Haemonetics Corporation (HAE) Q2 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Haemonetics Second Quarter Fiscal '21 Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference may be recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Olga Guyette, Investor Relations. Ma'am, you may begin.

Good morning, everyone. Thank you for joining us for Haemonetics' Second Quarter Fiscal '21 Conference Call and Webcast. I'm joined today by Chris Simon, our CEO; and Bill Burke, our CFO. This morning, we posted our second quarter and first half fiscal '21 result to our Investor Relations website, including analytical tables with the information that we'll refer to on this call. Additionally, we provided the complete P&L, 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 actions of product lines, acquisitions and divestitures. As in the past, we will refer to non-GAAP financial measures throughout this call to help investors understand Haemonetics' ongoing business performance. Please note that these measures exclude certain charges and income items. Please refer to this morning's earnings release for details 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 the anticipated results. Haemonetics cautions that these forward-looking statements are subject to risks and uncertainties, including the potential impact from the COVID-19 pandemic on our results and other factors referenced in the safe harbor statement in our earnings release and in our filings with the SEC. We do not undertake any obligation to update these forward-looking statements. And now I'd like to turn it over to Chris.

Thanks, Olga. Good morning, and thank you all for joining. Today, we reported second quarter fiscal 2021 organic revenue of $209 million, a decline of 16% versus prior year and adjusted earnings per diluted share of $0.62, a decline of 29% versus prior year. COVID-19 significantly impacted our results in the second quarter and the first half of fiscal 2021. From the outset of the pandemic, we prioritize safety and business continuity, and we have done so exceptionally well. Three quarters of our employees worldwide are front line workers. Manufacturing and supply teams, keeping our plants operational to ensure timely production and delivery. Tech support specialists working on-site with customers to install and keep our devices serviced. Field-based sales and clinical support reps calling on customers to keep them informed and supported and engineers and commissions working in our labs to advance our many development projects. Their efforts and the efforts of all of our employees have kept our customers safe, stocked, serviced and fully supported. The fundamentals of our business remain strong, and there are 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 nonstrategic 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 as the global health crisis has impacted each of our 3 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 are 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. COVID-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 base given the structural and 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 extensive measures to ensure the health and safety of donors and they have begun a myriad of advertising and promotional campaigns to encourage donations after the government economic stimulus ended in August. Haemonetics continues to do everything we can to support them, 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 and 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 onetime benefit in the first quarter of prior year. We have continued to upgrade U.S. customers to the latest version of our NexLynk DMS software, and we are targeting completion over the next year. We recently launched our Donor 360 app to support customers as they rebuild their donor bases, and we are advancing our long-term goals to migrate to a fully cloud-based global offering. Software is 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 Plasma per donation on average using a novel percent plasma nomogram. Our proprietary Persona technology significantly strengthens the well-established NexSys value proposition with our ability to safely increase plasma yield. Our clinical trial of more than 23,000 collections showed a gain of 8.2% compared to YES technology, and we expect that in a broader real-world population, Persona could add an additional 70 milliliters on average to the 23-milliliter average gain from YES technology. We are talking with all of our customers about Persona, and we are committed to making it economically attractive and logistically easy to adapt. 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. Our 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 Plasma collection recovers and fractionators replenish through depleted plasma inventories, we are well-positioned in a resilient end market. 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 immunoglobulin hasn't changed, and we remain confident in a 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. Overall, our hospital business saw a 12% sequential improvement in the second quarter over the first quarter. With consistent improvement across all 3 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, in China. In North America, we saw 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 our fiscal '20, 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 TEG cartridges in the second quarter, partially offset by continued pandemic related challenges. We continue to invest in our innovation agenda through clinical trials that build evidence for our hemostasis management products, while we strengthen our go-to-market model and commercial execution in all key geographies. Our TEG devices continue to play an important role in researching coagulopathy in COVID-19 patients. Transfusion management was up 14% in the second quarter and 9% year-to-date, primarily driven by strong growth in BloodTrack through new accounts in several key geographies. SafeTrace Tx also grew in the second quarter, primarily driven by new software installations. Purposeful hospital access allowed our teams to drive several in-flight 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 as cell saver benefited 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 has helped validate the essential role that our technologies play in assessing risk of bleeding and blood clots, providing autologous blood transfusions and helping 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 as 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 in a challenging 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 it happening until the pandemic subsides. 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. The increased installed base should provide longer-term benefits to our disposable sales. Apheresis revenue was down 8% in the second quarter and was flat year-to-date. The $8 million 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 COVID-19. Previously 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 Fajardo production facility and concurrent whole blood filter supply agreement with the purchaser of that facility. Our operational excellence program 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 in spite of COVID-19. In addition to divesting the Puerto Rico Blood Facility, we are also modernizing and expanding our Plasma and TEG disposable manufacturing in Pittsburgh, PA. OEP 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 turnaround and create long-term value. We have the plans, the talent and the financial strength to pivot fully to transformational growth propelled by innovative technologies in healthy growing markets. I want to close by again thanking our teams who are 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 or 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 the 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 COVID-19. Adjusted operating expenses in the second quarter were $66.4 million. A decrease of $8.8 million or about 12% compared with the second quarter of the prior year. Adjusted operating expenses in the first half were $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 and 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 the health and welfare of our employees in manufacturing, supply chain and customer-facing roles. The cost containment measures included restricting travel, reducing nonessential 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 option exercises in the first quarter. We do not expect this benefit to repeat in the second half and anticipate that the fiscal '20 adjusted income tax rate will be 16% to 17% and 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 $0.62 compared with $0.87 in the prior year second quarter, a decrease of $0.25 or 29%. Adjusted earnings per diluted share in the first half was $1.08 compared with $1.67 in the prior year, a decrease of $0.59 or 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 anticipated pace and timing of the recovery. While the current environment remains extremely uncertain, we are prepared to implement additional measures or 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 of the 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 the 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 end of 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 million 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 pre-COVID 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 remains strong. And after the recovery in collection volumes, we anticipate growth in Plasma collections to be above pre-pandemic levels for 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 costs of the pandemic subside. And now I'd like to turn the call back to the operator.

[Operator Instructions] Our first question comes from Anthony Petrone of Jefferies.

I hope everyone is doing well. A couple of questions first on Plasma volumes, and then I'll go down to margins and costs. 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 what the early look is in terms of exiting October where volumes are specifically? And then a follow-up here would be just an update on NexSys contracting for one, but you also mentioned, Chris, the Persona FDA clearance. Just wondering how that trialing phase for that specific technology will also play out and then I'll have a follow-up for Bill.

Yes. Thanks, Anthony. Appreciate the questions. First off, with regards 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 it will affect it. 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 we look at this simply because prior inflections have been more closely correlated with historical seasonal increases. So it's 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 there 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'd just like to see that play forward a bit before we call. 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 improvement. Long term, we remain really bullish. But we'd just like to see a bit more of a trend line there before we can extrapolate. In terms of NexSys, we are in dialogue with all of our customers. Persona has amplified that dialogue and in some cases, pulled it forward. We're excited about what we're doing there, and we're looking forward to making sure as we attempt to do this, that all of our customers understand the value proposition, understand our capabilities to implement in a COVID environment, make it seamless, nondisruptive and get them the benefit, which for some who haven't adopted NexSys, will be upwards of 80-plus ml, 90 ml in some cases of additional plasma plus the cycle time as well as the paperless environment to drive compliance and safety and then 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 will be -- maybe just one quick follow-up on Plasma would be the whole notion of safety stock amongst the plasma fractionators. Is there an estimate as to where that sits? And then for Bill, just on the margin front, the sequential gains were obviously substantial. And so maybe just an update on the current ongoing restructuring plan where the target was $80 million to $90 million of gross savings, just how much of that has been realized at this point? And then what is the cadence of the remaining savings as we look ahead into the calendar?

Yes. I think so, first on our customers' inventory levels clearly best directed towards them. We monitor this to the best of our ability. What's very clear in hindsight is when we had such robust growth well in excess of the 8% to 10% long-term trend, but new numbers in the mid-teens and better with some of our largest customers. They were taking advantage of a healthy environment, collections and building inventory appropriately. They've taken some steps to make sure they don't have shortages, including expedited release, et cetera, with the various regulatory agencies. So they've tried to protect themselves on the downside, while we all build towards recovery. Different numbers depending on the customers, it's a 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 they're keen to collect, I think that is imminent. And clearly, we want to help them get that back on track in the current period.

Anthony, it's Bill. I can answer the second and third parts of the question. So on our margins, particularly on our operating margins, we were up 590 basis points sequentially from Q1 to Q2. The majority of that gross margin improvement came in our -- sorry, operating margin improvement came in our gross margin with about 500 basis points of improvements there. There are a few things that drove that improvement sequentially. First, our OEP savings that we continuously talk about and delivered quite a bit in the first half of this year, improved from -- or higher from -- in Q2 than the first quarter. We also had a one-time charge in the first quarter related to capitalized variances, and we had to true-up our inventory days on hand because of the build in inventory as revenue had declined year-over-year. We also had lower COVID-related expenses. We had talked about the COVID expenses that were used to ensure the safety of our employees. We had slightly less expenses in the second half with the dissipating outbreak of COVID. And then also in the second quarter, we had a onetime true-up for some pricing events, particularly in Plasma that we probably don't see repeating for the remainder of this year. So I hope that answers your question on operating margin. You also had a question on 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 my commentary in the gross margin, we did see some improvement in the savings. We are still committed to the $80 million to $90 million as part of the program or in the program full right through FY '23, and when we do get around to guiding, we will start to talk about a little more granularity of the operational excellence program savings.

Our next question comes from Larry Keusch of Raymond James.

Maybe, Chris, to start -- both you and Bill certainly expressed confidence in the 8% to 10% growth of Plasma collections over the long term. Maybe just talk a little bit about why you have that confidence, given again, some of the potential for alternative therapeutics out there to IG.

Sure, Larry. Thanks for the question. Yes. We take our cues from our customers in the market at large. We obviously tap into our own scientific advisory council. We read everything that's out there and have had numerous discussions with key opinion leaders and the medical community at large. I don't profess that we have proprietary insights about anti-SGRN therapy, for example, or hypersialated offerings. But what I would say is the things we track to discern that and get that -- what we think is an 8% growth in long-term CAGR in -- with regards to IG and then the 8% to 10% that we benefit from as a result of it. We look at the capital allocation that our customers have put forth both in their collectors and in fractionation. That continues unabated. We look at their R&D pipeline, that the myriad of different -- do the accounts differently, whether it's several hundred or 7,000 new trials underway, including Grifols AMBAR study, for example. These are important advances. We still know that there is meaningful off-label use in the products to treat horrible diseases that are otherwise untreated. And the ongoing movement to mild and moderate, including a shift over to subcutaneous therapy, which does require more source Plasma 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 the relative competitiveness of these new therapies, they will play a role. The timing of that is unclear and the extent of that is unclear. And because of that, we look at our own guidance and kind of what's in front of us and get very comfortable with that 8% to 10% number.

Okay. Perfect. Just a couple of other quick ones here. Another one for you, Chris. You certainly mentioned couple of times on the call about your ability to deploy NexSys without disruption and 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 weave in there -- kind of what your capabilities are for implementation and kind of what was the experience with Octapharma? And then I just had a couple of quick ones for Bill.

Sure. So our customers have been head down, kind of doing what they can do to replenish their donor base and regain the momentum they had heading into COVID that's been their primary focus. And obviously, our focus to support them. What we have done in parallel, I talked pretty extensively about it is the ongoing upgrade and transition to the NexLynk donor management software platform. That's something we began 1.5 years ago, sitting here today, we are in-flight to upgrade all of our customer base to the new NexLynk 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 offering. So that's very powerful in many, many ways. The software upgrade is the more challenging. The hardware matters, but we've demonstrated our ability to turn a center often overnight. So the bigger challenge of the software well underway. We're in a good place to do that. And I think that enables the broader conversion to NexSys as a platform that 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, Bill, just 2 here for you. Just back to the gross margin, obviously, it was impressive in the fact that it got back to essentially pre-COVID levels in the second quarter. I'm just wondering given the sort of various puts and takes that you talked about, how sustainable do you kind of see this level? And should we think about the upside opportunity within that margin once plasma volumes normalize? And the other part of the question is, some of the larger customers out there, plasma customers have certainly thrown out a number that feels like September was down 20% year-over-year and certainly improved from where it was in July. Just any thoughts around that?

Thanks, Larry. So on the gross margin question. So I kind of unpacked the details there sequentially with the answer to Anthony's question. But really, the one thing that impacted gross margins in the second quarter that isn't repeatable, is that onetime pricing true-up. We have -- we had -- there was that benefit in Q2 -- relates to contracts on our plasma business, but I just don't want to get into a lot of details about it. But I think the more important point that you asked is the question about the Plasma volumes are returning to normal levels. Obviously, that would drive operating margins higher in the back half of the year, if we do get that inflection point. And that kind of transitions into your last question, which was the inflection point, right? Chris mentioned it in his prepared remarks that we've seen the year-over-year declines in plasma, roughly the same, right up until the end of the quarter and then just into the month of October, too. But what we have seen is a sequential improvement from Q1 to Q2 of about 9%. But again, we have all confidence that it's going to bounce back here at some point, whether it's this year or lingers into early next fiscal year. It's just yet to be seen. But when that does happen, we should see an inflection in the operating margins.

Our next question comes from David Lewis from Morgan Stanley.

Maybe just, Bill, just a follow-up there, a quick view on gross margin. So I mean, the revenues were down mid-teens, but yet GMs obviously were kind of flat year-on-year into the back half of the year, is it safe to assume gross margin should be sort of stable at that 52% level? Or as volumes recover, you should see some natural uplift in GMs?

Well, if volume recovers, we would see some uplift, but there's a bunch of noise going on right now with inventory too. So we've had this -- we've had this -- you can see it on the cash flow statement, this increase in our inventory balances so far this year of almost $38 million. So we're looking to address that. And by addressing that, we will have some pressure on our gross margins. But when we're just talking about normal volumes not only in Plasma, but in hospital returning back to normal and the incremental savings that we're getting from we -- in theory, we would see an uplift in our gross margin. But I do want to point out, again, we did have that pricing true-up in Q2. So there was an anomaly from Q1 to Q2.

Okay. And is it safe to assume, Bill, just a lot of what we're seeing that some of the OEP time lines have been pulled in a little bit. It certainly seems that way based on second quarter numbers?

Well, we are -- it's -- we're not only looking to pull things in from OEP, 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 they're keeping in their back pocket, right? So we drive the teams pretty hard. And the organization understands the commitments that they're making to deliver these savings. We do have this other -- this cost containment. I want to say that they're non-OEP. It's things that we've done on a lot of discretionary spend to drive savings too. And it's been impacting not only our SG&A, but also some improvements in the gross margin, too. We're not doing anything to a detriment to the business longer-term so we still are investing for growth there, but that is also helping on margins.

Okay. Very helpful. And then Chris, a few questions here on Plasma. The first is maybe a more simple one. Pursuant it to new customers that don't yet have NexSys, obviously, is a subject of great negotiation. But for the customers that already adopted NexSys how do you go about rolling out Persona to those customers, right? It's -- you're giving greater value. How does that work with customers are already on contract with NexSys?

Yes, Dave. So 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 want it to be logistically easy for them, right? So 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 milliliters, right? So they're happy to do that. But it takes real work. What we are keen to do, it's public that we work with Octapharma on the trial, the impact trial itself. So we have teed them up for conversion, and we're working hard to make that a worthy reference case that we can build upon and that the industry can build upon. All of our existing NexSys customers are in line to do this. They may have contractual reasons why they have to proceed at one pace versus the other. But we stand ready to make the conversions. Those conversions can happen and it will be misleading to say they're simple turnkey. They're not. They're more than that. But it is primarily software related, and it is something that through the trial work that we did, 23,000 donations as well as the ongoing work that we've now done post FDA 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 2 more, just quick questions here on plasma. So the first one is sort of more macro. I mean, your largest customers are basically saying they're going to -- 2 things are going to happen the next 4 quarters. Either they're going to get back to normal with the distant collections or actually, they're going to run ahead of normal, obviously, as they look to recoup inventories over the next 4 quarters. That's sort of what your largest customers are saying, can you see any reality here with your business where your business should not track linearly with what those large fractionators are saying at some point over the next 4 quarters?

Yes. David, we have 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 and attitudinal forces at work there that have allowed Europe to outperform on a relative and absolute basis as well. So we feel good about the European piece. So in North America, at 80% share, we're -- we stand ready to help make these -- that recovery and the trajectory coming off of that recovery as robust as possible. So no, there's nothing unique about our system or our 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 getting those structural and attitudinal factors in place and sufficient numbers to replenish a depleted donor base. And then the resumption of growth, which we fully expect, right? And we've said that from now. So a resumption of growth I know our customers are all keen not only to avoid stock-outs and kind of get back on track, but actually to replenish depleted inventories. So as the recovery builds, we're looking at a multi-year trend that should be as robust as anything we saw over the last 2 years.

Okay. And then just last one 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 prepared for very negative Plasma trends in this quarter, which is obviously what we saw. Look, if you look at the numbers, it's not obvious to the casual observer that there was any improvement, frankly, this quarter. And while there really shouldn't have been through sort of mid-August, there certainly should have been some activity sort of in the back half of August and September on stabilization 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 and most of the improvement was in October or you did see meaningful improvement in September? And maybe you could describe sort of some of the other factors in the channel that suggest why we didn't see that improve in terms of Plasma momentum here in this particular quarter.

Yes. Thanks, David. We certainly appreciate the hyper-focus on daily, weekly, monthly results call in the trend and knowing what -- what can we extrapolate from our vantage point, our customers have done an exceptional job of keeping their centers open, keeping their centers safe, managing through the myriad of challenges, which is, as I said, structural and attitudinal required to drive their performance. What we are encouraged by is that over the course of the second quarter, there is a seasonality to our business. The first quarter is always the softest collections quarter of the year for us. And then it builds sequentially in each quarter thereafter 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, but they need to do so while they are replenishing that depleted donor base. The donor base, it was down 40% during the lockdown 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 border sites versus new centers in comparison to existing centers, where they're still trying to build donor foot traffic. All of 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 there are 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 that because we have seen previous benefits 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 -- the global health crisis in the U.S. and Europe that we just need to be mindful of. Long term, we feel usually bullish. But in the near term, and we've 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 here about the recovery.

Our next question comes from Dave Turkaly of JMP Securities.

Great. I may have missed this, but obviously, I think a bunch of us saw some comments from customers of yours. And I don't know if you made any comments, but 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 contracts. Is that new pricing contracts or is that from legacy ones?

Yes. So I'll let Bill expand upon the latter part of that, Dave. But thanks for the question. No, we -- as a general role, we've tried hard on this, right? It's a concentrated industry, concentrated customer base. We don't talk about individual customers for reasons of confidentiality. We're 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 over the last 1.5 years on the Persona platform to 23 milliliters in yield, the speeding up of our cycle times. The Paypros environment is safer and more compliant and clearly, donor satisfaction, which is paramount, especially in this environment where everyone is looking to build their active donor base. We now overlay the additional benefits of Persona on top of that, an additional 70 ml in the trial. So we're feeling quite good about that, and that's the discussions that are underway. We had previously disclosed that we had gained share in our software business, the DMS Persona center software and that changes are underway. But we haven't talked about individual customers, Dave. And candidly, I don't think we will. What we will do when we return to guide is we'll factor in gains associated with those contracts as part of our guidance. Bill had made reference to contracting is part of our gross margin improvement. One of the things we've done with the rollout of NexSys as we've tried to align with customers with regards to the productivity they experience on our capital. We know they're faster, and we know they're more productive. We put incentives in place that are turn rate based. They're more productive with our capital and improve our ROIC, that's reflected in the pricing. Obviously, in a COVID environment, that gets a lot tougher, and we've made some short-term adjustments to be a better partner with those customers and help them manage through the heat of the pandemic when we were kind of in lockdown stage. We don't see that repeating going forward, but we did make some of those changes. But the reference to that was exactly that. ROIC based turn rate contracting that was historical for the existing NexSys customers, and we don't think that plays forward.

Got it. And then you talked a couple of times about the structural and attitudinal factors. I would imagine the structural ones may have been dealt with largely at this point, but maybe not the attitudinal ones. I'd love to get your just updated thoughts on those and where they stand now, if they're improving, I would imagine they are. But how that looks now versus maybe last quarter?

Yes. Thanks. Clearly, they're improving. We 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 quarter. There are still restrictions in place, they may be voluntary, they may be mandatory. But there's controls around that. Colleges are in session but may operate remote or have restrictions around where the students can and in 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 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 side-swiped by the pandemic. That's the biggest challenge. That is the driver of growth historically. Prior to NexSys, the way Plasma collectors grew their base of Plasma was by opening new centers. And I think that's the piece that's 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 that's the attitudinal piece that needs to play forward, Dave.

Our next question comes from Mike Matson of Needham & Company.

Just curious on the $8.8 million year-over-year decline in OpEx. Do you have any feel for how much of that was due to kind of temporary COVID benefits like decreased travel and things like that?

Yes. It was a really solid decrease 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 majority of it is related to the cost containment actions as we classify them. So -- and it's the travel restrictions and some of the compensation-related items that we've addressed. So are they repeatable possibly? I mean, is travel ever going to be the same as it has been historically? So it's hard for me to say exactly what's going to happen going forward. But the majority of the cost savings were related to cost containment and the other portion is OEP.

Okay. That is helpful. And then just on this transition with your software to a cloud-based model, can you just talk about how that would affect the sales and kind of the payment scheme, I assume it moved to some sort of subscription fee or something like that?

Yes, Mike, we're still working through that. What I would say, at this point, we -- I think historically, we were almost a reluctant or at least a non-committed provider of the software. I think it's very clear in the environment that our customers are pivoting to that world-class software, cloud-based, global offerings, integrated that can go from the donor at home. When their counts thinking about the nation to collective 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 pivot. And so we're trying to be very thoughtful about that transition. There are important considerations around data privacy and cybersecurity. There's numerous other software applications in play 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 it's got to be fully compliant and tied into all of the health regulations, but we are able to help our customers. And we've rolled this out across the industry as a consideration, just to help our customers get that foot traffic back to their centers safely. So they're able to do 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 the center to hold your spot in the center when the bed is 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 a first installment. It's a modest one at that, but this is a multiyear program, and it's evidence of our commitment to leading with software. We do think about SaaS. We do think about the digitization of our platform as a real enabler of growth. Persona wouldn't have happened if we didn't have the data and the analytics coming off of the NexSys collections, we've only just begun. There will be Persona to impact 2.0 trial and beyond 2.1, 2.2. 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.

Our next question comes from Mike Petusky of Barrington Research.

I guess I want to ask a question. Given sort of the acceleration of COVID infections in the U.S. and really around the world and sort of the forecast of possibly how bad the next several months or, let's say, 3 to 6 months could be how do you guys think about that in terms of the hospital side of your business? And I guess, particularly given what I would guess, wouldn't be positive incremental on access for sales teams or surgical procedures, particularly non-electives. I mean can you talk about -- is that business even more so than plasma given that plasma has some positive seasonality. Is that business at some risk in a really dark COVID environment for sort of W recovery as opposed to continued momentum?

Yes. Thanks, Mike. The risk of COVID, the COVID resurgence is risk to our different aspects of our business is meaningful. When we look about it, and I'll actually touch upon all 3 of our businesses, and I'll touch upon the OEP and cost savings that Bill had highlighted. Maybe you can just go there first. We feel within our company, we have a high degree of confidence that we've 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 we're 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 feel quite good about the things we can control and the cost savings that Bill just referenced a moment ago that are part of our COVID response. When we look at the 3 business units, hospital, in many ways, is in full recovery. We benefit by the fact that fully north of 70% of the procedure volume that we are dependent upon is considered non-elective. It's a great term, not a great one, candidly. But we are mostly in cardiovascular 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 surges we feel like many in med tech, more broadly, that we're going to be able to deliver and experience a full-on recovery in our fiscal year, right? And we're looking at that fourth quarter as return to normalcy. So we feel quite good about what hospitals are doing and our ability to respond, even as we're talking about software installation and services on BloodTrack and safety. So hospital is in a good place benefit by that 70-30, 80-20 split, but it's also hospital customers managing through and ensuring that essential care is provided. Our Blood Center business actually recovered largely within the first quarter. It is anything but normal. But blood factors worldwide have responded. We've been there because we have the supply to support them. Furthermore, they built safety stocks for fear of exactly the type of surges you're referencing. And we feel good about our ability to continue to service and support those. So those 2 businesses, fully half of our revenue, we feel quite confident. It really comes down to one, Plasma in North America put traffic into the centers and our customers' actions there. We've talked a lot about that on the call. But -- so it's not for the faint of heart. It's not without its challenges, but I feel quite good specifically on that hospital segment you talked about, I throw Blood Center in the mix as well.

Great. That's great information. You guys referenced improvement at college campus is obviously a meaningful portion of your sort of the Plasma donor base. Would you say, though, that, that population is lagging relative to the somewhat of the recovery you guys are seeing or plasma collection companies are seeing sort of across the space?

Yes. The college campuses play a unique role. It differs from one customer to the next, what the relative exposure is there. What we've seen in the fall term is 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, Bill and I both talked about the 9% sequential improvement in the second quarter that is historical. And we've experienced that in prior years. That's a big thing. As 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, is the open question.

Got you. All right. Last one for Bill. Bill, I just didn't quite catch what you said around share repurchase. Is that still on hold for the time being? Or are you guys open in the second half to getting active again?

Yes. So 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.

Our next question comes from Anthony Petrone of Jefferies.

Maybe just a quick housekeeping one. Typically, you give North American plasma growth as well as kit growth. I'm not sure if you've given out those statistics today. And that would be just for the follow-up.

Yes. Anthony, I just can't recall off the top of my head, what's in the tables there, but there are schedules and tables that we post to the website. So the information's in there. You have to refer to that. If you have questions about that, then you can -- or Olga and I can field any of the questions that you have.

There are no further questions. Ladies and gentlemen, this does conclude the conference, and you may now disconnect. Everyone, have a great day.