Good morning ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter 2022 Haemonetics Corporation Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a Q&A session. [Operator Instructions] Please be advised today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your speaker host today, Olga Guyette, Director of Investor Relations. Please go ahead.

Thank you. Good morning, everyone. Thank you for joining us for Haemonetics second quarter fiscal 2022 conference call and webcast. I'm joined today by Chris Simon, our CEO; and Bill Burke, our CFO. This morning, we posted our second quarter fiscal 2022 results to our Investor Relations Web site along with our updated 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 '21. As in the past, we'll 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 in excluded items, including comparisons with the same periods of fiscal '21 and a reconciliation to GAAP results. Our remarks today 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 impacts from the 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 it over to Chris.

Thank you, Olga. Good morning everyone and welcome. Before we discuss our second quarter results, I'd like to begin with the news we announced this morning that Bill Burke has decided to retire from Haemonetics effective next summer. Bill joined the company in August 2016 and has been a valuable visor and partner to me while building Haemonetics' world class finance team. Together we have directed strategic financial initiatives enabling us to best leverage our resources for investments in people, products and processes that drove our turnaround and are fueling our long-term growth. I'm grateful that bill will continue to serve as CFO through the remainder of this year as we conduct a search for his successor. We have also agreed to work closely with a successor and the finance team financing to affect a seamless transition. I offer Bill my sincere appreciation for his many contributions to our company. Now on to the second quarter results. Today we reported organic revenue growth of 5% for our second quarter of fiscal '22 and adjusted earnings per share of $0.60, down $0.02 or 3% compared with the second quarter of the prior year. Our performance in the quarter reflects revenue growth across all of our business units and we are encouraged by our overall positive first half fiscal '22 results and the momentum we have built moving forward. We are enthusiastic about our success so far. Our teams are demonstrating strength and resiliency and we anticipate robust growth through the second half of our fiscal year. We are advancing our market leadership by driving significant value for donors, collectors, patients and physicians around the world. We see clear evidence of upturn in our key markets, including meaningful increases in plasma collections, growth in demand for our hospital products and the performance…

Thank you, Chris, and good morning, everyone. Chris has already discussed revenue, so I will begin with adjusted gross margin which was 52.6% in the second quarter, an increase of 40 basis points compared with the second quarter of the prior year. Adjusted gross margin year-to-date was 53.6%, an increase of 380 basis points compared with the first-half of the prior year. Our adjusted gross margin benefited from the addition of our VASCADE Vascular Closure business, continued growth savings from our Operational Excellence program, and favourable mix from the remaining product portfolio as our business continued to recover from the effects of the pandemic. These benefits were partially offset by inflationary pressures in our global supply chain, including freight costs, previous divestitures, and price adjustments. Additionally, the sequential decline in adjusted gross margin of 210 basis points in the second quarter, was primarily driven by inflationary pressures in our global supply chain, including freight costs. Adjusted operating expenses in the second quarter were $82.4 million, an increase of $16 million or 24% when compared with the prior year. As a percentage of revenue, adjusted operating expenses increased by 260 basis points and we're at 34.3%. Adjusted operating expense in the first half were $169.5 million, an increase of $39.3 million or about 30% compared with the first half of the prior year. The acquisition of our VASCADE Vascular Closure business had the largest impact on the increase in adjusted operating expenses. Also affecting the increase were increases in freight costs and higher research and development expenses, as we broadened our project portfolio to strengthen our technology. Our second quarter adjusted operating income was $43.8 million, an increase of about $1 million or 2%. In the first half adjusted operating income was $81.7 million, an increase of $10.2 million or 14%…

Thank you. [Operator Instructions] Now, first question coming from the line of Anthony Petrone with Jefferies. Your line is open.

Thank you, and good morning, everyone and good luck, Bill, as you transition into retirement. Maybe to kick-off with a few questions on plasma and guidance, maybe Chris, Andrew, Bill, you know, kind of walk us through how the quarter progressed in particular. Particularly it looked as if earlier in the quarter there were signs of a more, sort of protracted plasma reversal improvements earlier in the quarter, which kind of gave way to some pressures toward the end of the quarter. So may be just a little bit on where the specific pressures were as the quarter evolved? Was it border centers? Was it just Delta constraints specifically? We've been hearing a lot about hospital staffing shortages, was that at play at the plasma centers in the United States? So maybe just a little bit on the ebbs and flows of the quarter? And I'll have a couple of follow ups.

Yes, hey Anthony it’s, Chris. Thanks for the question. With regards to the progression, right, we are in the midst of recovery. We remain optimistic about the overall recovery. I think there's ongoing questions as they will continue to be around pace and timing and candidly from our original forecast, probably one to two months off of that in terms of gaining that trajectory. But if I just take you back, because we have put a bunch of numbers out, so let me try to clarify where we are. We reported 14% growth in the first quarter. When we did our earnings call in August we said that through the month of July we had actually, we're closer to 20% growth. And then I spoke at Morgan Stanley Conference in September and said, we're actually inching up towards the mid 20s. Over the course of the remainder of the quarter, we came in, as you saw from the results today at 20%, which as you head into third quarter, third quarter of last year we experienced meaningful growth and we are forecasting that we will experience meaningful growth again this third quarter. Historically, the business ticks up on average across the industry 3% to 5%. We did well in excess of that last year. We expect to do well in excess of that again this year. The revised guidance range of 10% to 20% on the low end, and as we said in our prepared remarks contemplates continued 20% growth, very consistent with where we were in the second quarter and at the high end of the range would be nearly double that at 35%. And where we are today and lesson learned about the jumpiness in this data, we're well within that range and we feel confident in our revised guidance as best we can given as you said, we don't control the southern border, we don't control the Delta variant. We are working hand-in-hand with our customers to make sure the centers are fully operational, that they are safe and proceed today. And I think the industry collectively is doing yeoman's work to drive this recovery. If we see the higher end of our range, we'll be back to pre-pandemic levels by our fiscal year end on the low end of the range that'll carry on into FY 2023. But the recovery is underway. We're confident there's nothing different structurally or longer term. And in fact, as I said in the prepared remarks, as we get out ahead of this, the opportunity to grow in excess of the 8% to 10% historical average is in front of us and we're ready to support that given the need to replenish depleted inventories.

Just a couple of follow ups here on the outlook. A, and then just safety stock levels industry wide. On the outlook now plus 10% to 20%, revised for plasma, one of the larger fractionators recently came out and guided plus 15 to 25, which was in line with the prior guide. So may be just a little bit of reconciliation there? And then secondly, when you look at sort of safety stock levels, I know it's hard to sort of look beyond reported financials, but anything you can glean as to where kind of industry wide safety stock levels sit heading into the back end of this year? And, of course, if they are running low that would sort of point to a need to over collect, as you mentioned? I'll get back in queue. Thanks.

Yes, thanks, Anthony. So, as you know, I won't comment on individual customers. The numbers can move around a bit. Folks report that they have different fiscal periods than we do, which are still as you know, through March 31, if someone's looking at a calendar year or a midyear, it's going to be different and we recognize and respect that. I think our collectors do have other sources of plasma. Some of them are picking up third party plasma, et cetera. So there can be reasons why the individual forecasts are going to differ. From our vantage point, as we said, recovery is underway, and we feel good about it. The lag candidly was more in the summer months, and maybe a one to two-month delay in the trajectory that the industry is now achieving. And so from our vantage point, we just have to call it based on what we saw this past summer, and where we see it going forward. 10% to 20% is still robust growth and we feel confident that collectively we can deliver on that. In terms of the inventory levels that our customers maintain of frozen plasma, it's less than transparent and it's complicated. They've done a bunch of things to expedite the release of that inventory. It's certainly had to manage end market demand for different indications and different formulations. We don't have a lot of visibility into that. We track it closely and it's one of the reasons that we're bullish that as the recovery accelerates, that they'll continue to accelerate certainly beyond anything getting us back to prior levels, because there is a need, as we did probably in the three years in the run up to the pandemic, to help the industry build volume, that build plasma volume storage. So we're there, we're looking forward to support it, and it's just a question of the exact timing and pace from where we sit.

Thank you.

And our next question coming from the line of Andrew Cooper with Raymond James. Your line is open.

Hi, everybody. Thanks for the questions. May be just a followup with one more on the plasma trajectory. I know you sort of alluded to it, but can you give us a little bit more specific flavor for what you've seen through October and sort of where the growth sits today? Is it still consistent with that 20-ish percent or has it picked up a little bit as we move beyond sort of the worst of the worst of the pandemic?

Yes, thanks for the question. As it pertains to the Delta variant, and what we're seeing on the ground and centers, in part enabled by some of our digital applications, the centers are safe and fully operational and it's been quite impressive to watch what our customers have been able to do to make it a good and rewarding donor experience. So in that regard, we feel quite confident that collectively as an industry, we can manage through the pandemic as it migrates and becomes an endemic going forward, presumably. In terms of where we are, obviously, the data jumps around a bunch we know. We see a historical 3% to 5% increase in the third quarter. That's a combination of everybody being back-to-school gearing up for the holiday spend, and some other seasonal effects. Last year, we grew well in excess of that. We anticipate and the 10% to 20% guide fully anticipates that we're going to grow well in excess of that. We're a month into the quarter. I don't want to get in the habit of kind of drilling down in the weeklies because they're just too noisy. But we feel quite confident with the guide that we've given that, what we're seeing quarter-to-date, we're well within the range, and therefore kind of okay with what we're putting forth.

Okay, great. I appreciate that. And then maybe just on sort of some of the inflationary items, can you give us a little bit more flavor for maybe what's great, like it shouldn't be a ton of labor, but that's something we've heard a lot of folks talk about. So how do we think about those two are some of the other inputs? And then whether in fiscal 2022 or longer term, any ability to start passing through some of those inflationary items to the customers or how else can you offset some of those items?

Bill, you want to take a run at that?

Sure. Hi, Andrew. On the inflationary pressures, most of the pressures that we're seeing are freight related specifically, later in the second quarter. I think everybody has seen the news, right, we started to really see that those freight costs go up, but in addition, we are seeing slightly higher raw material costs too and that goes back even into our first quarter. We don't, in our guidance we haven't anticipated that any of those costs will, will bounce back, right? We just are expecting pretty much a steady state right to the end of this fiscal year. And then on the second part of your question regarding the pass through of our costs to customers, I think it's just a wait and see right now. We have our eye on it and it's something we're looking at, but I think we're just going to have to wait longer term to see what happens in regards to the cost coming back to normal.

[Indiscernible] I can build on that Bill. What I would say is, one of the things that that we are proud of, and I think we've had a lot of recognition from our customers is business continuity, and our own employees, our safety and health, which is a requirement for that. So we've worked very hard to keep all of our manufacturing and distribution sites fully operational. There's been lots of challenges. We've had to rejigger and the international freight piece has been highlighted is in particular a real headwind for us. But the reality is, we have been able to maintain business continuity throughout. And I think as we get into the winter and spring, we're having the right conversations with customers to make sure that we can ensure that our contracts are long-term contracts, both on the hospital side and with our collectors. But we'll continue to explore what's fair and equitable in terms of what we're putting forward.

Great, thanks again.

And our next question is coming from the line of Drew Ranieri with Morgan Stanley. Your line is open.

Hi, thanks for taking my questions. Just sorry to go back to guidance and plasma here, but just when we look at the low end and high end Chris, I hear your remarks, which is we're still in kind of an uncertain environment. So can you just give us a little bit more color on what you're seeing at the ground level at centers, and really your confidence that you are able to achieve maybe at least the lower end of the guidance, just maybe help us better appreciate how you're building up that lower end in terms of volume and pricing trends? And then you did call out the southern border issue. I know you've previously mentioned that maybe it was like 100 basis point headwind, but has that changed at all in terms of your thinking in guidance? Thank you.

Yes, thanks for the question Drew. So as it plays out, volume and pricing do work together here, which we've talked about the price challenges through the first part of the year. Some of those were associated with legacy PCS2 agreements and things that have expired. We also had the fact that we have volumetric pricing and in some cases where the utilization was down we had challenges there. So the good news is this works together. What we've guided for assumes on the low end of the range that we build on the performance we've already achieved year-to-date, in particular the 20% year-over-year growth in the second quarter, and that we continue upon that trajectory. It gets harder for sure. The third quarter last year was a meaningful uptick well beyond that 3% to 5% historical. The same factors apply this year. We saw the end of the majority of the federal stimulus programs back at the end of the summer, kind of August and into September. We've had a similar dynamic here this year, and we tracked closely savings rate and household income and the numbers correspond with what we observed last year at this time. So there can certainly be challenges associated with new variants and we don't foresee additional stimulus. There are some lingering programs that could have an effect, but the majority of it tracks closely to what we observed previously and that gives us more confidence in this environment forecasting forward. Where I think we see this also is the continued pressure on our customers. They've done their part. They've raised remuneration levels, they've opened new centers, and they continue to invest longer term in fractionation and R&D, which gives us confidence, but yes, the second half is no small feat from where we sit, but we revised the guidance with a level of confidence that will deliver in that range.

And then just kind of the other topic theme in MedTech with staffing shortages at hospitals, can you give a little bit more detail on what you're seeing or what you saw in the quarter and how that's embedded in your guidance? I mean, the Vascular Closure business, I think continues to be a bit above our expectations, but maybe how staffing shortages could relate to that business? Thank you.

Yes, thanks, Drew. We compete in four distinct segments in the hospital space and our transfusion management business is largely a software business. It's largely subscription revenue, unaffected by this. Right? There's just a little bit of movement in terms of how fast we can do installations. Our teams have been creative and resilient to figure out how to take a hospital live on our software with minimally -- minimal time on site, so no effects there. Cell salvage was down a bit in the quarter due to the Delta variant, not due to staffing shortage, but largely due to the Delta variant. As procedure volumes recovered, the performance recovered, and we feel good about that going forward. The two leading pillars of growth for us in hospital TEG and VASCADE are doing well and have not been affected by staffing shortages, but we see that in other sectors, for sure. I hear a lot about reconstructive orthopedics for example, we're not in that space. Right? And remain, so what we're seeing in cardiology, in cardiac surgery and trauma, has been unaffected by staffing shortages. Delta variant matters, in some cases it's a positive; in other cases it's the headwind. Electrophysiology is we're getting to learn that space better is just more traditional seasonality. And as I said in the prepared remarks, we had a bit of a lull in the summer as everybody, including the practice and clinicians took some time off, well deserved, and then things came roaring back in September, and we expect that momentum continues through the second half of the year, which is what gave us confidence to raise our guidance there.

Thanks for taking the questions.

And our next question is coming from the line of Mike Matson with Needham & Company. Your line is open.

Yes, good morning. Thanks for taking my questions. I guess, I'm still just struggling to really understand what's going on with pricing in the plasma business. I think you said the volumes were up. I joined the call a little late, but I think it was around 20% for the quarter, but your overall sales for the business organically was up about 7%. Is that right? And 13% -- is that 13% all from pricing? And what's driving that? When will that kind of go the other way?

Yes, Mike, I appreciate the question. Your numbers are right. That's what we've put out. I think the first and the largest factor is pricing is associated with legacy PCS2 agreements, so none of this is around the new technology, NexSys or Persona. It's legacy PCS2s and specifically, as we've called out, we had a term bound agreement with one of our large customers, that agreement has reached the end of that period and no longer continues, that will annualize in our fourth quarter of this year. There's also some effects on volume as I mentioned just a moment ago that, that works against us. As the volume recovers to the point that 20% on the low end of the range that we just talked about, we'll get the benefit of that kind of passing through. There's some smaller effects as it pertains to mix for liquids, for example, at a spot buy last year in the quarter that didn't repeat obviously, and that's a challenge. The pricing in Europe is different in Europe, ebbs and flows as part of our mix. It would be part of that. But that's -- they are the main factors. The good news is, yes, annualization and the return of volume coupled with the benefit we are now receiving from the ongoing rollout of NexLynk and NexSys, and now as part of this the continued rollout of Persona, all of which will be positive factors for us as the year progresses.

Okay. So it sounds like you have one large customer that you had a contract with some pricing locked in that expired, and then the new pricing you're getting from them is substantially lower, am I understanding that right?

We priced up to develop our piece at the time, which was proprietary technology. There was a five-year limit on it. This contract predates Bill and I. it was a long-lived thing. It expired a year ago, and we've kind of worked through the comp of that expiry.

And the pricing stepped down significantly after that fixed five-year period was up effectively?

Yes.

Okay. And so that will be a headwind through the end of fiscal 2022?

Yes.

Okay, all right. And then I guess the -- with regard to CSL, do you have any indication of whether or not they want to extend the contract by another year? And when do you -- when would they have to notify you of that?

Yes. What we've communicated on CSL, that agreement, which dates back to 2006 has one more unilateral extension period. So if CSL chose to extend the contract beyond the 30th of June in 2022, they could extend that for one additional year. They would need to notify us six months in advance of that of their intention to do so. What we communicated last April was that they had come to us and said they were not going to extend beyond the current period, and there's been no change in that to date.

Okay, got it. And then my final question, just on the freight costs, so I -- we've heard this from a lot of companies, but it's not surprising in that regard, but I was wondering if, are your freight costs may be higher than sort of normal, putting aside inflation because of the NexSys upgrades? I mean are you having to ship around a lot of these NexSys units to the plasma centers and things like that, is that part of why it's hitting you harder maybe than some other companies?

Yes. I'll let Bill break it down for you, but our supply chain cost, right, and we've avoided any disruption, but our factors, the number one factor is international freight. And yes, a large number of our devices, both NexSys and TEG Success are produced overseas, and we need to get them to the U.S., which is our largest market in both cases. That's expensive, and we've taken steps to make sure we'll have the equipment here in the U.S. when it's needed. So that's part of the challenge there. Another inflationary challenge we're grappling with is resin. In all of our plastic components and particularly early in the year, early in the pandemic, earlier in the pandemic, we saw some real price increases. We think we've managed through that, but we're working through that inventory as we speak, and that's why you're seeing it pass through our P&L in the way it does.

Okay, got it. Thanks.

And again, I'm showing no further questions at this time. And ladies and gentlemen, that does conclude our conference for today. We thank you for your participation. You may now disconnect. Everyone, have a great day.