefit of a full year of U.S. tax reform and higher levels of stock option exercises and share award vesting. Adjusted earnings per diluted share were $0.61 in the fourth quarter and $2.39 for fiscal 2019, increases of 41.9% and 27.8%, respectively, when compared with the same periods of fiscal 2018. We have realized $54 million of savings as a result of the Complexity Reduction Initiative since the program’s inception and reinvested the majority of the savings in Plasma and Hospital. Additionally, in the fourth quarter and fiscal 2019, we incurred approximately $6.4 million and $13.6 million, respectively, in restructuring and turnaround expected – expenses anticipated by our Complexity Reduction Initiative. Free cash flow before restructuring and turnaround costs was $70.7 million in fiscal 2019 compared to $161.8 million in fiscal 2018. The decrease is the result of higher capital expenditures and working capital, including NexSys PCS devices and expansion of Plasma disposables' production capacity. In fiscal ‘19, we also completed our previously authorized share repurchase program and purchased $160 million worth of company stock. We finished fiscal 2019 with $169.4 million of cash on hand, a decrease of $10.8 million from the prior year. Now turning to fiscal 2020 guidance. Our fiscal 2020 organic revenue growth guidance is expected to be in the range of 6% to 8%. We remain confident in the continued market growth underlying our commercial Plasma business and anticipate Plasma revenue growth of 11% to 13% in fiscal 2020, including North America Plasma growth of 14% to 16%. Our North America revenue guidance includes only NexSys device contract that have been signed and includes the annualizing of pricing premiums from NexSys device conversions in fiscal 2019. We expect 11% to 13% organic growth in our Hospital business in fiscal 2020 and expect that growth in hemostasis management will be consistent with the revenue growth rate we have seen in fiscal 2019. Due to the size that hemostasis management and the impact at a relatively low dollar amount has on its growth, we will continue to see some variation in hemostasis management quarterly growth rates during the year. In the first half of fiscal 2019, we had a favorable impact from order timing in China and North America. And as such, we expect that first half revenue growth rates, TEG, will be significantly lower than in the second half of fiscal 2020. Also, transfusion management will benefit from new product launches, which will start contributing towards growth in the second half of fiscal 2020. Our fiscal 2020 guidance for Blood Center revenue is a year-over-year decline of 6% to 8%. The anticipated revenue decline in Blood Center is slightly higher than in fiscal 2019 and reflects additional business exits, primarily within whole blood, that no longer meet our strategic objectives. Our guidance also assumes additional declines in transfusion rates and single-dose platelet collections in Japan. We expect unfavorable impact from order timing in the first half of fiscal 2020 when compared with fiscal 2019. We will continue to realize savings in both cost of goods sold and operating expenses similar to fiscal 2019 as part of our Complexity Reduction Initiative. We will substantially complete this program by the end of fiscal 2020 and expect $25 million to $30 million of incremental cost savings. We expect that about 1/3 of our fiscal 2020 complexity-reduction savings will drop through to operating income. The remaining 2/3 will be offset by higher depreciation from NexSys device placements, depreciation from capacity expansion for Plasma disposables and investments to support new product launches and strengthen other areas of our business. We expect adjusted operating margin to be in the range of 19% to 21%. This market expansion represents an additional 200 to 400 basis point expansion over fiscal 2019. After 2 consecutive years of delivering EPS growth of more than 20%, we are setting our guidance at 17% to 26% growth in fiscal 2020 and expect our earnings per share to be in the range of $2.80 to $3. With our recent history of delivering growth, both on top line and bottom line, coupled with increasing operating and financial leverage, we remain confident in our ability to deliver our fiscal 2021 aspiration of doubling our operating income when compared with fiscal 2016. We expect our fiscal 2020 free cash flow before restructuring and turnaround expenses to be in the range of $100 million to $125 million. Additionally, we sought and gained authorization from our Board of Directors for the repurchase of up to $500 million of Haemonetics' common shares with the authorization expiring two years from the date of its issuance. The timing and amount of activity under the repurchase program will be at management’s discretion. The intent of the authorization is to offset dilution, including ongoing dilution anticipated over the two year period. In addition to this share repurchase activity, the company’s capital allocation strategy continues to prioritize funding of all planned internal investments to support the business as well as inorganic opportunities to accelerate its long-term growth plans. Before we take your questions, I’d like to take a moment and summarize a few important points we discussed during our call. Our ability to generate revenue and earnings growth reinforces our confidence in achieving our operating income target of $240 million and up to 4x fiscal 2016 free cash flow by the end of fiscal 2021. Our expected revenue and adjusted EPS guidance includes only NexSys device contracts that have been signed. Any additional signings will enable us to update our guidance. Our complexity-reduction savings commitment of $80 million is expected to be achieved by the end of fiscal 2020. Our free cash flow generation, together with a $350 million credit line and our EBITDA expansion, leave ample capacity for investments into our core businesses and inorganic opportunities while also allowing us to address continuing dilution through our newly authorized $500 million share repurchase program. Now I’d like to turn the call back to the operator.

[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.

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