Ladies and gentlemen, thank you for standing by and welcome to the Haemonetics Second Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Olga Guyette, Investor Relations. Please go ahead.

Good morning. Thank you for joining us for Haemonetics' second quarter fiscal 2020 conference call and webcast. I'm joined today by Chris Simon, our CEO; and Bill Burke, our CFO. Today, we will discuss our second quarter and first half fiscal 2020 results. All revenue growth rates are on an organic basis and exclude impacts from currency, product end-of-life decisions, and divestitures. Our remarks today will include forward-looking statements, and our actual results may differ materially from anticipated results. Information concerning factors that could cause results to differ is available in the Form 8-K we filed today and in periodic filings that we make with the SEC. This morning, we posted our second quarter and first half fiscal 2020 results to our Investor Relations website. We included updated fiscal 2020 guidance and posted analytical tables with the information that we'll refer to on this call. I would like to remind everyone that consistent with our past practices, we have excluded certain charges and income items from the adjusted financial results and guidance. Details on excluded items, including comparisons to the same period of fiscal 2019, are provided within the Form 8-K and have been posted to our Investor Relations website. Additionally, our press release and website include a complete P&L, balance sheet, summary statement of cash flows as well as reconciliations of our reported and adjusted results. And now I'd like to turn it over to Chris.

Thank you, Olga, and good morning everyone. Haemonetics delivered strong second quarter results and a positive first half fiscal 2020 performance, as we continue to accelerate revenue growth and improve profitability. Our teams grew revenue by 8.6% in the second quarter, and 8.3% year-to-date. Our innovation agenda is propelling us with the launches of NexSys, the success trauma indication and PlateletMapping cartridge, and SafeTrace Tx. Today we are reaffirming total company organic revenue guidance of 6% to 8%. Improvement in operating leverage led to second quarter adjusted earnings per share of $0.87, up 55% from the prior-year quarter, and up 45% in the first half. Complexity reduction, operational excellence, pricing, and the transformation of our product portfolio are driving higher margins. Adjusted operating income margin expanded by an additional 530 basis points year-to-date due to improvements in our business and disciplined spending. Bill will provide more detail but overall we are proud of the work our teams are doing to strengthen our trajectory and we are increasing our adjusted EPS and adjusted operating margin guidance based on our positive first half performance. Let's talk about our business unit results and trajectory. Starting with Plasma, revenue grew 14.6% in the second quarter, and 15.4% in the first half. North America accounts for about 93% of our plasma business and drives the majority of the growth. In North America, we grew 14.7% in the second quarter, and 16% in the first half with contributions from volume, mix, and pricing. North America collection volume grew in the mid-single-digits and we were aided by NexSys PCS device premiums, pricing initiatives within our liquid solutions business, and discrete items in software. Based on conversations with our customers and input from the recent PPTA Industry Forum, we forecast collection volume to increase to approximately 10% in…

Good morning everyone. Chris has already discussed revenue. So I will start with adjusted gross margin, which was 52.6% in the second quarter, improving 440 basis points over the second quarter of fiscal 2019. This expansion reflects benefits from improved product mix, pricing, and productivity savings related to both our complexity reduction initiative and operational excellence program. We continue to have higher depreciation related to both NexSys device placements and expansion of our plasma production capacity that offset some of the improvements. Adjusted gross margin in the first half of fiscal 2020 was 51.9% improving 420 basis points from the prior-year first half with essentially the same factors influencing results as in the second quarter. Adjusted operating expenses in the second quarter of fiscal 2020 was $75 million, a decrease of $2 million or 3% compared with the prior-year second quarter. We continue to realize productivity savings and had lower research and development costs, which were partially offset by investments in sales and marketing, particularly in our Hospital segment as we continue to expand our sales organization. Adjusted operating expenses in the first half of fiscal 2020 were $147 million, an increase of $2 million, or about 1% compared with the prior-year first half as sales and marketing investments, and higher performance-based compensation were partially offset by productivity savings and lower research and development costs. As a percentage of revenue, adjusted operating expenses both in the second quarter and in the first half of fiscal 2020 were 29.8% of revenue down 230 and 100 basis points respectively. Second quarter fiscal 2020 adjusted operating income of $58 million increased by $19 million, or 49%, compared with the prior-year second quarter. In the first half of fiscal 2020, adjusted operating income of $109 million increased by $30 million or 37% compared with…

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

Hi, good morning. Thanks and congratulations on our strong quarter here. Maybe to begin with a few on Plasma and then I'll shift over to cost. In terms of Plasma, Chris and Bill, you mentioned, this 10% growth rate is accelerating into the second half. And maybe just to sort of clarify, how that comes about at the Plasma Business Forum. And our understanding it's a long-run average that the industry, sort of commits to just based on their forecasting, so maybe just a little bit of clarity around that that second half outlook and I have a couple of follow-ups.

Sure. Anthony, it’s Chris. Thanks for the question. So as we called out in our prepared remarks, first half collection demand was mid-single-digits. I’m proud of the team working hard with combination of liquids and software to close the gap for our original forecast. And we did that quite well; it’s contributed to the strong first half. We anticipate based on the long-term modeling that we've done and going back and look at this now over the course of the decade as well as the conversations we had with each of our customers as recently as two weeks ago at the PPTA Forum. World needs more plasma, they're ramping up their collection activities. They work against some challenges in the marketplace in terms of a strong economy that makes it difficult to get donors through the door. But they're taking the actions they need to take and we'll be ready to meet that and which is why we think that second half will trend more towards that 10% collection volume.

The follow-ups here would be all of the collectors have committed to new center construction and those are coming online at various different rates. So maybe just what are you seeing in terms of new center construction? What is the Haemonetics win rate at those new centers? And to what extent is NexSys being placed at those new centers, and then the last one will be on cost?

So on the new center rates, it varies from one customer to the next stage, have different priorities. Some have chosen to grow through acquisition, others grow strictly through organic and there's lots of combinations there. And what I think a 10% rate is consistent in terms of the number of new centers. So if you think we're in 800 plus centers now, you're going to see something in excess of 50 new centers opening this year could be as many as 100, it’s depending on how quickly they can get their plans together. With regards to the new centers in all of our contracts, they're governed by the existing agreements. So where we have exclusivity, all the new centers are opened today, if that's with NexSys, they open with NexSys, if it’s with the PCS2, they open with PCS2.

Okay, that’s helpful. And last just on cost, obviously, the margin that are sequentially better year-over-year, there's now two cost reduction programs, Bill, can you just clarify the savings we're seeing so far? Is this still the first program or you starting to see the second program actually rolling as well? Thanks again.

Yes, thanks Anthony. So on the cost programs we are on the first program, which was a complexity reduction initiative. We had committed to $25 million to $30 million of additional savings this year, with a third of those savings dropping through to operating income. And we’re seeing that, we are achieving those numbers, so part of the operating margin expansion is due to that. And then last quarter we announced the Operational Excellence Program and we are seeing some early savings related to that program so both contributing nicely to our overall margin expansion.

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

Good morning. So a few questions for me. May be, Bill, just starting with you picking up on margins, obviously another second quarter of kind of significant margin improvement, if I think about the guidance into the back half, operating margin guidance stepped down -- steps down almost two points second half versus first half. Just trying to understand why, what are some of the drivers sort of behind that as we think about the back half of the year?

So our year-to-date operating margin is at 22.2% we are guiding 21% to 22%. So on an average basis for those first six months, we're pretty close to the range but we are seeing and we are anticipating that in the second half will might revert a little bit closer, where we were in the first quarter. But there's no overall deterioration longer-term, we still see these individual programs that we're running contributing to the expansion.

Okay. But there's no discrete spending items you can sort of address in the back half that would drive that?

Well, we have -- we continue to invest in the hospital salesforce. And during the first half of this year, we were ramping up the salesforce, and in the back half of the year, we have that that entire expansion complete. So we do see a little bit more spending in the second half related to the expansion.

Okay. And then, Chris, I want to come back to Plasma market growth because sort of the commentary you are making sort of stands slightly different than what sort of some of the larger Plasma players you are seeing in terms of what they're seeing in their core businesses. You have seen busy acceleration at a CSL and Grifols here in the most recent period. So are we just going to flush out a little more what you're specifically you're saying obviously, there is a book-to-bill or a lag time between sort of finished product and collected product. Are you talking about some of the differences in these two things because it's going to be very clear about what you're saying about collections versus what they're saying about demand and finished product growth?

Yes, I appreciate the question. It is a complicated supply chain, it passes from collection and cold storage to fractionation and refinement and ultimate distribution to the end markets. And there is meaningful lags over that process, which can be in excess of a year from start to finish. What we are seeing, we fully understand and buy into the long-term market demand and we just take those projections directly from our customers. We've had -- we've retained 100% of our share in the North American source Plasma market. There's no change in share or a portion that they're. What we are seeing is the reflection that as they expand to new centers, new centers are less productive for a period of time, as they grow through acquisition you’re having normal integration challenges and the unevenness in collection volumes there. And I think they face the additional headwind of a very robust economy, which as I said, makes it more challenging to get donors through the door. In the conversations we've had, when they lay out their supply chain for us and they need to collect more plasma and that's why we see the uptick in the second half of the year.

Okay. And then the Hospital business, so your biggest acceleration this quarter was in segments of the Hospital business, any one-time dynamics you caught there, Chris, and just kind of curious the sustainability of that kind of improvement in Hospital into the back half of the year? Thanks so much.

Sure. So we're very bullish on Hospital and we actually see Hospital accelerating over the next several quarters, driven primarily by TEG. We've had the benefit now, some real success with our innovation agenda in R&D. We have TEG success trauma indication in the U.S. which is going to quickly and left some real uptick there as is quite bullish, we have a PlateletMapping cartridge four-channel cartridge which lets us compete broadly inside of care, which is the only product that can do that. And we're seeing the benefits and we're rolling get that, we have the benefit of the salesforce expansion which is really starting to come into its own, combination of those factors are driving TEG. We also see with SafeTrace Tx and BloodTrack our transfusion management software services offering in hospital blood banking where we're having some real uptick there, hospitals are going through a meaningful overhaul of their enterprise support systems we’re participating nicely in that and I think that will continue to accelerate. It’s chunky because it's tied to capital expenditures and such but we're building out our capabilities and I think that'll propel us. Cell Salvage was a little bit of a lagger on that regard. Thankfully, we got it back on the positive this quarter. But we look at that business and we looked at what we're doing there and we think again purposeful execution can drive acceleration in the back half of the year and that’s what we are counting on.

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

Good morning. This is John on for Larry. If we could start on NexSys, Chris, perhaps you can give us an update on the real world data on the use of NexSys supporting the economic argument, just an update there would be great.

Yes, thanks, John. So rapidly approaching seven million collections and the basic math on that what we said in the prepared remarks at on average 23.1 milliliters per collection is a range obviously it can be 18 up to 30 additional per depending on the weight of the donor. But on average 23.1 multiply that out and we're pressing 160,000 additional leaders provided for the customers using NexSys. That's really the first dimension of that value proposition yield. Those customers have set up. They’re doing faster turns per device or bed per day. That's great. It's improving their collection capacity as a result we know because of the paperless interface that these collections are more compliant, and it's more easy -- easier excuse me to demonstrate that compliance to the regulatory authorities or to your own teams. So it is both better and safer and we're hearing that from donors in terms of ongoing exit surveys, they enjoy the experience, it's just a better environment to donate plasma. And so we feel very confident that with seven million collections that our value proposition is being affirmed.

Great. And then just on the IgG shortage specifically in the U.S., in your viewpoint, we've heard different things, is it a fractionation capacity issue or is it more of a collection issue or there's some other factors we should consider?

We don't have any reason to believe it's a collection issue, what we observed in the market and it is more of an observation because we don't participate directly in this aspect of the supply chain is very much at the end of the chain. And it has to do with contracts and individual business being won or lost and having some imbalances of supply across the supply chain or across manufacturers. And there's a long history of this playing out in the industry, when there's just this higher level of demand. There's always going to be some frictional gaps that need to be covered and the industry has done a great job for respond to those in the past. I'm sure they'll do so here.

And then last one for me just on whole blood, that business has checked a little bit better than we were expecting in the quarter. It's also a sense in talking to industry experts in that space that the transfusion rate in the U.S. is starting to stabilize maybe a little bit more than, than even previously. So what's your viewpoint there?

I think fundamentally, our viewpoint is unchanged. We observed that same plateauing again you have variability East Coast, West Coast that becomes actually quite local, quite specific to the individual markets in terms of blood supply and availabilities. That said, we look at the U.S. at roughly 33 or 34 transfusions per thousand population, in comparison to Canada, to Europe, to what we see in Japan or Australia, and we see the rates going to continue to come down, the market will be continue to challenge. We’re pleased with what our team is doing to hold their own there, but we don't -- we don't see a reversal in the long-term systemic decline in the rate of transfusion and therefore the price pressures and the compression overall that that market is going to experience.

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

Great, thanks. You mentioned the Salesforce expansion in Hospital. I was wondering if you could put that into context, how big that force is and how many you're adding or maybe a percent that you're increasing? And I know in the past, we've talked about the capacity to do acquisitions there. I’m wondering if that's still the case, maybe an update on if there's something that you could add to that portfolio as well.

Yes, Dave this is Chris. Thanks for the question. In terms of the Salesforce expansion, I feel quite good about what we're doing there. That's roughly a 50% expansion off the current base and it comes in different flavors. We have both your traditional sales reps, we call them sales managers. We built that phase after, feeling have a good overall coverage now of the target market in North America. And we are still building out behind them with our clinical representatives who basically are in the accounts, once capital has been placed, educating and advancing the state of care in terms of the use of the actual TEG devices. So that expansion is still underway. We're still hiring out. And I think for us, particularly with a new Global Hospital Business Unit, President and Stewart Strong; I think we now have the ability to apply the learnings from North America. It will look different country by country throughout the world, but we do have a broad spectrum of use for TEG and I think what we've learned about this model and its advancement here in the U.S. will apply in variations, of course, but we will apply more globally. We're excited about getting after that here in the second half of this year and beyond. The M&A acquisition agenda will also fall not only to myself, but to Stew. And together we intend to get after that to help build out this portfolio and stay relevant.

Got it. And then I missed some early part of the call, so I apologize if you’ve discussed this, but we're two quarters into the fiscal year, you've raised your guidance twice. And I know you had said that guidance is based on contract signed to-date. I mean, that we're looking at some of the cost savings and the benefits coming through but can you comment on -- have we seen significant new customers come on board? Or is this kind of more programs coming through driving the upside, and those are still largely to come?

Yes, so there's been no new contracts and we don't -- we haven't changed our position that we won't include contracts and until but prepare us [indiscernible] got the Plasma collection [indiscernible]. We see it return to robust collection rate in the second half of the year that'll allow us to stay within our guidance range. In terms of the actual customers in conversion, what I would say is I feel [indiscernible] Bill has talked on this, he's come up with our own version of the 4P's, which is priorities, proof, price, and a paradigm shift. In terms of priorities, we said from the outset that we will move at the pace that our customers are ready to move they have competing priorities and we meet them and work through that. In terms of proof is what I said earlier on this call, the seven million collections, we have a very strong reference case library now it’s been built, we think we can answer any of the questions that exists around the economic value proposition for NexSys and the full platform. For price, we need to command a premium for the value we can pay and that gets into the paradigm shift which is historically, on the collection side, this has not been an industry that's valued innovation or paid for innovation. We're working with our customers to explain our view and drive that paradigm shift. So it will take time, we know that, but we will be patient and I think we will be successful.

Thank you. [Operator Instructions]. And our next question comes from Larry Solow from CJS Securities. Your line is open.

Great. Thanks. Just a few follow-ups, most of my questions have been answered. Just on that last point, Chris. Obviously, you had a nice bolus of early adopters last year. Do you have contracts that are expiring over the next six, 12 months that where customers can actually stay on the old plasma machine or is there some type of -- does that nappy stimulus for conversion?

Yes, Larry, I don't want to get into specifics with individual customers, what I would say is it's actually quite a complicated structure, right. We have contracts with the devices and disposables, there are separate contracts for software, there is contracts for liquids, et cetera. So they all have different durations, different expertise, we're at the table having the right conversations with all of our customers and remain optimistic on the pace of change here.

Okay. In terms of the gross margin improvement obviously driven by a lot of factors is it fair to say that that cost cutting and productivity gains are more than half of that, driving the majority of that with the mix and pricing helping on the top?

Yes, those costs programs are definitely helping. I want to quantify the third or a half but the combination of the pricing, the mix, and those savings programs are definitely all contributing to the margin -- the margin increase. And we continue to see benefits in those programs and anticipating margins to continuing to improve over the long-term.

Right. And just on a free cash flow guidance, maybe the second quarter in a row where you increased net income guidance but not free cash flow, is there any reason for that?

In my prepared remarks, we do talk about an increase in our overall working capital related to inventories and some other items. So we’re at -- we still intend to get to the range and cash flow, if you look at where we stand on a year-to-date basis, will definitely pick up in the second half.

Okay. And just last question, more of a global longer-term question. Any thoughts, I think you guys have spoken out this before but on the SCR antagonists. Any thoughts of them potentially taking some of plasma, there are from the pharmaceutical market?

We monitor it closely Larry as do our customers. What we read in the literature and what our scientific advisory committee informs us on is, anytime, basic economics anytime you have a $20 billion market with significant unmet need in this growth rate, you're going to have a bunch of folks who are on the periphery working to innovate and from a health care and public health and patient perspective, I hope they're successful. When we look at the timeline, and what that will likely mean, we see it ideally is complementary therapy and the time horizons are much longer than I think young biotechs would otherwise want them to be. But that's just the reality of the science. So five to 10 years, best case scenario and even then probably adjunctive not fully disruptive here.

Thank you. And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Chris Simon for any closing remarks.

Thank you, operator, and thanks all of you for your -- for questioning and dial-in. We put a lot of information out this morning between our downloads and the prepared remarks here and at the risk of being repetitive, I'll give you a quick summary which is we had a really strong first half propelled by revenue growth from our product launches NexSys, TEG 6s and SafeTrace Tx coupled with increased productivity primarily from our complexity reduction. As we highlight it, there are challenges in second half revenue growth rate that we are calling out. We of course will do what we can do to address it. But those challenges remain. We are reaffirming our FY 2021 aspiration of doubling operating income and quadrupling free cash flow and our long-term value drivers will continue to propel us, plasma, hospital, innovation, and operational excellence leading to significant expanded capacity and long-term value creation. Thanks for listening in today.

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