Haemonetics Corp Q1 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by. And welcome to the Haemonetics' First Quarter Fiscal '21 Conference Call and Webcast. Please be advised that today's conference may be recorded. 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 Haemonetics' First Quarter Fiscal '21 Conference Call and Webcast. I'm joined today by Chris Simon, our CEO; Chad Nikel, our President of Blood Center; and Bill Burke, our CFO. This morning, we posted our first quarter results to our Investor Relations website, including analytical tables with the information that we will refer to during 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 of 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 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 impacts 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.

Good morning, everyone, and thank you for joining. We continue to live in extraordinary times. 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 remain 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 NexSys platform advancements, hemostasis management, clinical programs and software development, and digitization. We are a year into our 4-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. Haemonetics is well positioned to adapt and thrive, bringing important technologies to health care 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 with the effects expected 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 '20. Our work to convert customers to the latest version of NexLynk 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 NexSys platform continues to deliver value, 11 million YES 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 to 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 U.K., 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 TEG capital sales, which helped to offset lower disposable usage due to procedure volume declines in China and North America. Disposable revenues 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 BloodTrack as we were able to successfully close on several deals in the U.K., Italy, and North America that had been in our fourth quarter fiscal '20 pipeline. BloodTrack growth was partially offset by declines in SafeTrace Tx as limited access to hospitals during the first quarter impacted our ability to perform new installations. Cell salvage revenue was down 19% in the quarter, primarily due to significantly lower procedure volumes. In addition to suspended elective procedures, nonelective procedures and trauma related incidents declined significantly due to social distancing and various global lockdowns during the quarter. Unlike other areas of the hospital, cell 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 $1 billion opportunity that is still largely underpenetrated. We participate in critical, fast-growing areas like cardiology and trauma. We have a robust development pipeline, and we will continue to benefit from improvements we are making to our go-to-market approaches to strengthen our presence in TEG, ClotPro, and transfusion management. The end market demand for these products will continue to normalize as procedures return to pre-COVID levels. In the near term, regions in individual hospitals will be impacted differently by resurgences in the associated procedure impact and capital constraints. Elective and nonelective 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 in utilization and 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 GVS 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 Abénex. 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 stockpiling 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, ramping our sales and operations planning processes, and realizing the benefit of our customer-centric business unit structure. Apheresis 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 collection is generating value. Apheresis growth was reduced by a competitive loss we previously called out in fiscal '20, resulting in a $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. 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, so I'll start with adjusted gross margin, which was 47.2% in the first quarter, a decline of 400 basis points compared with the prior year. The primary drivers of this decline were related to impacts from lower revenue and 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 toward 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 option exercises that are not expected to repeat in future periods. We anticipate that the fiscal '21 adjusted tax rate will be 16% to 17%. Our first quarter adjusted earnings per diluted share was $0.46 compared with $0.81 in the prior year, a decrease of $0.35 or 43%. The decrease was due to the progression of the pandemic and its adverse impact on our first quarter revenue, gross margin, and adjusted 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 a multiyear operational excellence program designed to deliver $80 million 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 million 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 for 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 improvement in working 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 our 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.

Our first question comes from David Lewis of Morgan Stanley.

A few for me this morning. I guess the first thing either 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. Just kind of curious what they're communicating to you in terms of what the baseline assumption is for the next 3 to 6 months for plasma collection demand? And then I have a couple of follow-ups here.

Thanks for the question, Chris. To start, I want to emphasize that we expect to return to pre-COVID-19 levels and growth, but the timing is uncertain. We're collaborating closely with our customers regarding donor traffic at our centers. During most of the first quarter, we faced significant challenges, which we identified. These challenges included structural issues such as social distancing and lockdowns, along with limited public transportation and closed college campuses. There are also attitudinal factors that we're addressing to ensure donors feel safe and encouraged to return. This is a continuing process, and we're not ready to provide more detailed insights beyond what we have shared. We're actively engaging with all our customers, who recognize the same underlying issues and remain cautiously optimistic about the increase in donation volume throughout the rest of this year and into fiscal year 2022.

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?

Well I'll 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 our donors are 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 getting to the collection center and beyond. We've done things in partnership with our customers. We've created a new COVID app, 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's 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. Just that's my question for you. And then for Bill, can you just 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?

Yes, David, it's 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 hyperimmunoglobulins as potential therapeutics. They're 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 isn't collected in the first half of our fiscal '21 just adds up to the deficit and the robust recovery that we anticipate going forward beyond that.

David, it's Bill. Just thought to clarify your question. Did you mean the bulk purchases in Blood Center and not plasma?

I'm sorry. The blood banking commentary that was mentioned in the queue.

Okay. I thought you mentioned that plasma was part of the question. In the Blood Center, we did observe some timing issues with orders. As order stockpiling stabilizes and we return to a normal supply chain rhythm, we should see reduced purchases. Therefore, we do not expect the growth observed in the Blood Center during the first quarter to continue in upcoming quarters, as the inventory built up by Blood Center customers is utilized.

Our next question comes from Anthony Petrone of Jefferies.

I have 2 follow-ups to Dave's questions and a P&L question for 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 of a steep decline in fiscal 1Q. Is it fair to say that fiscal 1Q would be the trough, and we would still be pressured by marginal benefits as we move through the year? So that would be the first question. And then the follow-up would be, just 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.

Thank you, Anthony. To address your first question, we cannot predict the future with certainty. I expect that the first quarter will experience a mix of structural factors, including significant lockdowns. Society as a whole seems better equipped to handle the pandemic now, so we are not currently expecting widespread lockdowns, although there may be localized situations. We believe we are past that phase and understand our current structural situation. A major uncertainty remains around college campuses; many plan to open, but we do not know if they will stay open or how the attitudes of those demographics will compare to our main collection efforts. These are crucial considerations, and we remain cautiously optimistic within reasonable limits. However, it's essential not to underestimate the pandemic and its effects. We need to approach this matter thoughtfully. We believe that our industry has the potential to improve based on our experiences thus far; we are learning and adapting in response to our customers. This gives us some cautious optimism. Regarding the shortage issue, it is indeed significant, as the U.S. now accounts for 90% of the world's sourced plasma supply. There has been a notable decline in the amount of recovered plasma collected from blood center customers over the last few years. These plasma collectors are also facing challenges in meeting the demand for whole blood, red cells, and platelets. Therefore, our top priority is to ensure that these centers become fully operational again. Our customers are actively working on this, and we will do everything possible as an industry to prevent stockouts while addressing the challenges we currently face.

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

Thanks, Anthony. Regarding the operational excellence program, we still expect to achieve between $80 million and $90 million in gross savings, and the majority of these savings will contribute to operating income over the duration of the program. We haven't disclosed what we've recognized so far, as we prefer to wait until we're ready to provide guidance. As for guidance, we don't want to commit to anything at this moment, but we do plan to issue guidance. The key factor for doing so will be a change in the collection trends, particularly in plasma, as Chris noted. We need to see an increase in foot traffic to our centers. We've yet to observe that, but once we do and feel confident in our forecasting and the expected volume, we'll provide the guidance. Currently, we're comfortable with our SG&A in the profit and loss statement and have issued some guidance regarding our tax rate in the prepared remarks. However, we need to see a return in plasma collections before we finalize any guidance, as that's the main indicator for us.

Our next question comes from Larry Keusch of Raymond James.

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 is 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.

Yes, Larry, we are confident that the underlying demand in the end market will remain strong. An 8% growth in IgG is a meaningful indicator for an extended period, and that trend is expected to continue. The demand for plasma is ongoing. While I believe we will see a new normal that differs from the pre-COVID environment, the reliance on the U.S. remains stable. Historically, during prolonged recessions, plasma collectors tend to benefit as they fulfill an essential role in the economy, and there is a strong inclination to donate. As we navigate through the current attitudinal challenges, I anticipate a significant recovery in collection foot traffic in the U.S., which is what most of our customers are counting on. Internationally, we are active in the four European countries that collect and compensate donors, and we are proud of our operations there. We will continue to invest in this area. We have noticed a slight improvement in recovery, though it constitutes a smaller portion of our overall business. Our share outside the U.S. is on par with our domestic presence, possibly just slightly lower. However, we are well-positioned to respond regardless of where the demand arises.

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 believe that there are some challenges, as you noted. And there is this ability to sort of coexist in a market that can still grow collection volumes, 8% to 10%. And then for Bill, 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.

Sure, Larry. So look, on the FcRn, we have said, for as long as I've been at the company that you don't have an $18 billion 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, 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 MG at 4% or 5%; ITP is another 5% or 6%; then CIDP is a larger piece, around 20%. What we're looking at is where these drugs are, what they target, what their relative efficacy and established safety will be as they move through Phase II and Phase III trials. And we would say, you start with that 40% of the business that's autoimmune and you start carving back down against that. And then from where we are, we just basically look at the time and a risk adjustment. And that gives us good comfort that our core 8% to 10% growth in collection volume, which is driven off of the IgG growth of 8%, plus some other things that we see underneath the surface that benefit us in collection volume. From that perspective, we don't know that they will take out 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 tapped key opinion leaders. And we just come back with a 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.

All right, Larry. Your second question was about inventory. In the quarter, our inventory increased by almost $25 million, primarily in our plasma business, particularly due to stocking up on bowls and bottles. There was a lot of uncertainty during the quarter regarding potential plant shutdowns because of COVID-19. Therefore, we intentionally built up our inventory and did not reduce production despite the revenue decline. Our top priority was to ensure we didn't run out of stock for our customers. We feel confident about maintaining this level of inventory. As Chris mentioned earlier, we're optimistic that collections will rebound, and this inventory tends to move very quickly. We also believe that aside from cash, inventory is likely the second best asset on the balance sheet. Of course, we currently have a lot of inventory, but we anticipate it will decrease over time.

Our next question comes from Larry Solow of CJS Securities.

I have a couple of follow-up questions. Regarding Larry's question on the inventory build, you mentioned that production levels have been maintained. As we look ahead to this quarter, do you anticipate a slight decrease in production? Given that you've increased inventory and demand is still a bit below normal, could this impact gross margin in the near term?

We are considering different options regarding inventory. We don't want to make any commitments at this moment because it affects the entire company. However, there is a level of inventory with the bowls and bottles that we are comfortable reaching. Production does turn over, and we anticipate that as we overcome this downturn in collections and the impacts of COVID-19 decrease, we will not only see normal annual collections but our customers will also want to replenish their safety stock levels. Therefore, we believe inventory will eventually be reduced on the balance sheet.

And Larry, Chris here. It's another follow-up on that, right. As Bill mentioned, we took the actions we took, and we feel quite good about them. Obviously, it has an effect, including on gross margin. Inventory is the one thing we value along with cash, given the uncertainty. Another aspect is our operational excellence program, which includes network optimization. We are taking advantage of our through-cycle mindset, trying to accelerate certain aspects of that program where opportunities arise. Having some inventory on hand gives us greater freedom to operate against some of those plant moves, for example. So we're trying to be thoughtful about it. I think the next quarter will be telling for us regarding how we feel about the inventory build. We're having those conversations in real-time with customers weekly to ensure that we are aligned with their needs while still being responsible stewards of our resources.

Understood. You really addressed my next question. Bill mentioned that you're still aiming for operational excellence with a target of $80 million to $90 million. I was going to ask about your cost controls, which seemed better than I expected this quarter, especially with revenue being considerably down. My question is whether this improvement is solely due to the operational excellence program, or if you've implemented additional cost reductions. Some of those might be temporary, but could lead to long-term savings. Is that a possibility?

Yes. We strive for operational excellence to secure as much savings as possible, though some initiatives are long-term and focus on gross margin, which means they take longer to realize. When we call for action within the organization, we see a strong response, particularly regarding cost reduction. We're pleased with our current position. Certain savings occurred naturally this quarter due to circumstances, like reduced travel. Many companies experienced similar decreases, and we saw significant savings in that area. There are other measures I mentioned earlier, but we must be cautious. We are not making any expense cuts that could hinder our future growth. We genuinely believe that everything will rebound, and we want to avoid actions that could impede the company's growth potential.

Okay. I have a quick question about plasma collections. There have been many inquiries on this topic, and I'm trying to understand the geographical shifts outside the U.S. What about within the U.S.? Perhaps it's too short-term a question, or maybe the plasma operators would be better sources. In regions where COVID is less prevalent, could plasma collectors offer higher incentives to attract donors, potentially increasing inventory levels over time? I'm trying to consider how they are adapting to this situation.

Yes, I think there are interesting modifications happening right now. Some of the prior segmentation we discussed, such as distinguishing between college towns, border towns, new centers, and mature centers, is becoming more relevant. It's important to consider that the pandemic may impact these subsegments differently. We need to look at how our customers are responding and how we can assist them with their responses. I mentioned the COVID app, which many centers, now operating in a more appointment-based manner for social distancing, have been asking about. If social distancing requires a six-foot distance and we consider health and hygiene measures, are we looking at a reduction in capacity by half? This situation can vary significantly from center to center. For example, in Malaysia, we had to cut our workforce by 50%, yet our production capacity was over 70% because of measures we implemented. Our collectors can adapt similarly within their regions, and we can support them in that process, with tools like the NexSys system aiding their efforts. We're working to establish a new normal, and I'm cautiously optimistic that it will benefit us. It should address the concerns of donors as well. However, as you mentioned, if a state or city is under lockdown, it creates a structural challenge that affects donor attitudes. Nonetheless, we are making progress. There has never been so much awareness about the advantages of plasma. People are now more informed about what plasma is than ever before. Hopefully, this increased awareness will help us return to strong collection levels as we transition into the new normal.

Right. And just speaking of silver linings, just last question. I think just from a high level, I know you can't talk specifics. But just in terms of conversion to NexSys 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 throughput 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 NexSys 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 NexSys 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 their software, the latest versions of NexLynk. So again, our folks are trained on this. We've stayed fully operational. And I think we've demonstrated the ability to power through this even in the context of the pandemic. So I agree that the value proposition has never been more relevant or stronger. And I think our ability to act against it is equally robust.

Our next question comes from Mike Matson of Needham.

This is David Saxon on for Mike. Just one for me this morning. Just wondering if you can talk about the benefit of TEG testing for COVID patients and if this led to any new placements that could drive future TEG growth?

Yes. David, thanks for the question. We're very enthusiastic about TEG'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 if a disease type 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 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, 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. TEG has 80% share of that market. And I think we've increasingly kind of advanced, and working with the scientific and medical communities to advance the understanding of what's really going on using viscoelastic testing as an important diagnostic to understand these risk factors. So the capital sales in the 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. So we'll see how that plays out over the remainder of the year, but we're enthusiastic about TEG's role in therapeutic diagnostics for COVID.

Our next question comes from Dave Turkaly of JMP Securities.

I'll just add a question here at the end. Chris, you've been quite active, especially regarding divestitures. I'm curious if we should expect that to continue. What has influenced your decision to sell some of these assets now, and what can we anticipate moving forward regarding any other potential divestitures or acquisitions?

Yes, 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 through-cycle mindset. We laid out a 5-year turnaround. This is year 5 of the turnaround. We're committed to power through that. Our portfolio moves, acquisitions and divestitures are absolutely part of that. 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 we put a bunch of things in motion, really over the last several years, some of which 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, please?

I see it in two main areas: first, the North America software and the European-based software, both of which experienced flat to double-digit declines. Moving away from those definitely enhances our growth rate. It also allows us to focus better on our core competencies, particularly in disposables and equipment. We have a lot of talent that we can keep concentrating on areas where they can create value for the company and our customers. The second point is about the Fajardo filter manufacturing plant that we sold to GVS. We have had a long-term relationship with GVS, who specialize in producing filters, which adds significant expertise. This transaction was beneficial for both parties. Beyond the long-term supply agreement, I’m really enthusiastic about the access to engineering talent we now have, which is something we greatly desire. We anticipate significant future value from this partnership. Thank you.

Our next question comes from Anthony Petrone of Jefferies.

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 the percentage of centers at the moment that may be located in high-impact states, thinking of Florida, Texas, border states, et cetera?

Yes, there are over 800 source plasma collection centers in North America, mostly in the U.S. We have more than 80% market share of those centers, meaning our footprint reflects the industry's overall presence. There is a concentration in the Southern U.S., as well as the Southeastern and mid-Atlantic regions, creating an L-shaped distribution across the Southwest and up the East Coast. We closely monitor the COVID flare-ups and outbreaks, with a particular focus on a few states, including Texas, Florida, and key Midwestern and Eastern states like Michigan and Ohio, where we rely heavily on collection. In the first quarter, our operational areas coincided almost exactly with the areas most affected by COVID. Fortunately, through various actions, we're seeing positive developments in places like Arizona, Texas, and Florida in terms of flattening the curve, which provides us with cautious optimism as we navigate this broader societal challenge that impacts both us and our customers.

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.