Haemonetics Corporation (HAE) Q4 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2021 Haemonetics Corporation Earnings Conference Call and Webcast. 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 Olga Guyette, Investor Relations. Thank you. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining us for Haemonetics fourth quarter fiscal 2021 conference call and webcast. I'm joined today by Chris Simon, our CEO; and Bill Burke, our CFO. This morning we posted our fourth quarter and fiscal 2021 results to our Investor Relations website along with our fiscal 2022 guidance and analytical tables with the information that we'll refer to on this call. Additionally, we provided a complete P&L, balance sheet, summary statement of cash flows, as well as reconciliations of our GAAP to non-GAAP financial results and guidance. 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 and the impact of the 53rd week in fiscal 2021. As in the past, we'll refer to non-GAAP financial measures through out the 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 in excluded items, including comparisons with the same periods of fiscal 2020 and a reconciliation to our GAAP results. Our remarks today include forward-looking statements, and our actual results may differ materially from anticipated results. Haemonetics cautions that these forward-looking statements are subject to risks and uncertainties, including any potential impact from the COVID-19 pandemic on our results 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 the call over to Chris.

Good morning, everyone, and thank you for joining today. Before I get into our results, I want to review the news we announced a few weeks ago. In April, CSL Plasma notified us that they do not intend to renew their US supply agreement for the use of our PCS2 plasma collection system equipment and the purchase of plasma disposables that expires in June of 2022. We were informed that CSL's decision was not based on the level of service or quality of our products, but rather reflects a change in internal strategy that was made some time ago, presumably before they had experience with NexSys and Persona. We are disappointed by CSL's decision, but it does not change our commitment to the plasma market and our technology to improve collections. The NexSys and Persona value propositions are strong, supported by real-world data and real-time customer feedback, and we are excited about what this platform means for our customers. We are taking a comprehensive approach to address the impact the CSL transition will have in fiscal 2023. We are acting with urgency, but we are being thoughtful and balanced in our planning. Our ability to respond is enhanced by the steps we have taken these past few years to strengthen our financial health, improve productivity, drive innovation, reshape our portfolio and build a collaborative performance-driven culture. We are well positioned to navigate this change. We are focused on driving value for customers and shareholders, and our decision-making is guided by a through-cycle mindset. We will continue to pursue growth strategies to maintain our market leadership, including developing innovation in partnership with our customers. We also remain committed to productivity and being good stewards of the company's resources. We will provide more details on the path forward as our plans take shape. With that, let me turn to our results for the quarter and the fiscal year. Today, we reported organic revenue decline of 14% in the fourth quarter and 13% for fiscal 2021 and adjusted earnings per share of $0.46, down 33% in the quarter and down 29% to $2.35 for the year. Fiscal 2021 was a difficult year for Haemonetics as the pandemic had varying effects across our businesses and their respective customers. Despite the challenges, we made progress to build a stronger Haemonetics. We divested non-performing assets like the Fajardo blood filter manufacturing operations, Blood Center Donor Management software in the US and In Log SAS Blood Bank and Hospital software in Europe. We made organic and inorganic investments in attractive and growing markets, including the launch of Persona and the Donor360 app and the acquisitions of ClotPro and Cardiva Medical. We modified our capital structure for financial flexibility and remain diligent with cost containment while continuing to fund growth. We made significant changes to the way we source and make our products as part of our Operational Excellence Program. While we cannot control the pandemic's impact on our customers' businesses, we met every challenge keeping our employees safe and our plants operational with high levels of service and customer support. Early fiscal 2022 will continue to be challenging, but we expect the pace of recovery to accelerate over the year. The end market demand for our products remains strong and we do not see structural or other changes from the pandemic that would impact the need for life-saving plasma-based medicines or hospital devices for critical areas of medicine like trauma interventional cardiology and electrophysiology. We have healthy and viable businesses delivering exceptional value-adding technology. We have proven our resilience and our ability to drive growth and productivity and we will do so again as our markets recover from the pandemic. Turning now to our business units. Plasma revenues declined 28% in the fourth quarter and 26% in fiscal 2021, as the pandemic continued to have a pronounced effect on the US-sourced plasma donor pool. We saw lingering effects beyond fourth quarter into April. North America disposables declined by 31% in the fourth quarter, primarily driven by declines in volume and a negative impact from the expiration of pricing on a historical technology enhancement with one of our customers. Sequentially, Plasma collection volumes declined by 13% compared with historical average seasonal declines of about 7%, as additional economic stimulus hindered recovery. Fiscal 2021 was an especially difficult year for Plasma collections, given the interplay of different factors affecting donor behavior. Our customers have taken extensive measures to ensure the health and safety of donors and to launch a myriad of promotional campaigns to encourage plasma donations. Our teams have remained focused on ensuring no disruptions to our supply, service and support. Despite the environment, we advanced our innovation agenda with the FDA clearance of Persona, which safely yields an additional 9% to 12% of Plasma on average per collection. We extended the reach of our customers to donors via our Donor360 app, which allows donors to engage with centers before in-person visits, decreasing door-to-door time and improving the overall donor experience. Given the pandemic's negative effect on collections, increased yield is more important than ever. And feedback from NexSys customers operating with YES technology or Persona continues to be positive. We believe they were able to offset some of the headwinds from the pandemic because they benefited from safe, higher plasma yield per donor, bidirectional paperless connectivity and increased donor satisfaction. NexLynk DMS rollouts continue on pace and the software continues to be a key enabler and differentiator for NexSys. All of our major customers have agreed to adopt NexSys, somewhere in their collection network. And we anticipate that by mid-fiscal 2023, the majority of our customers excluding CSL will be on NexSys in the US or globally. As we emerge from the pandemic and see future sustained increases in available donors, the operational efficiency benefits of NexSys, integrated with NexLynk DMS will be an increasingly valuable tool to support greater donor traffic. We anticipate initial Persona rollout this fiscal year, as we strive to move in sync with our customers and pace our technology implementations to meet their individual needs. We are committed to advancing our innovation agenda across devices, disposables and software to develop products that create long-term sustainable value for our customers. We continue to do everything we can to support our customers and we remain cautiously optimistic about the timing and pace of recovery. The demand for plasma-derived medicines remains strong and our customers are doing what they can to recruit and retain donors. Unfortunately, donor economics play a critical role in Plasma collections and we expect collections will be muted until government stimulus wanes. Beyond stimulus, we expect a return to the long-term 8% to 10% growth of the US-sourced Plasma collections market and we see potential to grow in excess of that as customers strive to replenish depleted plasma inventories. Hospital revenue increased 12% in the fourth quarter and 4% in fiscal 2021. Our hospital business experienced continued sequential improvement over the first nine months of the fiscal year. Fourth quarter recovery was uneven, as we saw another spike in COVID cases early in the quarter followed by material improvement in February and March coupled with the anniversary of the previous impact of COVID-19 in China and other geographies that were affected earliest by the pandemic. Hemostasis Management revenue was up 19% in the fourth quarter and 9% in fiscal 2021. North America our largest market showed sequential growth throughout the first nine months of the year. And despite a spike in COVID cases early in the fourth quarter, the business exited in a strong position including additional penetration into new accounts. China, our second largest market, benefited from a lower comparator in the prior year fourth quarter due to the early onset of COVID-19. Strong capital sales in North America and EMEA have also contributed favorably to our fourth quarter and fiscal 2021 results. We continue to drive our go-to-market strategies for viscoelastic testing to meet the unique needs of our regional markets. We are executing on the Chinese market introduction of our locally designed and manufactured viscoelastic testing technology that expands our product offering to meet the needs of that geography. Transfusion management was up 9% in the fourth quarter and fiscal 2021, primarily driven by strong growth in BloodTrack through new accounts and geographic expansion of SafeTrace Tx. Our teams have used remote tools to advance installations and utilization in customer environments where access continues to be restricted. Cell Salvage revenue grew 2% in the fourth quarter and declined 8% in fiscal 2021. Our Cell Salvage results in the quarter benefited from the easy comparison with the prior year quarter in China and 80% growth in capital sales as we continue to upgrade our customers to the latest technology. Partially offsetting these benefits in the fourth quarter was overall lower procedure volume due to COVID-19. The integration of Cardiva Medical is going well and the performance of the business is exceeding expectations. The VASCADE proprietary vascular closure technology strengthens our hospital portfolio in the attractive interventional cardiology and electrophysiology markets and the team is focused on driving the strategy underlying this acquisition. Although excluded from our organic revenue results, Cardiva added close to $8 million of revenue in March as our teams continue to drive penetration in the top hospital accounts for interventional procedures in the US. Additionally as US procedure volume continues to improve, we've seen increasing benefit from product utilization among existing accounts. Our long-term outlook for this business is strong as our combined product development and regulatory teams work closely together on OUS registrations and driving additional product innovation. Overall, the pandemic has validated the essential role of our technologies in hospital. We have demonstrated our ability to safely and effectively sell, including to new and existing accounts, install and service our equipment despite limited access to hospitals. Blood Center revenue declined 10% in the fourth quarter and 4% in fiscal 2021. Apheresis revenue declined 3% in the fourth quarter and grew nearly 1% in fiscal 2021. Fourth quarter apheresis results were impacted by unfavorable distributor order timing in the EMEA and a competitive loss partially offset by strong capital sales. Order timing was overall a benefit to our full year fiscal 2021 results as distributors made large stocking orders in response to the pandemic, particularly in Europe and the Middle East. We also benefited from strong capital sales as we continue to support our customers in the collection of convalescent plasma. These benefits were partially offset by the previously disclosed competitive loss that had a $17 million impact on our full year results. Excluding this loss, overall Blood Center revenue actually grew in fiscal 2021. Whole blood revenue declined 24% in the fourth quarter and 14% in fiscal 2021 driven by lower collection volumes due to COVID-19 and discontinued customer contracts in North America. We remain committed to supporting enhanced product quality and services for our Blood Center customers, while preserving cash generation and exploring portfolio rationalization as appropriate. I'll now turn the call over to Bill.

Thank you, Chris and good morning everyone. I will begin by discussing our fiscal 2021 actual results followed by our fiscal '22 guidance. Chris has already discussed revenue, so I will start with adjusted gross margin, which was 50% in the fourth quarter, a decline of 30 basis points compared with the fourth quarter of the prior year. Adjusted gross margin year-to-date was 50.3%, a decline of 130 basis points compared with the prior year. On the positive side, we continue to benefit from productivity savings realized from our Operational Excellence Program and lower depreciation expense related to our PCS2 devices, which were mostly depreciated by the end of the prior fiscal year. We also saw benefits from the recent acquisition of Cardiva Medical. The primary drivers of the adjusted gross margin decline were unfavorable pricing and product mix, mainly due to the impact of COVID-19, higher inventory-related charges and the impact of recent divestitures. These inventory-related charges which relate to CSL's intent not to renew the US plasma disposable supply agreement had about 220 basis points impact on our fourth quarter and about 60 basis points impact on our fiscal 2021 results. The combination of our recent divestitures and our strategic decision to exit the liquid solution business resulted in a net negative impact of 70 basis points on our fourth quarter and about neutral impact on our fiscal 2021 adjusted gross margin. Adjusted operating expenses in the fourth quarter were $81.9 million, an increase of $9.2 million or 13% compared with the fourth quarter of the prior year. Adjusted operating expenses for fiscal 2021 were $283 million, a decrease of $9.8 million or 3% compared with the prior year. Adjusted operating expenses both in the fourth quarter and fiscal 2021 were impacted by higher variable compensation, the acquisition of Cardiva Medical and the impact from the 53rd week. Contributions from our productivity savings and cost-containment efforts that were put in place earlier in the pandemic helped to offset some of the impacts and allowed us to make additional growth investments into our business. As a result of the performance in adjusted gross margin and adjusted operating expenses, fourth quarter adjusted operating income was $30.5 million, a decrease of $16.8 million or 35%. And adjusted operating income for fiscal 2021 was $154.6 million, a decrease of $63.4 million or 29% compared with the prior year. Adjusted operating margin was 13.5% in the fourth quarter and 17.8% in fiscal 2021 down 630 basis points and 420 basis points respectively compared with the same periods in fiscal '20. For both periods the lost leverage from revenue coupled with the inventory-related charges higher variable compensation and impacts from portfolio changes outpaced the impact of cost mitigation efforts and productivity savings. These inventory-related charges and higher variable compensation put downward pressure on operating margins by approximately 500 basis points in the fourth quarter and approximately 100 basis points in fiscal 2021. The variable compensation incentives we established during the pandemic and the onetime inventory-related charge due to the recent customer announcement are not expected to affect future operating margins. The adjusted income tax rate was 12% in the fourth quarter and 14% in fiscal 2021 compared with 18% and 15% respectively for the same periods of the prior year. Fourth quarter adjusted net income was $23.9 million down $11.5 million or 33%. And adjusted earnings per diluted share was $0.46 down 33% when compared with the fourth quarter of fiscal '20. Adjusted net income for fiscal 2021 was $120.7 million down $50.6 million or 30% and adjusted earnings per diluted share was $2.35 down 29% when compared with the prior year. The inventory-related charges and higher variable compensation had a downward impact on adjusted earnings per diluted share of $0.18 in the fourth quarter and $0.12 in fiscal 2021. Our Operational Excellence Program continued to deliver positive results and drive improvements in adjusted gross and adjusted operating margins. This program has also enabled us to offset some of the challenges resulting from the pandemic. During fiscal years '20 and 2021 the program to date gross savings are approximately $34 million with the majority of those savings dropping through to adjusted operating income. Cash on hand at the end of the fourth quarter was $192 million an increase of $55 million since the beginning of the fiscal year. Free cash flow before restructuring and turnaround costs was $99 million in fiscal 2021 compared with $139 million in the prior year. Fiscal 2021 included a $54.3 million payment for a compensation-related liability as part of the Cardiva Medical acquisition. The total purchase price paid for Cardiva Medical was reduced by the amount of this liability. Lower increases in inventory lower capital expenditures and improvement in accounts receivable compared -- when compared with the prior year have benefited fiscal 2021. Although the free cash outflow for inventory is lower than in the prior year the impact from lower sales volume in plasma has resulted in a higher disposables inventory balance. We will continue to monitor our inventory levels and expect inventory fluctuations to continue as we adjust our production to support customer demand and our Operational Excellence Program initiatives. In addition to free cash flow the fourth quarter ending cash balance benefited from the completion of a $500 million convertible debt offering which resulted in a net cash inflow of $439 million. Offsetting the cash inflow during fiscal 2021 was $390 million of net cash spent on recent portfolio moves and $82 million of debt repayments including a $60 million repayment of the revolving credit line that was outstanding at the end of fiscal '20. Our current debt structure includes a $700 million credit facility that does not mature until the first quarter of fiscal '24 with the majority of the principal payments weighted toward the end of the term. At the end of the fourth quarter total debt outstanding under the facility was $302 million. There were no borrowings outstanding under the $350 million revolving credit line at the end of fiscal 2021. During the fourth quarter we completed a $500 million convertible debt offering. Our EBITDA leverage ratio as calculated in accordance with the terms set forth in the company's existing credit agreement is 3.4 at the end of fiscal 2021. The existing $500 million share repurchase authorization will expire at the end of May 2021 with $325 million remaining on the authorization. We will update our capital allocation priorities in the next few quarters as we continue to develop our long-range plan. Now I will turn to our fiscal '22 guidance. Our business continues to be impacted by the pandemic, therefore our fiscal '22 guidance includes wider-than-usual ranges that reflect the uncertainty of the pace of the continuing recovery. We will narrow or update our guidance as necessary throughout the year. Our fiscal 2022 organic revenue growth is expected to be in the range of 8% to 12%. We remain confident in the continued market growth underlying the commercial plasma business and anticipate plasma revenue growth of 15% to 25% in fiscal 2022. At the low end of our guidance range, we assume that the second and third rounds of economic stimulus will continue to impact plasma collections through the first half of fiscal 2022 with stronger collection volumes in the second half of fiscal 2022. At the higher end of our guidance range, we assume that recovery will begin mid-second quarter with additional acceleration toward the end of the fiscal year as customers begin to replenish safety stock levels. In both cases, we expect the run rate for plasma collections to be at or above fiscal 2020 levels at the end of the fiscal year. Disposable revenue related to CSL collection volume is included in the guidance for 12 months. In fiscal 2021, we recognized disposable revenue in the US from CSL of approximately $89 million. This plasma revenue guidance also includes the net impact of initial rollouts of Persona and NexSys adoption for customers with whom we have agreements with the majority of the benefit towards the end of the fiscal year. These benefits are partially offset by price adjustments, including the expiration of fixed term pricing on a historical PCS2 technology enhancement and a onetime safety stockholder in fiscal 2021. We expect 15% to 20% organic revenue growth in our Hospital business in fiscal 2022. This growth rate assumes the recovery of hospital procedures will continue to improve throughout the year and will be close to fully recovered across all geographies by the end of our fiscal 2022. Our Hospital revenue guidance includes Hemostasis Management revenue growth in the mid-20s. The Cardiva Medical acquisition is anticipated to deliver $65 million to $75 million of revenue and is excluded from organic revenue growth until the anniversary of the acquisition date. Our fiscal 2022 guidance for Blood Center revenue is a year-over-year decline of 6% to 8%. The anticipated revenue decline in Blood Center reflects the annualization of business exits primarily within North America whole blood, the non-repeating revenue related to convalescent plasma in fiscal 2021 and the effects of order timing which favorably impacted fiscal 2021. We expect fiscal 2022 adjusted operating margins in the range of 19% to 20% and adjusted earnings per diluted share in the range of $2.60 to $3. Our adjusted earnings per diluted share guidance, includes an adjusted income tax rate of approximately 21%. In fiscal 2022, we expect our Operational Excellence Program to deliver gross savings of approximately $22 million with less than half benefiting adjusted operating income due to inflationary pressures and investments in manufacturing. The program began in fiscal 2020. And by the end of fiscal 2022, we anticipate achieving approximately $56 million of gross savings with about 60% of those savings benefiting adjusted operating income. The remaining year of the Operational Excellence Program is being updated as part of our comprehensive effort to address the impacts from the anticipated customer loss in early fiscal 2023. We intend to communicate the updated Operational Excellence Program as part of our longer-range plan. We also expect our free cash flow before restructuring and turnaround expenses in fiscal 2022 to be $135 million to $155 million. Before we open the call up to Q&A I want to reiterate the key points that we hope you take away from today's call. First, while the pandemic continued to impact our business, we don't believe it has caused any structural changes to the end market demand for our products. By the end of our fiscal 2022, we expect full recovery across all of our businesses, but the exact pace of the recovery is the biggest variable included within our guidance. Second, we believe our product portfolio strongly positions us to capitalize on the market recovery ahead. Despite the challenges put in front of us, our teams remain focused on rationalizing our product portfolio to emphasize the products and markets that meet our strategic goals, prioritizing investment and allocating capital to strengthen the core capabilities and technology that make us distinctive. Third, our operational excellence program continues to drive transformation primarily in our manufacturing and supply chain as we become more agile and flexible. We made significant progress to-date, which has allowed us to offset some of the headwinds due to the pandemic. And we expect to have close to 60% to 70% of the program completed by the end of our fiscal 2022 with the majority of those savings benefiting our adjusted operating income. And finally, we have a proven dedicated team committed to driving value for our customers and our shareholders. We are proud of the way our teams have risen to meet the challenges over the past year. We recognize more challenges are ahead including difficult donor economics and the eventual loss of CSL in plasma. We are committed to taking action, managing costs and mitigating the impact without compromising future growth of our business. And while we have a lot of work to do in the coming quarters, we're confident that our team's experience, resilience and agility will ensure that Haemonetics has a bright future. With that, I will turn the call back to the operator for Q&A.

Thank you. [Operator Instructions] Our first question comes from Anthony Petrone with Jefferies. Your line is open.

Thank you. And couple of questions to start on guidance and then I'll shift to plasma. Maybe starting with earnings guidance out of the gate, maybe just a recap of what is baked in for the Cardiva dilution to the earnings line in fiscal 2022? That would be the first question. And then offsetting that how much gain, are you getting from the restructuring? And then perhaps maybe to round out the earnings question, you referenced price several times. So how much price erosion is baked into the earnings line? And then I have a couple more on plasma.

Hi, Anthony, it's Bill. I can take your first one there. So on the guidance, your first question was on Cardiva. We have $65 million to $75 million of Cardiva revenue in the guidance. It's in line with what we had in the deal model. It is -- there is dilution included in the EPS numbers. It's -- we haven't disclosed exactly what that's going to be and we're going to stay away from the exact dilution that's in there. But it is slightly dilutive both on the operating income level and in EPS. Your second part of the question, I think it was related to the…

Yeah, the earnings, yeah, how much is baked in for restructuring gains and then offsetting that to what extent is price impacting earnings?

Yeah. So our -- let me just give you an overview of our Operational Excellence Program. So through the end of fiscal 2021, we recognized $34 million of gross savings with about half of that dropping through to adjusted operating income. In FY 2022, we're anticipating an additional $22 million of gross savings. And we stated that about less than half of that can drop through to adjusted operating income because there's inflationary pressures and some investments in manufacturing that we've netted into the -- or against the gross savings. But in total, the $56 million of gross savings will be 60% to 70% of the overall program savings through the end of FY 2022.

Okay. And then just pivoting to plasma, maybe a little bit on the 15% to 25% organic guide. Just to splice that what's in there for COVID headwind? It sounds like that's still lingering certainly through the first half. But you also referenced last quarter contract wins as well as in today's prepared remarks. So how much headwind is baked in there from a basis point standpoint offset by contract gains? And I'll just go to the last one in for Chris. Just maybe high level on the strategic comments today we have a new competitor coming in Terumo. I'm just wondering if you could provide a little bit more detail on the strategic thoughts that are going on internally and some potential countermeasures at least as you look at how the landscape is shifting here early on? Thanks.

Yes. Anthony why don't I -- do you want to start first?

Yeah. I'll take the plasma guidance question. So the range that we provided was 15% to 25%. And what's included in the range there and is most impactful in the guidance is the pace of the recovery related to the pandemic. And coming out of Q4 we still have seen some weakness. Chris mentioned it in his remarks that we haven't seen really a recovery coming out of the fourth quarter. So through this -- throughout Q1 and FY 2022 so far, the volumes have still been down versus the prior year. So that's reflected in our guidance. And at the low and high end of the guidance there are just slightly different assumptions on the recovery. So at the low end of the guidance, we have recovery not beginning until late in the second quarter and then accelerating throughout the back half of the year. In the high end of the guidance, we're a bit more optimistic and we are assuming that we see volumes recover earlier in the second quarter. In both cases though, we do expect that coming out of FY 2022 on a run rate basis that we would be at/or above the volumes that we were experiencing back in fiscal 2020. And then one other thing that is affecting the guidance range early in the year in FY 2021, we referred to a stocking order of about $6 million. And that stocking order has about a 3% or 4% impact, a downward impact on the guidance range this year.

Okay.

Okay?

Yes. Thank you.

Yes. So Anthony on your questions regarding a longer-term perspective, we remain very bullish on 8% to 10% growth in collection volumes to meet the demand for IG worldwide. Clearly, the pandemic has depleted inventories, so we fully expect that they are -- our collection customers to drive higher volumes of collections as they did in prior years pre-COVID to make up for that gap. So we don't see any structural change. We're excited about this. The actual recovery in the third quarter of last year is a good reference point in that regard. When we look at that recovery clearly stimulus is the single largest factor, and as Bill just articulated, it's just difficult to know exactly when the influence of stimulus is going to wane. So what we're forecasting is that mid to latter part of our second quarter with robust recovery into the latter part of the year probably offsetting seasonality, or any other changes you would otherwise expect. So we fully anticipate, but we think it's going to be delayed. We overlay on top of that what we're doing with our portfolio, which we remain very confident in the value proposition of that portfolio. The NexLynk DMS conversions continue full stride. We expect to have that completed by year-end. As I mentioned in the prepared remarks that is for most of our customers a precursor to NexSys. All of those customers are -- have agreed to adopt NexSys either US or globally with the exception of CSL. So those conversions are underway. They begin increasing in earnest on the other side of NexLynk. And we expect to have our existing base converted to NexSys by midyear 2023, right? So, we're enthusiastic about that and we are overlaying Persona with its 9% to 12% yield on top of that, which again we described previously is a game-changer in terms of excitement within the industry. So from our vantage point, we double down on technology and innovation and drive that adoption through the market paced by our customers whose first second and third priority understandably is recovery from the pandemic.

I’ll get back. Thank you. Thanks.

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

Great. Thanks. Good morning everyone. I guess, I have two questions here. First for Chris. Look, Chris, I think part of what's reflected in the stock price is concerns from investors that you sort of got blindsided by what CSL wound up doing with its contract and the potential for other customers to move in that direction. So I'm just curious as to your thoughts as to again how you fit into the equation here. And what can you tell us, I guess, specifically about the contracts and perhaps some longevity that could give people some comfort that this can't necessarily change three months from now?

Yes, Larry. So we're in constant dialogue with our customers conducting business reviews planning for recovery. All of those customers, as we've said, with the exception of CSL, though CSL has agreed to adopt in Europe and that's underway, all of those customers have agreed to adopt NexSys, right, in the US or globally. And the conversations we're having with them is about how to make that roll out as minimally disruptive as possible for their ongoing business given the heightened urgency around recovery. So we're under contract, we feel great about what the competitive position of the product and what it means for them. They're excited about the adoption and that's what our conversations are focused on.

And Chris just a quick follow-up on that. When you talk about deployment of NexSys into your customers, can you help us understand sort of how broad that is within those customers in terms of the agreements and the deployment there? And can you even provide any sort of -- even at a high level some thoughts on the longevity of your contracts to help give investors some comfort that there's some runway here? And then I have a…

Larry, I want to stay away from specific conversations around customer contracts. It's confidential and proprietary. And candidly in a tightly contested market like this it's just not helpful, right? So as a general course, we don't talk about individual customers. We're not going to talk about the details of those contracts. What I can tell you is that the change out of a network is no small feat for us for our customers. So the agreements we have in place cover all of the existing PCS2 devices and the associated disposables in the US or globally as mentioned. I don't think we or our customers take those change-outs lightly. It's predicated upon a belief on the value proposition of the product first and foremost, and how it will enhance their collection capabilities, the yield, the cycle time, the connectivity and the donor satisfaction. And then, I think increasingly, it's predicated upon our commitment to innovation and technology. We're not in any way shape or form resting on our laurels. Through the pandemic, we introduced not only Persona, but the Donor360 app, that's having meaningful benefit for all of our customers, when we rolled it out industry-wide. We're not backing off of our technology. We'll double-down and we have through the pandemic and beyond.

Okay. That's really helpful. And then I guess for Bill, just trying to again wrap my arms around the guidance for fiscal 2022. I'm wondering, Bill if you can, just sort of help bridge the operating margin assumption that you've got in the guide that 19% to 20% versus the 2020 operating margin which was closer to 22%? Just trying to understand the downward pressures there from what you achieved in 2020 to the guide for 2022.

Yeah. Thanks, Larry. The largest contributors of the difference between FY 2020 and our guidance for this year would be first and foremost is the plasma volume, right? We all know that plasma volume is highly leveraged at the operating margin level. So when plasma is off, we're not -- we said we would be at the end of FY 2022 run-rates equal to FY 2020, but we'd still for the year be down. And that's putting pressure on the operating margins. The second piece is the Cardiva dilution. And then, our operating expenses are I would call it neutral. And I want to say that, because we are in the process of getting back our operating expenses to levels where they were in FY 2020, after being significantly down in FY 2021 because of our cost-containment efforts.

Okay. And just as we try to dial in the right operating expenses here can you help us think a little bit about Bill, -- again, I know you said that Cardiva would be dilutive but can you help us think a little bit about the incremental OpEx, that's coming through on that acquisition? Thanks.

Yeah. So I would -- when you look at our Q4, in FY 2021 that could essentially be your starting point for expenses, give or take. And then, when you look at Cardiva right, we know -- we said $65 million to $75 million of revenue. So use a mid-point apply somewhere in the 75% margin range. And if we're negative on the operating income line you can back into an expense amount that gives you an idea of where you should be.

Great. Thanks very much. Appreciate it.

Yeah. You got it.

Thank you. Our next question comes from Larry Solow with CJS Securities. Your line is open.

Great. Good morning. Thanks for taking my questions. Just a couple of follow-ups on the Cardiva piece, first, I thought when you guys made that acquisition it was going to be sort of I think $0.10 to $0.20 dilutive in the year. Is that in the first year? And most of that, I anticipated at the time was going to be interest expense which was before you did the convert so can you help me just bridge that? Has that changed at all? I guess you're not -- I gather you're no longer giving that guidance. You're not giving specific guidance on Cardiva. So it seems like the operating expenses are higher than initially thought, or could you just give a little more color on that?

So Larry, the revenue range is similar to what we provided. And you're correct …

Right.

…on the EPS range what we gave initially. We subsequently have done the convertible debt offering which did remove some of the interest expense related to that.

Right, right.

…But still on the operating income line, we are negative. We're anticipating the amount on operating income to be negative. But we'd probably be at the -- on an EPS basis we'd be at the lower end of the range that we had provided before on the EPS line.

Okay. And then, just to clarify on Plasma. So Chris, it sounds like you're pretty confident that, by the end of fiscal 2023 the majority if not all of your customers will have converted to NexSys with the exception of CSL, who in theory wouldn't be a customer then anyhow, in the U.S. at least, I should say. Is that correct?

Yeah. With your clarification that, we are under contract with CSL for Europe, and that conversion has already begun and we intend -- both, parties have communicated their intent to honor the contract which is a long-term agreement.

And the number this year it sounds like you probably -- timing-wise maybe you get some conversions at year-end. But I guess and you mentioned in the guidance, maybe at the high end of that plasma range you're putting in a little bit of conversion there. Is that sort of...

Yeah, that's exactly right, Larry. We've got to continue to power through which is …

Right.

… challenging in a pandemic environment. The NexSys -- NexLynk, DMS software upgrades we've done well with that. We continue to do well with that. We anticipate completion as scheduled by the end of this year. For anybody who's converted we are actively moving on the NexSys PCS. And the pace of that conversion is really as it has been from the outset dictated by our customers. We stand ready to go and they need the plasma. So anything we can do to pull that forward, we'll take advantage of. But our guidance reflects the likelihood that both, the recovery itself and the conversions are a second half event and into 2023.

Right. Okay. And then just shifting gears lastly, just on the cost structure. I know you're not ready to sort of give your outlook for fiscal 2023. But, Chris, obviously, you've done a great job in rightsizing the company since you came five or six years ago. Just from a high level, I guess, it's a two-part question. On the Operational Excellence Program, getting that remaining $25 million to $35 million targeted savings, which maybe is a little bit lower now, because of inflation, is that going to be an achievable number still? Because I know part of that, sort of, $80 million to $90 million was predicated on volume gains in plasma. So, clearly, you're not going to get -- yes, go ahead. Thanks.

What I would say about the program, Larry, is we're really proud of what that team has done. It's not just global manufacturing and supply, its R&D, its quality assurance, it's our business services. Collectively, they've made tremendous strides, despite whatever the world has thrown at them.

Sure.

We did take a view at that, which said, we're going to capitalize on high volume and throughput businesses. That's changed somewhat, as a result of CSL's decision. So that team is in the process of reexamining what are the levers that we can pull intelligently. The first priority of that initiative is to ensure continued world-class product quality. And we're not going to compromise that. The second priority is world-class customer service. We're not going to compromise that. We then look at the savings, what we've signed up for to date and the pass-throughs, et cetera. That's hard wired. What we intend to do and what Bill explained, I think, in his prepared remarks is, we will now step back with the adjusted volume that will begin in our FY 2023, with the loss of CSL's US PCS2 supply agreement. When we look at that, we'll figure out what OEP needs to become as a result of it. And as you said, I think, this is a team through complexity reduction, through OEP, through the cost management during the pandemic, that's demonstrated their commitment to being good stewards financially. And we're going to continue to do so here, but we're not going to do it in a way that's going to compromise our leadership position in the markets where we compete.

Absolutely. Okay, great. Got it. I appreciate the color. Thanks so much.

Thanks.

Thank you. Our next question comes from Mike Matson with Needham & Company. Your line is open.

Yes. Thanks. So with regard to the NexSys upgrades, you're saying you expect those to be completed by mid, I think, fiscal 2023? And so is that right? And then, what is your expectation around Persona? Is that going to be kind of beyond that? Is that like another upgrade on top of NexSys, I assume?

Yes, Mike, you have it exactly right. It's mid-2023, the fiscal 2023. And the Persona discussions are going great. We're having those in parallel. I think different customers will view the upgrade to Persona differently. There's a series of clarifications, tests, et cetera, given the magnitude of the change for them. So we're working our way through that. What's reflected in our guidance is the contracts we've already reached. And as we get closure and pull some of the additional opportunity in, we'll communicate through our guidance accordingly.

Okay. Thanks. And then, I don't know if you need to answer this, but just with regard to the stimulus program, I mean, there's the cash payments, but there's also the extended unemployment that I think goes through September. So do you have a feel for whether it's the just the cash, one-time stimulus payments versus the added unemployment payments that have caused the pressure on the collection volumes? And because it is unemployment, I mean, we're looking at, like, September time frame, but if it was the stimulus then could occur earlier or maybe that's why your guidance is so wide and you're uncertain about the timing.

Yes, Mike. That is a driver of the 15% to 25% range on our guidance for growth in revenue on plasma and it's really a function of when does that kick in? And you are right, there are multiple components of this, whether we're looking at the federal dollars or the state dollars, whether we're talking about one-time payments, whether we're talking about the weekly unemployment additional subsidies. There's even provisions for tax credits that get factored in, beginning mid-year in our calendar year. So it's a complicated confluence of different factors. We've worked hard to model that. We're having conversations, obviously, with our customers about that to understand their perspective and how much of that's reflected in the forecast they submit to us. At the end of the day, what we're trying to get to is, what is disposable income, what is household savings rates net of all this. And I think we had some good learnings from the past year. And while, I think, we struggle to be precise in the forecasting of it, in both directions, candidly, I think, we've learned a bunch. And that's reflected in the range that we've put forth.

Okay. Thanks. And then, I just had one clarification question on the -- this PCS2 tech enhancement pricing issue. Can you maybe elaborate on that a little? I didn't understand what that was. It sounds like it's some sort of headwind on pricing on the legacy PCS2 units or something.

Yes. There is -- it's a legacy agreement, long-dated agreement that was sunset here just recently and it's just a change to -- there's an enhancement we made. We got priced for it at the time years ago. It was a time-bound agreement and the agreement has expired.

Okay. And is that all the customers or just one customer?

It was with one customer.

Okay, got it. Thanks.

Thank you. Our next question comes from Drew Ranieri with Morgan Stanley. Your line is open.

Hi Chris. So, you talked before about your focus on M&A to really diversify the portfolio. You've also completed several divestitures strategic exits just get out of lower-growth lower-margin businesses. So, as you kind of look ahead and I know there's still a lot of unknowns here, but do you feel more compelled to prune the portfolio in greater magnitude just give yourself maybe more flexibility or to drive further growth and profitability enhancements?

Yes. Drew I appreciate the question. I think from our vantage point at one level, this doesn't change anything, right? We are focused on growth organic, inorganic, shareholder value creation long-term. We still have aspects of this portfolio that are probably not part of the future of this company. And intelligently and thoughtfully when we can do so in transactions that are value-creating we'll address that, right? In the interim, we are highly focused on delivering full value for our customers across all of our customer base. So, I'm impressed and pleased by what the team was able to get done this year the divestitures that we called out in terms of very antiquated software in our US Blood Center donor market and some stuff that was very isolated for Europe. Just -- we are highly committed to software as a growth lever for the company as our customers demand it. But those programs were just not bad, right? They're very antiquated. I think similarly the divestiture of the Fajardo manufacturing facility for whole blood filters we were able to transition that to a world-class supplier who will do great things with this and we got back operating agility in our manufacturing network. We'll continue to look for those type of opportunities for sure. In terms of the acquisitions, we've been busy, right? And we've done a bunch of things culminating in Cardiva. There was a discussion earlier about Cardiva and I think could potentially get lost in all of this because of our reporting. We are very pleased with the work so far to integrate and assimilate, right? We closed the transaction in March and we have been full steam ahead. We've gone out of our way to avoid any disruption to that business. And the results that we have seen through the first three months of the year clearly are evidence of that. This is an exciting opportunity. It's a jolt of energy not only to the Cardiva team, but also to our own hospital business unit. And I think you're seeing that in our results in terms of the pace of recovery and the growth therein. So, electrophysiology, interventional cardiology, exciting growth segment for us and we really like our chances of what's happening with the VASCADE portfolio.

Got it. Thank you. And actually on that topic just touching on your outlook for Cardiva for fiscal 2022 I see your guidance is $65 million to $75 million. I know you mentioned that they did about $8 million in March given your financials. But I just kind of want to better understand kind of the run rate there. I mean it sounds like it's over a $20 million quarterly run rate. So, can you just help us better understand in the context of your $65 million to $75 million guidance? And then fiscal 2022 is it more focused on kind of going deeper in existing accounts with Cardiva or are you thinking more of commercialization across a broader account base? Just getting -- trying to get a better sense of the commercial investments in the year. thank you.

Sure. I understand the question. The -- from our vantage point, right, we've spent a lot of time in diligence. We put together what we think is a very robust deal model the $65 million to $75 million is a direct take from that. And it's early days. We're excited by what we see. We understand if you annualize that March number you get to a different place. We're not ready to do that yet, right? This is a rapidly growing product. It grew 50% year-over-year last year under Cardiva's leadership. And we need to spend a little bit more time with it to truly understand the forecast and the growth potential. As we learn more we'll share more and if need be adjust accordingly. From what we're seeing, the primary benefit is twofold. We are -- that team is hyperfocused on driving penetration in the top 600 US based interventional cardiology and electrophysiology hospitals, right? And there's some back and forth around this and geographic expansion. But the bottom line is that team is executing in a very powerful way against the opportunity that's right in front of it. And we see a lot of excitement there. In parallel, we are looking for opportunities to augment that and pull aspects of the plan forward where that presents itself. That's something we're going to be talking about more in the coming months across our entire portfolio in part with response to changes in the plasma landscape. So we will seek out opportunities to do more and to do it sooner. And Cardiva will be a place that we look for that type of opportunity. But what we're excited about is what they're doing with the resources they have. We think we can do more with additional resources. What you don't see in the results, but is equally important is the investments that our combined teams are making clinically and more broadly to build out our footprint and our potential outside the US. So I think that will come to fruition. When we have a chance to sit down and talk more broadly about the portfolio we'll provide additional clarity. That's a result of the diligence and the early work together with the Cardiva team. But it's exciting. We're delighted to have them on board and they're delivering accordingly.

Thanks for taking the questions.

Thank you. Our next question is a follow-up from Anthony Petrone with Jefferies. Your line is open.

Thanks. Just a couple of quick follow-ups on cadence in Plasma. First would be just on CSL. They have the one year option extension to June 2023. I'm just trying to kind of run through that scenario. When would they have to sort of indicate to the company that they would have to sign on for that? And maybe what are your thoughts on the probability that they resign for 2023? And then the last one on Persona. It sounds like discussions are ongoing. I mean when we think about upgrades to Persona and timing, is there a potential for any in fiscal 2022 or do you think that's a beyond fiscal 2023 event? Thanks again.

Yeah. Thanks, Anthony. In terms of the agreement with CSL, we communicated a lot about that, so I'll stay on that because we have spoken about it. The agreement has one additional extension that is at CSL's discretion. They would need to notify us in writing by the 31st of December of this year, if they intend to go beyond June of next year. And they have one more of those extension periods available. In terms of likelihood of that, it's a question best directed at CSL. In terms of persona, we have included a handful of signed agreements and planned rollouts some of which have already happened, some of which will happen over the course of the year. We are obviously in discussion with -- we are in discussions with others and we would be -- obviously we'd be excited to pull those forward. In some cases, it's very straightforward; in other cases, there's important underlying science in terms of handling a bottle. That is a third larger understanding the implications for fractionation given the higher yields and testing which we've done what the customers need to do because there are fractionation formulas with regards to the higher -- what is the protein concentration. We are working collaboratively with our customers through all that. The pace of it makes it a little difficult to predict. But as we reach closure on those and pull them in some of which we would hope will happen in FY 2022. That's what pushes us towards the upside of our guidance. And if it goes beyond that we'll talk about that then.

Thank you.

Thank you. And I'm currently showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.