Q1 2021 Haemonetics Corp Earnings Call
Hello, and welcome to the Haemonetics first quarter fiscal 21 conference call the webcast.
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Oh, no like the hand, the conference over to your Speaker today, Mr., Dan Goldstein, Vice President corporate controller, Sir you may begin.
Good morning, everyone.
Thank you for joining us for Haemonetics. This first quarter fiscal 21 conference call with webcast.
I'm joined today by Chris on our CEO.
Chad nickel.
And then a blood center and Bill Burke our CFO.
This morning, we posted our first quarter results to our Investor Relations website.
Looting analytical tables with the information.
Her two on this call.
Additionally, we provided a complete you know.
Balance sheet summary statement of cash flows as well as reconciliations of our GAAP to non-GAAP financial results.
Before we get started unless otherwise noted all revenue growth rates discussed today on an organic basis and exclude impact from currency strategic exits of our class the liquid solutions business.
Acquisitions and divestitures.
As in the past, we will refer to non-GAAP financial measures throughout this call to help investors understand haemonetics is ongoing business performance.
Please note that these measures exclude certain charges income items.
Please refer to this morning's earnings release for details on excluded items, including comparisons with the same period since fiscal 2000, and a reconciliation to our GAAP results.
Our remarks today may include forward looking statements and our actual results may differ materially from the anticipated results.
Haemonetics cautions that these forward looking statements are subject to risks and uncertainties, including the potential impacts and the could go a bit 19 pandemic on our results and other factors referenced in the Safe Harbor statement in our earnings release and in our filings with the FCC.
We do not undertake any obligation to update these forward looking statements and now I'd like to turn it over to Chris.
Good morning, everyone. Thank you for joining.
We continue to live and extraordinary times and today, we will give perspective on the impact could be cobot 19, and dynamic when our performance and we provide our view of the strength of our markets the effectiveness of our strategy.
Our response to crisis prioritized safety business continuity and cash preservation, allowing our manufacturing supply chain and customer service to avoid disruptions.
We remain fully operational in all of our markets across all of our product lines, we chose to build inventory to safeguard against endemic related stock Alps and to prepare for recovery.
Importantly, our through cycle approach kept our turnaround on track we are executing its plan to laying the foundation for continued growth. For example, we recently completed our third annual employee survey and the results showed exceptionally strong morale in spite of challenging circumstances.
Our value drivers are intact propel us through recovery and the new normal let me provide a few highlights.
Despite current marketplace challenges plasma and hospital remain attractive markets with significant growth potential I will talk about how we see them recovering in a few minutes.
You are making meaningful progress on our innovation agenda with Nexus platform advancements hemostasis management clinical programs and software development and Digitization.
We are year into our for your operational Excellence program, we remain on schedule pursuing strategic sourcing lean and network optimization, including select investments like a new Pittsburgh site to support U.S. plasma and hospital disposables.
Our recently announced transactions show, our intent and ability to execute wrote oriented M&A, we're committed to pruning and augmenting our portfolio and we continue to prioritize allocating capital to growth investments leveraging our strong balance sheet and free cash flow.
Hi, this is well positioned to adapt in five three important technologies to health care providers donors and patients we fully expect to recover Capri cobot 19 levels and growth trajectory. The timing is uncertain based on the pandemic and our customers response to the crisis, we see affects expect through the end.
Fiscal 21.
Let's turn to our results.
Today, we reported first quarter fiscal 21 organic revenue decline of 16% and a decrease in adjusted earnings per share of 43%.
Endemic was the main driver of the plasma in hospital revenue declines as well as the blood Center revenue increase.
Plasma revenue declined by 35% in the quarter, primarily due to a 38% decrease in north American collections compared with the prior year.
Factors negatively influencing collection volumes throughout the quarter included stay at home orders limited public transportation and border travel College campus closures and reticence to donate.
As the quarter progressed stay at home orders were lifted social distancing precautions were established and the continued need for plasma donations well publicized however, breast collection volumes have persistent.
Along with lower collection volumes do the pandemic software revenue decreased in the quarter because of a onetime benefit in fiscal 20, our work to convert customers. The latest version of <unk> next link remains on track as we have seamlessly shifted to remote collaboration and implementation support.
We deployed our technical support resources to help customers managed through social distancing challenges R&D rapidly created a cloud based software applications, enabling to owners to register at home and streamline the pre collection process with enhance safety efficiency and convenience.
The next platform continues to deliver value 11 million selections, yielding 250000 incremental leaders as classroom.
We are advancing meaningful innovation, including assessing the expanded use of donor biometric data and analytics to personalize donations to safely collect more plasma.
Well collection volume in the current environment is a challenge we remain confident about the strength of the plasma end market and we expect a return to stork collection volume growth rates.
Underlying demand for plasma derived medicines has not changed in our customers will need to accelerate collections to replenish deplete plasma inventory.
There was also growing excitement about plasmids potential role as a unique therapeutic agent for the treatment of the virus.
We fully anticipate that our plasma growth will improve as part of a protracted recovery.
Exact timing is uncertain based on the pandemic, we will continue to do everything possible help our customers create a more robust new normal to avoid disruptions the supply of plasma derived drugs.
Longer term, we are aware potential new treatment alternatives like fcr and within the auto immune segment.
There are important questions about clinical utility and relative benefits in addition to hurdles to approval pricing and commercial scalability.
Meanwhile, there are thousands of plasma clinical trials underway for primary immune deficiency and auto immune disorders. We believe there is room in the market to allow for new entrants without materially reducing the prospects for 8% to 10% collection volume growth overtime.
Moving to hospital revenue declined 4% in the quarter, primarily due to cope with 19 related procedure declines hospital resources being diverted to critical I see you need unrestricted access for sales teams.
The impact was felt mostly in China, and North America with some recovery in both markets during the quarter as restrictions in China east be paired with the prior quarter and U.S. hospitals began to raising procedures.
China grew approximately 90% sequentially from the fourth quarter fiscal 2008, due to a lower compared or caused by the pandemics impact earlier in the calendar year.
However, first quarter fiscal 21 revenue was still down 26% against the prior year quarter due to a combination of cobot 19 and distributor order timing.
Hemostasis management revenue was up 2% in the quarter due to record capital sales primarily in the UK, Italy in North America.
Hi volume of capital sales was primarily due to strong selling activity that occurred in our fourth quarter as well as sales to hospitals to research coagulation and cobot 19 patients.
Our European business delivered double digit growth on the strength of peg capital sales, which helped offset lower disposable usage due to procedure volume declines in China and North America.
Disposable revenue started to recover in the second half of the quarter S.U.S. economy reopened in hospital procedure volume increased in our largest market.
Well not included in our organic growth rate revenue from clot Pro which we acquired in April added 50 basis points to hospitals reported growth rate for the first quarter.
Transfusion management revenue was up 5%, primarily due to strong growth.
Blood track as we were able to successfully close on several deals in the UK, Italy, and North America that had been in our fourth quarter fiscal 20 pipeline.
Bloodtrack growth was partially offset by declines and Safetrace, TX as limited access to hospitals during the first quarter impacted our ability to perform new installations.
Cell salvage revenue was down 19% in the quarter, primarily due to significantly lower procedure volumes. In addition to suspend the collective procedures non elective procedures and trauma related incidents decline significantly due to social distancing in various global lockdowns during the quarter.
Unlike other areas of hospital cell salvage is more sensitive to all procedure declines. So we did not see the same level up recovery on this business during the first quarter.
Despite the current challenges we believe long term trajectory of hospital remains strong useight billion dollar opportunity, but it's still largely underpenetrated.
We participate in critical fast growing areas like cardiology and trauma, we have a robust development pipeline and we will continue to benefit from improvements we are making to our go to market approaches to strengthen our presence in tag clot Pro in transfusion management end market demand for these products will continue to norm.
The lives as procedures return to free cobot levels.
In the near term regions in individual hospitals would be impacted differently by resurgence is and the associated procedure impact and capital constraints elected and non elective volumes wolfberry and we're watching these developments closely particularly in North America in China, which comprised 65% of hospital revenue.
Hospital customers are navigating these challenges such that we expect sequential quarter over quarter improvement in procedure volumes with a return to normal levels by the end of our fiscal year.
Now I'll turn the call over to Chad will talk about our blood Center business.
Thank you, Chris and good morning, everyone. Overall, we believe the underlying fundamentals of the blood center business have not changed.
And we are committed to supporting our customers as they work through challenges in utilization in market dynamics in today's unique environment.
Amid these unprecedented challenges we continue to make strides in reshaping our blood center portfolio. There are three recent transactions.
First the divestiture of our blood filter manufacturing operations and for heart of Puerto Rico and supply agreement with filtration expert GDS will help us improve quality, while pursuing or asset light approach.
This transaction was another stuff and blood centers role and operational excellence.
In addition, we announced the sale of our U.S. blood donors software to G.P.I. and the divestiture of our hospital and blood Bank software used primarily in France to Avonex.
Each of these organizations were selected based upon their capabilities and ability to meet evolving needs of our customers.
These transactions advanced our strategy to enhance our focus among our core disposable and equipment products.
In the quarter Blood Center revenue was up 2% on the strength of favorable order timing as blood collectors and distributors made large stocking orders in response to the Pandemics.
Particularly in Europe, and the Middle East.
What is a collection base business that differs from commercial plows, not because of lower dependence on the U.S.
And recovery correlates to improved cobot, 19 trends and Reopenings in the EU in Asia.
Hold what the populations willingness to donate altruistically in times of crisis.
We're able to support these requirements in a challenging market due to our efforts over the last few years to optimize the blood center business, including simplifying our portfolio through product rationalization.
I think our sales and operations planning processes and realizing the benefit of our customer centric business units structure.
April results revenue was up 7% in the quarter, primarily due to favorable distributer order timing as well as continued plasma growth in Japan and other markets.
The plasma growth is a positive signal that our strategy designed to support global blood center customers as they become more focused on sourced plasma collection is generating value.
A brief this growth was reduced by a competitive loss, we previously called out in fiscal 2000, resulting in a bolt 4 million dollar impact in the quarter.
Additionally, we are actively engaged in supporting customers and convalescent plasma collections and over 25 countries.
While we believe the revenue upside is limited we're committed to doing our part to support the collection of this therapeutic.
Out the pandemic.
We feel that volume requirements continue to grow we are uniquely capable of deploying large quantities of capital equipment, then disposables to meet variable short term demands.
Oh blood revenue was down 6% on the quarter due to a double digit decline in North America, partially offset by favorable distributor order timing in Europe, and the middle East North.
North America revenue declined due to lower collection volumes caused by cobot 19, and previously discontinued customer contracts.
Discontinued contracts also led to a double digit software revenue declined in the quarter.
Despite the strong first quarter performance, we expect that the benefits of the high stocking orders may reverse some of the future as customers risk aversion returns to normal along with safety stock levels.
While hospital procedures have resumed it will take time for procedure volume to revert fully to pre cobot 19 levels, which may temporarily reduce the demand for blood products in fiscal 21.
Blood Center remains a strategic lever for Haemonetics, we remain committed to portfolio rationalization as well as our goal to support enhanced product quality and services for our customers, while preserving our cash generating role for the company.
Now I'd like to turn call over to Bill.
Good morning, everyone.
Chris and chat have already discussed revenue. So I was talking adjusted gross margin, which was 47.2% in the first quarter.
A decline of 400 basis points compared with the prior year.
The primary drivers of this decline were related to impacts from lower revenue and high operational costs related to covert 19.
There were also incremental cost to safeguard the health and welfare of our employees and our manufacturing and supply chain as well as customer facing employees.
However, we were able to partially offset these downward effect with productivity savings from operational excellence program cost containment actions and the portfolio decisions to exit liquids.
Adjusted operating expenses in the first quarter were $63.7 million, a decrease of $7.8 million or 11% compared with prior year.
As a percentage of revenue adjusted operating expenses were 32.6% an increase of 280 basis points compared with the prior year.
Lower adjusted operating expenses were due to a combination of productivity savings and the cost containment measures implemented the partially offset the negative effects of covert 19 on revenue and in our manufacturing and supply chain costs. These cost containment actions included restricting travel producing nonessential spending.
Delaying hiring reducing some compensation related items.
In addition, we also had lower research and development cost in the first quarter fiscal 21, compared with the prior year, mainly due to savings related to operational excellence program and slightly lower spending related to covert 19.
These reductions in cost were partially offset by modest investments.
We will continue to invest in our business with a bias towards organic growth and innovation that will continue to expand our commercial capabilities.
As a result of the performance of our adjusted gross margin and our adjusted operating expenses. The first quarter. Adjusted operating income was $28.5 million, a decrease of $22.9 million or 45% compared with the prior year.
Our adjusted operating margin was 14.6% in the first quarter, a decline of 680 basis points compared with the same period in fiscal 2000.
Our adjusted income tax rate was 4.3% in the first quarter compared with 10.4% in the same period of fiscal 20.
The rate was abnormally low in the first quarter, a full fiscal 20 and 21 from the benefit of higher share vesting and option exercises that are not expected to repeat in future periods.
We anticipate that the fiscal 21 adjusted tax rate will be 16% to 17%.
Oh first quarter adjusted earnings per diluted share was 46 cents compared with 81 cents in the prior year, a decrease of 35 cents a 43%.
The decrease was due to the progression of the pandemic and its adverse impact on first quarter revenue gross margin and adjust and operating margin.
We remain committed to our growth objectives and have not changed our investment thesis related to our innovation agenda.
We continue to review our financial modeling that evaluate different financial impacts to each business unit using varying scenarios based on the anticipated safe and timing of the recovery.
While the current environment remains extremely uncertain, we're prepared to implement additional measures or change the course of action on those initiated if necessary.
In August of 2019, we announced the multiyear operational excellence program designed to deliver $80 million to $90 million, an annualized savings by transforming transforming the way, we source make and deliver our products.
Well the operational excellence program builds on the complexity reduction initiative. It is designed principally to transform our global manufacturing and supply chain organization.
This program began providing benefits in the second half of fiscal 20 in we anticipate that it will be substantially completed by the end of fiscal 2003.
We remain committed to delivering $80 million to $90 million savings estimate that the majority of the savings realized will drop through to adjusted operating income by the conclusion of the program with the return of the business back to historical levels.
We are pleased with our overall financial health, including our liquidity position and we continue to pursue our goal of preserving cash.
In April we drew down $150 million on unresolved revolving credit line, which increased our existing cash on hand at the end of the first quarter $276 million.
We have an existing credit facility of $700 million that does not mature until the first quarter fiscal 2004 with the majority of the principal payments weighted toward the end of the term.
Total debt outstanding under the facility at the end of the first quarter was $529 million split between our remaining term loan balance of $319 million in borrowings under our revolving credit line of $210 million.
Our EBITDA leverage ratio remains low and we have an additional $200 million remaining on our revolving credit line, which include with that repayment on the revolving credit facility $60 million subsequent to the ended the first quarter.
Free cash flow before restructuring and turnaround cost was $11 million in the first quarter fiscal 21, compared with $5 million in fiscal 20.
The higher free cash flow in fiscal 2001 is the result of $36 million from improvements in working capital management, primarily due to lower inventory growth improved accounts receivable collection and at the absence of a onetime accounts payable decrease from the prior year related to the timing of payments to one about third.
Party service providers.
The working capital improvement was partially offset by a decrease in adjusted net income.
At this time, we did not foresee.
First half of fiscal 21, with the $325 million that remain on our current share repurchase authorization of up to $500 million.
In summary, I'd like to conclude with some closing thoughts.
Business continuity employee safety cash preservation in a through cycle approach will continue to be our priorities.
Our manufacturing and supply chain remain fully operational and we are committed to our operational excellence program and related savings.
We withheld issuing physical 21 guidance due to the continuing uncertainty remaining about the pace and timing of the recovery, which we believe will be protracted.
We remain confident in the longer term strength of the end markets that we serve across our three business units, including 8% to 10% annual plasma collection volume growth overtime.
Our recently announced portfolio moves signal hour increased desire and ability to execute our strategy and we will continue to focus on M&A.
We are confident that our disciplined and thoughtful approach to financial decisions and capital allocation priorities.
With a strong liquidity and balance sheet will enable us to emerge from the current environment as a stronger company.
And now I'd like to turn the call back to the operator for Q1 I.
As a reminder to ask a question you will need to press Star then one or new telephone to withdraw your question press the pound key please stand by Washington politics M&A roster.
Our first question comes from David Lewis of Morgan Stanley. Your line is open.
[laughter] good morning, Thanks for taking the questions a few for me. This morning, I guess the first thing Krisher Bill is you talked about plaza questions being down about 25% to 30% in April the performance in the quarter sort of implies those trends worsened in June can you give us any sense of sort of where they ended june or where they're tracking.
In July or what frankly, the fractionator customers are telling you what their baseline assumption is for collections are they've talked about that publicly I just kind of curious what their communicating to you in terms of what the baseline assumption is for the next three to six months for plasma collection demanded that had a couple of follow ups here.
David It's Chris Thanks for the question, let me start with a general statement that certainly applies supply asking but it's a cost are all of our businesses, which is that we fully expect to recover to pre cobot 19 levels and growth trajectory question is timing right and it's important I guess in the second point that.
We don't want to come across as certain about things that are on certain by definition right. So we're working closely with all of our customers.
Around this issue donor traffic through the centers and you know what we saw all through the majority of the first quarter was real challenges and we called out those challenges I think they are both structural items like social distancing requirements in the Lockdowns to proceed with them.
Coupled with.
Restricted public transportation border travel and you know just the need to feel the college campuses being closed et cetera. There's also attitudinal factors and we're working with our customers on those attitudinal factors make sure that the owners.
Ill safe and our I'm encouraged to return to the nations. So it's an ongoing process and we're not prepared to give a lot more visibility into it and beyond what we have well obviously, an active discussions with all of our customers. They all site the same <unk>.
Issues and our.
Optimistic, but cautiously so about a alto nation volume will will tick up over the remainder of this year and 22 for us.
Okay can you comment at all Chris and just any any incremental recovery here you've seen in July relative to what would be implied by sort of down 40 down 45 in June.
Well I go back to the structural factors, David and I feel like we are making meaningful progress. There I think it's more at this point, yeah attitudinal factors, our donors feeling about the.
The virus in the threat there in how are they selling about the relative safety of the entire donation process not just what they get greeted with at the door, but the process getting to the collection center and beyond we've done things in partnership with their customers with greater than new.
Cope it app.
You know Colgate 360, which basically allows centers to immediately go to a scheduling process keep the donor gonna social distance they can either waiting their cars are outside the center for their appoint at a time I think those things are clearly, helping but it's early days and I think there's a broader set of attitudinal factors that need to play out and all.
I guess in September to give us a better read on the second half of the or.
Okay, and you kind of dealt with my my second question I spoke my second or third here for bill as well, but it sounds like there are multiple factors Phil talked about here in terms of the market. There has been the impact of federal stimulus I'm doing or willingness center locations in specific areas in social distancing requirements. It sounds like you've been able to solve for maybe center location.
And in social distancing, but but the but the key issue is doing or willingness and I'm just sort of curious if that is gonna be just time, where that can be solved by fractionators, providing a frankly greater incentives to the donors I'm. Just that's my question for you and then for Bill just help us quantify the bulk purchase orders and the non plasma business. This particular quarter and sort of what that may imply.
For a for next quarter as a potential headwind. Thanks, so much.
Yeah, David Chris So on the Attitudinal factors I.
Don't disagree with your summation structurally I think we've done as an industry what can be done I think as we look through the attitudinal piece, it's dynamic and I think views around they you know the threat from the pandemic are evolving I think the perception of safety in the centers is evolving there's never been more public discussion around plasma driven by.
Both convalescent plasma and hyper mean globulins as potential therapeutics, they're positive effects right and we expect that will continue forward I do feel like <unk>. The end market demand remains every bit as robust and so whatever isn't collected in the first half.
Our fiscal 21, just feel adds up to the deficit and the robust recovery that we anticipate going forward beyond that.
Hi, David It's Phil just talk to clarify your question.
Did you mean, the bulk purchases in blood center not plasma.
I'm sorry.
I'd be a blood banking commentary that was referenced in the queue sorry Bill.
Okay. That's okay I just I thought you had said dot plasma as part of the question. So in Blood Center, Yes, we did see some Ah order timing and the business.
And you know as those order stocking stock to.
Level off as you get back to normal supply chain type.
Uh huh.
Cadence.
We should see less purchases. So we are expecting another growth that you SAR and blood center in the in the in the first quarter not to repeat in future quarters as those inventory stockings are.
Drawn down by the what's kind of customers.
Thanks, so much.
Yes.
Our next question comes from Anthony Petrone of Jefferies. Your line is open.
Thanks, and good morning, AWS, two follow ups to Dave's questions and.
Piano question from Bill as well and so maybe Chris as you as you sort of reference here that the year old main pressured in plasma. However, we're coming off of a steep decline in fiscal one Q is it fair to say that that fiscal one Q would be the trough and we.
Would still be pressured but marginal benefits as we moved to the year.
During the first question.
And then a follow up would be just how does this play in terms of immunoglobulins shortages.
We had a shortage situation pre coal bid.
Donations are down so I would imagine that that situation has exacerbated.
And how does that sort of play in your discussions with customers around an upgrade cycle and then all have one penal question. Thanks.
Thanks, Anthony So the started your first question again, we don't have a clairvoyant on this I would expect the first quarter.
Where we had this confluence of structural factors, including meaningful Lockdowns right feel like you know society at large is better relative term of course dealing with the pandemic. So we don't we're not at this point anticipating widespread Lockdowns makes me.
Situational things geographically, but I think we're we're beyond that I'm kind of no. We have structurally the Gulf in question around college campuses. Many are intending to open will they stay open.
How will that attitudinal demographic differ and then what we've seen through the I mean when nucleus of collections. They are important factors and you know, we're again cautiously optimistic about that but within limits right and I think that yes underestimate. This pandemic can be affected this time.
That might get your own Karl so we need to continue to be thoughtful about that we do think that though we as an industry collectively have the ability to improve from the base that we've experienced so far we are learning and.
Our customers and we are responding accordingly, so that gives us grounds for cautious optimism in terms of the shortage question. It's obviously quite important U.S. is now responsible for 90% of the worlds are sourced plasma supply 785% to 90% there is.
You know they they collect their own plasma and occasionally buy recovered plasma from.
It's blood center customers that was a much larger number three or four years ago, it's dropped pretty meaningfully and those flexes have their own challenges meeting the demands for whole bloods in red cells in place. So from our vantage point getting these centers fully operational and back to their practical capacity is priority one all of.
Our customers are working on it we're working with them I think so we will do everything within our power as an industry to avoid those stockouts, but that's the challenge facing to right now.
That's a.
That's helpful need just the the follow up would be bill on the on the cost side. The 80 to 90 million can you remind us of what amount as realized thus far.
Will that be predominantly Cogs related.
And then just you know an item from the press release. This morning. It indicates that no guidance potentially could be issued later this year what are the triggers to issue guidance later in the years. Thanks again.
Thanks, Anthony So on your on the operational Excellence program question, yet, we're still looking at $80 million to $90 million up of gross savings there and we have said that the majority of those savings would drop through to operating income over the life of the program.
We have not said specifically what we have recognized to date, we want to withhold those comments and told ready due to issue a issue guidance.
And on the guidance question.
No.
We don't want to say, whether we're going to are not going to him. We always intend to issue guidance, but the the triggers to do it is just a inflection in this curve of saw a collection, specifically and plasma right like Chris mentioned, we need that foot traffic back into the centers, we haven't seen it yet.
But once we do and we get comfortable.
With a forecast and that's being done and the the level of [noise].
Volume coming back then then we'll issue that guides, we feel pretty good in the PNM right now about our Sq now you know we can forecast that profitably we did issue a little bit of guidance on our our tax rate in the in the prepared remarks.
But we definitely need to see the inflection Bakken in class Miss what we tried that that's the main trigger.
All right. Thanks Yep.
Next question comes from Larry Kooij of Raymond James Your line is open.
Thanks, Good morning, everyone.
Just a tad thinking about the plasma collection in the U.S. and Chris I recognize all of the various dynamics that have been going on both structural and attitudinal.
But I guess the question is do.
Do you think there is potential riskier that.
You know just a collection volumes in the U.S. are are you know more structurally impaired.
For a longer period of time.
And that you know collectors may have to start looking elsewhere.
Graphically and how are you position to the extent that they do for example in place such as Germany or or or other areas I'd be question one.
Yeah, Larry it's.
So we feel strongly that the underlying end market demand will continue I Gigi 8% growth says there is a meaningful guide over an extended period of time is absolutely right. That's going to continue that man continues unabated, they will need to plasma I think.
I don't believe or we will see a new normal and it will be different than what it was pretty cold, but but I don't believe the relative dependence on the U.S. is at risk here I think that if you look at prior periods typically a protracted recession tends to be relatively soon.
Favorable period of time for our plasma collectors they fill in the using the economy and there's strong biased donate so I think as we get on the other side somebody attitudinal challenges I think you'll see meaningful and robust recovery and collections foot traffic here in the U.S. and I think that's that's <unk>.
Most of our customers are betting on in terms of performance outside the U.S., we absolutely participate throughout the four countries in Europe that collect on remunerate and Oh, we're proud of the business that we're doing there will continue to invest for Hep C slightly better recovery, although it's a small percentage of what we do a week.
You know better recovery, there, but our share Oh U.S. is is comparable to what we have here in the state I'd be interested pad lower but I think we have the ability to respond regardless of where the demand coming from.
Okay terrific.
And then one other question for you, Chris and then a quick one for though.
Obviously, you talked about some of the competitive therapeutics that that are in development, including Fcr and maybe just talk a little bit about you know sort of what work you've done to come to the conclusion that.
You know you believed that.
There are some challenges easy as you noted and there is its ability to.
Sort of coexist in a market that can still grow.
Collection volume take 10% and then for Bill.
You know inventory, obviously is spin up quite substantially over the last couple of years I'm just help us think about I get that we should be thinking about inventories just longer term trending I wouldn't be would be helpful. Thank you.
Sure alert so on Fcr and we have said for as long as I've been at the company that you don't have you know of 18 or 20 billion dollar end market.
Which is the DG market without.
Tracking a lot of competition, and certainly fcr and anti action or M. Flex. That's an important first wave for that when we think about it essentially the collection volumes that were looking at is driven by I'd UGI auto immune diseases are 40% of that it breaks down whether we're talking.
The about AMG.
Four or 5% CEO I T. P isn't another five or 6% and then see I'd be is a larger piece around 20%, but we're looking at is where these drugs are what they target what their relative efficacy and established safety will be as they move through phase.
Two in phase three trials and you know we would say you start with that 40% of the business its auto immune to start carbon back down against that and then from where we are.
Especially look at that time, and they risk adjustment and that gives us good comfort that our core 810% growth in collection volume, which was driven off of the ICICI growth of 8% plus some other things that we see underneath the surface that benefit awesome collection volume from that perspective, we don't neither there.
We'll take up a role to play but there are important questions.
Approval probability commercial scale up pricing and reimbursement how they will be viewed against you know the G, which is viewed as highly efficacious, particularly in a number of these categories, where there's meaningful risk to a new therapeutic coming in so we come back and we can take you through more details.
We go through it Weve apt or scientific advisory community. We've tapped a key opinion leaders, we just come back with some conclusion that particularly when you look at relevant analogs for new biologics just come into an established market like this they typically grow the market rather than cannibalize it and they typically take significantly.
Longer than maybe the originators behind those drugs would otherwise spire too.
All right Larry in the second question was off for me on inventory, yes in the quarter, our inventory was up almost $25 million. The majority of that increase was in our plasma business and specifically related to bowls and bottles stocking.
There's a lot of uncertainty in the quarter, if a plant could potentially shut down because of Oh covert 19, hitting the plant.
So we intentionally built inventory did not slow production down even with the decline in revenue. We are number one objective was do not stuck out to customers. So we feel comfortable building this level of inventory like Chris said before we're comfortable that the you know the collection cycle will bounce back in this is inventory that.
Moves very quickly.
We also felt like if you you know besides cash this is probably the second best thing on the balance sheet to have is is the inventory. So longer term. Obviously you know we have a lot of inventory right now we do expect even toy to decline overtime.
Okay terrific. Thank you okay yep. Thanks, Larry.
Our next question comes from Larry Solow CJS Securities Your line open.
Great. Good morning, guys. Just a couple of follow ups actually one to Larry's question on the inventory build and.
He said he kept a production levels a sustained.
As we look out perhaps this quarter, we do expect some a little bit of a drop in production or the other secrets inventory of demand still remains a little below normal and could that have sort of a knock on effect on gross margin in the short.
Well yeah. That's a you know it's something we're looking at we we don't want to commit to anything right now because they're implications across the company, but yeah. I mean, there's a certain level of that type of inventory that I've mentioned with the bowls and bottles that we are comfortable getting too and like I said, you know that production does turn and.
You know, we do expect that once we get through this collections downturn.
And covert 19 is you know dissipates that not only will we get the collections for normal year, but that our customers want to rebuild their safety stock levels. So one way or another we feel like given toil come off the balance sheet, but yeah, we learned when looking at all different options right now.
And to Larry again.
It's just another follow up on that as Bill said, we took the actions. We took we feel quite good about that obviously has an effect.
Moving on gross margin. It is inventory is the one thing that we value along with cash you're given the uncertainty. The other aspects of this is we do have the operational excellence program, which includes network optimization. We are taking advantage as part of our through cycle mindset trying to accelerate certain aspects that program where the opportunity.
The presents itself and.
Having some inventory on hand gives us greater freedom to operate against some of those plant moves for example, so we're trying to be thoughtful about it I think the next quarter will be telltale for us around how do we feel about the inventory build and we're having those conversations real time with customers weekly, let's make sure that we're where we need them to be.
But still being good stewards of the resources as we try to [laughter].
Got an absolutely sorts of towards getting my mouth on that so next question.
Bill mentioned operational excellence still sort of you still targeting 80, 90 million and I was going to sort of that.
Question I had was it looked like.
Your cost controls were better than I thought would be this quarter, obviously revenue down a lot and you know my question is when you just an acceleration on the operational excellence program or are there other cost that youve taken out of the business and maybe some of those are majority those a temporary but maybe that actually more over the long run even try it better.
Our.
Cost saving.
Potentially you got a possibility.
Yes, Hi, Larry obviously, we do everything we can on operational excellence to bring as much savings forward as possible, but some of those programs our longer term, they're right more gross margin oriented and so they take a little longer to get asked but up what we do you know we make we protocol to action to the organization and the organization.
In response, when we when we ask for.
Initiatives to be driven in this case it was cost reduction so we're very happy with where we are I.
I mean, there just some things just naturally happen because of what was going on in the quarter right. So like travel for example, like most companies rightly speaking about lower travel a mild again, if it was getting on a plane. So we saw significant savings there, but there were other actions you know that I spoke about.
In the prepared remarks, but you know they want to be careful, though where we're not doing anything from an expense perspective that is going to inhibit our growth going forward right. We're very careful there could be we modestly and truly believe that everything is going to bounce back here.
We do not want to do anything that.
Hurts the growth prospects of the company.
Okay, and then just quickly on just on the plasma collection, but a lot of questions on this topic, just trying to get to feel.
And I know Larry asked the question just terms of geographical shift.
Outside the U., but within the U.S. I mean, maybe it's too short term for question and maybe I should be asking the plausible operated themselves, but in other words in areas, where there isn't a lot less coal did you know temporarily at least can you know maybe this happens overtime inventory levels continue to go get lower but couldnt.
Plasma collectors get higher incentives in areas, where you know better.
It's less colder going on him and drive the owners that way I'm just trying to think of how they are trying to adapt to this environment.
Yes, I think there are interesting adoptions modifications going on as we speak even some of the.
Segmentation that we had offered in our prior calls and some of the ongoing discussions the separation out of college towns versus border towns versus new centers and mature centers obvious stuff, but as you think about it.
It is possible depend dynamic effects those different sub segments differently.
How are customers responding how can we help them with that response I mentioned that cobot app.
Most centers don't work on appointment basis more do today, because it helps social distancing and it's one of these ones we've been asked and prior discussions well it social distancing is six feet and they'll be associated health and hygiene measures are we talking about taking out half the capacity and I think that.
There is dramatically from one center to the next and I think it is candidly why these examples like we've seen than our own manufacturing footprint, where in Malaysia, where we were required to reduce our headcount by 50%. We did not see a 50% drop off in our production capacity in fact, a production capacity was in excess of 70%.
Because of measures, we took our collectors have that ability within their footprints and we can work with them on how to do that some things enable further by the Nexus system that allows them to do that so.
Uhhuh, we're working in solving for a new normal day today I'm cautiously optimistic that will help it will help with the attitudinal factors you well to make owners feel safe there is a broader play into your point if.
Your stake or your city isn't locked down that's a that's a structural challenges to overcome that has as a tail effect on the attitudes into owners, but collectively we're working on it there's never been more headlines about the beneficial answers plasma folks I actually don't plasma yesterday at a much greater level than ever.
I have before hopefully that's a silver lining that as we face into the new normal helps us get back to a bus collections.
Right and just speaking if silver linings just last question.
Just from a high level I know you could talk specifics, but just in terms of conversion to Nexus platform. It seems like inevitably this will hopefully happened, but perhaps coated temporarily slows it but over the middle term, maybe that helps conversion as well.
Opens up more discussions to improve.
Throughput capacity these centers.
Full behind that.
In supply any thoughts or not.
I think it puts an exclamation point on the value proposition of the Nexus platform clearly yield I think that's one that gets everybody's attention, but we're talking about the cycle time of a donation we're talking about relative compliance and the ability to document that electronically and then just this overall.
All sensors satisfaction and the professionalism collection that is enabled by the Nexus platform of course, we have to demonstrate we can do that.
Okay, that's safe and I think we now have done so whether we're talking about new center openings were center conversions for software upgrades, which I think at number where customers had been very thoughtful about using.
Some of the downtime to upgrade their software latest versions of next link. So again, our folks are trained on this we've stayed fully operational and I think we've demonstrated the ability to power through this even in the context of the pandemic. So I agree that the value propositions never been more relevant or stronger.
I think our ability to act against the <unk> equally robust.
Got it thanks I appreciate the color.
Our next question comes from like Medicine Needham Your line is open.
Yes, Hi, good morning. This is David taxing on for Mike. Thanks for taking the questions on just one for me. This morning I'm. Just wondering if you can talk about the benefit of tech testing for coated patients and if this led to any new placements that could drive future tegra.
Thanks.
Yeah, Hey, David Thanks for the question, we're very enthusiastic about tags roll in this what we discovered and it was first identified in northern Italy that a number of these calls at 19 patients were presenting with meaningful thrombo elastic complications there.
Plus was clotting at much faster rates on in parts of the body that you would not normally see this particularly for a busy times characterized as a respiratory disease. Obviously these are very serious complications they lead to.
Pulmonary embolism or stroke or cardiovascular complications so.
Widespread interest in that we spent a lot of time working with our opinion leaders and major treatment centers to get them devices for research purposes. I think that's helped to basket case, we certainly see that now in North America, starting to see that is going as far as the recovery in China. So I think there's.
A strong interest in Thrombo elastic testing TEG has 80 share of that market and I think we've increasingly kind of advanced and working with the scientific and medical communities to advance the understanding what's really going on and using the so elastic testing as an important diagnostic I understand its risk factor show.
The capital sales in first quarter, we're a new high for us despite the pandemic. Despite the challenges that hospitals were spending a lot of.
Money on ice you care et cetera. So.
We'll see how that plays out over the remainder year, but we're enthusiastic about tectrol no no therapeutic diagnostics for Colby.
Great. Thank you.
Our next question comes from Dave Turkaly JMP Securities. Your line is open.
Great. Thanks, I'll just stick sneak one in here if you had the.
Chris You know obviously, there's been a you've been pretty active particularly on the divestiture front, but I.
Yes, I'm just curious you know should we expect that to continue and why have they <unk> I guess sort of your thought process around you know selling some of these things and selling them now.
And what we should expect sort of moving forward. If you if you have any thoughts on.
Other things to either a divest or acquire thank you.
Dave Thanks for your patience.
We have chat on the call I'm going to invite him to comment.
On the actions that have been affected the blood center business as we said at the outset as bill highlighted in his summary remarks, we're committed to a through cycle mindset, we laid out a five year turnaround. This year five of the turned around we're committed to power through that our portfolio moves acquisitions and divestitures are absolutely part of that.
You want to pivot our portfolio to growth, we want to play in sectors, where we can make a meaningful and distinctive contribution and benefit by the growth and profitability that comes with that so.
We put a bunch of things in motion really over the last several years, some of which come to fruition in the quarter in a few more that will power through but a lot of credit chat and his team for making that happen. So that's why don't you comment.
Hey, Dave I kind of look at it in two buckets first was the North America software in the European.
They software.
Both of those businesses were flat to declining in double digits. So exiting those definitely improves our growth wage rate in the business.
Additionally, I think.
It positions us better just from a focus perspective and since I've taken over the business. That's one thing that you'll get a narrower focus on where our core competencies are and you know that really is through the disposables and the equipment side of the business. So we have a lot of talent and we'll keep them focus in areas, where they can drive value for the company and the customers.
On the second one is the for harder filter manufacturing plant that.
We divested to GBS.
We've had a long term relationship in GBS they produce filters exclusively.
A lot of competency there.
It was definitely a win win situation for us and I think what we got out of it beyond just kind of a long term supply agreement is I'm really excited about just the access to the engineering talent.
The depth. They have is something that we could only dream up so.
We expect a lot of value.
In the future coming out of that relationship. So thank you.
Yeah.
Okay.
Our next question comes from Anthony Petrone of Jefferies. Your line is open.
Just a quick follow up on the geographic footprint of of the centers in the U.S. that better within your network and then is there any way to.
Sort of break out.
The percentage of of centers at the moment that may be located in high impact states thinking on Florida, Texas.
Water states et cetera, thanks again.
Yeah, Anthony it's so there are over 800 sourced plasma collection centers.
In North America predominately U.S. as you know, we have and access with 80 share of those center. So we are footprint represent the industry's footprint in that regard there is a concentration in both the southern part of the U.S. and eastern South.
<unk> to be clear in mid Atlantic, let's kind of.
L shaped curve, if you will across the bottom on the east coast, We we track.
Flare ups, he outbreaks and paying close attention to that there are a small number of states, Texas, Florida some of the big.
Midwestern states like ER and Eastern States, Michigan, Ohio for example that we're heavily dependent upon for for this collection. So we pay close attention to it there was a point in time in the first quarter where.
Our footprint and the dog eat math, if you will for cobot were.
Almost a direct overlap thankfully through a very set of actions, but we're seeing some progress in places like Arizona, and Texas and Florida in terms of flattening out curves and Oh that gives us cautious optimism, but that's that's what we're managing through when it's a broader societal issue that we and our our custom.
For sure are caught up in <unk>.
Thanks, Thanks again.
There are no further questions.
Ladies and gentlemen, this concludes today's conference call. Thanks for participating you may now disconnect everyone have a great. Okay.
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