Earnings Call Transcript - HAE Q1 2020

Operator, Operator

Good day, ladies and gentlemen, and welcome to the Haemonetics First Quarter Fiscal Year '20 Conference Call and Webcast. As a reminder, this conference call may be recorded. I would now like to introduce your host for today's conference, Ms. Olga Vlasova, Investor Relations. Ma'am, you may begin.

Olga Vlasova, Investor Relations

Good morning. Thank you for joining us for Haemonetics' First Quarter Fiscal Year '20 Conference Call and Webcast. I'm joined today by Chris Simon, our CEO, and Bill Burke, our CFO. Before we begin, I'd like to remind everyone that on July 22, the company announced changes to its reportable segments. We also realigned previously reported business units to align with the internal management structure of the business units. To help with this transition, we have provided 2 years of historical revenues and fiscal '20 revenue guidance in the new business unit structure. All documents are available on the Investor Relations website under the Guidance and Analytical tables. Today, we will discuss our first quarter fiscal '20 results and the new segment structure. All revenue growth rates are on an organic basis and exclude impacts from currency, product end-of-life decisions, and divestitures. Adjusted earnings per share is calculated using weighted average diluted shares outstanding of 52.3 million, which represents basic shares outstanding, plus the dilutive effect of stock awards. Our remarks today will include forward-looking statements, and our actual results may differ materially from anticipated results. Information concerning factors that could cause results to differ is available in the Form 8-K we filed today and the periodic filings we make with the SEC. This morning, we posted our first quarter fiscal '20 results to our Investor Relations website. We included updated fiscal '20 guidance and posted analytical tables with the information that we'll refer to on this call. I would like to remind everyone that consistent with our past practices, we have excluded certain charges and income items from the adjusted financial results and guidance. Details on excluded items, including comparisons to the same period of fiscal '19, are provided within the Form 8-K and have been posted to our Investor Relations website. Additionally, our press release and website include a complete P&L, balance sheet, summary statement of cash flows as well as reconciliations of our reported and adjusted results. And now I'd like to turn it over to Chris.

Christopher Simon, CEO

Thanks, Olga. Good morning, and welcome to today's call. We benefited from solid execution across all businesses to grow organic revenue 8% in the fiscal first quarter. Adjusted gross margin improved 400 basis points to 51.2%. Adjusted operating margin was up 360 basis points to 21.4%, and adjusted earnings per share grew 37% to $0.81 per share. The positive start to the year confirms that our strategy is working, our value drivers are propelling us forward, and we continue to make meaningful progress on our multiyear turnaround. Turning to the 3 business units. Plasma, our largest BU, grew 16%, with a 17% increase in North America, driven by price, volume, and mix. We have completed more than 5 million YES procedures, resulting in more than 115,000 incremental leaders of plasma collected. NexSys PCS and NexLynk DMS are complementary interconnected offerings designed to work together seamlessly. Haemonetics is the only company to offer both, and together, they enable increased yields and greater collection center capacity. NexSys safely delivers up to 31 milliliters of additional plasma per donation for high-hematocrit, large-volume donors. Beyond increased volume per donation, NexSys enables more collections per center and a more positive, predictable donor experience. These factors decrease the overall cost to collect by approximately 10%. A July report from the American Society of Health-System Pharmacists outlines a shortage across the number of IgG drugs. Our customers are taking action to increase collection volumes, and we are responding. The NexSys value proposition has never been more relevant. We are engaging with all of our customers on the tangible benefits of the fully integrated, bidirectional technology that is unique to NexSys. Upgrading collection center software has become a primary focus for most of our customers, and NexLynk DMS has emerged as the preferred solution. The NexSys value proposition is supported by a growing body of real-world evidence. Customers who have converted are realizing the value, and this gives us added confidence in the superiority of our platform. Moving to Hospital. Revenue grew 8.3%, and we are on track to deliver our plans for the year. Hemostasis management grew nearly 16% year-on-year after double-digit growth last year, led by strong performance in the U.S. and China. We are encouraged by customers' enthusiasm in the early stages of the U.S. launch of our new indication for TEG 6s, which is the only site of care device specifically cleared for adult trauma. Surgeons, anesthesiologists, and nurses are eager to have a hemostasis testing device that they can use in critical care areas, while lab personnel are pleased that TEG Manager software helps manage testing and compliance. Some hospital customers have expressed interest in a comprehensive program now that both cardiac and trauma indications are cleared in the U.S. Cell Salvage was challenged this quarter by pockets of weakness, especially in Europe. We completed the OrthoPAT end-of-life program, and we are turning our attention to opportunities to improve performance on the remaining Cell Saver line. The phased launch of SafeTrace Tx, software that protects patients from transfusion mistakes, is progressing ahead of schedule. We have a robust pipeline of willing early adopters that are enabling us to accelerate rollout. Adoption of BloodTrack software, which delivers information at the bedside, will continue to grow globally as hospitals seek increased efficiencies in transfusion services, particularly in the U.S. and the U.K. Across Hospital, we see a positive impact from pricing and sales force expansion. The talent infusion is helping strengthen our competitiveness. R&D projects are progressing as scheduled, including the planned global launch of a 4-channel platelet mapping cartridge later this year. We continue to have high expectations for all 3 of our Hospital segments as we refine our portfolio and focus our efforts on the products that help improve the standard of care while lowering health care costs. Blood Center revenue was down 2% in the quarter. Transfusion rates continue to decline, driving down whole blood collection volume. Our team is working diligently amid a difficult price-sensitive market, consistent with our stabilization strategy for Blood Center. We are making every effort to be successful in areas where our product offerings are differentiated. We will continue to evaluate each contract to balance the value it brings to our customers and to Haemonetics, including foregoing unprofitable business in order to stay competitive. In January, we outlined 6 long-term value drivers that underpin our corporate strategy. We have been implementing the complexity reduction initiative to revamp our operating model and reduce spending, particularly operating expenses and administrative costs. We are on track to deliver more than $80 million of savings by the end of fiscal '20. Complexity reduction has helped catalyze cultural change in Haemonetics, and we will continue to seek ways to reduce complexity to free up resources. Today, we announced a new multi-year operational excellence program designed to deliver $80 million to $90 million of annualized savings by transforming the way we source, make, and deliver our products. It builds on the complexity reduction initiative, but it is different in that it focuses on our operating functions. First and foremost, the program will strengthen our performance by further improving quality. This is our top priority, and our success depends on it. The program will also enhance sustainability and scalability, and it will amplify efficiency by reducing unproductive costs and processes while investing in effective solutions. The centerpiece of the program is transforming our global manufacturing and supply chain organization for more modern, flexible, and efficient end-to-end production. Strategic sourcing is a top priority as we fundamentally rethink what we make versus what we buy. We will improve plan performance by implementing Lean Six Sigma, and we will optimize our network by automating and rightsizing capacity for the future. The divestiture of our Union, South Carolina facility in May was part of this asset-light approach to improve ROIC. The program timing is strategic and purposeful as we have laid the foundation for operational excellence. We are launching from a position of strength with the right leadership, the right fact base, and momentum in our operating results to effectively execute these changes. There is a lot of energy behind our efforts to build an agile and lean organization. The savings will not only strengthen our financial health, but also free up additional resources to invest in innovation and growth. We are committed to delivering near-term results while also taking actions and making investments to strengthen our growth trajectory. Strong first quarter performance and the anticipated early benefits from operational excellence give us confidence to increase our fiscal '20 adjusted EPS guidance range to $2.95 to $3.15 and adjusted operating margin expectations to approximately 21%. We also remain confident that we can meet our previously communicated fiscal '21 aspirations for operating income and free cash flow. Before I turn the call over to Bill, I want to thank our customers who put their trust in us, and also our employees who make it possible by living our values every day. It's an exciting time to be at Haemonetics.

William Burke, CFO

Thank you, Chris, and good morning, everyone. Before I begin, I'd like to remind you that the revenue growth rates I will discuss are on an organic basis. On that basis, in the first quarter of fiscal '20, we had 8% growth in revenue for the total company. Plasma revenue was up 16.1% in the first quarter. North America Plasma, which accounts for about 93% of the total Plasma business, grew 17.4% in the first quarter. The majority of the growth was driven by higher collection volumes, pricing benefits from NexSys device conversions in the prior fiscal year, and continued pricing initiatives within our liquid solutions business. Additionally, we had a one-time item in software which had a favorable impact on the Plasma growth rate of approximately 2% in the first quarter. We remain confident in the continued growth of our Plasma business and affirm our fiscal '20 revenue guidance of 13% to 15% and North America Plasma guidance of 14% to 16%. Hospital revenue grew 8.3% in the first quarter, which was in line with our internal expectations, implying an acceleration of growth throughout the remainder of the year to achieve our annual guidance range of 11% to 13%. Within Hospital, hemostasis management grew 15.7% in the first quarter. Commercial execution, including leverage from our sales force expansion and new pricing strategies, are driving growth in TEG disposables, and we delivered double-digit growth for both TEG 5000 and TEG 6s. Our allocation of investments to fund growth, specifically in the sales force and product portfolio expansion, continues to support the growth profile of the business. Also within Hospital, Cell Salvage and transfusion management grew 1.9% in the first quarter, driven by strong growth in transfusion management, particularly within North America, as we continue to develop our markets and gain share. Early results from the limited release of SafeTrace Tx version 4 also positively contributed to our first quarter results. Partly offsetting these benefits in transfusion management was performance in Cell Salvage, which was below our internal expectations in the first quarter due to increasing competitive pressures, order timing related to a large distributor in Europe, and capital sales in North America. We affirm our fiscal '20 Hospital revenue guidance of 11% to 13%, including growth in hemostasis management, consistent with the revenue growth rate we achieved in fiscal '19. Blood Center revenue declined by 2.3% in the first quarter. Apheresis revenue accounts for about two-thirds of blood center revenue, and is comprised of platelet, red cell, and plasma disposables as well as the associated capital equipment. Apheresis declined by 1.1% in the first quarter. The main driver of the decline was the increasing share of double dose platelet collections in Japan. Whole blood revenue declined by 4.1% due to continued slowing transfusion rates and unfavorable order timing when compared with the first quarter of fiscal '19. Overall, we are on track to meet our full year expectations, and we affirm our fiscal '20 guidance in the range of a decline of 4% to 6%. We continue to transform our portfolio and expand gross margins. Adjusted gross margin was 51.2%, an increase of 400 basis points compared with the same quarter in the prior year. This expansion in adjusted gross margin primarily reflects pricing benefits, improved product mix, the divestiture of the Union, South Carolina facility, and additional benefits from the complexity reduction program. Partly offsetting these improvements was additional depreciation from both NexSys device placements and the expansion of our Plasma disposables production capacity. Adjusted operating expenses increased $3.9 million compared with the first quarter of fiscal '19 and were higher by 30 basis points at 29.8% of revenue. This increase was primarily due to additional investments in TEG sales and marketing and higher performance-based compensation, partially offset by savings from our complexity reduction initiative. Adjusted operating income was $51.4 million in the first quarter, $10.7 million or 26.3% higher than the first quarter of fiscal '19. Adjusted operating margin of 21.4% was up 360 basis points compared to the same period of fiscal '19 as the benefits from improved mix, implementation of pricing strategies, complexity reduction, and the Union divestiture outweighed increased depreciation and additional investments. We remain confident in our company-wide efforts to improve our operating performance, and we anticipate our adjusted operating income margin for fiscal '20 will be at the high end of our previously issued guidance or approximately 21%. Our income tax provision on adjusted earnings was 10.4% in the first quarter of fiscal '20, significantly lower than 17.9% in the first quarter of the prior year. This lower tax rate was due to higher share vestings and increased option exercises. Based on the benefits we are seeing from equity vesting and option exercises, we now expect our first half tax rate to be a low-teens percentage of adjusted income before taxes and our second half tax rate to be in line with the full year income tax rate from fiscal '19. Adjusted earnings per share came in at $0.81 or 37.3% higher than the first quarter of fiscal '19, driven by strong operating income growth, the lower tax rate, and fewer outstanding shares. Our adjusted earnings per share reflects $0.07 positive impact on a year-over-year basis from our tax rate. I'd now like to provide some financial details about the operational excellence program announced this morning. Although we have shown improvements in gross and operating margins, we have additional opportunities to improve product quality and lower our cost of goods sold. We anticipate that this program will be substantially completed by the end of fiscal '23, providing benefits beginning in the second half of fiscal '20 and targeted to reach $80 million to $90 million in annual savings. We estimate that the majority of the savings realized will drop to operating income by the conclusion of the program. Additionally, this program will result in restructuring and related charges of $60 million to $70 million and additional investments of $60 million to $70 million in capital expenditures. These expenditures will be incurred over the course of the 4-year program as the specific actions required to execute on these initiatives are identified and approved. Additional details about the pacing of anticipated savings, required restructuring and related charges, and capital expenditures will be evaluated each year as part of our annual operating plan and will be provided with our annual guidance for each fiscal year. In the first quarter of fiscal '20, we incurred $51 million of asset impairments and related costs associated with the disposition of the Union, South Carolina facility to CSL Plasma. These charges were primarily related to the manufacturing facility, including its equipment and inventory, and were excluded from our adjusted earnings. Free cash flow before restructuring and turnaround costs was $5 million in the first quarter of fiscal '20 compared with $6 million in the first quarter of fiscal '19. In the first quarter of fiscal '20, we had a $63 million cash outflow related to an increase in working capital, which included a decrease in accounts receivable, offset by 3 items. First, we had an increase in inventories due to a build of our safety stock levels in particular for Plasma, which included the continued manufacturing of NexSys devices; second, accrued liabilities decreased as we made a payment for the fiscal '19 year-end performance-based bonus; and finally, a decrease in accounts payable related to the timing of payments to one of our third-party service providers. In the first quarter of fiscal '20, we completed $75 million of our $500 million share repurchase program and repurchased about 645,000 common shares. As a reminder, our $500 million share repurchase authorization was issued for 2 years, and we planned to utilize this authorization during fiscal '20 and fiscal '21 to offset historical and ongoing dilution. We finished our first quarter fiscal '20 with $190 million of cash on hand, an increase of about $21 million from fiscal '19 year-end. We are confident with our fiscal '20 expectations of 6% to 8% organic revenue growth and 24% to 32% adjusted earnings growth over the prior year. We continue to fund revenue growth opportunities and execute on transformative initiatives. The first quarter was a strong beginning to fiscal '20, and we believe that the momentum created, coupled with the operational excellence program, sets us up to achieve our fiscal '20 guidance and helps to derisk our fiscal '21 aspirations.

Operator, Operator

Thank you. And our first question comes from Anthony Petrone from Jefferies. Your line is open.

Anthony Petrone, Analyst

Thanks. Good morning, and congrats on a strong start to the year here. First question's going to be on Plasma and just going through the moving parts there on the 16% under the new reporting structure. Can you maybe give us a little bit of detail on the benefit from volumes versus price in the quarter or even maybe NexSys kits versus the legacy? But within that, can you provide a little bit of detail on what we've been hearing are persistent rising shortages of IVIG? And around that, what would be the impact for volumes as the year progresses? And then I'll have one follow-up on cost.

Christopher Simon, CEO

Yes, it's Chris. Thank you for the question. Regarding Plasma, it involves a mix of volume, mix, and price, and differentiating them can be sensitive due to the competitive landscape. However, we observe a strong ongoing demand for source plasma. We have benefited from last year's conversions to the NexSys platform and the associated premiums. Additionally, as Bill mentioned, we had an excellent quarter and continue to see robust demand for our NexLynk DMS and the related upgrades, along with our service and support offerings. All of this has positively contributed to the quarter and boosts our confidence in the guidance moving forward. Concerning shortages, we monitor this closely, and there are numerous publications detailing the situation in the market. This issue originates from IVIG, as you've pointed out, alongside the continuing expansion in indications, formulations, and geographical reach. The market and industry are actively responding to address these shortages, reinforcing the value of our platform, and we are prepared to assist the industry in meeting this increased demand.

Anthony Petrone, Analyst

I just want to follow up to confirm if there are any issues with donor retention or attracting donors to collection sites. Also, regarding the new cost program that was announced, how should we approach integrating that throughout the fiscal 2023 targeted endpoint?

Christopher Simon, CEO

Yes. Thanks, Anthony. So with regard to donor satisfaction, donor retention attraction, we think that's actually the unsung real benefit of NexSys. We're doing a bunch of exit surveys. What we hear is a spike in donor satisfaction to procedures more interactive. It is faster. It is more predictable. And it's early, so I want to be careful where we go with the data at this point. But across 5 million collections, we now have clear evidence that donors donate more frequently and are willing to come back more for a longer duration of time in their active period of donating. So we think it's an important part of the value proposition that will come to the floor as we expand that reach. With regards to the new program, I think what we said in the prepared remarks, this is very much focused on improving product quality and service support. It builds on the lessons learned from complexity reduction. Complexity was a huge catalyst for us culturally, but this we focus disproportionately on our cost of goods sold and improving quality and reliability in our global supply chain.

William Burke, CFO

And Anthony, it's Bill. As part of the guidance that we issued, the savings related to the program are included in that new guidance. And with the folks of the program manufacturing, it takes a little bit longer to get to the savings, obviously. So we'll start to see those savings ramp up as we get into FY '21 and beyond, but we have included some savings already into the guidance that we adjusted upwards.

Operator, Operator

Thank you. And our next question comes from David Lewis from Morgan Stanley. Your line is open.

Unidentified Analyst, Analyst

Hi. This is Mason on for David. Thanks for taking my question. The gross margins obviously stepped up materially, and you cited mix, pricing strategies, and productivity. Any chance you can parse these out a little bit further and what's potentially the most material drivers here, and then how you see the outlook from here on gross margins? Thanks.

William Burke, CFO

Yes. All those items contributed to a 400 basis point increase in gross margin. We don't typically break down the specific benefits of each driver, nor do we usually provide quarterly guidance on gross margin. However, moving forward, you can expect to see all the benefits we discussed this quarter supporting margins for the remainder of the year. One significant one-time factor that boosted margin this quarter was the recognition of revenue from certain software contracts, which added about a point to gross margin. Aside from that, our pricing strategies are looking very positive. The sale of the Union, South Carolina facility also benefited margins and will continue to do so throughout the year. Additionally, the complexity reduction program, which is in its final stage this year, also provided some advantages.

Christopher Simon, CEO

Yes, it's Chris. Let me address that. I believe operational excellence will help us improve our gross margins over time, particularly by reducing our cost of goods sold. In terms of our operational expenses and SG&A, we have significantly reshaped our spending. SG&A is something I'm particularly focused on. We have made considerable investments in sales while keeping our overall operating expenses neutral by cutting costs in G&A. This rebalancing reflects a true investment stemming from our efforts in complexity reduction, which has contributed to our top-line performance.

Unidentified Analyst, Analyst

Great. That's very helpful. And then Hospital segment growth came in a little lighter than, I think, Street estimates this quarter. I was wondering if you could touch on this in a little bit more detail, and if you're still comfortable with the achievability of fiscal '20 guidance? Thank you.

Christopher Simon, CEO

Thank you, Mason. We are confident with our fiscal year 2020 guidance, which remains unchanged. We are pleased with TEG, especially in the early stages of the adult trauma launch in the U.S., which is progressing well. We're seeing strong demand for the product in China and other markets, so TEG is performing on track or better than expected. Transfusion management is also a key strength for us; it's a smaller business, but it's profitable and growing quickly, which we are excited about. We have faced some challenges with Cell Salvage, with varying issues depending on the region. It is currently not performing as needed globally, particularly in Europe due to competitive pressures. We have made changes to our commercial team and are enhancing our competitive strategies. We believe we will recover from this setback, which was a weakness for us in the last quarter that we plan to address.

Unidentified Analyst, Analyst

Thank you, both.

Operator, Operator

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

Larry Keusch, Analyst

Thanks. Good morning, everyone. Just wanted to, Chris, maybe touch on capital allocation, sort of a 2-part question here, and then I had one other one. Again, sort of just thoughts around M&A and how you view the environment out there, asset valuations, et cetera. And then as the second part of that question, maybe this is for you, Bill. As you think about the share repurchase that you sort of have planned here over the next year and change, just curious as to how we should be thinking about that. You did an ASR. So just trying to think through. Is ASR more likely to be the way that you'll get this done or is it potentially just more open market purchases? Just trying understand how we think about the modeling.

Christopher Simon, CEO

Thank you for the question. We invest a significant amount of time in capital allocation. The business is becoming more robust as we enhance our EBITDA margins and cash flow, which presents a challenge in determining the best approach. Our priorities remain the same. First, we focus on organic growth, which includes investing in our workforce, expanding our product offerings, and enhancing our equipment and capacity to meet increasing demand. This is our top priority and something we are proud of. Additionally, we aim to pursue inorganic growth to complement our strategy. While you mentioned that asset valuations in the market are high and have only seen slight corrections this year, we view ourselves as potential buyers. However, we will not pursue deals unless they provide beneficial operating advantages, not simply because of favorable borrowing terms. We are actively looking, especially in the hospital sector, as we seek to enhance TEG's presence globally and create more operational leverage in that segment. We have identified some promising opportunities, but we intend to approach this cautiously and thoughtfully. Now I'll hand it over to Bill to discuss how share repurchases fit into this strategy.

William Burke, CFO

We utilized the ASR for the share repurchase this quarter and also for the prior authorization. We plan to continue using the ASR for future programs due to the benefits it offers, including early share retirement, discounts, and reduced administrative burden on the company. We will keep using it going forward.

Larry Keusch, Analyst

Okay. And then just given the rising trade tensions with China, can you just remind us again of your exposure to tariffs, and if there was, what it was in the quarter, and, again, to the extent that there is a meaningful tariff exposure, how you're planning to mitigate it?

Christopher Simon, CEO

Yes, we are monitoring the situation closely. We're optimistic about our growth in China, where two of our three businesses are performing well. Both our Hospital and Blood Center divisions are contributing positively to our overall results, but collectively they account for less than 5% of our revenue. Additionally, the portion of product supply to China that originates from the U.S. is even smaller. Therefore, it has not had a significant impact. So far, neither country has prioritized blood or blood-related products in their initiatives. We are tracking this situation and do not view it as a material concern. We are also looking for opportunities to expand, particularly in our Plasma business, and we would like to source locally in China. We plan to continue exploring these opportunities in the upcoming quarters as they arise.

Larry Keusch, Analyst

Okay. Very good. Thank you very much.

Operator, Operator

Thank you. Our next question comes from Brian Weinstein from William Blair. Your line is open.

Andrew Brackmann, Analyst

Hey, guys. Good morning. This is actually Andrew Brackmann on for Brian. A couple of questions on the $5 million collections to date. So I think that's right around $1.5 million in the quarter. So I guess, first, was this in line with your assumptions heading into the quarter? And then as we think about sort of the remainder of the year and the guide, should we assume this $1.5 million per quarter or $6 million run rate is a number of collections which are contemplated in that guide? Or is that something more?

Christopher Simon, CEO

Andrew, it's Chris. So you are right, $5 million collection's kind of fully in line with what we have anticipated. We're not going to guide to the individual number of collections. What we have is in our guidance and our ranges, et cetera, we're assuming no new substantial contracts on the disposables themselves or for new equipment. So we'll continue to grow that. We'll grow that as our customers respond to the unmet need in the marketplace, and we think that we'll see an increasing benefit. It is interesting if you actually work back against what that means for them, right? If you think about 115,000 leaders that dose 5 million collections reflect, depending on what value you put on that, that's worth in likelihood in excess of $20 million of incremental Plasma just valued at their current cost base. I'm ignoring the 10% savings, which should be another $50 million to $60 million on top of that or the foregone remuneration for donors that comes from that. This is easily worth $80 million to $100 million of economics to the industry, and we're delighted to be a part of that equation and helping those customers realize it. It will continue to grow over the year. And if we have reason to change our guidance accordingly, we will.

Andrew Brackmann, Analyst

Okay. Regarding the new restructuring plan announced today, I appreciate the update, but I would like to discuss the opportunities for expanding core operating margins beyond this plan. Specifically, in the long term, what should we expect the operating margin to reach to achieve peak performance for Haemonetics?

William Burke, CFO

Yes. Thanks, Andrew. So on operating margins, 3 years ago, operating margin was in the 13% range. We're guiding to approximately 21% now. So we've seen significant operating margin expansion over the last 3 years. We, 2 years ago, had said that by fiscal '21 that we would be approximately 20% or just above that. We haven't updated any guidance related to that. We're at approximately 21% guide. This year, we are ahead of what we thought for the plan. But on our next Investor Day meeting, which we don't have scheduled yet, we'll start to provide guidance going forward on our operating margins.

Andrew Brackmann, Analyst

Thanks, guys.

Operator, Operator

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

Dave Turkaly, Analyst

Thanks for the opportunity. I have to ask, what was the previous management team doing that has allowed you to identify an additional $80 million to $90 million in cost savings? I’m joking a bit, but having just finished identifying $80 million in cuts by the end of this year, I'm curious if your background and experience, Chris, is what you're leveraging to achieve this level of savings.

Christopher Simon, CEO

It's interesting to think back, as this marks my three-year anniversary since the first earnings call. I was asked a question during that call about what gave us confidence in our audacious plan, and I realize now that I may not have provided the best answer. In hindsight, I would say that any significant transformation is really dependent on the leadership team and their ability to recruit the right talent. Today, we feel much more assured that we have the right leaders throughout the organization, especially in key areas such as manufacturing, supply, quality assurance, design, engineering, and global business services. Our focus on productivity gains and product quality stems from the leadership in those areas, which simply wasn't present three years ago. With this team in place, along with their access to data and analytics, detailed knowledge, and the momentum they've built, we are free from operational penalties that affected us before. Three years ago, our earnings per share were significantly lower, and while a portion of this improvement is due to reducing complexity, a major factor is the lack of operational penalties credit to the team. We're confident in their ability to deliver results, and we anticipate that a large share of those savings will contribute to our enhanced financial health.

Dave Turkaly, Analyst

Got it. You mentioned NexLynk, but you also talked about SafeTrace and BloodTrack, noting that you appear to be one of the few companies providing such software solutions. I wanted to hear your perspective on what competitors might be doing in these areas and whether you believe they are working on anything similar. Additionally, how significant of an advantage do you think this gives you? It appears that you are achieving positive outcomes with your software across various sectors.

Christopher Simon, CEO

Yes, we are focused on improving our software capabilities both internally and through partnerships. We believe this will be a significant driver for our future success. Looking back to 2015, Haemonetics was largely absent from the DMS software space. We allowed others to take that space and faced challenges as a result. However, one of our customers reached out to us, frustrated with their current support, and that led to a successful partnership. By 2017, we completed the transition, which laid the groundwork for NexLynk. Since then, we’ve regained several competitive customers back to the NexLynk system and are upgrading all users from our older system. This has been a key factor in the success of NexSys. We feel there is still much more potential in software, data, analytics, and digital services for our customers, and we plan to keep improving in this area. The Hospital sector presents a different but exciting opportunity. You mentioned SafeTrace Tx with BloodTrack. While there is competition, we are really concentrating on this area. Our historical integration related to blood services gives us an advantage, and this distinctiveness is similar to what we offer with DMS. Unlike in DMS, we are not just the best in this field; we are the only ones providing this specific service.

Dave Turkaly, Analyst

Thank you.

Operator, Operator

Thank you. And our next question comes from Mike Petusky from Barrington Research. Your line is open.

Mike Petusky, Analyst

Thank you. I have a quick question about the guidance for the hospital segment. Is there a significant assumption regarding adult trauma? Additionally, you mentioned that it's off to a good start. If you could provide any additional details on that, I would appreciate it.

Christopher Simon, CEO

Yes. On adult trauma, we got the approval and release earlier in the fiscal year. So we're coming out of the gates from the second part of the quarter trying to get moving on it, and I think we'll ramp from there. We're eagerly awaiting the channel option for platelet mapping cartridge, which we expect to have this year as well. Outside the U.S., I think we have the full spectrum of use for the TEG's success, so we're just expecting our sales force investments and the go-to-market model step-up that we've done there to begin to pay dividends and returns, much like we're seeing already in the U.S. I think the combination of those things buoy us on TEG. Transfusion management gives us additional upside, and I think the real focus is just getting our footing back and taking back what's rightfully ours in Cell Saver. That's a market-leading product. And I think with the end of life complete for OrthoPAT, we have the focus and the energy, and we just need to execute against it. But the combination of those 3 gives us optimism for the guide. It will regain where we are and make up the difference by year-end for Hospital.

Mike Petusky, Analyst

Okay. That’s all I got. Great start to the year. Thanks.

Christopher Simon, CEO

Thank you, operator. Just a couple of quick closing comments because it's interesting times, for sure. I think the strong start to the year is evidence of the robustness of our long-term value drivers. Complexity reduction, as an example, helped catalyze both cultural change for us and lowered our operational expenses. Operational excellence, on the other hand, will build on these learnings, but is more focused, as we've said, on improving quality while also lowering our COGS. We're optimistic about growth and profitability, such that we raised our adjusted EPS and operating margin guidance, and we're confident that this strategy and our ability to accelerate growth can create long-term value for our stakeholders across the board. So thanks again for joining today.

Operator, Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone have a wonderful day.