Haemonetics Corporation (HAE) Q3 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Haemonetics Q3 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Ms. Olga Guyette, Director, Investor Relations. Please go ahead, ma'am.

Thank you. Good morning, everyone. Thank you for joining us for Haemonetics' third quarter fiscal 2021 conference call and webcast. I'm joined today by Chris Simon, our CEO; Stewart Strong, President of the Hospital business unit; and Bill Burke, our CFO. This morning, we posted our third quarter and year-to-date fiscal 2021 results to our Investor Relations website, including the analytical tables with the information that we'll refer to on this call, and an investor presentation on the pending Cardiva transaction. Additionally, we provided the complete P&L, balance sheet, summary statement of cash flows as well as reconciliations of our GAAP to non-GAAP adjusted results. Before we get started, unless otherwise noted, all revenue growth rates discussed today are on an organic basis and exclude the impact of currency fluctuations, strategic actions of product lines, acquisitions and divestitures. As in the past, we will refer to non-GAAP financial measures throughout this call to help investors understand Haemonetics' ongoing business performance. Please note that these measures exclude certain charges and income items. Please refer to this morning's earnings release for details on excluded items, including comparisons with the same periods of fiscal 2020 and a reconciliation to our GAAP results. Our remarks today may include forward-looking statements, and our actual results may differ materially from the anticipated results. Haemonetics cautions that these forward-looking statements are subject to risks and uncertainties, including the potential impact from the COVID-19 pandemic on our results, risks related to proposed acquisition of Cardiva Medical, and other factors referenced in the Safe Harbor statement in our earnings release and in our filings with the SEC. We do not undertake any obligation to update these forward-looking statements. And now, I'd like to turn it over to Chris.

Thank you, Olga. Good morning, everyone. Our improved third quarter results are evidence of the strength of our strategy and our progress transitioning to transformational growth. We have a lot to discuss today. Let me start by highlighting five key themes. Revenue improved sequentially in all three business units as our markets are recovering from the pandemic. Productivity on the Operational Excellence Program and cost management helped improve our profitability. We are making meaningful progress with NexSys adoption. Our innovation agenda continues to propel organic growth and the Cardiva acquisition will help us diversify, grow and create shareholder value. Moving to our results, organic revenue was down 6% in the quarter and 12% year-to-date as the impact of the pandemic continued to affect our business. Third quarter adjusted earnings per diluted share was $0.81, down 14% from the prior-year quarter and down 28% year-to-date. While our results were below our pre pandemic fiscal 2020 third quarter, we did see a 14% sequential improvement in revenue, driven by all three business units, and our adjusted earnings per diluted share was up 31% from second quarter. Plasma revenue declined 13% in the third quarter and 26% year-to-date as the pandemic continued to have a pronounced effect on the US-sourced plasma donor pool. Revenue declines were partially offset by a $6 million one-time safety stock order of plasma disposables. Sequentially, North America collection volume improved 29% excluding the effect of the safety stock order. To put this in perspective, we typically have a 3% to 5% seasonal increase in the third quarter. Our customers have taken extensive donor safety measures and launched a myriad of promotional campaigns to encourage donations. Heightened safety protocols and compelling financial incentives, along with waning government stimulus, contributed to 10 consecutive weeks of volume recovery. NexSys platform adoption is progressing and we are confident that it will supplant PCS2 as the standard for sourced plasma collection worldwide. We are on track to upgrade all US customers to our NexLynk DMS software by the end of the calendar year. All major customers have agreed to adopt NexSys PCS devices somewhere in their network. This bodes well for eventual broad-based implementation because history shows that firsthand user experience leads to adoption. Rollout will not be immediate as there is important planning and support work to be done and, near-term, Haemonetics and our customers' primary focus is on driving a robust recovery in collections. Our innovation agenda continues to propel organic growth. Persona's individualized, donor-specific approach is expected to yield an incremental 9% to 12%. of plasma per collection. NexSys early adopters are validating the new nomograms impact on immunoglobulin levels and implementing logistics changes needed to support the new procedure, including accommodating our collection bottle that is a third larger. The real world data being collected will strengthen the NexSys offering and inform ongoing innovation in our proprietary collection technology, including safely advancing additional personalization and further yield enhancements. Meanwhile, we continue to do everything we can to support our customers and we remain cautiously optimistic about the timing and pace of recovery. The third quarter highlights the critical role that donor economics play in plasma collections. Collection volumes weakened over the last few weeks, which we believe was driven by a donor response to the new government stimulus. Nonetheless, our customers are ramping up to support end market growth. And although forecasting remains difficult in this environment, once the pandemic subsides, we expect to see 8% to 10% collections growth over the long term, and the potential to grow in excess of that as customers replenish their inventories. Blood Center revenue declined 1.4% in the third quarter and 2.6% year-to-date. The business continues to outperform as our continuity and responsiveness enable us to supply blood bankers around the world seeking to expand safety stocks. We also continue to support customers globally in collecting convalescent plasma. We had strong capital sales both in the third quarter and year-to-date as our apheresis devices continue to play an important role in helping to provide essential blood products to our customers. We believe the increased installed base should provide longer-term benefits to our disposable sales. Apheresis revenue was up 6% in the third quarter and 1.8% year-to-date. Continued plasma growth and favorable order timing among distributors in both periods was partially offset by the impact of a previously disclosed customer loss of about $4 million in the quarter and $12 million year-to-date. We did not see distributor stocking order reversals in third quarter. Whole blood revenue declined 19% in the quarter and 11% year-to-date, driven by lower-than-usual procedure volumes due to COVID-19, previously discontinued customer contracts and overall declines in blood utilization rates. Additionally, whole blood revenue in the third quarter was impacted by unfavorable order timing among distributors. Our recent efforts to optimize this portfolio has allowed our team to focus on apheresis devices and disposables which is driving performance. Before I turn the call to Stu to talk about Hospital business unit results and the Cardiva integration, I want to reiterate our rationale for the deal. Cardiva is a leader in vascular closure, an underdeveloped segment with significant potential. VASCADE is a leading product with strong tailwinds and the Cardiva team is talented and highly motivated to deliver. With focus and support, we can accelerate growth, especially in electrophysiology, where VASCADE MVP is uniquely positioned for use with cardiac ablation procedures. This is a revenue deal. But with added scale, there will also be increased operating leverage. We avoid the G&A costs Cardiva would have incurred to operate as a public company. We can use our infrastructure to support US expansion and our international commercial organization can help to launch VASCADE outside the US. Together, we can improve our global reach and relevance. Investments in sales and clinical reps, as well as clinical, medical and health economics capabilities will benefit both portfolios in IC and EP. Our TEG long range plan is anchored in interventional cardiology, with further opportunity in electrophysiology. Haemonetics' Hospital BU can learn from Cardiva and, over time, there may be commercial and/or clinical call point synergies. We value diversification and growth. Cardiva diversifies our product offerings and catapults us into IC, EP and vascular closure, attractive near adjacencies that can fuel accelerated growth. Our focus has shifted to integration and execution is now our top priority. Over to you, Stu.

Thank you, Chris. And good morning, everyone. I would like to reiterate my excitement about Cardiva. The acquisition is on track to close this quarter. Detailed integration planning is underway, and we're squarely focused on driving revenue growth. We're supporting the Cardiva's team strategy in their commercial, product innovation and manufacturing plans, while working on G&A integration. Now moving to our results. Hospital revenue increased 5% in the third quarter and 1% year-to-date. Our Hospital business has seen continued sequential improvement over the course of the fiscal year and our third quarter growth was driven by our direct markets across the globe. And in particular, our top two markets, North America and China. Hemostasis Management revenue was up 11% in the third quarter and 6% year-to-date compared with the prior year, driven by strong sales of TEG disposables in the US and capital sales in Europe. The pandemic continued to partially offset the strength of this business both in the quarter and year-to-date. We are excited to share that the FDA has issued guidance on the use of viscoelastic testing in patients suspected of COVID-19 coagulopathy and we are working to update our indication in line with the guidance. The use of TEG analyzers for hypercoagulable patients has already been discussed in a number of scientific publications and updated indications will give us the opportunity to be proactive in deploying this technology to help advance COVID-19 patient management. In parallel, we're driving our go-to-market strategies. We recently signed an agreement in China to manufacture locally designed and made viscoelastic testing analyzers and locally manufactured reagents to expand our product offering to meet the unique needs of the Chinese market. The product line will focus on automation, high throughput, and easy customer interface as we build a market-specific platform, with further innovation in the pipeline. Transfusion management was up 7% in the third quarter and 9% year-to-date, primarily driven by strong growth in BloodTrack through new accounts in several key geographies. Our teams have implemented alternative methods to advance installations and utilization in customer environments where access continues to be restricted. Cell salvage revenue declined 6% in the third quarter and 11% year-to-date, primarily driven by declines in disposable usage. Sequentially, cell salvage revenue was up 1% in the third quarter as additional recovery and procedure volumes plateaued toward the end of the quarter. The pandemic continues to validate the essential role our technologies play in assessing bleeding and thrombosis risks, autologous blood transfusions and effectively managing blood supply. Recovery has been very encouraging, but we're cautious about the near-term forecasts as procedure volumes have leveled off over the past four weeks, driven by a global resurgence of COVID cases that may prolong the recovery. We are confident in the Hospital business unit's long-term value to our customers and their patients and our significant opportunity for growth and expansion. And now, I'll turn the call over to Bill.

Thank you, Stu. And good morning, everyone. Chris has already discussed revenue, so I will start with adjusted gross margin, which was 51.4% in the third quarter, a decline of 70 basis points compared with the third quarter of the prior year. Adjusted gross margin year-to-date was 50.4%, a decline of 160 basis points compared to the first nine months of the prior year. The primary drivers of the declines in both the third quarter and year-to-date were impacts from higher costs, including an inventory charge in the third quarter, cost of COVID-19 protective measures and lower volume. There was also some unfavorability due to product mix. These downward effects on gross margin were partially offset by productivity savings realized from the ongoing strength in our Operational Excellence Program and lower depreciation expense as our PCS2 devices were mostly depreciated by the end of the prior fiscal year. Additionally, the combination of our recent divestitures and our strategic exit of the liquid solution business resulted in a net negative impact on our third quarter and about neutral impact on our year-to-date adjusted gross margin. We continue to successfully execute an appropriate balance of cost control measures and investments without disrupting our growth objectives. Adjusted operating expenses in the third quarter were $71 million, a decrease of $2.4 million or 3% compared with the third quarter of the prior year. Adjusted operating expenses year-to-date were $201.1 million, a decrease of $19.1 million or 9% compared with the first nine months of the prior year. Lower adjusted operating expenses both in the third quarter and year-to-date were due to a combination of ongoing productivity savings related to our Operational Excellence Program and cost containment measures implemented to help offset the negative effects of COVID-19. Partially offsetting these savings were ongoing investments in key growth areas of the business. As a result of the performance in adjusted gross margin and adjusted operating expenses, the third quarter adjusted operating income was $52.6 million, a decrease of $9 million or 15%. And adjusted operating income year-to-date was $124.1 million, a decrease of $46.7 million or 27% compared with the same periods in fiscal 2020. As our business continues to recover from the pandemic, we have seen significant progress in the sequential, quarterly improvement of our adjusted operating margins throughout the fiscal year. We continue to expect adjusted operating margins to improve to levels above fiscal 2020 once the pandemic fully subsides. Adjusted operating margin was 21.9% in the third quarter and 19.2% year-to-date, down 190 basis points and 350 basis points respectively compared with the same periods in fiscal 2020. For both periods, the lost leverage from revenue declines outpaced the impacts of cost mitigation efforts. The adjusted income tax rate was 16% in the third quarter and 15% in the first nine months of the fiscal year compared with 17% in the third quarter and 14% in the first nine months of the prior year. Third quarter adjusted net income was $41.4 million, down $7.1 million or 15%. And adjusted earnings per diluted share was $0.81, down 14% when compared with the third quarter of fiscal 2020. Adjusted net income year-to-date was $96.8 million, down $39.1 million or 29%. And adjusted earnings per diluted share was $1.89, down 28% when compared with the prior year. Our third quarter results are encouraging and show a significant recovery from the effects of the pandemic. In the short term, however, we continue to view the current environment as uncertain and we will not be providing guidance for the fourth quarter. Our Operational Excellence Program is delivering positive results and continues to drive improvements in adjusted gross margin and adjusted operating margin. We remain committed to delivering $80 million to $90 million of savings by the end of fiscal 2023 as part of this program, which is essential for our future growth. The progress we have made has helped us to reduce the impacts from the pandemic. We expect the majority of savings realized will drop through to adjusted operating income by the conclusion of the program, with the return of the business back to historical levels. Free cash flow before restructuring and turnaround costs was $99 million in the first nine months of fiscal 2021 compared with $95 million in the prior year. We have been able to offset the decline in earnings due to the impact of the pandemic on sales volumes, particularly in the Plasma business through a combination of lower increases in inventory, lower capital expenditures, and improvement in accounts receivable when compared with the prior year. Although our free cash flow for inventory is lower than the same period of the prior year, the impact from lower sales volumes in Plasma has resulted in a higher disposables inventory balance. We continue to monitor inventory levels and have seen a decrease in our disposable inventory sequentially. Additional fluctuations in inventory may occur as we adjust our production to support customer demand and our Operational Excellence Program initiatives. Cash on hand at the end of the third quarter was $189 million, an increase of $52 million since the beginning of the fiscal year. In addition to free cash flow, the third quarter ending cash balance increased $28 million from recent portfolio moves and decreased $73 million due to debt repayments, including a $60 million repayment of the revolving credit line that was outstanding at the end of fiscal 2020. The borrowing of $150 million under the revolving credit facility in the first quarter of this fiscal year was repaid during the third quarter and has no effect on the cash increase in this fiscal year. Our current debt structure includes a $700 million credit facility that does not mature until the first quarter of fiscal 2024, with the majority of the principal payments weighted toward the end of the term. At the end of the third quarter, total debt outstanding under the facility included a $311 million term loan. There were no borrowings outstanding under the existing $350 million revolving credit line at the end of the third quarter. Following our announcement to acquire Cardiva Medical, we will execute an additional term loan of $150 million and will finance the remaining $325 million balance using a combination of our cash on hand and our existing revolving credit line. At the completion of this transaction, which is expected to occurred during the fourth quarter, our EBITDA leverage ratio as calculated in accordance with the terms set forth in the company's existing credit agreement will increase from 1.3 at the end of our third quarter of fiscal 2021, up to about 3.2. Our capital allocation priorities are clear and remain unchanged as we continue to prioritize organic growth, followed by inorganic opportunities and share repurchases. Over the last four years, put a lot of emphasis on strengthening our portfolio and funding key organic growth initiatives. These investments have enabled us to improve our growth trajectory and will continue to fuel growth. We have also bought back a total of $435 million or 4.5 million of the company shares outstanding. And while we do not plan to make additional purchases under the current share repurchase authorization, we view share repurchases as an important driver of shareholder return. M&A is also a critical pillar of our capital allocation. And by acquiring Cardiva Medical, we are adding a high growth asset which will help us sustain future revenue growth and provide attractive financial returns. And now, I'd like to open the call for Q&A.

[Operator Instructions]. Our first question comes from David Lewis at Morgan Stanley.

Just a couple from me here. Obviously, Chris, I want to start obviously with your NexSys comments because, obviously, they departed from prior quarters. So, can we take from your commentary, Chris, that you now have reached contractual terms with all your customers as relates to the use of NexSys?

Short answer, David, is yes. But I want to qualify the answer because I think an important not to drive undue speculation. We are very confident that NexSys is well on its way to supplanting PCS2 as the standard for sourced plasma collection worldwide. The reason we're confident for that is because, at this point, substantially all of our major customers have agreed to adopt NexSys somewhere in their collection networks. And I want to be clear about the somewhere in their networks. In some cases, it is global, commensurate with our current share. In other cases, they've said they want it for the US market as a starting point or another geography as a starting point. The reason we are reacting to that development is because, in the past, the device experience has been the key driver of adoption. When customers have the opportunity to use the device, experience the benefits firsthand, integrated platform and everything it delivers in terms of work processes, in terms of improved compliance and reporting capabilities, the better donor experience which is absolutely paramount in the current environment, and of course, the yield, not just the 3% that comes with NexSys PCS properly equipped, but Persona to follow, and the combination of those things is just a very powerful value proposition that when experienced firsthand has led to broad-based adoption. So, what we're communicating is that we're on that path.

Just two quick follow-ups there. In terms of one, do you believe these contracts reflect the value of Persona? In the old days, we sort of thought that the timing from implementation to contract signing is something around six months. Any comments on those two points?

Yes, I want to clarify. The message we're delivering is specific to NexSys PCS devices. They are in combination with the NexLynk DMS software and the broader support for the package. They don't necessarily include Persona. The commentary we're offering today is around NexSys. I'm happy to talk about Persona and where we are on that. But our commentary was specific to NexSys. In terms of the adoption, as a second part of the qualifier, if you will, on this, I think everybody's enthusiastic about what NexSys can mean for them and their network over time in a broad based way. But in the interim, the first, second and third priority for Haemonetics as well as our customers is helping those customers recover collection volume from the pandemic. And we're pleased with the third quarter results. We think there's forces at work that'll continue to build there over time, but that's our focus. That's our customers' focus and that that's going to be the primary orientation that we follow. Beyond that, there is further work to be done on the software upgrades, there's further work to be done to plan and accommodate for NexSys and eventually for Persona in the collection centers and in the fractionation network. So, it's time bound. We're not going to actually comment on the commentary for time today. We may get into that more in May when we have more clarity. But at this point, it would be premature.

And just two quick ones. And I'll ask them both upfront and get back in queue. I asked her about Persona. But obviously, people are focused on value either for NexSys or value for Persona. Do these contractual terms reflect any value for NexSys? And then, Bill, just for you, this quarter is interesting, leverage really inflected in the quarter. You basically saw the kind of profit levels you saw back in March, but the plasma number was 10 million lower. So, how are we thinking about OAP here towards the end of the year, and, frankly, what's the trajectory on margins going forward as we get Plasma to start to continue to recover? Thanks so much.

In terms of the value proposition, in terms of value capture, we feel very good about where we are. We've spent a lot of time talking about and focusing our energy on competing on innovation. We think, clearly, NexSys, NexLynk, PCS, the Persona upgrades are best in class and they define a path that we're on that we continue to improve upon. The great news in all of this is the early adopters for NexSys who've been working with device over the last two years have validated that value proposition across all the dimensions that we've been talking about and what I just referenced a moment ago. So, the good news there is those existing customers feel great about the value proposition and what they're paying for it. And I think we are equally confident that the next wave of customer adoptions will bear that out further. And then persona just adds to it beyond that. Bill?

David, your question on operating margins. So, we've seen sequential improvement now from Q1 to Q2 and then again from Q2 to Q3. We're at almost 22% operating margins in third quarter. That really gets us back to the operating margin that we were at for full year FY 2020. We're still below the prior year by 190 basis points in the quarter and 350 basis points against the prior year on a year-to-date basis. But what we're seeing is you mentioned the Operational Excellence Program, we are getting good savings and we continue to get traction in that program. We also have some containment cost activities that we implemented related to COVID, which is helping offset some of the – actually most of the costs related to COVID from an expense standpoint. And again, no, it's really important that – as that Plasma business continues to return and we eventually see it returning to pre-COVID levels, that adds significantly to our operating margins. And then finally, longer term , we do expect to be above where we were for FY 2020, driven again by a combination of OAP savings, the Plasma growth and the value for the innovation that we're delivering. So, we're really bullish on our operating margins longer term.

Our next question comes from Larry Keusch with Raymond James.

Chris, since you opened the door to questions around Persona, maybe you could provide an update on kind of the feedback that you're getting or where do you think you stand with that? Would be great.

Persona is a game changer. And it's been viewed as such by our customers who are on the front edge of that, right? Anybody who adopted NexSys earlier in the process is eligible for Persona now. What we are doing with them, because it is meaningfully different than the current collection, we're talking about an additional 9% to 12% yield enhancement. They're going through the process, which was all expected, to do validation of the protein concentration in the additional collected plasma to make sure there is no dilution. We've done our own testing for the original clinical work. We're very confident in the outcomes we'll get to. But it's an understandable factor that these customers want to go through. I think is point one. I think there's also – and what's great about the NexSys device equipped with NexLynk is the ongoing tracking and monitoring of donor safety, right? We want to make sure that everything we are doing prioritizes donor safety and enhances the donor experience as we experienced in the trial, so that there's an ongoing monitoring there. And then it sounds trivial, but it matters a lot, given that we're talking about 40 million, 50 million, 60 million units a year collected of sourced plasma, the logistics of handling a bottle that is a third larger and processing that bottle into their fractionation facilities, the laser that's used to cut the bottle, how the bottle itself is folded, the freezing dynamics, all important factors that need to be validated in our customers' supply chain. So, we are going through that process. We don't anticipate any hiccups along the way. But it's a meaningful change. And we're working our way through that. But what's very clear in this market, perhaps even more so due to the challenges associated with collecting in the middle of a pandemic is that yield matters and yield enhancements there are meaningful. And we intend to add to it, right? We're not done. We're going to continue to drive our innovation agenda to advance both safety and yield, which we think there's room to run there with Persona.

Two other questions. Maybe for you, Chris. Maybe if we can peel back the onion a little bit here and just dive into sort of what you saw with plasma collections from your vantage point during the, during the quarter. You obviously alluded to in your comments of some, I guess, movement backwards a little bit here recently. So, if you could sort of get to that, maybe kind of both US, which I understand dominates collections, but also what you're seeing perhaps in Germany or elsewhere that might provide some color for us. And I guess along with that, how should we be thinking about that seasonal impact in the fiscal fourth quarter? Because clearly that tends to go the other direction on you. So, maybe help us think about that. And then, I guess, just quickly for Bill, just any plans, thoughts on an Analyst Day and timing there or updating the LRP? What do you need to kind of see or get visibility on to be able to move forward with those two events? Thank you.

On plasma volumes and what we are seeing, so third quarter can be characterized as 10 weeks of recovery, which really started in early October. We've tracked multiple factors. I don't think there's any mystery around it. It is multifactorial, starting with donors' attitudes around safety and their willingness to venture out and do donations. What we can say is clearly the efforts our customers have taken, and they've been extensive, have driven home the point that plasma donation is safe. The centers themselves are socially distanced, there's things we've done to help, we rolled out the COVID application which lets you do all your screening remotely and queuing up virtually, et cetera. But the centers are safe and fully functioning. And we clearly saw the donor attitudinal response to that in the third quarter. The other factors really come down to just a cross play of various economics. And this is probably less precise than any of us would like it to be. But given the human dynamic there, that's the reality. On one hand, you have recessionary pressures. We are in a deep recession, and our donor pool needs to supplement their income stream. You couple that with a challenge, an offset that comes through stimulus, which is a benefit to donors and would work negatively against collection volumes, and then the counterbalancing actions that our customers have taken to further incent donation, promotional efforts, higher donor fees, et cetera. So, you have this interplay on the economics. What we saw in the third quarter was the pressure of the recession, the absence of – or at least the waning government stimulus and a meaningful step up in promotion remuneration from our customers to their donors led to this drive, which was quite meaningful above and beyond the seasonal adjustments we would expect. We get to January, and we have seen new stimulus back into the market and we're seeing some of the corresponding effects that we would have expected to see from our modeling in terms of diminished collections in the early part of the year. Now, there will likely be more stimulus to come, but stimulus ultimately will be time bound. Unfortunately, the recession will take time to correct, and that's a positive effect. So, we remain very confident in the long term 8% to 10%. And in fact, as we said in our prepared remarks, for a period of time, as we're recovering, collectors will do what they can do to replenish their depleted reserves, which means we could grow in excess of that 8% to 10% for a period of time, so the inventories are replenished. As it pertains to fourth quarter and seasonality, typically, our third quarter is our most robust collection volume of the year. So, we tend to see a modest drop off in the fourth quarter as kind of a bit of an aftermath of the holidays, et cetera. We would assume that, but candidly, it's an assumption at best given how unstable this market is, given the pandemic and everything else that's going on. So, it's an interesting dynamic. We're paying close attention, I think because of the hard work that we and our collector customers have done, this is really down to the economics and you can watch the same factors we are and predict accordingly. Bill, over to you.

Larry, your question on investor day, so, obviously, we're overdue for an Investor Day. We definitely need to have one and we want to have one. It's important for us to be able to understand exactly what's happening as the with the financials as the pandemic eases because that recovery will obviously drive our financials going forward. So, it's important to eliminate some of those questions. We're hoping summertime. We'd love to do it in person with a vaccine out there for COVID. We're hoping that has a major impact and things open back up, and we can get something scheduled this summer. But no promises. We may have to end up doing it virtually. But we prefer to do it in person.

And does the LRP get tied to that analyst day? Do you kind of need the same inputs and visibility to be able to do both? Or were they disconnected?

I think we'd love to showcase the innovation. You don't have a whole investor day focused on innovation, but I think everyone would be disappointed if we don't provide an LRP at that investor day. Obviously, we did it a few years ago now, I think four years ago. So, we're long overdue. I think the combination of looking at the innovation as well as the five-year LRP in that forum is the right place to do it.

Our next question comes from Anthony Petrone with Jefferies.

I have a couple also on Plasma and then I'll shift to Cardiva. Just on Plasma, Chris, can you give us an update on where the total install base sits? And maybe what percent as we sit here today is already upgraded to NexSys? And then, as you look ahead to Persona and you reference conversations, how broad based, over time, do you think Persona upgrades will be just based on your interest exiting last quarter? And then, I'll have a few follow-ups?

Anthony, in terms of our total installed base, there has not been any meaningful change in share in aggregate There's always puts and takes in any given time period. One of our customers will acquire somebody if they were an existing customer of ours. And that customer has a split share, we may see a modest loss of share over time. On the other hand, if the customer they acquired was not one of our customers, then we see the corresponding benefit. We're roughly, on a global basis, with this point where we were a year ago today pre-pandemic. So, we haven't seen any meaningful change in the install base. I don't expect that we will. At the end of the day, we compete on innovation. I think that resonates with our customers. There may be some who don't value it. And on the margin, that'll present whatever challenges it presents, but we're committed to competing on innovation, standing behind the value propositions that support that. In terms of Persona, as I said, they're rate limiting factors to the pace of the rollout. But it's got everybody's attention for the right reasons. It is proprietary. We intend to continue to invest behind it. So, the process for Persona is a staged rollout. Of course, you have to be on NexSys to benefit from the Persona technology. And right now, I think that's having the desired effect in the market in terms of the overall agreements around NexSys adoption. On one point I didn't mention, just to go back to Larry's question, the European market, while it's a more modest portion of our total collection volume, European market throughout the year, our fiscal year, has fared better. Initial – back off from the early days where Europe locked down. But as Europe began to reopen, what we saw, because the donor economics are just different there. We've had a more robust recovery. We're actually ahead of forecast, and we're actually experiencing modest year-on-year growth through the European collection network. It's not a material effect on our business. I don't want to overstate it, but it does give us another lens through which to observe the donor attitudinal and behavioral dynamics that are driving the US market, which is what we're really dependent upon.

The follow-up would be just the 9% to 12% yield benefit is – is that because of Persona or is that for both technologies? And then, the follow-up on Cardiva, one quick one would be, is there an update on the financing mix for the $475 million upfront? How much of that will be debt versus cash on hand? And then one for Stu just on VASCADE in Europe. Maybe just if you can describe what the competitive sort of mood in Europe or broadly in EP is? How long do you think VASCADE MVP could be in the EP market on a relatively standalone basis? Thanks again.

I'll take the first and then hand it to Bill and Stu respectively. On Persona, Persona was run through the IMPACT trial, which was done comparing NexSys PCS versus NexSys PCS with Persona. So, the 9% to 12% yield enhancement is additional to the 3% that we factor in, the 23 milligrams that come as an improvement off of the base PCS2 on to NexSys, and then Persona is driving additional yield on top of that. The reason it's ranged is because there are meaningful differences in the population. The whole concept of Persona is an individualized nomogram that is tailored to the individual donors' height and weight and hematocrit, essentially determining how much plasma they have to give and then angling for a constant percentage there. And we just see that much variability in the population, which is why it's 9% to 12% additional to what we do with NexSys.

Anthony, your question on Cardiva financials was around the $475 million upfront payment. We have not updated from what we said on the Cardiva call from two weeks ago. We are going to take out $150 million term loan. And on the remaining $325 million, that would be split between revolver and cash. We haven't said what the allocation would be there. But I did point out in the prepared remarks that we have no borrowings under our existing revolving credit facility as of the end of Q3 and we have available on that line $350 million. And we actually have almost $200 million of cash on the balance sheet.

To answer your question about the landscape in Europe, primarily, in the interventional side of the business for EP, we're looking at either a figure-of-8 suture or compression for closure. That's what the vast majority of physicians are doing in Europe right now. So, as I'm sure you know, in Europe, every country is very different in the way they approach things. Where we're looking closely at, what the value proposition is in each of the major countries in Europe to determine what our launch strategy is there based on both cost considerations, as well as clinical considerations from a value prop. But there's a lot of upside relative to growth of vascular closure devices being used in electrophysiology procedures in Europe. And to give you some sort of timeline, we're probably looking at 12 to 24 months before we're able to enter that market. But we are looking at those options and pursuing updates to their clinical registrations in Europe.

Anthony, let me come back to you and correct something I said. So, NexSys off of a baseline of PCS2 is essentially a 2% to 3% yield enhancement, 23 milligrams if they're just using base NexSys. How about base PCS2? Persona, in the trial work we did was another 70 milligrams plus or minus on top of that. We think about that as 8% to 10%. incremental. Therefore, the combined benefit for somebody who's not using NexSys is the 9% to 12% we quoted in our prepared remarks. Just want to be clear about that. So, 2% to 3% on NexSys, 8% to 10% on Persona, in combination 9% to 12%. Again, the variability driven by differences in the population.

Our next question comes from Dave Turkaly with JMP Securities.

Chris, maybe given the comments on NexSys and the compete on innovation comments you've made, I know pricing was an important component of what the system, and imagine with Persona, even is expected to deliver. So, I'd just love to get your thoughts on how those contracts are coming through. Are you getting the price that you thought is more or less? Any color would be great.

Dave, I appreciate the question. I know this is pivotal for folks in terms of the investment thesis around Plasma. Obviously, we get very sensitive talking about individual customers or price in any way that's going to disadvantage us vis-à-vis the competition. What I will say is, we aspire to be a value-added partner to the industry. We never want to put technology out there priced in a way that isn't the ultimate win-win-win, better for donors, better for collectors, and better for us. And I think we have that in the case of NexSys and Persona. We have that in the case of our NexLynk DMS. So, we feel very good. And more importantly, the customers who have adopted NexSys and have been running with it now for an extended period, who are also on the front edge of the validation and adoption of Persona, it continues to ring true to them. So, it bodes well going forward beyond that. I just want to better not give our competitors any more information than we already have. Except though, I will say that innovation cycle will continue. We're very committed to getting back in the clinic and putting more good ideas to work to help drive the recovery, to help drive yields to make that donor experience that much more user friendly.

Congrats again on the Cardiva deal. If we look at the last, I guess, year, maybe a little more, you had a bunch of sort of little transactions, acquisitions, divestitures and the like? I'm just curious given the size of that and where the portfolio stands, should we still expect things like that? Or I think your answer might be that it may be done for a while, but what do you feel about the overall portfolio now with that in house?

I'll make some specific commentary about the strategy. And I'll ask Stu to comment on Cardiva and what that market may mean for us. I think we've been on a journey over the past four-and-a-half or five years to turn around the company and portfolio rationalization factors prominently in that. Words matter. And the words, winning market, leading positions, superior results are the essence of our strategy. And then we break that down into the six value drivers that we've been talking about for a while. So, we are committed to inorganic growth as part of that portfolio rationalization and we divested some of the Blood Center software business that was really tied to our filter business in North America and France and parts of Europe. They just didn't make sense for us going forward. We're hugely committed to software and ultimately digitization of our platforms and our offerings. But in that sector of the business, it was neither an attractive market nor a leading product. And by divesting it, we've created greater focus. You see that in some of our Blood Center results on equipment and disposables. For Cardiva, and I think we've said this for a while, we believe there's meaningful benefits to scaling and expanding our Hospital business worldwide. And we think the Cardiva opportunity for what it means in vascular closure, electrophysiology, interventional cardiology is incredibly powerful in that regard. Our immediate priority, as we said in our prepared remarks, is properly integrating Cardiva into Haemonetics and adding fuel to the fire that they've created and driving that 40% plus growth that is forecast for the product mix there. We're hyper-focused on helping make that happen. The good news about this business, it's robust. And with recovery, our cash flow returns and our EBIT expands. And, yeah, we'll be back in the market to take a hard look at other complementary assets that can help propel that growth story. So, Stu, over to you to talk more there.

I think, first I'll just say, I'm really proud of what we've done with TEG. We've successfully penetrated into cardiovascular surgery, trauma, in particular. In those settings, we've become the standard of care for identifying bleeding and thrombosis risk. So, it's done a great job there. Interventional cardiology, and by extension EP, is really the next largest area of potential use for TEG. And it's currently under penetrated. There's a big target there for us to grow the adoption of TEG through training and education in interventional cardiology, and by extension, EP. So, when we look at what Cardiva helps do for us, on top of the value it has as a standalone, it really enhances our penetration into the attractive interventional cardiology, EP markets. It also does it in a way where we're not competing head to head with some of the major strategics in that space. So, those major strategics are driving the growth of that market through innovation. And we're seeing about 13% growth of the EP space. What Cardiva has been able to do is carve a niche for themselves to facilitate those procedures, make those procedures easier and more efficient, get patients to emulate quicker, which makes sense for everyone in the room and do it in a way that's not necessarily competing with a major strategic. So, we really like that simplicity of the portfolio, the way they can create efficiency in the EP lab, and we believe it's a strong value proposition when combined with what we're already doing in the space we're already moving into with products like TEG.

Our next question comes from Mike Matson with Needham & Company.

Chris, I wanted to ask about your conversations with your customers in the Plasma business about their kind of safety stock inventory levels. Do you expect them to, in the long run, try to get back to the levels they were at prior to COVID? And is there any potential that, given kind of the shock experience of COVID, that they might actually try to run higher inventory levels in the longer run?

Mike, I appreciate the question. Our customers are really thoughtful about this. These are world class companies with global supply chains and extensive long range plans, dealing with the sheer volume of clinical trial work that they are doing to grow and expand the autoimmune and immunology kind of suite of product offerings. So, they have robust growth plans. Clearly, the pandemic was a setback. I think depending on the company, and their starting point, they felt more pressure, some more than others, and we've seen some of that response in the market in terms of the productivity. However, I think all realized that this is a challenge for them. And it is a very connected logistical network. So, A, we fully expect long-term growth in that 8% to 10%. It'll ebb and flow based on new trial, competitive offerings, et cetera. But we feel quite good about that number, tying back to an 8% growth in demand for IG. We do expect that they will want to replenish their safety stocks. They're thoughtful. They have the ability. It's very long shelf life for frozen sourced plasma. So, I think we would be fully expecting that, over time, they will build back those inventory levels. And I think candidly, there's been some lessons learned for us in that process. When we were collecting at 15% or 20% with individual customers in the prior three years, pre COVID, we needed we pay more attention to how much of that is their organic growth, which it was in many cases, versus they're building safety stocks for some eventuality, which unfortunately, has been COVID. So, I think they're thoughtful about it. We need to be thoughtful about it as well. I fully expect in the year to come they will double down on new center openings. They've opened many centers through the pandemic. I think they'll be back on track fully to do so in calendar 2021. As Bill said, as the vaccine rolls out, you see that they're doing what they can to drive the remuneration, and then, obviously, we think that our technology helps take that all to another level. So, it bodes well for robust recovery on the other side of the pandemic. It won't be linear. There's going to be fits and starts as we're seeing in the current environment. But long term, we feel quite good about it. And we think that they'll do the right things in terms of ensuring they have supply.

Just regarding this FDA guidance around TEG testing for COVID, have you seen any sort of measurable benefit to that business from COVID to date? And does this guidance increase the probability that it could be a benefit going forward, at least until COVID rates kind of come down?

I'll let Stu answer your question directly. I think one of the things that we're excited by is, this is an ongoing dialogue that we're having with the medical community, with our scientific advisory committee and the KOL base on patient blood management, and ultimately, with the regulators. And what we're excited by is obviously to be able to play a role in Europe and absolutely horrific set of conditions here around COVID-19. But also, what it bodes well for with regards to a broader based view of patient blood management, hemostasis, and viscoelastic testing, and the role that it plays in kind of working across different disease states, different procedures, I think, is an interesting area of scientific advancement that we've been championing for a while. But, Stu, maybe you should comment on the specifics.

Mike, we haven't seen any material difference made by this announcement. And keep in mind, this just happened over the last couple of weeks. But what we do think is to sort of reiterate what Chris said, is it opens the dialog for conversations around – in particular thrombosis and the diagnosis of potentially hypercoagulable patients that have COVID. And that conversation happening in departments that we're typically not in. As I just mentioned a moment ago, cardiovascular surgery, trauma, those settings we're typically in and have a good footprint in hospitals. This is actually opening the aperture a little bit more to have those discussions in other departments as well, around that hypercoagulable state that these patients are in. so, we think there's opportunity to further educate around the use of TEG down the road as a result of this guidance.

And our last question comes from Larry Solow with CJS Securities.

Just a couple of just clarification or follow-ups. Just on the – Chris, you mentioned there hasn't been any meaningful change in the install base, which sounds like your announcement this morning that you have some planned initial placements or placements at some of your larger collectors who may not have adopted. The language is a little bit different. I'm just trying to figure out, in prior placements, did the customers sort of start with an initial base and then expand? I'm just trying to figure out if it's any different than how you've done prior placements. And realizing that some of the – the two largest collectors out there have not really adopted yet. So, maybe it's a little bit different when you're looking at a much larger network versus a small network at some of your smaller customers. Can you maybe clarify on that?

I appreciate the question. Each customer is different because they each have different starting points. My comments earlier around the install base, we haven't seen meaningful change in share. It can happen. There's obviously different and important dynamics in the marketplace. We do have competitors. Customers, over time, are free to change, right? What we have found is customers prefer – within whatever the base, whether the share is 100% or 10%, or anything in between, they tend to like continuity and consistency. It's very rare to have a center that will operate more than one device, right? So, if it's a PCS2 center or it's one of our competitor center, or it's NexSys center, they tend to want to have a single standard operating procedure and protocol across the center. Similarly, when they adopt a new standard operating procedure, as they need to, for example, to upgrade to the NexLynk DMS, they typically want to do that across their entire network. It will be staged. And with software, the staging is longer by necessity because of the amount of changes required. With NexSys PCS, we've talked in the past, we can change the center out overnight. We can't change the entire network overnight. And in this case, what we're trying to be clear about is that we've meaningfully advanced the discussions, we've gotten to agreements, we're not getting into how many centers have they changed, et cetera. It doesn't help us or our customers to talk about that. We will factor that in to our growth plans going forward, of course. But what we're trying to communicate is the nature of the discussions has evolved and has progressed. And that progression gives us renewed confidence in the longer term. The actual pace, et cetera, this has to be staged, and it is going to be staged as part of and largely behind the recovery from the pandemic. That is the first, second and third priority, as I said earlier, and we're not going to do anything to disrupt the momentum that our customers are creating with regards to the recovery. Now, as that happens, we then can feather this in as we complete the NexLynk software upgrades, as we get them ready to go kind of trained and equipped. Or as they experience it. Maybe they've taken it in a different market, not the US market, but somewhere else in the world at scale. They're going to get that experience. And we're confident that as they have that experience, they'll get increasingly excited about not only the value proposition, as we've talked about, but also our ability to convert them. And we are confident in our ability to do that even in the height of the pandemic. We've had some experiences this past year. So, I think it bodes well. But it will be staged, and it will likely be measured over an extended period of time. Because that's the nature of the environment that we and our customers operate in.

I suppose, of course, Persona and just the onset of COVID has obviously helped accelerate these conversations, certainly with new customers or customers that haven't converted, how about existing customers that are already on NexSys? I assume interest on Persona is probably pretty high. Can you speak qualitatively? Any conversions yet? Logistically, how that process would work?

Customers who are already running NexSys are first up in the queue for the upgrade to Persona, folks are very excited by it. And we are neck deep in that validation process that I referenced earlier, making sure there's no degradation in the IG concentration. We are confident there is not, but it's something that needs to be tested and validated in our customers' network. It's the ongoing safety monitoring, make sure there's no adverse events with donors. Again, high level of confidence there. But we want to continue to monitor this as we go forward at scale. And then, the logistics, depending on the supply chain and the fractionation process, the front end, how does that frozen block of sourced plasma get processed in for production? It varies from one customer to the next. And we need to help them adapt their systems and their supply to be able to handle a bottle that's meaningfully larger.

Have any customers adopted Persona on a commercial level? Without getting into details, just qualitatively. Can you confirm that?

It's work in progress. So, it is underway. But I don't want to get into the nuances of the difference between validation or validation at scale versus full rollout. It is underway and I can confirm that those conversations have been very positive across the entire installed base of NexSys.

Just a quick question for Bill. Bill, just on the Operational Excellence, nothing new in terms of $80 million, $90 million cost savings, productivity gains and the majority of [indiscernible] bottom line. I think you said by fiscal 2023. That does assume that that – that was an initial sort of target built on a growth assumption, right? So, I assume if we're not that – if COVID is still impacting us and we're not at that level, that revenue level that you had assumed in that analysis, we won't quite get to that number by the end of – or by fiscal 2023 until revenue sort of reaches that target? Correct?

Overall, the Operational Excellence Program is going really well, Larry. We have good traction, good projects going on. We do expect volumes to return here eventually and we still feel comfortable at this point that by FY 2023, we'll see those savings. But, yes, it is dependent at some point getting back to the normal levels of revenue that we've experienced historically with growth.

And the Cardiva acquisition, obviously, that was more on the revenue growth potential. But I going to imagine, as you roll that into your network, there'll be some potential savings coming out of that too inevitably on the cost side?

Of course. Of course, there are always synergies, right? But again, just to reiterate what Stu and Chris said, the deal is built on revenue growth, but synergies are a natural part of M&A.

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