Q2 2021 Haemonetics Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Haemonetics second quarter fiscal 21 conference call and webcast at.
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The conference over to your speaker today, it's all the diet Investor Relations Ma'am you may begin.
Good morning, everyone. Thank you for joining us for Haemonetics second quarter fiscal 21 conference call in Bobcat.
I'm joined today by Chris Simon, our CEO and Bill Burke our CFO.
This morning, both of their second quarter and first half fiscal 21 results to our Investor Relations web site, including the analytical people with information that we'll refer to on this call.
Additionally, we provided to complete the 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 are on an organic basis and exclude the impact of currency fluctuations strategic axes of product line acquisitions and divestitures.
As in the past sort of first to non-GAAP financial measures through how this cool to help investors understand haemonetics I'm going business performance.
Please note that these measures exclude certain charges an income item.
Please refer to this mornings earnings release for details on excluded items, including comparisons with the same periods of fiscal 20, and a reconciliation to our GAAP results.
Our remarks today may include forward looking statements and our actual results may differ materially from they disappeared it results humanity.
Haemonetics cautions that these forward looking statements are subject to risks and uncertainties, including the potential impact from the call. Good night, you've been done ocwen their results and other factors referenced in the Safe Harbor statement in our earnings release and in our filings with the FCC.
It does not undertake any obligation to update these forward looking statements.
Now I'd like to turn it over to Chris.
Thanks good.
Good morning, and thank you all for joining us.
Today, we reported second quarter fiscal 2021 organic revenue of $209 million.
Kind of 16% versus prior year and adjusted earnings per diluted share of 62 cents, a decline of 29% versus prior year.
Oh, but 19 significantly impacted our results in the second quarter and first half of fiscal 2021.
He also depend damage, we prioritize safety and business continuity and we have done so exceptionally well.
Three quarters of our employees worldwide, our frontline workers manufacturing and supply teams, keeping our plant's operational to ensure timely production and delivery tech support specialists working on site with customers to install and keep our device and service field based sales and clinical support reps calling on.
Customers to keep them informed and support it engineers and collections working in our labs to advance our many development projects their efforts and the efforts of all of our employees have kept more customer see stopped service and fully supportive.
The fundamentals of our business remains strong and there are as robust end market demand for our products and for the products of our customers.
We have employed a through cycle mindset to prepare for recovery and long term value creation in the new normal.
We have achieved critical milestones, including acquiring hospital based products divesting non strategic blood center software assets and receiving FDA clearance for persona.
We are not issuing fiscal 21 guidance today as there is still significant uncertainty about the ongoing impact from COVID-19 to our customers, especially sourced plasma collectors.
Forecasting in this environment is difficult that's a global health crisis has impacted each of our three customer groups differently.
And the timing and pace of recovery is different for each with that context, let's look at our business unit results and the actions, we're taking to drive near and long term success.
Plasma revenue declined 30% in the second quarter and 32% year to date, primarily due to a decrease in North America collections compared to prior year sequentially collection volume was up 9% in North America in the second quarter, which is typical of the seasonal increase in demand we experienced in prior years.
We have not seen a meaningful inflection point beyond seasonality since the end of our second quarter.
Oh, but 19 has had a pronounced effect on the source plasma donor base in the U.S. and our collection customers have struggled to replenish that pace given the structural an attitudinal factors that must be overcome we are in close contact with all of our customers who are doing everything they can to accelerate the recovery they have taken.
An extensive measures to ensure the health and safety of donors and they have begun a myriad of advertising and promotional campaigns to encourage their nations. After the government economic stimulus ended in August.
M&A Acs continues to do everything we can to support that and we remain optimistic however, predicting the pace of recovery is difficult and we are cautious about attempting to be precise and forecast a situation that is complex and uncertain.
By contrast market conditions for collections in Europe have been different to date and plasma revenue was up 2% versus second quarter of the prior year increased 34% sequentially from first quarter.
Software revenue decreased in line with plasma collection declines in the second quarter and was negatively impacted year to date by a one time benefit in the first quarter of prior year we.
We have continued to upgrade U.S. customers to the latest version of our next like Dms software. We are targeting completion over the next year. We recently launched our donor Threesixty app support customers as they rebuild their donor basis, and we are advancing our long term goals to migrate to a fully cloud based global offering.
Software as a strategic lever for our customers and we are innovating to support their recovery and growth plans.
We were pleased to receive FDA clearance for persona, the only donor tailored solution clinically shown to yield more platform for duration on average using a novel per cent plasma nomogram.
Our proprietary persona technology significantly strengthens the well established nexus value proposition with our ability to safely increase last month yield.
Our clinical trial more than 23000 collections showed a gain of 8.2% compared to U.S. technology, and we expect that in a broader real world population persona could add an additional 70 milliliters on average to the 23 millimeter average gain from yes technically.
Sure.
We are talking with all of our customers about persona and we are committed to making it economically attractive and logistically easy to adopt.
Persona is our innovation agenda at work and we plan to further leverage data and analytics to improve yield cycle time safety and compliance and donor satisfaction.
Or through cycle mindset and commitment to growth underpins, our plans to drive the value of each plasma collection.
We have taken steps to ensure continued supply with the agility to meet customers needs for all milestones within the recovery and beyond as.
As plasma collection recovers and Fractionators replenish their depleted plasma inventories, we are well positioned in a resilient end markets.
We are monitoring the timing and pace of the recovery and perhaps most importantly.
We continue to view the impact of the pandemic as temporary the underlying demand for immunoglobulins hasn't changed and we remain confident in the long term collection volume growth projection of 8% to 10%.
Moving to hospital revenue increased 2% in the second quarter and was down 1% year to date over.
Overall, our hospital business saw a 12% sequential improvement in the second quarter over the first quarter.
Consistent improvement across all three segments.
Our hospital products are primarily used in non elective cardiovascular and trauma procedures, which showed meaningful recovery since the first quarter.
Strong execution in a challenging environment allowed us to accelerate recovery, especially in key markets like North America and China.
In North America, we sold 19% sequential revenue improvement in the second quarter, driven largely by disposable sales, resulting from higher procedure volumes, enabling positive organic growth in the U.S.
China was affected earliest and hardest by COVID-19 during the fourth quarter of Arpus on it and while still down compared to prior year. The recovery in China has been encouraging with revenue sequentially, improving 90% in the first quarter and 16% in the second quarter.
Hemostasis management revenue was up 4% in the second quarter compared with the prior year quarter, driven by strong U.S. disposable sales year to date Hemostasis management was up 3% and benefited from strong capital equipment sales in the first quarter followed by sales of headquarters is in the second quarter.
Actually offset by continued pandemic related challenges.
We continue to invest in our innovation agenda through clinical trials to build evidence for our hemostasis management products, while we strengthened our go to market model and commercial execution in all key geographies. Our TEG devices continue to play an important role in researching where you often see in COVID-19 patients.
Transfusion management was up 14% in the second quarter and 9% year to date, primarily driven by strong growth in blood track through new accounts in several key geographies Safetrace. TX also grew in the second quarter, primarily driven by new software installations.
Purposeful hospital access allow our teams to drive several inflight projects to completion.
Cell salvage revenue declined 8% in the second quarter and 13% year to date, primarily driven by declines in disposable usage. However, second quarter revenue improved 26% sequentially over first quarter, a cell saver benefit it from the resumption of elective and non elective procedures.
This progress is encouraging and we anticipate additional improvement in the second half of fiscal 21 as procedures normalize.
Overall, the crisis is help validate the a central role that our technologies play and assessing risk of bleeding and blood clots, providing autologous blood transfusions, and helping us effectively manage blood supply.
We have demonstrated our ability to safely and effectively sell install and service our equipment. Despite limited access to hospitals. Accordingly, we expect continued increases in disposable sales a surgical procedure volumes continue to improve and we anticipate a return to pre pandemic levels in our fourth quarter.
Blood Center revenue declined 8% in the second quarter and 3% year to date.
We have been able to supply and support our customers as they provide essential blood products may challenge in collections environment, notably, we did not see distributor stocking order reversals in the second quarter and although that remains a risk we do not anticipate that happening until the pandemic subsides weaker.
We continue to engage with customers globally to support the collection of convalescent plasma we increased capital sales in the first half of the year up 75% in first quarter and up 29% in second quarter versus the prior year.
Increased installed base should provide longer term benefits to our disposable sales.
Hey for research revenue was down 8% in the second quarter was flat year to date.
The 8 million dollar impact of a previously disclosed customer loss was offset by continued plasma growth in Japan, and other markets and favorable order timing in the first quarter.
Whole blood revenue declined by 9% in the second quarter, and 7% year to date, driven by lower than usual procedure volumes due to cope with 19 previously can this discontinued customer contracts and overall declines in blood utilization rates.
We continue to optimize this portfolio, including the recent divestiture of certain blood Center donor software. In addition to our earlier divestiture of the four hydro production facility and concurrent whole blood filters supply agreement with the purchaser of that facility.
Our operational excellence is fully on track to raise product and service quality, while reducing cost of goods sold to drive margin improvements.
We are making progress optimizing our plant network and sourcing to increase efficiency Inspite COVID-19.
In addition to divesting the Puerto Rico Blood facility, we're also modernizing and expanding our plasma and TEG disposable manufacturing in Pittsburgh Yeah.
Oh, we p. savings combined with steps, we took to reduce costs earlier in the year have helped to partially offset revenue declines from the pandemic.
We are executing our strategy. Despite the challenges of the global health crisis, and we remain confident in our ability to deliver results complete the turn around and create long term value we.
We have to plan the talent and the financial strength to pivot Foley to transformational growth propelled by innovative technologies in healthy growing markets.
I want to close by again thanking our teams for delivering for our customers and accomplishing our strategic plan milestones bill over to you.
Good morning, everyone. Chris has already discussed revenue. So I will start with adjusted gross margin, which was 52.2% in the second quarter, a decline of 40 basis points compared with the second quarter of the prior year.
Adjusted gross margin year to date was 49.8% a decline of 210 basis points compared with the first half of the prior year.
The primary drivers of the decline both in the second quarter and year to date <unk> impacts from COVID-19, including higher operational expenses lower volume and unfavorable product mix. These downward effects were partially offset by productivity savings realized from our operational excellence program.
And lower depreciation expense.
Adjusted gross margin on a year to date basis also reflects a benefit.
From a strategic decision to exit liquids, which was offset by the impact from recent divestitures in the second quarter.
Additionally, the sequential improvement in adjusted gross margin of 500 basis points in the second quarter was driven by greater cost savings from cost containment actions.
And the operational excellence program, a onetime pricing true up associated with long term contracts and lower operational expenses due to cost at 19.
Adjusted operating expenses in the second quarter was $66.4 million.
A decrease of $8.8 million or about 12% compared with the second quarter of the prior year.
Adjusted operating expense in the first half $130.1 million, a decrease of $16.6 million or about 11% compared with the first half of the prior year.
Lower adjusted operating expenses, both in the second quarter in the first half of this fiscal year were due to a combination of ongoing productivity savings and cost containment measures implemented to help offset the negative effects of COVID-19 related to lower volume and cost to safeguard to health and welfare of.
Our employees in manufacturing supply chain and customer facing roles.
The cost containment measures included restricting travel, reducing non essential spending delaying hiring and reducing some compensation related items.
Partially offsetting these savings were modest investments in key growth areas of the business.
As a result of the performance in adjusted gross margin and adjusted operating expenses. The second quarter adjusted operating income was $42.9 million.
A decrease of $14.8 million or 26%.
In the first half adjusted operating income was $71.5 million, a decrease of $37.7 million or 35% compared with the same periods in fiscal 20.
Adjusted operating margin was 20.5% in the second quarter and 17.6% in the first half down 240 basis points, and 460 basis points, respectively, compared with the same periods in fiscal 20.
For both periods the lost leverage from revenue declines outpaced the impact of cost mitigation efforts.
The adjusted income tax rate was 19% in the second quarter and 13% in the first half of the fiscal year compared with 15% in the second quarter.
And 13% in the first half of the prior year.
The lower adjusted income tax rate in the first half of this fiscal year benefited from a higher than usual impact from a deduction associated with share vestings and opt ins option exercises in the first quarter.
We do not expect this benefit to repeat in the second half and anticipate that the fiscal 21 adjusted income tax rate will be 16% to 17%.
In implied adjusted tax rate of 17% to 19% in the second half of this fiscal year.
Adjusted earnings per diluted share in the second quarter was 62 cents compared with 87 cents in the prior year second quarter, a decrease of 25 cents or 29%.
Adjusted earnings per diluted share in the first half was a dollar eight compared with $1.67 in the prior year, a decrease of 59 cents with 35%.
The decrease in adjusted earnings per diluted share both in the second quarter and first half of fiscal 21 was due to the adverse impact of the COVID-19 pandemic on revenue and adjusted gross margin. Despite the cost containment actions initiated.
We continue to review our financial modeling that evaluates different financial impacts to each business unit using varying scenarios based on the anticipated pace and timing of the recovery.
While the current environment remains extremely uncertain, we are prepared to implement additional measures will change the course of action on those initiated if necessary.
We remain committed to delivering $80 million to $90 million of savings by the end of fiscal 23 as part of our operational excellence program.
This program has contributed meaningfully in the first half of fiscal 21, and we expect the majority of savings realized will drop through to adjusted operating income by the conclusion of the program with the return of the business back to historical levels.
We continue to pursue our goal of preserving cash.
Free cash flow before restructuring and turnaround costs was $38 million in the first half of fiscal 21, compared with $31 million in the first half of the prior year.
The improvement in free cash flow before restructuring and turnaround is primarily due to lower working capital outflows compared with the prior year.
In particular, we had a decrease in accounts receivable due to a reduction in days sales outstanding and lower revenue.
We also had lower increases in inventory when compared with the same period up to prior year.
Although cash outflow from inventory is lower than the prior year.
The impact of lower sales volumes in plasma has resulted in a higher disposables inventory balance that is being addressed.
In the first half of fiscal 21, we incurred net borrowings of $90 million on revolving credit line.
These borrowings combined with the free cash flow and net proceeds from portfolio moves increased cash on hand to $279 million by the end of the second quarter.
As a reminder, our EBITDA leverage ratio remains low and we have an existing credit facility of $700 million that does not mature until the first quarter of fiscal 24 with the majority of the principal payments weighted towards the end of the term.
Total debt outstanding under the facility at the end of the second quarter was $465 million split between the remaining term loan balance of $315 million and borrowings under the revolving credit facility of $150 million.
Subsequent to the ended the quarter, we repaid $150 million under the revolving credit facility.
Following the repayment, we now have $350 million available for future borrowings under that facility.
Our capital allocation priorities are clear and remain unchanged, we will continue to invest in our business with a bias towards organic growth and innovation that will continue to expand our commercial capabilities and we will remain opportunistic with M&A and share repurchases.
The existing share repurchase authorization has $325 billion remaining on the existing $500 million authorization through the end of this fiscal year.
We intend to be thoughtful in executing additional share repurchases, which may include extending the authorization beyond its existing expiry date.
In summary, I'd like to conclude with a few closing thoughts.
We continue to manage the impacts of COVID-19 throughout the business and we remain fully operational and have not had any interruptions in the supply of our products.
Second quarter results showed encouraging trends in our hospital business, which began to recover and we anticipate further improvement to Cree coated levels by the end of fiscal 21.
In Blood center, although we did not see a reversal in the second quarter of the distributor stocking orders that occurred in the first quarter.
We anticipate this reversal may occur as the pandemic subsides.
The end market demand for plasma derived pharmaceuticals remain strong and after the recovery and collection volumes, we anticipate growth in plasma collections to be above pre pandemic levels to the short term.
And at 8% to 10% in the long term.
However, the plasma business continues to be challenged by the timing and pace of the recovery and we have not seen an inflection point.
The recent FDA clearance of our persona technology is evidence of our commitment to innovation.
We believe this technology will bring significant value to our customers, especially in this challenging environment.
And we are making it available economically attractive and easy to implement.
And finally, the operational excellence program contributed meaningfully to the first half results and will continue to be a significant driver of margin expansion as volume recovers and cost of the pandemic subside.
And now I'd like to turn the call back to the operator.
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Our first question comes from Anthony Petrone of Jefferies. Your line is open.
Hi, Thanks and.
Oh, I hope everyone is doing well.
A couple of questions first on on plasma volumes go down.
To margins and cost and so just wondering just on the plasma donation volume trend.
Maybe if there's an update as to where the quarter exited specifically volumes in September and now with the early look is in terms of exiting October where where volumes are specifically and then as a follow up you would be just an update on nexus contracting for one but you also mentioned, Chris the persona ASCII clearance.
Just wondering how that trialing fees from that specific technology will also play out and then I'll have a follow up for bill. Thanks.
Yeah. Thanks, Anthony appreciate the questions first.
First off with regard to this trend right. We monitor this closely we're obviously in close discussions with all of our customer base to understand what they're observing in the market and how little effect that we have seen.
An increase in collection volume as we exited the quarter and through the month of October. However, it's our inclination to take a more conservative stance. When you look at this simply because.
Prior inflections have been more closely correlated with historical seasonal increases so its early to tell our customers are doing everything they can we're doing everything we can to support them and we remain cautiously optimistic but.
That can be a lot of noise in the system, particularly if you're talking about daily and weekly and even monthly trend line. So we just like to see that play forward a bit before we call. It and that's the primary reason we chose not to guide for today's earnings call. So I'm cautiously optimistic we have seen improvement and.
We fully anticipate we'll continue to see improved long term, we remain really bullish but we just like to see you know a bit more of a trend line there before we can extrapolate.
In terms of Nexus, we are in dialogue with all of our customers persona has amplified that dialogue and in some cases you pulled it forward. We're excited about what we're doing there and we're looking forward to making sure I'm as we attempt to do this that all of our customers understood.
On the value proposition understand our capabilities to implement a in a cold environment make it seamless non disruptive.
Let them to benefit, which you know for some who haven't developed at Nexus Oh, yeah upwards or you know 80, plus and now 90 M.L. in some cases of additional plasma plus the cycle time.
As well as the paperless environment to drive compliance and safety and them clear benefits on donor satisfaction, which is key in this market. So again cautiously optimistic dialogue continues.
That's helpful. And then the quick follow ups would be maybe just one quick follow up on on plasma would be and the whole notion of safety stock amongst the plasma Fractionators is there an estimate as to where that sits and then no per bill just on the margin front. The sequential gains were obviously substantial and so maybe just an update on the.
Okay.
The current ongoing restructuring plan, where the target was 80 90 million of gross savings just how much of that has been realized at this point.
And then what does the cadence of the remaining savings you know as we look ahead into the calendar. Thanks again.
Yeah, I think so first on our customers inventory levels clearly best directed towards them. We monitored this to the best of our ability whats very clear in hindsight is when we had such robust growth well in excess of the 8% to 10% long term trend, but no numbers in the mid teens and better some of our.
Our largest customers they were taking advantage of a healthy environment elections and building inventory appropriately they've taken some steps to make sure. They don't have shortages and including expedited release et cetera, with the various regulatory agencies. So they they've tried to protect themselves on the downside, while we all built towards recovery.
Different numbers, depending on the customers the little bit opaque. So we're not in a position to give specific insight around that beyond what we read from our customers earnings releases and press releases. So.
I know the keen intellect I think that is imminent and you know clearly we want to help them get that back on track.
In the current period.
Hi, Anthony its bill good morning, I can answer the second third parts of the question. So on our margins, particularly on our operating margin. We were up 590 basis points sequentially from Q1 to Q2.
The majority of that gross margin improvement came in our I was talking about operating margin improvement came in our gross margin was about 500 basis points of improvements. There. There were a few things that that drove that improvement sequentially.
First our OE p. savings that we continuously talk about.
Quite a bit in the first half of this year improved from a higher from in Q2 than in the first quarter.
We also had a one time charge in the first quarter related to capitalized variances as we have to true up our.
Inventory days on hand, because of the field and inventory as our revenue had declined year over year.
We also had lower coverage related expenses, we have talked about the corporate expenses that were used to ensure the safety of our employees, we had slightly less expenses in the second half with it not anticipating outbreak of of Cowen and then also in the second quarter, we had a onetime truck force.
Oh pricing events, particularly in a in plasma that we probably don't see repeating for the for the remainder of this year.
So I hope that answers your question on operating margins just had a question on the operational Excellence program, we did not disclose exactly the savings that we had in the first quarter or the second quarter, but as you can see from Mike.
My commentary and the gross margin we did see some improvement in the savings we are still committed to the aged $90 million as part of the program or in the program fall right through flight 23.
And you know when we do get around to guiding we will start to talk about a little more granularity of the operational excellence program savings.
Thanks again.
Thanks Anthony.
Our next question comes from Larry Keusch of Raymond James Your line is open.
Thanks, Good morning, everyone.
Maybe Chris to start you, both you and Bill certainly expressed confidence in the.
8% to 10% growth of you know classics collections over the long term.
Maybe just talk a little bit about why you have that that confidence given again some of the.
10 show for alternative Therapeutics out there Dai ichi.
Sure Larry Thanks for the question.
We take our cues from their customers in the market at large we obviously tap into our own scientific Advisory Council, we read everything that's out there and and Ive had numerous discussions with key opinion leaders and the medical community at large I don't profess that we have prior Terry insights about.
Anti F CRN therapy for example, or a hyper sialylated offerings, but what I would say is.
Things, we track to talk to discern that and get that what we think is an 8% growth long term CAGR and.
With regards to GE and then the 8% to 10% we benefit from as a result of it we look at the capital allocation that our customers have put forth in their collection centers and in fractionation that continues unabated, we look at their R&D pipeline that the myriad of different you know that do that counts differently the weather.
Several hundred or 7000 trials underway, including.
Including referrals and bar study for example, these.
Other important advances thing, we still know that there is meaningful off label use in the products that treat horrible diseases that are otherwise untreated and due to the ongoing no movement, a mild and moderate including a shift over to subcutaneous therapy, which does require more source.
Yes, no to deliver we look at all of that we look at what our own customers are saying now, which we think aligns with this about relative competitiveness of these new therapies. They will play a role and the timing of that it's unclear on the extent of that is unclear and because of that.
You look at our own no guidance and kind of what's in front of us and get very comfortable with that 8% to 10% number.
Okay perfect.
Couple of other quick ones here. Another one for you Chris you certainly mentioned a couple times on the call about your ability to.
Absolutely.
Access with without disruption in sort of in a seamless fashion I guess the question is how big of an issue is this for potential customers is this something that they are concerned about and maybe.
What we have in there kind of what your capabilities are for implementation and then kind of what was your experience with Dr. farm and I just had a couple of quick ones for Doe.
Sure. So our customers have been head down you know kind of doing what they can do to replenish their donor base and.
Regain the momentum they had heading into cold, but that's been their primary focus and obviously you know our focus to support them.
What we have done in parallel talked pretty extensively about it is the ongoing upgrade and transition to the next link donor management software platform. That's something we began a year and a half ago sitting here today, we are in flight upgrade all of our customer base or the new.
Next link system, we think we're about a year away from completing that upgrade and as a result of that process. Our software share now equates roughly our disposable share in North America, where we have the software offerings. So that's very powerful in many many ways. The software upgrade is the more.
Challenging hardware matters, but what we've demonstrated our ability to turn a center often overnight. So bigger challenge the software are well underway when a good place to do that and I think that that.
That enables the broader conversion to nexus as a as a platform, but we're pushing forward with so we feel quite good about that we continue to demonstrate that even in the current environment.
Okay, perfect and then build just a two here for you just back to the gross margin obviously it was.
Impressive.
And the fact that it got back to essentially pretty koby levels in the second quarter I'm. Just wondering you know given that this sort of various puts and takes that you talked about how sustainable do you kind of see this this level and how should we think about you know the upside opportunity within that margin ones plasma volumes normalize.
And the other part of the question is you know some of the larger cost.
Customers out there plasma customers have have you know certainly thrown out a number that feels like you know September was down 20% year over year, and certainly improved from where it was in <unk>.
In July I'm, just any any thoughts around that thanks.
Okay. Thanks.
Thanks, Larry so on on the on the gross margin question. So I kind of unpack the details there sequentially with and at the answer to Anthony's question, but that really but the one thing that impacted gross margins in the second quarter. That's a.
Isn't repeatable is that one time pricing pricing true up you know we have we have there were there was that dock benefit in Q2, it relates to contracts, our plasma business, but just want to get into lot of details about it but that's the I think the more important point that you asked as to the question about the plasma volley.
James are torn returning to normal levels obviously.
That would drive operating margins higher in the us in the back half of the year. If we do get that inflection point in that kind of transitions into your last question, which was.
The inflection point right, Chris Chris mentioned it in his up in his prepared remarks that we've seen the year over year declines in plasma roughly the same right up buttons until the end of the quarter and then just into the the month of October two but what we have seen is a sequential improvement from Q1 to Q2.
9%, but again you know we have all confidence that it's going to bounce back here at some point you know whether its this year or lingers into early next year, it's just yet yet to be seen but when that does happen we should see inflections in the in the operating margins.
Okay perfect. Thank you yep.
Our next question comes from David Lewis from Morgan Stanley. Your line is open.
Hi, good morning, Thanks for taking the questions. Maybe just feel just felt there was a quick view on gross margin serving the revenues were down mid teens, but yet you know James obviously were kind of flat year on year into the back half of the year. You know is it safe to assume gross margin should be sort of stable that 52% level or as volumes recover you should see some.
Actual uplift in Ngls.
Well, if if if volume volume recovers, we would see some uplift, but there's a bunch of noise going on right now with inventory too. So you always had this this week.
Hi. This is you know you can see it on the cash flow statement to saw increase our inventory balances. So far this year up almost $38 million. So we're looking to address that and by dressing that we will have some.
Some pressure on our gross margins, but when we're just talking about.
Normal volumes Im not only in plasma, but hospital returning back to normal and the incremental savings that we're getting from Oh, we Pee Wee in theory, we would see an uplift in Uh huh.
Our gross margins I do want to point out again, you know we did have that pricing trough in Q2. So there wasn't a nominally from Q1 to Q2.
Okay and seek to symbol to somebody but we're seeing that some of the OE p. timelines have been pulled in a little bit. It certainly seems that way based on second quarter numbers.
Well you know it's.
It's we're not only looking to pull things in from all we p. and we're pretty aggressive on our savings no matter, what I mean, when the teams put together these savings programs, there's not a lot there they're keeping in the back my back pocket right. So we drive we drive the teams pretty hard in the organization understands the commitment that they're making to deliver deliver these savings we do have this other.
These cost containment I want to say that the non OE Pete.
It's things that we've done and a lot of discretionary spend to drive savings too and it's been impacting not only our S. DNA, but also a slight improvement in the gross margin too we're not doing anything to a.
A detriment to the business longer term. So we still are investing for growth there, but that is also helping our margins.
Okay very helpful and then Chris a few questions here in plasma. The first is maybe a more simple one.
Pursuant to new customers that don't yet have Nexus, obviously is a subject of great negotiation, but are the customers that already adopted Nexus I mean, how do you go about rolling out persona to those customers right, it's you're giving greater value how does that how does that work with customers are already on contract with Nexus.
Yes, Dave so.
What we what we put forth and I think bill and I. Both mentioned this in our prepared remarks, we want to be economically attractive and we wanted to be logistically easy for them right. So that there are meaningful changes right. It's a larger bottle almost a third larger so we've got to change out some disposables and they have to adjust their.
Logistics and manufacturing processes to accommodate that which comes with an additional 80 or 90 millimeters rights are there we're happy to do that.
But it takes real work well we are keen to do it's public that we work with you know off the pharma on the trial the impact trial itself. So weird tee them up for for conversion and we're working hard to make that a worthy reference case that you know we can build upon in the industry can build upon.
You know all of our existing Nexus customers are in long to do this they may have contractual reasons why they have to proceed on pace versus the other but we stand ready to make the conversions those conversions can happen and it would be misleading to say there you know simple turnkey, they're not they're more than that well do this primarily software.
Related and it is something that you know through the trial work that we did 23000 donations as well as the one going work. We've now done post a F.D.A. clearance, we feel confident in our ability to pull the trigger on that quickly at least as quickly as our customers are prepared to go.
Okay, and then two more just quick questions here on plasma. So the first one is sort of more macro I mean, your your largest customers are basically saying.
They're going to two things are going to happen next four quarters, I know, they're going to get back to normal but it just in collections were actually they're going to run you know.
Head of normal obviously as they look to recoup a inventories over the next four quarters, but that's sort of what your largest customers are saying can.
Can you see any reality here with your business, where you know your business should not track linearly with what those large fractionators are saying at some point over the next four quarters.
Yes, David we have you know north of 80 share of the North American market and that's the market. That's been the hardest hit right. We're doing outside the U.S. Europe has done quite well there are different structural an attitudinal forces at work there that have allowed you're up to.
Outperform on a relative and absolute basis as well so we feel good about the European piece on North America.
80 share, where we stand ready to help make these ah that recovery and the trajectory coming off of that recovery as robust as possible. So no. There's there's nothing unique about our system more offering in the market that would be different than and restrict us in any way.
From being able to deliver against our customers aggressive growth forecast I think it's just a matter of <unk>.
Getting those structural an attitudinal factors in place and sufficient numbers to replenish depleted donor base.
And then you know the resumption of growth, which we fully expect right and we've said that from outside a resumption of growth I know our customers are all keen not only.
To avoid stockouts and kind of get back on track, but actually to replenish depleted inventories. So you know as the recovery builds.
We're looking at you know a multi year.
Trend that that should be as robust as anything we saw over the last two years.
Okay, and then just last from a more near term question for you I just want to kind of Hammer. This point home. If you look at this particular quarter I think investors are paired her for very negative plasma trends in this quarter, which is obviously, what we saw but like if you look at the numbers. It's not it's not obvious to the casual observer that there was any improvement frankly this quarter end, but it really shouldn't have been through sort of mid August there's certainly should have been.
Some activity sort of the back half of August and September on stabilization better promotions things of that nature. So is that the way you see it at the back half of this quarter really didn't see any improvement in most of the improvement was in October Oh, you did see meaningful improvement in September and maybe you can describe there's so many other factors in the channel that suggests why we didn't see that improve in terms of.
Class a momentum here in this particular quarter. Thanks, so much I'll jump back in queue.
Yeah. Thanks, David we certainly appreciate the hyper focused on daily weekly monthly results you know Colin the trend and knowing what you know what can we extrapolate from from our vantage point, our customers exceptional job of keeping.
Keeping their centers open keeping their centers safe managing through the myriad of challenges as I said structural an attitudinal required to drive their performance. What we are encouraged by is that youre over the course of the second quarter. There is a seasonality to our business. The first quarter is always.
The the softest collections quarter of the year for US and then build sequentially in each quarter thereafter, I'm through the end of the calendar year for certain and we are seeing that seasonality play out again.
Beyond that it's been a challenge and I think it's because not only do they need to respond to the ongoing seasonal growth what they need to do so while they are you know.
No replenishing that the pleaded donor base donor base it was down 40% during the lock down phase of the pandemic. So they're working against that I think it plays out very differently. If we are talking about centers that are operating on college campuses versus in major metropolitan areas versus along the border.
Our sites versus new centers.
Comparisons are existing centers, where they are still trying to build donor foot traffic. All these play out all of these are the challenge that our customers are responding to it's been impressive to see the response I do think they're important trends underway as we speak but our bias is going to be to be a tad more conservative in terms of when and how we call.
Yes, because we have seen previous benefits that that didn't quite play out or at least didn't play out beyond seasonality earlier in the pandemic. So we're cautious there are things happening as we speak in the on the bigger parts of their global health crisis in the U.S. in Europe, and we just need to be mindful of long term, we feel you know usually.
Bullish but in the near term and we got to be mindful that we don't control the broader pandemic in the environment that we operate in so until we have some normalization. There we think it's going to be difficult to make a precise call.
Oh, sorry.
Great. Thanks, so much.
Our next question comes from Dave Turkaly of JMP Securities. Your line is open.
Oh, great. Thanks.
I missed this but.
Obviously, I think a bunch of us saw some comments from customers for years and I don't know if you made any comments, but but.
Did did you talk about any new contracts on the plasma side.
That were signed in the quarter and the comments that you made gross margin the pricing.
Associated with long term contract is that new <unk>.
Pricing contracts or is that from legacy ones. Thank you.
Yes, so I'll, let bill expand upon the latter part of that day, but thanks for the question no. We as a general rule would drive hard on this right. It's a concentrated industry concentrated customer base, we don't talk about individual customers for reasons of confidentiality. We are obviously in discussions with.
All of our customers worldwide not just in the U.S., but in the U.S. The FDA clearance for persona has elevated those conversations and there's meaningful benefits the existing benefits that we had talked about you know over the last year and a half on the persona platform for 23 milliliters in yield speeding.
Off of our cycle times, the paperless environment safer and more compliant and clearly the owner satisfaction, which is paramount, especially in this environment, where everyone is looking to build per active diner base. We now overlay the additional benefits persona on top of that you know one additional 70 M.L. in the trial.
So we're feeling quite good about that and that's discussions that are underway.
We had previously disclosed that you gained share in our software business the Dms.
On her center software and that's that changes are underway, but we haven't talked that ended up customers. They have and currently I don't think we will what we will do when we return to guide is a little factoring gains associated with those contracts as part of our guidance Bill had made reference to contracting as part of.
Our gross margin improvement one of the things Weve done with the rollout of Nexus is we've tried to align with customers with regards to productivity. They experience on our capital we know there faster and we know they're more productive we put incentives in place that are turn rate base, they're more productive with our capital and improve our ROI see that's really.
Given the pricing, obviously I co it environment that gets a lot tougher and we've made some short.
Short term adjustments to be a better partner with those customers and help them manage through the you know the heat of the pandemic. When we were kind of in locked down stage, we don't see that repeating going forward, but we did make some other changes, but the reference that was exactly that ROI see based turn rate contracting that was.
Historical for the existing Nexus customers and we don't think that place for it.
Got it and then you talked a couple times about the structural attitudinal factors I would imagine the structural reforms.
They have been dealt with largely at this point, but.
Maybe not the attitude in the ones that I'd love to get your updated thoughts on those where they stand now.
If they are improving I would imagine they are but.
How that looks now versus maybe last quarter. Thank you.
Yeah.
Thanks, So clearly clearly they're improving you know weve talked about the structural being meaningfully better it is but not completely right. There is not a free flow of donor traffic across the border with Mexico, because on either side of that order there are still restrictions in place.
They'd be voluntary they made a mandatory you know, but ah, but theres controls around that colleges are inception, but many operate remote or have restrictions around where the students and what numbers. They can gather so we've seen improvement on the college campuses for sure.
And that's part of the seasonality we experience in our business, but I would be hesitant to call that.
A return to normal maybe a new normal, but it's it's not where we were historically I think the biggest challenge is the new centers that just haven't had an opportunity yet to.
Build out their donor base and then they get sideswiped by like the pandemic. That's the biggest challenge that is the driver of growth historically prior to Nexus the way plasma collectors grew their base of plasma. It was by opening new centers and I think that's the piece that has been disrupted we're watching and waiting we have.
Good models around what that looks like as it comes and I think we'll be on the front edge of being able to call that when we see it but you know that's the attitudinal piece that that needs to play for them.
Thank you.
Our next question comes from Mike Matson of Needham and company. Your line is open.
Hi, Thanks for taking my questions.
Just curious on the <unk> $8.8 million a year over year decline that Opex do you have any feel for how much of that was due to a temporary cobot benefits like decrease travel and things like that.
Yeah.
It was a it was a really solid decreased in the quarter. So it was 8.8 million or a 12% reduction in our overall operating expenses and actually on a year to date basis, it's almost $17 million, an 11% decline the.
The majority of it is related to a to the cost containment actions as we classify them.
So at the travel restrictions and you know the some of the compensation related items that we to dress so nor.
No they repeatable.
Possibly I mean that is travel ever going to be the same as it has been historically so it's it's hard for me to say.
Exactly what's going to happen going forward, but the majority of the cost savings related to cost containment and the other portion is Oh, we peak.
Okay. That's helpful. Thanks, and then just on this transition with your software to a cloud based model can you just talk about the how that would affect the sales and kind of the of the payment scheme I assume it moved to some sort of subscription fee or something like that.
Yeah, Mike we're still working through that what I would say at this point you know we.
I think historically, we were almost a.
Reluctant or at least.
Non committed provider of software I think it's very clear in the environment that our customers or you know pivoting to that world.
World Class software cloud based mobile offerings, Scott integrated that and go from the donor at home.
Oh on their couch thinking about a donation to collect good and QC plasma on its way to the production site fractionation.
That's where the industry is pivoting and I think we aspire to lead that have it and so we're trying to be very thoughtful about that transition they're important considerations around data privacy and cyber security. There's no numerous other software applications and light here.
We need to and want to be a part of that what we were able to do very successfully here in our second quarter was roll forward. The donor 360, app, it's a straightforward offering but its got to be fully compliant and tied into all of the health regulations, but we are able to help our cost.
And we've rolled this out across the industry as a consideration just to help our customers and we'll get that that foot traffic back to their centers safely. So they're able to do their their medical review online and there's capabilities within the app to be able to manage queuing. So you don't have to physically be in there.
Centre to hold your spot in the center one when the beds available and that's proven to be really useful and it's part of what we see is gaining momentum in the recovery. So it's the first installment it's a modest one at that but this is a multi year program and it's it's evidence of our commitment to leading with software we do things.
Talk about Hsas, we do think about the digitization of our platform as a real enabler growth persona wouldn't have happened if we didnt have the data and the analytics coming off of the Nexus collections.
We've only just begun there will be a persona tubes that no impact to dato trial and beyond to dot one to got to win in many ways. We're just getting started with leveraging the power of data and analytics on a digital platform to help our customers outperform.
Okay, great. Thank you.
Our next question comes from Mike Pesky of Barrington Research. Your line is open.
Hi, guys I just wanted to ask a question given sort of the.
Celebration of Covidien section.
Really around the world.
One of the forecast.
And the next.
Several month or.
Could be.
How do you guys think about that in terms of Uh huh.
Hi.
And I guess, particularly given you know what I, what I would guess.
Wouldn't be.
ER positive incremental.
Access for sale.
Surgical procedures, particularly non elective I mean can you can you talk about is that is that business.
Even more so than plasma given that.
Seasonality that business at some risk.
Really dark cold environment.
W. recovery as opposed to continued momentum.
Yeah. Thanks, Mike the risk of coal that you know the Kobe resurgence is risk to our different aspects of our business is meaningful when we look about at all she touched on all three of our businesses and I'll touch upon yeah, we'd be in cost savings that bill at highlighted maybe you can just go with their first we feel within our company we are.
Have a high degree of confidence that we.
Mastered this right in terms of how to stay fully operational we don't expect that it's going to disrupt us. We don't expect that Ah you were going to lose production and we don't expect that it's going to slow down our methodical March to delivering our operational excellence program quality and savings. So we feel quite good about the thing.
Yes, we can control and the cost savings that bill just referenced a moment ago that are a part of our cobot response.
When we look at the three business units.
Hospital in many ways. It is in full recovery, we benefit by the fact that fully north of 70% of the procedure volumes that we are dependent upon its considered non elective. It's a great term not not not a great. One candidly, but we we are mostly in card.
Our vascular and trauma and there's not a whole lot of discretion about those procedures. So as long as hospitals and we've been really impressed by this worldwide as long as hospitals are able to stay functioning. Despite the surge is we feel like many in med tech more broadly that we're going to be able to live.
And and experience a full on recovery in our fiscal year <unk> and we are looking at that fourth quarter is.
A return to normalcy. So we feel quite good about you know what hospitals are doing in our ability to respond even as we're talking about you know software installation and services on Bloodtrack and Safetrace. So hospitals in a good place we benefit by that 70, 30, 80, 20 split, but it's also hospital customers.
Managing through and ensuring that essential care is provided on our blood center business actually recovered largely within the first quarter is anything but normal blood collectors worldwide have respond that we've been there because we have the supply to support them. Furthermore, they built safety stocks for fear.
Exactly the type of surgeries, you're referencing and you know we feel good about our ability to continue to service and support those so those two businesses fully half of our revenue we feel quite confident it really comes down to one plasma in North America foot traffic into the centers and our customers actions or with <unk>.
I don't recall, but so it's not for the faint heart, it's not without its challenges, but I feel quite good specifically on that hospital segment, you talked about I broke blood center in the mix as well.
Right.
Great information thank you.
You guys referenced a improvement in college campuses obviously.
Meaningful.
Yeah.
Yeah.
Plasma donor base.
Would you say, though that that that Oh.
Hoppy elation.
Lagging relative to the.
Someone from the recovery you guys are seeing.
Plasma collection companies are saying.
<unk>.
Yes, the college campuses play the unique role it differs from one customer to the next what the relative exposure is there what we've seen in the fall term as many of the colleges are back on campus and as expected as we headed into September and October perhaps even more so you see that traffic picking up and that.
But that is you know bill and I, both talked about a 9% sequential improvement.
In the second quarter that is historical and we've experienced that in prior years, that's a big thing as the kids go back to school, that's a big part of the lift and it's encouraging that we see that even in this environment, where it goes from here I think that's the only question.
All right last one for Bill Bill I, just I just didn't quite catch what you said around share repurchases. That's still on hold for the time being are you guys opened.
Open in the second half to.
Getting active again thanks.
Yes. So we we had said that we would pause the share repurchase program in the first half of this year.
We have now said that we will be thoughtful about doing any additional share repurchases under our $325 million that is remaining on the that $500 million authorization, but we also indicated that we may have to extend the authorization beyond its existing expiry date.
Which is at the end of this fiscal year.
Okay very good thanks, guys okay.
Our next question comes from Anthony Petrone of Jefferies. Your line is open.
Oh, hi, Thanks, maybe just a quick housekeeping one [noise] typically given northern.
North American plasma growth as wells kids grow not sure if you even at those statistics today and.
And that would be interest for the follow up thanks.
Yeah, Anthony I can't I, just can't recall top my head whats in the in the tables, there, but there are schedules and tables that we posted the.
The website so.
Informations and they'd have to refer to that give questions about that then you can oh God I can feel than any of the questions that you have.
Oh good thanks.
There are no further questions.
Ladies and gentlemen, this does conclude the conference you may now disconnect everyone have a great day.
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