Haemonetics Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Humanetics First Quarter Fiscal 21 Conference Call and Webcast. At this time, all participants' lines are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star and then one on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star and then zero. I would now like to hand the conference over to your speaker today, Mr. Dan Goldstein, Vice President Corporate Controller. Sir, you may begin.

Good morning, everyone. Thank you for joining us for Haman Addicts' first quarter fiscal 21 conference call and webcast. I'm joined today by Chris Simon, our CEO, Chad Nickel, our president of Blood Center, and Bill Burke, our CFO. This morning, we posted our first quarter results to our industrial relations website, including analytical tables with the information that we will refer to on this call. Additionally, we provided a 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 impacts from currency, strategic exits of our plasma liquid solutions business, acquisitions, and divestitures. As in the past, we will refer to non-GAAP financial measures throughout this call to help investors understand Hamanetics' 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. Hamanetics cautions that these forward-looking statements are subject to risks and uncertainties, including the potential impacts in 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. Good morning, everyone, and thank you for joining. We continue to live in extraordinary times, and today we will give perspective on the impact of the COVID-19 pandemic on our performance, and we will provide our view of the strength of our markets and the effectiveness of our strategy. Our response to the crisis prioritized safety, business continuity, and cash preservation, allowing our manufacturing, supply chain, and customer service to avoid disruptions. We remained fully operational in all of our markets across all of our product lines. We chose to build inventory to safeguard against pandemic-related stockouts and to prepare for recovery. Importantly, our through-cycle approach kept our turnaround on track. We are executing as planned and laying the foundation for continued growth. For example, we recently completed our third annual all-employee survey, and the results showed exceptionally strong morale in spite of challenging circumstances. Our value drivers are intact and will propel us through recovery and the new normal. Let me provide a few highlights. Despite current marketplace challenges, plasma and hospital remain attractive markets with significant growth potential. I will talk about how we see them recovering in a few minutes. We are making meaningful progress on our innovation agenda. with Nexus platform advancements in the stasis management clinical programs and software development and digitization. We are a year into our four-year operational excellence program. We remain on schedule, pursuing strategic sourcing, lean, and network optimization, including select investments like a new Pittsburgh site to support U.S. plasma and hospital disposables. Our recently announced transactions show our intent and ability to execute growth-oriented M&A. We are committed to pruning and augmenting our portfolio, and we continue to prioritize allocating capital to growth investments, leveraging our strong balance sheet and free cash flow. Immunetics is well-positioned to adapt and thrive, bringing important technologies to healthcare providers, donors, and patients. we fully expect to recover to pre-COVID-19 levels and growth trajectory. The timing is uncertain based on the pandemic and our customers' response to the crisis, but the effects expect through the end of fiscal 21. Let's turn to our results. Today we reported first quarter fiscal 21 organic revenue decline of 16% and a decrease in adjusted earnings per share of 43%. The pandemic was the main driver of the plasma and hospital revenue declines, as well as the blood center revenue increase. Plasma revenue declined by 35% in the quarter, primarily due to a 38% decrease in North American collections compared with the prior year. Factors negatively influencing collection volumes throughout the quarter included stay-at-home orders, limited public transportation and border travel, college campus closures, and reticence to donate. As the quarter progressed, stay-at-home orders were lifted, social distancing precautions were established, and the continued need for plasma donations was well publicized. However, depressed collection volumes have persisted. Along with lower collection volumes due to the pandemic, software revenue decreased in the quarter because of a one-time benefit in fiscal 2020. Our work to convert customers to the latest version of NexLink remains on track, as we have seamlessly shifted to remote collaboration and implementation support. We deployed our technical support resources to help customers manage through social distancing challenges. R&D rapidly created a cloud-based software application, enabling donors to register at home and streamline the pre-collection process with enhanced safety, efficiency, and convenience. The Nexus platform continues to deliver value, 11 million nest collections yielding 250,000 incremental liters of plasma. We are advancing meaningful innovation, including assessing the expanded use of donor biometric data and analytics to personalize donations to safely collect more plasma. While collection volume in the current environment is a challenge, We remain confident about the strength of the plasma end market, and we expect a return to historic collection volume growth rates. The underlying demand for plasma-derived medicines has not changed, and our customers will need to accelerate collections to replenish depleted plasma inventory. There is also growing excitement about plasma's potential role as a unique therapeutic agent for the treatment of the virus. We fully anticipate that our plasma growth will improve as part of a protracted recovery. The exact timing is uncertain based on the pandemic. We will continue to do everything possible to help our customers create a more robust new normal to avoid disruption to the supply of plasma-derived drugs. Longer term, we are aware of potential new treatment alternatives like FCRN within the autoimmune segment. but there are important questions about clinical utility and relative benefits, in addition to hurdles to approval, pricing, and commercial scalability. Meanwhile, there are thousands of plasma clinical trials underway for primary immune deficiency and autoimmune disorders. We believe there is room in the market to allow for new entrants without materially reducing the prospects for 8% to 10% collection volume growth over time. Moving to hospital, revenue declined 4% in the quarter, primarily due to COVID-19-related procedure declines, hospital resources being diverted to critical ICU needs, and restricted access for sales teams. The impact was felt mostly in China and North America, with some recovery in both markets during the quarter as restrictions in China eased compared with the prior quarter and U.S. hospitals began to resume procedures. China grew approximately 90% sequentially from the fourth quarter of fiscal 20 due to a lower comparator caused by the pandemic's impact earlier in the calendar year. However, first quarter fiscal 21 revenue was still down 26% against the prior year quarter due to a combination of COVID-19 and distributor order timing. Hemostasis management revenue was up 2% in the quarter due to record capital sales, primarily in the UK, Italy, and North America. The high volume of capital sales was primarily due to strong selling activity that occurred in our fourth quarter, as well as sales to hospitals to research coagulation in COVID-19 patients. Our European business delivered double-digit growth on the strength of PEG capital sales, which helped offset lower disposable usage due to procedure volume declines in China and North America. Disposable revenue started to recover in the second half of the quarter as the U.S. economy reopened and hospital procedure volume increased in our largest market. While not included in our organic growth rate, revenue from ClotPro, which we acquired in April, added 50 basis points to hospitals' reported growth rate for the first quarter. Transfusion management revenue was up 5%, primarily due to strong growth from blood track as we were able to successfully close on several deals in the UK, Italy, and North America that had been in our fourth quarter fiscal 20 pipeline. Blood track growth was partially offset by declines in SafeChase TX as limited access to hospitals during the first quarter impacted our ability to perform new installations. Self-salvage revenue was down 19% in the quarter, primarily due to significantly lower procedure volumes. In addition to suspended elective procedures, non-elective procedures and trauma-related incidents declined significantly due to social distancing and various global lockdowns during the quarter. Unlike other areas of hospital, self-salvage is more sensitive to all procedure declines, so we did not see the same level of recovery in this business during the first quarter. Despite the current challenges, we believe the long-term trajectory of hospital remains strong. It is a billion-dollar opportunity that is still largely under-penetrated. We participate in critical, fast-growing areas like cardiology and trauma. We have a robust development pipeline, and we will continue to benefit from improvements we are making to our go-to-market approaches to strengthen our presence in TEG, clot-pro, and transfusion management. The end market demand for these products will continue to normalize as procedures return to pre-COVID levels. In the nearer term, regions and individual hospitals will be impacted differently by resurgences in the associated procedure impact and capital constraints. Elective and non-elective volumes will vary, and we are watching these developments closely, particularly in North America and China, which comprise 65% of hospital revenue. Our hospital customers are navigating these challenges such that we expect sequential quarter-over-quarter improvement in procedure volumes with a return to normal levels by the end of our fiscal year. And now I'll turn the call over to Chad, who will talk about our blood center business. Thank you, Chris, and good morning, everyone. Overall, we believe the underlying fundamentals of the blood center business have not changed, and we are committed to supporting our customers as they work through challenges and utilization in market dynamics in today's unique environment. Amid these unprecedented challenges, we continue to make strides in reshaping our blood center portfolio through three recent transactions. First, the divestiture of our blood filter manufacturing operations in Fajardo, Puerto Rico, and supply agreement with filtration expert GBS will help us improve quality while pursuing our asset-light approach. This transaction was another step in Blood Center's role in operational excellence. In addition, we announced the sale of our U.S. blood donor software to GPI and the divestiture of our hospital and blood bank software used primarily in France to Avonex. Each of these organizations were selected based upon their capabilities and ability to meet the evolving needs of our customers. These transactions advance our strategy to enhance our focus on our core disposable and equipment products. In the quarter, blood center revenue was up 2% on the strength of favorable order timing as blood collectors and distributors made large stocking in response to the pandemic, particularly in Europe and the Middle East. Blood is a collection-based business that differs from commercial plasma because of lower dependence on the U.S. and recovery correlates to improved COVID-19 trends and reopenings in the EU and Asia, coupled with the population's willingness to donate altruistically in times of crisis. We're able to support these requirements in a challenging market due to our efforts over the last few years to optimize the blood center business, including simplifying our portfolio through product rationalization, our sales and operations planning processes, and realizing the benefit of our customer-centric business unit structure. Aporesis revenue was up 7% in the quarter, primarily due to favorable distributor order timing, as well as continued plasma growth in Japan and other markets. The plasma growth is a positive signal that our strategy to support global blood center customers as they become more focused on source plasma collections is generating value. Aporesis growth was reduced by a competitive loss we previously called out in fiscal 20, resulting in a full $4 million impact in the quarter. Additionally, we are actively engaged in supporting customers in convalescent plasma collections in over 25 countries. While we believe the revenue upside is limited, we are committed to doing our part to support the collection of this therapeutic throughout the pandemic. We feel that if volume requirements continue to grow, We are uniquely capable of deploying large quantities of capital equipment and disposables to meet variable short-term demands. Whole blood revenue was down 6% in the quarter due to a double-digit decline in North America, partially offset by favorable distributor order timing in Europe and the Middle East. North America revenue declined due to lower collection volumes caused by COVID-19 and previously discontinued customer contracts. The discontinued contracts also led to a double-digit software revenue decline in the quarter. Despite the strong first quarter performance, we expect that the benefits of the high stocking orders may reverse in the future as customers' risk aversion returns to normal along with safety stock levels. While hospital procedures have resumed, it will take time for procedure volume to revert fully to pre-COVID-19 levels. which may temporarily reduce the demand for blood products in fiscal 21. Blood Center remains a strategic lever for haemonetics. We remain committed to portfolio rationalization as well as our goal to support enhanced product quality and services for our customers while preserving our cash-generating role for the company. And now I'd like to turn the call over to Bill. Good morning, everyone. Chris and Chad have already discussed revenue, which was 47.2% in the first quarter, a decline of 400 basis points compared with the prior year. The primary drivers of this decline were related to impacts from lower revenue and higher operational costs related to COVID-19. There were also incremental costs to safeguard the health and welfare of our employees and our manufacturing and supply chain, as well as customer-facing employees. However, we were able to partially offset these downward effects with productivity savings from the Operational Excellence Program, cost containment actions, and the portfolio decisions to exit liquids. Adjusted operating expenses in the first quarter were $63.7 million, a decrease of $7.8 million, or 11% compared with the prior year. As a percentage of revenue, adjusted operating expenses were 32.6%, an increase of 280 basis points compared with the prior year. Lower adjusted operating expenses were due to a combination of productivity savings and the cost containment measures implemented to partially offset the negative effects of COVID-19 on revenue and in our manufacturing and supply chain costs. These cost containment actions included restricting travel, reducing nonessential spending, delaying hiring, and reducing some compensation-related items. In addition, we also had lower research and development costs in the first quarter of fiscal 21 compared with the prior year, mainly due to savings related to our operational excellence program and slightly lower spending related to COVID-19. These reductions in costs were partially offset by modest investments. We will continue to invest in our business with a bias towards organic growth and innovation that will continue to expand our commercial capabilities. As a result of the performance of our adjusted gross margin and our adjusted operating expenses, the first quarter adjusted operating income was $28.5 million, a decrease of $22.9 million, or 45%, compared with the prior year. Our adjusted operating margin was 14.6% in the first quarter, a decline of 680 basis points compared with the same period in fiscal 20. Our adjusted income tax rate was 4.3% in the first quarter, compared with 10.4% in the same period of fiscal 20. The rate was abnormally low in the first quarter of both fiscal 20 and 21 from the benefit of higher share vestings and auction exercises that are not expected to repeat in future periods. We anticipate that the fiscal 21 adjusted tax rate will be 16 to 17%. Our first quarter adjusted earnings per diluted share was $0.46 compared with $0.81 in the prior year, a decrease of $0.35 of 43%. The decrease was due to the progression of the pandemic and its adverse impact on our first quarter revenue, gross margin, and operating margin. We remain committed to our growth objectives and have not changed our investment thesis related to our innovation agenda. We continue to review our financial modeling that 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 or change the course of action on those initiated if necessary. In August of 2019, we announced the multi-year Operational Excellence Program designed to deliver $80 to $90 million of annualized savings by transforming the way we source, make, and deliver our products. While the Operational Excellence Program builds on the Complexity Reduction Initiative, it is designed principally to transform our global manufacturing and supply chain organization. This program began providing benefits in the second half of fiscal 20, and we anticipate that it will be substantially completed by the end of fiscal 23. We remain committed to delivering $80 to $90 million of savings and estimate that the majority of the savings realized will drop through to adjusted operating income by the conclusion of the program with the return of the business back to historical levels. We are pleased with our overall financial health, including our liquidity position, and we continue to pursue our goal of preserving cash. In April, we drew down $150 million on the revolving credit line, which increased our existing cash on hand at the end of the first quarter to $276 million. 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 toward the end of the term. Total debt outstanding under the facility at the end of the first quarter was $529 million, split between our remaining term loan balance of $319 million and borrowings under our revolving credit line of $210 million. Our EBITDA leverage ratio remains low, and we have an additional $200 million remaining on our revolving credit line, which includes a repayment on the revolving credit facility of $60 million subsequent to the end of the first quarter. Free cash flow before restructuring and turnaround costs was $11 million in the first quarter of fiscal 21 compared with $5 million in fiscal 20. The higher free cash flow in fiscal 21 is a result of $36 million from improvements in work and capital management, primarily due to lower inventory growth, improved accounts receivable collections, and the absence of a one-time accounts payable decrease from the prior year related to the timing of payments to one of our third-party service providers. The working capital improvement was partially offset by a decrease in adjusted net income. At this time, we do not foresee repurchasing shares in the first half of fiscal 21 with the $325 million that remain on our current share repurchase authorization of up to $500 million. In summary, I'd like to conclude with some closing thoughts. Business continuity, employee safety, cash preservation, and a through-cycle approach will continue to be our priorities. Our manufacturing and supply chain remains fully operational, and we are committed to our operational excellence program and related savings. We withheld issuing fiscal 21 guidance due to the continuing uncertainty remaining about the pace and timing of the recovery which we believe will be protracted. We remain confident in the longer-term strength of the end markets that we serve across our three business units, including 8% to 10% annual plasma collection volume growth over time. Our recently announced portfolio moves signal our increased desire and ability to execute our strategy, and we will continue to focus on M&A. We are confident that our disciplined and thoughtful approach to financial decisions and capital allocation priorities, coupled with a strong liquidity and balance sheet, will enable us to emerge from the current environment as a stronger company. And now I'd like to turn the call back to the operator for Q&A.

As a reminder, to ask a question, you will need to press star then 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from David Lewis of Morgan Stanley. Your line is open.

Good morning. Thanks for taking the questions. A few for me this morning. I guess the first thing to Chris or Bill is, You talked about plasma collections being down about 25% to 30% in April. The performance in the quarter sort of implies those trends worsened in June. Can you give us any sense of sort of where they ended June or where they're tracking in July or what, frankly, the fractionator customers are telling you what their baseline assumption is for collections? They've talked about that publicly. I'm just kind of curious what they're communicating to you in terms of what the baseline assumption is for the next three to six months for plasma collection demand. And I had a couple of follow-ups here.

David, it's Chris. Thanks for the question. Let me start with a general statement that certainly applies to Plasma, but it's across all of our businesses, which is that we fully expect to recover to pre-COVID-19 levels and growth trajectory. The question is timing, right? And it's important, I guess, as a second point, that we don't want to come across as certain about things that are uncertain by definition, right? So we are working closely with all of our customers around this issue of donor traffic through the centers. What we saw through the majority of the first quarter was real challenges, and we called out those challenges. I think they are both structural items like social distancing requirements and the lockdowns that preceded them, coupled with restricted public transportation, border travel. and just the college campuses being closed, et cetera. There's also attitudinal factors, and we're working with our customers on those attitudinal factors to make sure that donors feel safe and are encouraged to return to donations. So it's an ongoing process, and we're not prepared to give a lot more visibility into it than to be on what we have. We're obviously in active discussions with all of our customers. They all cite the same. blue issues and are optimistic, but cautiously so, about how donation volume will pick up over the remainder of this year and into FY22 for us.

Okay. Can you comment at all, Chris, on just any incremental recovery here you've seen in July relative to what would be implied by sort of down 40, down 45 in June?

But I go back to the structural factors, David, and I feel like we are making meaningful progress there. I think it's more at this point the attitudinal factors, how are donors feeling about the virus and the threat they're in, how are they feeling about the relative safety of the entire donation process, not just what they get greeted with at the door, but the process, you know, getting to the collection center and beyond. We've done things in partnership with our customers. We've created a new program. COVID app, you know, COVID 360, which basically allows centers to immediately go to a scheduling process, keep the donors at a social distance. They can either wait in their cars or outside the center for their appointed time. And I think those things are clearly helping, but it's early days, and I think there's a broader set of attitudinal factors that need to play out in August and September to give us a better read on the second half of the year.

Okay, and you kind of dealt with my second question. I'll ask both my second and third here for Bill as well. But it sounds like there are multiple factors Bill talked about here in terms of the market. There's been the impact of federal stimulus, donor willingness, center locations in specific areas, and social distancing requirements. It sounds like you've been able to solve for maybe center location and social distancing, but the key issue is donor willingness. And I'm just sort of curious if that is going to be just time, or that can be solved by fractionators providing, frankly, greater incentives to the donors. That's the question for you. And then for Bill, can you help us quantify the bulk purchase orders in the non-plasma business this particular quarter and sort of what that may imply for next quarter as a potential headwind? Thanks so much.

Yeah, David, Chris, so on the attitudinal factors, I don't disagree with your summation. Structurally, I think we've done, as an industry, what can be done. I think as we look through the attitudinal piece, it's dynamic, and I think views around the threat from the pandemic are evolving. I think the perception of safety in the centers is evolving. There's never been more public discussion around plasma driven by both convalescent plasma and hyperimmune globulins as potential therapeutics. There are positive effects, right, and we expect that will continue forward. I do feel like the end market demand remains every bit as robust, and so whatever, you know, isn't collected in the first half of our fiscal 21 just, you know, adds up to the deficit and the robust recovery that we anticipate going forward beyond that. Hey, David, it's Bill. Just to clarify your question, did you mean the bulk purchases in blood center and not plasma?

I'm sorry, the blood baking commentary, that was referenced in the queue. Sorry, Bill.

Okay, that's okay. I just thought you had said plasma as part of the question. So in blood center, yes, we did see some order timing in the business, and, you know, as those order stockings start to level off as you get back to the normal supply chain type cadence, we should see less purchases. So we are expecting, you know, the growth that you saw in blood center in the first quarter not to repeat in future quarters as those inventory stockings are drawn down by the blood center customers.

Okay. Thanks so much.

Yep. Our next question comes from Anthony Patron of Jefferies. Your line is open.

Thanks, and good morning. I'll ask two follow-ups to Dave's questions and a P&L question from Bill as well. And so maybe, Chris, as you sort of referenced here, that the euro will remain pressured in plasma. However, we're coming off a steep decline in fiscal 1Q. Is it fair to say that fiscal 1Q would be the trough and we would still be pressured but marginal benefits as we move through the year? So that would be the first question. And then the follow-up would be just, you know, how does this play in terms of immunoglobulin shortages? We had a shortage situation pre-COVID. Donations are down, so I would imagine that that situation is exacerbated. And how does that sort of play in your discussions with customers around an upgrade cycle? And then I'll have one P&L question.

Thanks. Thanks, Anthony. So to start on your first question again, we don't have clairvoyance on this. I would expect the first quarter where we have this confluence of structural factors, including meaningful lockdowns, right, we feel like, you know, society at large is better, relative term, of course, at dealing with the pandemic. So we don't, we're not at this point anticipating, you know, widespread lockdowns that we may see, you know, situational things geographically. But I think we're beyond that and we kind of know what we have structurally. Big open question around college campuses. Many are intending to open. Will they stay open? How will that happen? attitudinal demographic differ than what we've seen, you know, through the main nucleus of collections. They are important factors, and, you know, we're, again, cautiously optimistic about that, but within limits, right? And I think that you underestimate this pandemic and the effect of this pandemic at your own peril. So we need to continue to be thoughtful about that. We do think that we as an industry collectively have the ability to improve From the base that we've experienced so far, we are learning, and our customers and we are responding accordingly. So that gives us crowns for cautious optimism. In terms of the shortage question, it's obviously quite important. The U.S. is now responsible for 90% of the world's source plasma supply, 85% to 90%. There is, you know, they collect their own plasma and they occasionally buy recovered plasma from CHADS blood center customers. That was a much larger number three or four years ago. It's dropped pretty meaningfully and those collectors have their own challenges meeting the demands for whole blood and red cells and platelets. So from our vantage point, getting these centers fully operational and back to their practice capacity is priority one. All of our customers are working on it. We're working with them, and I think we will do everything within our power as an industry to avoid those stockouts. But that's the challenge that we're facing right now.

That's helpful. Maybe just the follow-up would be, Bill, on the cost side, the $80 to $90 million, can you remind us of what amount is realized thus far? Will that be predominantly COGS-related? And then just, you know, an item from the press release this morning, it indicates that, you know, guidance potentially could be issued later this year. You know, what are the triggers to issue guidance later in the year? Thanks again.

Thanks, Anthony. So on the operational assistance program question, yeah, we're still looking at $80 to $90 million of growth savings there, and we have said that the majority of those savings would drop through, to operating income over the life of the program. We have not said specifically what we have recognized to date. We want to withhold those comments until we're ready to issue guidance. On the guidance question, we don't want to say whether we're going to or not going to. We always intend to issue guidance, but the triggers to do it are just an inflection in this curve of collections, specifically in plasma, right, like Chris mentioned. We need that foot traffic back into the centers. We haven't seen it yet, but once we do and we get comfortable with the forecasting that's being done and the level of volume coming back, then we'll issue the guidance. We feel pretty good in the P&L right now about our SG&A. We can forecast that properly. We did issue a little bit of guidance on our our tax rate in the prepared remarks, but we definitely need to see the inflection back in plasma before we die. That's the main trigger. All right, thanks. Yep.

Our next question comes from Larry Cush of Raymond James. Your line is open.

Thanks. Good morning, everyone. Just thinking about the plasma collection in the U.S. and Chris, I recognize all of the various dynamics that have been going on, both structural and attitudinal. But I guess the question is, do you think there's a potential risk here that just the collection volumes in the U.S. are more structurally impaired for a longer period of time? and that collectors may have to start looking elsewhere geographically, and how are you positioned to the extent that they do, for example, in a place such as Germany or other areas? That would be question one.

Yeah, Larry. So we feel strongly that the underlying end market demand will continue IGG 8% growth as a, as a meaningful guide over an extended period of time is absolutely right. That's going to continue. The demand continues. They will need the plasma. I think I don't believe we will see a new normal, and it will be different than what it was pre-COVID, but I don't believe the relative dependence on the U.S. is at risk here. I think that if you look at prior periods, typically, A protracted recession tends to be a relatively favorable period of time for our plasma collectors. They fill a need in the economy, and there's strong bias to donate. So I think as we get on the other side of some of the attitudinal challenges, I think you'll see meaningful and robust recovery in collections for traffic here in the U.S., and I think that's what most of our customers are betting on. In terms of performance outside the U.S., we absolutely participate throughout the four countries in Europe that collect and remunerate. We're proud of the business that we're doing there. We'll continue to invest. We have seen slightly better recovery, although it's a smaller percentage of what we do. We've seen a better recovery there. Our share, OUS, is comparable to what we have here in the States. Maybe it's just a tad lower. I think we have the ability to respond regardless of where the demand comes from.

Okay, terrific. And then one other question for you, Chris, and then a quick one for Bill. Obviously, you talked about some of the competitive therapeutics that are in development, including FCRNs. Maybe just talk a little bit about sort of what work you've done to come to the conclusion that, You know, you believe that there are some challenges, as you noted, and there is this ability to, you know, sort of coexist in a market that can still grow collection volumes 8% to 10%. And then for Bill, you know, inventory obviously has been up quite substantially over the last couple of years. Just help us think about, again, how we should be thinking about inventories, just longer-term trending would be helpful. Thank you.

Sure, Larry. So on FCRN, we have said for as long as I've been at the company that you don't have, you know, an $18 or $20 billion end market, which is the IGG market, without attracting a lot of competition. And certainly FCRN, anti-FCRN, reflects an important first wave of that. When we think about it, you know, essentially the collection volume that we're looking at is driven by IGG. Autoimmune diseases are 40% of that. It breaks down whether we're talking about, you know, MG at 4% or 5%, you know, ITP is another 5% or 6%, and then, you know, CIDP is a larger piece, around 20%. What we're looking at is, you know, where these drugs are, what they target, what their relative efficacy and established safety will be as they move through phase two and phase three trials. And, you know, we would say start with that 40% of the business that's autoimmune and start carving back down against that. And then from where we are, you know, we just basically look at the time and the risk adjustment. and that gives us good comfort that our core 8%, 10% growth in collection volume, which is driven off of the IGG growth of 8% plus some of the things that we see underneath the surface that benefit us in collection volume, from that perspective, we don't deny that they will have a role to play, but there are important questions, approval probability, commercial scale-up, pricing, and reimbursement, how they will be viewed against the IGG, which is viewed as highly efficacious, particularly in a number of these categories, where there's meaningful risk to a new therapeutic coming in. So we come back, and we can take you through more detail as we go through it. We've tapped our scientific advisory community. We've tapped key opinion leaders. We just come back with some conclusion that, particularly when you look at relevant analogs, where new biologics have come into an established market like this, they typically grow the market rather than cannibalize it, and they typically take significantly longer than maybe the originators behind those drugs would otherwise aspire to. Larry, the second question was for me on inventory. Yes, in the quarter our inventory was up almost $25 million. The majority of that increase was in our plasma business and specifically related to bowls and bottles stocking. You know, there was a lot of uncertainty in the quarter if a plant could potentially shut down because of COVID-19 hitting the plant. So we intentionally built inventory to not slow production down, even with the decline in revenue. Our number one objective was do not stock out the customers. So we felt comfortable building this level of inventory. Like Chris said before, we're comfortable that the you know, the collections will bounce back and this is inventory that moves very quickly. We also felt like if you're, you know, besides cash, this is probably the second best thing on the balance sheet to have is the inventory. So longer term, obviously, you know, we have a lot of inventory right now. We do expect the inventory to decline over time. Okay, terrific. Thank you. Okay. Yep. Thanks, Larry.

Our next question comes from Larry Solo of CJS Securities. Your line is open.

Great. Good morning, guys. Just a couple of follow-ups, actually. One to Larry's question on the inventory build, and you said you kept production levels sustained. As we look at perhaps this quarter, do you expect a little bit of a drop in production? Obviously, if you increase inventory, the demand still remains a little below normal, and could that have sort of a knock-on effect on gross margin in the short run? Well, yeah, that's, you know, it's something we're looking at. You know, we don't want to commit to anything right now because there are implications across the company. But, yeah, I mean, there's a certain level of that type of inventory that I mentioned with the bowls and bottles that we are comfortable getting to. And like I said, you know, that production does turn. And, you know, we do expect that once we get through this collections downturn and COVID-19 is, you know, dissipates, that not only will we get the collections for a normal year, but that our customers will want to rebuild their safety stock levels. So one way or another, we feel like the inventory will come off the balance sheet. But, yeah, Larry, we're looking at all different options right now. It's another follow-up on that. As Bill said, we took the actions we took. We feel quite good about that, obviously, as an effect, including on gross margin. Inventory is the one thing that we value along with cashier, given the uncertainty. The other aspect of this is we do have the operational excellence program, which includes network optimization. We are taking advantage as part of our through cycle mindset, trying to accelerate certain aspects of that program where the opportunity presents itself. Having some inventory on hand gives us greater freedom to operate against some of those plant moves, for example. So we're trying to be thoughtful about it. I think, you know, the next quarter will be telltale for us around how do we feel about the inventory bill, and we're having those conversations real time with customers weekly to make sure that we're where we need them to be, but still being good stewards of the resources as we try to be. Got it. Absolutely. You sort of took the words out of my mouth on the sort of next question. You know, Bill mentioned operational excellence still sort of, you're still targeting the $80 to $90 million, and I was going to sort of ask, The question I had was it looked like your cost controls were, you know, better than I had thought would be this quarter, obviously revenue down a lot. And, you know, my question is was it just an acceleration on the Operational Excellence Program or are there other costs that you've taken out of the business and maybe some of those or a majority of those are temporary but maybe that actually will in the long run even drive better cost savings? Is that potentially, is that a possibility? Yeah, so, Larry, obviously we do everything we can on operational excellence to bring as much savings forward as possible. But some of those programs are, you know, longer term. They're more gross margin oriented, and, you know, so they take a little longer to get at. But what we do, you know, we put out a call to action to the organization, and the organization responds when we ask for initiatives to be driven. In this case, it was cost reduction. So we're very happy with where we are. I mean, there are just some things just naturally happened because of what was going on in the quarter, right? So like travel, for example, in most companies, right, speaking about lower travel, I don't think anybody was getting on a plane. So we saw significant savings there, but there were other actions, you know, that I spoke about in the prepared remarks. But, you know, we want to be careful, though. We're not doing anything from an expense perspective that is going to inhibit our growth going forward. We're very careful there because we honestly and truly believe that everything is going to bounce back here. We do not want to do anything that hurts the growth prospects of the company. Okay. And then just one quick bit on the plasma collections. I know a lot of questions on this topic. I'm just trying to get a feel – and I know Larry asked a question just in terms of geographical shift outside the U.S. How about within the U.S.? I mean, and maybe it's too short-term of a question, or maybe I should be asking the plasma operators themselves, but in other words, in areas where there is a lot less COVID, you know, temporarily at least can, you know, maybe this happens over time, inventory levels continue to get lower, but can plasma collectors, you know, give higher incentives in areas where, you know, there's less COVID going on and then drive donors that way? I'm just trying to think of how they are trying to adapt to this environment. Yes, I think there are interesting adaptions, you know, modifications going on as we speak, even some of the – segmentation that we had offered in our prior calls and some of the ongoing discussions, the separation out of college towns versus border towns versus new centers and mature centers. Obvious stuff, but as you think about it, it is possible that the pandemic affects those different sub-segments differently. How are our customers responding? How can we help them with that response? I mentioned the COVID app. Most centers don't work on an appointment basis, more do today, because it helps with social distancing, and it's one of these ones we've been asked in prior discussions, well, if social distancing is six feet and the associated health and hygiene measures, are we talking about taking out half the capacity? And I think that varies dramatically from one center to the next, and I think it is candidly one of these examples like we've seen in our own manufacturing footprint where In Malaysia, where we were required to reduce our head count by 50%, we did not see a 50% drop off in our production capacity. In fact, our production capacity was in excess of 70% because of measures we took. Our collectors have that ability within their footprints, and we can work with them on how to do that. Some things enabled further by the Nexus system that allow them to do that. So we're working and solving for a new normal day to day. cautiously optimistic that will help. It will help with the attitudinal factors as well to make donors feel safe. There is a broader play, and to your point, if your state or your city is in lockdown, that's a structural challenge to overcome that has a tail effect on the attitudes of donors. But collectively we're working on it. There's never been more headlines about the beneficial advantages of plasma. I think folks understand what plasma is today at a much greater level than they ever have before. Hopefully that's a silver lining that, as we face into the new normal, helps us get back to robust collections. Right, and just speaking of silver linings, just last question. I think just, you know, from a high level, I know you can't talk specifics, but just in terms of conversion to Nexus platform, it seems like inevitably this will hopefully happen, but perhaps COVID temporarily slows it, but over the middle term, maybe that helps conversion as it opens up more discussions to improve performance through credit capacity at these centers if they fall behind in supply. Any thoughts on that? I think it puts an exclamation point on the value proposition of the Nexus platform. Clearly yield, I think that's one that gets everybody's attention. But we're talking about the cycle time of a donation. We're talking about the relative compliance and the ability to document that electronically, and then just this overall sense of satisfaction and the professionalism of the collection that is enabled by the Nexus platform. Of course, we have to demonstrate that we can do that in a way that's safe, and I think we now have done so, whether we're talking about new center openings or center conversions or software upgrades, which I think a number of our customers have been very thoughtful about using some of the downtime to upgrade the software to the latest versions of NextLink. So, again, our folks have trained on this. We've stayed fully operational, and I think we've demonstrated the ability to power through this, even in the context of the pandemic. So I agree that the value proposition has never been more relevant or stronger, and I think our ability to act against it is equally robust. Got it. Thanks. I appreciate the call.

Our next question comes from Mike Madsen of Needham. Your line is open.

Yeah, hi, good morning. This is David Jackson on for Mike. Thanks for taking the questions. Just one for me this morning. I'm just wondering if you can talk about the benefit of tech testing for COVID patients and if this led to any new placements that could drive future tech growth. Thanks. Yeah, hey, David, thanks for the question. We're very enthusiastic about TAG's role in this. What we discovered, and it was first identified in northern Italy, that a number of these COVID-19 patients were presenting with meaningful thromboelastic complications. Their blood was clotting at much faster rates and in parts of the body that you would not normally see this, particularly for a disease that is characterized as a respiratory disease. Obviously, these are very serious complications. They lead to pulmonary embolism or stroke or cardiovascular complications. So widespread interest in that. We spent a lot of time working with our opinion leaders and the major treatment centers to get them devices for research purposes. I think that's helped advance the case. We certainly see that now in North America, and I think we're starting to see that again as part of the recovery in China. So I think there's a strong interest in thromboelastic testing. TAG has 80 share of that market, and I think we've increasingly kind of advanced and working with the scientific and medical communities to advance the understanding of what's really going on using this elastic testing as an important diagnostic to understand these risk factors. So, you know, the capital sales in our first quarter were a new high for us despite the pandemic and despite the challenges that hospitals were spending a lot of money on ICU care, et cetera. We'll see how that plays out over the remainder of the year, but we're enthusiastic about PEG's role in therapeutic diagnostics for COVID. Great. Thank you.

Our next question comes from Dave Terkely of ZMP Securities. Your line is open.

Great. Thanks. I'll just sneak one in here at the end. Chris, you know, obviously you've been pretty active, particularly on the divestiture front. But I guess I'm just curious, you know, should we expect that to continue? And why have, like, I guess sort of your thought process around, you know, selling some of these things and selling them now and what we should expect sort of moving forward if you have any thoughts on other things to either divest or acquire? Thank you.

Yeah, Dave, thanks for your patience. We have Chad on the call. I'm going to invite him to comment on the actions that have affected the blood center business. As we said at the outset and as Bill highlighted in his summary remarks, we're committed to a three-cycle mindset. We laid out a five-year turnaround. This is year five of the turnaround. We're committed to powering through that. Our portfolio moves, acquisitions, and divestitures are absolutely part of that. We We want to pivot our portfolio to growth. We want to play in sectors where we can make a meaningful and distinctive contribution and benefit by the growth and profitability that comes with that. So, you know, we put a bunch of things in motion really over the last several years, some of which have come to fruition in the quarter and a few more that we'll power through. But I give a lot of credit to Chad and his team for making that happen. So, Chad, why don't you comment? Hey, Dave. I kind of look at it in two buckets. First was the North America software and the European-based software. Both of those businesses were flat to declining in double digits. So exiting those definitely improves our growth rate in the business. Additionally, I think it positions us better just from a focus perspective. And since I've taken over the business, that's one thing that you know, get a narrower focus on where our core competencies are. And, you know, that really is through the disposables and the equipment side of the business. So we have a lot of talent, and we'll keep them focused in areas where they can drive value for the company and the customers. The second one is the Fajardo Filter Manufacturing Plant that we divested to GVS. We've had a long-term relationship with GVS. They produce filters exclusively, a lot of competency there. It was definitely a win-win situation for us. And, you know, I think what we got out of it beyond just kind of a long-term supply agreement is I'm really excited about just the access to the engineering talent. You know, the depth they have is something that, you know, we can only dream of. So we expect a lot of value in the future coming out of that relationship. So thank you. Thank you.

Our next question comes from Anthony Patron of Jefferies. Your line is open.

Just a quick follow-up on the geographic footprint of the centers in the U.S. that are within your network. I mean, is there any way to sort of break out, you know, the percentage of centers at the moment that may be located in high-impact states, thinking of Florida, Texas, border states, et cetera? Thanks again.

Anthony, so there are over 800 source plasma collection centers in North America, predominantly U.S. As you know, we have an excess of 80 share of those centers. So we, you know, our footprint represents the industry's footprint in that regard. There is a concentration in both the southern part of the U.S. and the eastern, you know, southeastern, to be clear, and mid-Atlantic centers. It's kind of an L-shaped curve, if you will, across the bottom and up the east coast. We track the flare-ups and the outbreaks and paying close attention to that. There are a small number of states, Texas, Florida, some of the big Midwestern states and eastern states like Michigan and Ohio, for example, that we're heavily dependent upon for this collection. We pay close attention to it. There was a point in time in the first quarter where, you know, our footprint and the heat map, if you will, for COVID were almost a direct overlap. Thankfully, through various sets of actions, we're seeing some progress in places like Arizona and Texas and Florida in terms of flattening out the curve and, you That gives us cautious optimism, but that's what we're managing, too, and it's a broader societal issue that we and our customers are caught up in. Thanks again.

There are no further questions. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.