Earnings Call Transcript
Haemonetics Corp (HAE)
Earnings Call Transcript - HAE Q2 2021
Operator, Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Haemonetics Second 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, Ms. Olga Guyette, Investor Relations. Ma'am, you may begin.
Olga Guyette, Investor Relations
Good morning, everyone. Thank you for joining us for Haemonetics' Second Quarter Fiscal '21 Conference Call and Webcast. I'm joined today by Chris Simon, our CEO; and Bill Burke, our CFO. This morning, we posted our second quarter and first half fiscal '21 result to our Investor Relations website, including analytical tables with the information that we'll refer to on this call. Additionally, we provided the complete P&L, balance sheet, summary statement of cash flows as well as reconciliations of our GAAP to non-GAAP financial results. Before we get started, unless otherwise noted, all revenue growth rates discussed today are on an organic basis and exclude the impact of currency fluctuations, strategic actions of product lines, acquisitions, and divestitures. As in the past, we will refer to non-GAAP financial measures throughout this call to help investors understand Haemonetics' ongoing business performance. Please note that these measures exclude certain charges and income items. Please refer to this morning's earnings release for details on excluded items, including comparisons with the same periods of fiscal '20 and a reconciliation to our GAAP results. Our remarks today may include forward-looking statements, and our actual results may differ materially from the anticipated results. Haemonetics cautions that these forward-looking statements are subject to risks and uncertainties, including the potential impact from the COVID-19 pandemic on our results and other factors referenced in the safe harbor statement in our earnings release and in our filings with the SEC. We do not undertake any obligation to update these forward-looking statements. And now I'd like to turn it over to Chris.
Chris Simon, CEO
Thanks, Olga. Good morning, and thank you all for joining. Today, we reported second quarter fiscal 2021 organic revenue of $209 million, a decline of 16% versus the prior year and adjusted earnings per diluted share of $0.62, a decline of 29% versus the prior year. COVID-19 significantly impacted our results in the second quarter and the first half of fiscal 2021. From the outset of the pandemic, we prioritize safety and business continuity, and we have done so exceptionally well. Three quarters of our employees worldwide are front line workers. Manufacturing and supply teams, keeping our plants operational to ensure timely production and delivery. Tech support specialists working on-site with customers to install and keep our devices serviced. Field-based sales and clinical support reps calling on customers to keep them informed and supported and engineers and commissions working in our labs to advance our many development projects. Their efforts and the efforts of all of our employees have kept our customers safe, stocked, serviced, and fully supported. The fundamentals of our business remain strong, and there is robust end market demand for our products and for the products of our customers. We have employed a through-cycle mindset to prepare for recovery and long-term value creation in the new normal. We have achieved critical milestones, including acquiring hospital-based products, divesting nonstrategic Blood Center software assets, and receiving FDA clearance for Persona. We are not issuing fiscal '21 guidance today as there is still significant uncertainty about the ongoing impact from COVID-19 on our customers, especially sourced Plasma collectors. Forecasting in this environment is difficult as the global health crisis has impacted each of our three customer groups differently and the timing and pace of recovery is different for each. With that context, let's look at our business unit results and the actions we are taking to drive near and long-term success. Plasma revenue declined 30% in the second quarter and 32% year-to-date, primarily due to a decrease in North America collections compared to the prior year. Sequentially, collection volume was up 9% in North America in the second quarter, which is typical of the seasonal increase in demand we experienced in prior years. We have not seen a meaningful inflection point beyond seasonality since the end of our second quarter. COVID-19 has had a pronounced effect on the source Plasma donor base in the U.S., and our collection customers have struggled to replenish that base given the structural and attitudinal factors that must be overcome. We are in close contact with all of our customers, who are doing everything they can to accelerate the recovery. They have taken extensive measures to ensure the health and safety of donors, and they have begun a myriad of advertising and promotional campaigns to encourage donations after the government economic stimulus ended in August. Haemonetics continues to do everything we can to support them, and we remain optimistic; however, predicting the pace of recovery is difficult, and we are cautious about attempting to be precise and forecast a situation that is complex and uncertain. By contrast, market conditions for collections in Europe have been different to date, and Plasma revenue was up 2% versus the second quarter of the prior year and increased 34% sequentially from the first quarter. Software revenue decreased in line with Plasma collection declines in the second quarter and was negatively impacted year-to-date by a one-time benefit in the first quarter of the prior year. We have continued to upgrade U.S. customers to the latest version of our NexLynk DMS software, and we are targeting completion over the next year. We recently launched our Donor 360 app to support customers as they rebuild their donor bases, and we are advancing our long-term goals to migrate to a fully cloud-based global offering. Software is a strategic lever for our customers, and we are innovating to support their recovery and growth plans. We were pleased to receive FDA clearance for Persona, the only donor tailored solution clinically shown to yield more Plasma per donation on average using a novel percent plasma nomogram. Our proprietary Persona technology significantly strengthens the well-established NexSys value proposition with our ability to safely increase plasma yield. Our clinical trial of more than 23,000 collections showed a gain of 8.2% compared to YES technology, and we expect that in a broader real-world population, Persona could add an additional 70 milliliters on average to the 23-milliliter average gain from YES technology. We are talking with all of our customers about Persona, and we are committed to making it economically attractive and logistically easy to adapt. Persona is our innovation agenda at work, and we plan to further leverage data and analytics to improve yield, cycle time, safety, compliance, and donor satisfaction. Our through-cycle mindset and commitment to growth underpins our plans to drive the value of each Plasma collection. We have taken steps to ensure continued supply with the agility to meet customers' needs for all milestones within the recovery and beyond. As Plasma collection recovers and fractionators replenish through depleted plasma inventories, we are well-positioned in a resilient end market. We are monitoring the timing and pace of the recovery and perhaps most importantly, we continue to view the impact of the pandemic as temporary. The underlying demand for immunoglobulin hasn't changed, and we remain confident in a long-term collection volume growth projection of 8% to 10%. Moving to Hospital. Revenue increased 2% in the second quarter and was down 1% year-to-date. Overall, our hospital business saw a 12% sequential improvement in the second quarter over the first quarter with consistent improvement across all three segments. Our hospital products are primarily used in non-elective cardiovascular and trauma procedures, which showed meaningful recovery since the first quarter. Strong execution in a challenging environment allowed us to accelerate recovery, especially in key markets like North America and China. In North America, we saw 19% sequential revenue improvement in the second quarter, driven largely by disposable sales resulting from higher procedure volumes, enabling positive organic growth in the U.S. China was affected earliest and hardest by COVID-19 during the fourth quarter of our fiscal '20, and while still down compared to the prior year, the recovery in China has been encouraging, with revenue sequentially improving 90% in the first quarter and 16% in the second quarter. Hemostasis management revenue was up 4% in the second quarter compared with the prior year quarter, driven by strong U.S. disposable sales. Year-to-date, hemostasis management was up 3% and benefited from strong capital equipment sales in the first quarter, followed by sales of TEG cartridges in the second quarter, partially offset by continued pandemic-related challenges. We continue to invest in our innovation agenda through clinical trials that build evidence for our hemostasis management products while we strengthen our go-to-market model and commercial execution in all key geographies. Our TEG devices continue to play an important role in researching coagulopathy in COVID-19 patients. Transfusion management was up 14% in the second quarter and 9% year-to-date, primarily driven by strong growth in BloodTrack through new accounts in several key geographies. SafeTrace Tx also grew in the second quarter, primarily driven by new software installations. Purposeful hospital access allowed our teams to drive several in-flight projects to completion. Cell salvage revenue declined 8% in the second quarter and 13% year-to-date, primarily driven by declines in disposable usage. However, second quarter revenue improved 26% sequentially over the first quarter as cell saver benefited from the resumption of elective and non-elective procedures. This progress is encouraging, and we anticipate additional improvement in the second half of fiscal '21 as procedures normalize. Overall, the crisis has helped validate the essential role that our technologies play in assessing risk of bleeding and blood clots, providing autologous blood transfusions, and helping effectively manage blood supply. We have demonstrated our ability to safely and effectively sell, install, and service our equipment despite limited access to hospitals. Accordingly, we expect continued increases in disposable sales as surgical procedure volumes continue to improve, and we anticipate a return to pre-pandemic levels in our fourth quarter. Blood Center revenue declined 8% in the second quarter and 3% year-to-date. We have been able to supply and support our customers as they provide essential blood products in a challenging collections environment. Notably, we did not see distributor stocking order reversals in the second quarter, and although that remains a risk, we do not anticipate it happening until the pandemic subsides. We continue to engage with customers globally to support the collection of convalescent plasma. We increased capital sales in the first half of the year, up 75% in the first quarter and up 29% in the second quarter versus the prior year. The increased installed base should provide longer-term benefits to our disposable sales. Apheresis revenue was down 8% in the second quarter and was flat year-to-date. The $8 million impact of a previously disclosed customer loss was offset by continued Plasma growth in Japan and other markets and favorable order timing in the first quarter. Whole blood revenue declined by 9% in the second quarter and 7% year-to-date, driven by lower than usual procedure volumes due to COVID-19. Previously discontinued customer contracts and overall declines in blood utilization rates. We continue to optimize this portfolio, including the recent divestiture of certain Blood Center donor software. In addition to our earlier divestiture of the Fajardo production facility and concurrent whole blood filter supply agreement with the purchaser of that facility. Our operational excellence program is fully on track to raise product and service quality while reducing the cost of goods sold to drive margin improvements. We are making progress optimizing our plant network and sourcing to increase efficiency in spite of COVID-19. In addition to divesting the Puerto Rico Blood Facility, we are also modernizing and expanding our Plasma and TEG disposable manufacturing in Pittsburgh, PA. OEP savings, combined with steps we took to reduce costs earlier in the year have helped to partially offset revenue declines from the pandemic. We are executing our strategy despite the challenges of the global health crisis, and we remain confident in our ability to deliver results, complete the turnaround, and create long-term value. We have the plans, the talent, and the financial strength to pivot fully to transformational growth propelled by innovative technologies in healthy growing markets. I want to close by again thanking our teams who are delivering for our customers and accomplishing our strategic plan milestones. Bill, over to you.
Bill Burke, CFO
Good morning, everyone. Chris has already discussed revenue, so I will start with adjusted gross margin, which was 52.2% in the second quarter, a decline of 40 basis points compared with the second quarter of the prior year. Adjusted gross margin year-to-date was 49.8%, a decline of 210 basis points compared with the first half of the prior year. The primary drivers of the decline, both in the second quarter and year-to-date are impacts from COVID-19, including higher operational expenses, lower volume, and unfavorable product mix. These downward effects were partially offset by productivity savings realized from our operational excellence program and lower depreciation expense. Adjusted gross margin on a year-to-date basis also reflects a benefit from the strategic decision to exit liquids, which was offset by the impact from recent divestitures in the second quarter. Additionally, the sequential improvement in adjusted gross margin of 500 basis points in the second quarter was driven by greater cost savings from cost containment actions and the operational excellence program, a one-time pricing true-up associated with long-term contracts and lower operational expenses due to COVID-19. Adjusted operating expenses in the second quarter were $66.4 million. A decrease of $8.8 million or about 12% compared with the second quarter of the prior year. Adjusted operating expenses in the first half were $130.1 million, a decrease of $16.6 million or about 11% compared with the first half of the prior year. Lower adjusted operating expenses both in the second quarter and the first half of this fiscal year were due to a combination of ongoing productivity savings and cost containment measures implemented to help offset the negative effects of COVID-19 related to lower volume and cost to safeguard the health and welfare of our employees in manufacturing, supply chain, and customer-facing roles. The cost containment measures included restricting travel, reducing nonessential spending, delaying hiring, and reducing some compensation-related items. Partially offsetting these savings were modest investments in key growth areas of the business. As a result of the performance in adjusted gross margin and adjusted operating expenses, the second quarter adjusted operating income was $42.9 million, a decrease of $14.8 million or 26%. In the first half, adjusted operating income was $71.5 million, a decrease of $37.7 million or 35% compared with the same periods in fiscal '20. Adjusted operating margin was 20.5% in the second quarter and 17.6% in the first half, down 240 basis points and 460 basis points, respectively, compared with the same periods in fiscal '20. For both periods, the lost leverage from revenue declines outpaced the impact of cost mitigation efforts. The adjusted income tax rate was 19% in the second quarter and 13% in the first half of the fiscal year compared with 15% in the second quarter and 13% in the first half of the prior year. The lower adjusted income tax rate in the first half of this fiscal year benefited from a higher than usual impact from a deduction associated with share vestings and option exercises in the first quarter. We do not expect this benefit to repeat in the second half and anticipate that the fiscal '20 adjusted income tax rate will be 16% to 17% and implied adjusted tax rate of 17% to 19% in the second half of this fiscal year. Adjusted earnings per diluted share in the second quarter were $0.62 compared with $0.87 in the prior year second quarter, a decrease of $0.25 or 29%. Adjusted earnings per diluted share in the first half was $1.08 compared with $1.67 in the prior year, a decrease of $0.59 or 35%. The decrease in adjusted earnings per diluted share, both in the second quarter and first half of fiscal '21 was due to the adverse impact of the COVID-19 pandemic on revenue and adjusted gross margin, despite the cost containment actions initiated. We continue to review our financial modeling that evaluates different financial impacts to each business unit using varying scenarios based on anticipated pace and timing of the recovery. While the current environment remains extremely uncertain, we are prepared to implement additional measures or change the course of action on those initiated if necessary. We remain committed to delivering $80 million to $90 million of savings by the end of fiscal '23 as part of our operational excellence program. This program has contributed meaningfully in the first half of fiscal '21, and we expect the majority of savings realized will drop-through to adjusted operating income by the conclusion of the program with the return of the business back to historical levels. We continue to pursue our goal of preserving cash. Free cash flow before restructuring and turnaround costs was $38 million in the first half of fiscal '21 compared with $31 million in the first half of the prior year. The improvement in free cash flow before restructuring and turnaround is primarily due to lower working capital outflows compared with the prior year. In particular, we had a decrease in accounts receivable due to a reduction in days sales outstanding and lower revenue. We also had lower increases in inventory when compared with the same period of the prior year. Although cash outflow from inventory is lower than the prior year, the impact of lower sales volumes in Plasma has resulted in a higher disposables inventory balance that is being addressed. In the first half of fiscal '21, we incurred net borrowings of $90 million on the revolving credit line. These borrowings, combined with the free cash flow and net proceeds from portfolio moves increased cash on hand to $279 million by the end of the second quarter. As a reminder, our EBITDA leverage ratio remains low, and we have an existing credit facility of $700 million that does not mature until the first quarter of fiscal '24, with the majority of the principal payments weighted towards the end of the term. Total debt outstanding under the facility at the end of the second quarter was $465 million, split between the remaining term loan balance of $315 million and borrowings under the revolving credit facility of $150 million. Subsequent to the end of the quarter, we repaid $150 million under the revolving credit facility. Following the repayment, we now have $350 million available for future borrowings under that facility. Our capital allocation priorities are clear and remain unchanged. We will continue to invest in our business with a bias towards organic growth and innovation that will continue to expand our commercial capabilities, and we will remain opportunistic with M&A and share repurchases. The existing share repurchase authorization has $325 million remaining on the existing $500 million authorization through the end of this fiscal year. We intend to be thoughtful in executing additional share repurchases, which may include extending the authorization beyond its existing expiry date. In summary, I'd like to conclude with a few closing thoughts. We continue to manage the impacts of COVID-19 throughout the business, and we remain fully operational and have not had any interruptions in the supply of our products. Second quarter results showed encouraging trends in our hospital business, which began to recover, and we anticipate further improvement to pre-COVID levels by the end of fiscal '21. In Blood Center, although we did not see a reversal in the second quarter of the distributor stocking orders that occurred in the first quarter, we anticipate this reversal may occur as the pandemic subsides. The end market demand for plasma-derived pharmaceuticals remains strong. And after the recovery in collection volumes, we anticipate growth in Plasma collections to be above pre-pandemic levels for the short-term and at 8% to 10% in the long term. However, the Plasma business continues to be challenged by the timing and pace of the recovery, and we have not seen an inflection point. The recent FDA clearance of our Persona technology is evidence of our commitment to innovation. We believe this technology will bring significant value to our customers, especially in this challenging environment, and we are making it available, economically attractive, and easy to implement. And finally, the operational excellence program contributed meaningfully to the first half results and will continue to be a significant driver of margin expansion as volume recovers and costs of the pandemic subside. And now I'd like to turn the call back to the operator.
Operator, Operator
Our first question comes from Anthony Petrone of Jefferies.
Anthony Petrone, Analyst
I hope everyone is doing well. A couple of questions first on Plasma volumes, and then I'll go down to margins and costs. And so just wondering, just on the plasma donation volume trend. Maybe if there's an update as to where the quarter exited specifically volumes in September and what the early look is in terms of exiting October where volumes are specifically? And then a follow-up here would be just an update on NexSys contracting for one, but you also mentioned, Chris, the Persona FDA clearance. Just wondering how that trialing phase for that specific technology will also play out and then I'll have a follow-up for Bill.
Chris Simon, CEO
Thank you, Anthony, for the questions. We are closely monitoring this trend and engaging with our customers to understand their market observations and potential impacts. As we finished the quarter and moved into October, we noticed an increase in collection volume. However, we are taking a cautious approach because past changes have been more closely aligned with historical seasonal trends. It is still early to determine the long-term outlook. Our customers are making efforts, and we are doing all we can to support them, and we remain cautiously optimistic. That said, we recognize that there can be significant fluctuations, especially regarding daily, weekly, or monthly trends, so we prefer to observe for a while before making any declarations. This caution is why we chose not to provide specific guidance in today's earnings call. We have seen improvement and expect this trend to continue in the long run, and we are confident about the future. However, we would like to see more consistent trends before drawing conclusions. Regarding NexSys, we are actively communicating with all our customers, and the Persona initiative has enhanced this engagement. We are enthusiastic about our progress and are committed to ensuring our customers are aware of the value we offer, especially in adapting to a COVID environment. We aim to provide a seamless experience that delivers substantial benefits, particularly for those not yet utilizing NexSys, which can lead to significant increases in plasma collection, reduced cycle times, and create a paperless environment that supports compliance and safety, all contributing to greater donor satisfaction, which is crucial in this market. Overall, we remain cautiously optimistic and continue our discussions.
Anthony Petrone, Analyst
That's helpful. I have a quick follow-up regarding Plasma, specifically about the concept of safety stock among the plasma fractionators. Is there an estimate on that? Also, for Bill, regarding the margin improvements, they were quite significant. Could you provide an update on the ongoing restructuring plan, which aimed for $80 million to $90 million in gross savings? How much of that has been achieved so far, and what is the timeline for the remaining savings as we look ahead?
Chris Simon, CEO
Yes. I think so, first on our customers' inventory levels clearly best directed towards them. We monitor this to the best of our ability. What's very clear in hindsight is when we had such robust growth well in excess of the 8% to 10% long-term trend, but new numbers in the mid-teens and better with some of our largest customers. They were taking advantage of a healthy environment, collections and building inventory appropriately. They've taken some steps to make sure they don't have shortages, including expedited release, etc., with the various regulatory agencies. So they've tried to protect themselves on the downside while we all build towards recovery. Different numbers depending on the customers, it's a little bit opaque. So we're not in a position to give specific insight around that beyond what we read from our customers' earnings releases and press releases. So I know they're keen to collect, I think that is imminent. And clearly, we want to help them get that back on track in the current period.
Bill Burke, CFO
Anthony, it's Bill. I can address the second and third parts of your question. Regarding our margins, specifically our operating margins, we experienced an increase of 590 basis points sequentially from Q1 to Q2. The majority of this improvement in operating margin came from our gross margin, which saw about 500 basis points of enhancement. A few factors contributed to this sequential improvement. First, our OEP savings, which we have frequently discussed, delivered substantially in the first half of this year and improved in Q2 compared to the first quarter. Additionally, we had a one-time charge in the first quarter related to capitalized variances, and we adjusted our inventory days on hand due to the increased inventory as revenue declined year-over-year. We also incurred lower COVID-related expenses; we had mentioned these costs, which were intended to ensure employee safety. As the COVID outbreak waned, expenses in the second half were slightly reduced. Furthermore, in the second quarter, we had a one-time adjustment for some pricing events, especially in Plasma, which we likely won't see repeating for the rest of this year. I hope this clarifies your question on operating margin. You also inquired about the operational excellence program. We did not specify the savings from the first or second quarter, but as indicated in my commentary on gross margin, we did observe some improvement in those savings. We remain committed to the $80 million to $90 million target as part of the program through FY '23, and when we are ready to provide guidance, we will offer more detailed information about the operational excellence program savings.
Operator, Operator
Our next question comes from Larry Keusch of Raymond James.
Larry Keusch, Analyst
Maybe, Chris, to start, both you and Bill certainly expressed confidence in the 8% to 10% growth of Plasma collections over the long term. Could you elaborate on why you have that confidence, considering the potential for alternative therapeutics to IG?
Chris Simon, CEO
Sure, Larry. Thanks for the question. Yes, we take our cues from our customers and the broader market. We consult with our scientific advisory council and stay informed by reviewing available literature and having multiple discussions with key opinion leaders in the medical field. While I don’t claim to have exclusive insights regarding anti-SGRN therapy or hypersialated products, we do track several factors that suggest an anticipated 8% growth in long-term CAGR related to IG, along with the 8% to 10% growth we expect to see as a result. We assess the capital investments made by our customers in both their collectors and fractionation processes, which have remained consistent. We also examine their R&D pipelines and numerous ongoing trials, including the Grifols AMBAR study. These are significant advancements. We recognize the considerable off-label use of our products to address severe diseases that lack treatment options. Furthermore, we observe a trend toward mild and moderate conditions and a shift to subcutaneous therapy, which necessitates more source Plasma. We take all of this into account, alongside what our customers are saying, which aligns with our views on the competitiveness of new therapies. However, the timing and extent of their impact remain uncertain. Therefore, we review our guidance and feel confident in the 8% to 10% growth target.
Larry Keusch, Analyst
Okay. Perfect. Just a couple of other quick ones here. Another question for you, Chris. You mentioned a few times during the call your ability to deploy NexSys without disruptions and in a seamless manner. How significant of an issue is this for potential customers? Is this a concern for them? Additionally, could you share your capabilities for implementation and the experience with Octapharma? I also have a couple of quick questions for Bill.
Chris Simon, CEO
Sure. So our customers have been head down, kind of doing what they can do to replenish their donor base and regain the momentum they had heading into COVID that's been their primary focus. And obviously, our focus to support them. What we have done in parallel, I talked pretty extensively about it is the ongoing upgrade and transition to the NexLynk donor management software platform. That's something we began 1.5 years ago, sitting here today, we are in-flight to upgrade all of our customer base to the new NexLynk system. We think we're about a year away from completing that upgrade. And as a result of that process, our software share now equates roughly our disposable share in North America where we have the software offering. So that's very powerful in many ways. The software upgrade is the more challenging. The hardware matters, but we've demonstrated our ability to turn a center often overnight. So the bigger challenge of the software well underway. We're in a good place to do that. And I think that enables the broader conversion to NexSys as a platform that we're pushing forward with. So we feel quite good about that. We continue to demonstrate that even in the current environment.
Larry Keusch, Analyst
Okay. Perfect. And then, Bill, just two here for you. Just back to the gross margin, obviously, it was impressive in the fact that it got back to essentially pre-COVID levels in the second quarter. I'm just wondering given the sort of various puts and takes that you talked about, how sustainable do you kind of see this level? And should we think about the upside opportunity within that margin once plasma volumes normalize? And the other part of the question is, some of the larger customers out there, plasma customers have certainly thrown out a number that feels like September was down 20% year-over-year and certainly improved from where it was in July. Just any thoughts around that?
Bill Burke, CFO
Thank you, Larry. Regarding the gross margin, as I explained earlier in response to Anthony's question, a significant factor affecting our gross margins in the second quarter was a one-time pricing adjustment. This specifically pertains to our plasma business, but I won't go into too many details on that. The key point to note is that plasma volumes are returning to normal levels, which should enhance operating margins in the latter half of the year if we reach that turning point. As Chris mentioned in his prepared remarks, we have observed year-over-year declines in plasma, remaining consistent until the end of the quarter and into October. However, there has been a sequential improvement of about 9% from Q1 to Q2. We are confident that there will be a rebound at some point, whether this year or possibly extending into early next fiscal year. Once that occurs, we expect to see an improvement in operating margins.
Operator, Operator
Our next question comes from David Lewis from Morgan Stanley.
David Lewis, Analyst
Maybe just, Bill, just a follow-up there, a quick view on gross margin. So I mean, the revenues were down mid-teens, but yet GMs obviously were kind of flat year-on-year into the back half of the year; is it safe to assume gross margin should be sort of stable at that 52% level? Or as volumes recover, you should see some natural uplift in GMs?
Bill Burke, CFO
If volume recovers, we would expect some improvement, but we are currently facing some challenges with inventory as well. We have experienced an increase in our inventory balances of nearly $38 million this year, which we are working to address. This will put some pressure on our gross margins. However, assuming we return to normal volumes in Plasma and hospitals, along with the additional savings we anticipate, we could see an increase in our gross margins. It’s important to note that we experienced a pricing adjustment in the second quarter, which created a discrepancy from the first quarter to the second quarter.
David Lewis, Analyst
Okay. And is it safe to assume, Bill, just a lot of what we're seeing that some of the OEP timelines have been pulled in a little bit. It certainly seems that way based on second quarter numbers?
Bill Burke, CFO
We are not only focused on integrating aspects from OEP, but we are also very committed to our savings goals. The teams responsible for these savings initiatives don't hold back on potential savings opportunities. We push the teams hard, and the organization recognizes its commitment to achieving these savings. Additionally, we have implemented cost containment measures unrelated to OEP, focusing on discretionary spending to generate savings. This approach has positively influenced not just our SG&A expenses, but has also contributed to improvements in our gross margin. While we are cautious not to harm long-term business prospects, we continue to invest in growth, which is also benefiting our margins.
David Lewis, Analyst
Okay. Very helpful. Chris, I have a few questions regarding Plasma. First, for new customers who do not yet have NexSys, this is certainly a matter that requires careful negotiation. However, for those customers who have already adopted NexSys, how do you approach the rollout of Persona? You're providing additional value, so how does this process work for customers who are already under contract with NexSys?
Chris Simon, CEO
Yes, Dave. So what we put forth, and I think Bill and I both mentioned this in our prepared remarks, we want to be economically attractive, and we want it to be logistically easy for them, right? So there are meaningful changes, right? It's a larger bottle, almost a third larger. So we've got to change out some disposables, and they have to adjust their logistics and manufacturing processes to accommodate that, which comes with an additional 80 or 90 milliliters, right? So they're happy to do that. But it takes real work. What we are keen to do, it's public that we work with Octapharma on the trial, the impact trial itself. So we have teed them up for conversion, and we're working hard to make that a worthy reference case that we can build upon and that the industry can build upon. All of our existing NexSys customers are in line to do this. They may have contractual reasons why they have to proceed at one pace versus the other. But we stand ready to make the conversions. Those conversions can happen and it will be misleading to say they're simple turnkey. They're not. They're more than that. But it is primarily software related, and it is something that through the trial work that we did, 23,000 donations as well as the ongoing work that we've now done post FDA clearance, we feel confident in our ability to pull the trigger on that quickly, at least as quickly as our customers are prepared to go.
David Lewis, Analyst
Okay. I have two quick questions about plasma. The first is more general. Your largest customers are indicating that two scenarios may unfold in the next four quarters. Either they will return to normal with distant collections, or they may exceed normal as they attempt to replenish inventories. Given what your largest customers are stating, do you foresee any scenario where your business might not align closely with what those large fractionators are predicting in the next four quarters?
Chris Simon, CEO
Yes, we have over 80% market share in North America, which has been the most significantly impacted region. In contrast, our performance outside the U.S., particularly in Europe, has been strong due to various structural and attitudinal factors that have contributed to Europe's relative and absolute outperformance. We have confidence in the European market. With our 80% share in North America, we are prepared to support the recovery and enhance its trajectory. Our system and offerings are on par with market demands, and we are well-positioned to meet our customers' ambitious growth expectations. It's really about putting the necessary structural and attitudinal elements in place to rebuild a diminished donor base. We anticipate a return to growth, which aligns with our customers' desire to avoid stock-outs and restore depleted inventories. As we see this recovery unfold, we expect a robust multi-year growth trend similar to what we experienced over the last two years.
David Lewis, Analyst
Okay. And then just last one more near-term question for you. I just want to kind of hammer this point home. If you look at this particular quarter, I think investors are prepared for very negative Plasma trends in this quarter, which is obviously what we saw. Look, if you look at the numbers, it's not obvious to the casual observer that there was any improvement, frankly, this quarter. And while there really shouldn't have been through sort of mid-August, there certainly should have been some activity sort of in the back half of August and September on stabilization promotions, things of that nature. So is that the way you see it at the back half of this quarter really didn't see any improvement and most of the improvement was in October or you did see meaningful improvement in September? And maybe you could describe sort of some of the other factors in the channel that suggest why we didn't see that improve in terms of Plasma momentum here in this particular quarter.
Chris Simon, CEO
Thank you, David. We truly appreciate the focus on our monthly results and trends. Our customers have done an outstanding job maintaining safe and operational centers despite numerous challenges that are both structural and attitudinal, impacting their performance. We're encouraged to see that the second quarter shows a typical seasonality in our business. The first quarter is generally our weakest in terms of collections, but we observe sequential improvements in each subsequent quarter leading up to the end of the year, and we're witnessing that seasonality again. However, it has been difficult as they not only have to respond to ongoing seasonal growth but also work on replenishing a donor base that was down 40% during the pandemic lockdown. The situation varies depending on whether we’re discussing centers on college campuses, in major cities, along border regions, or new centers compared to established ones, all of which face challenges in attracting donor foot traffic. It's impressive to see how our customers are responding to these challenges. There are meaningful trends emerging, but we remain cautious in our expectations because we have previously seen benefits that didn't extend beyond the seasonal patterns early in the pandemic. We are aware of significant developments in the health crisis in the U.S. and Europe that we need to pay attention to. Overall, we are generally optimistic about the long-term outlook, but we recognize that we don't have control over the broader pandemic and operating environment. Until we reach some level of normalization, it's challenging to accurately predict the timeline for recovery.
Operator, Operator
Our next question comes from Dave Turkaly of JMP Securities.
Dave Turkaly, Analyst
Great. I may have missed this, but obviously, I think a bunch of us saw some comments from customers of yours. And I don't know if you made any comments, but did you talk about any new contracts on the Plasma side that were signed in the quarter? And the comments that you made gross margin, the pricing associated with long-term contracts. Is that new pricing contracts or is that from legacy ones?
Chris Simon, CEO
Yes. I’ll let Bill elaborate on that, Dave. Thank you for the question. Generally speaking, we've made concerted efforts in this area. It’s a concentrated industry with a focused customer base, and we do not disclose details about individual customers due to confidentiality. We are engaging with customers globally, including in the U.S., where FDA clearance for Persona has enhanced those discussions. There are significant advantages with the Persona platform that we've previously highlighted over the past year and a half, such as a 23-milliliter yield and reduced cycle times. The Paypros environment is safer and more compliant, which contributes to donor satisfaction, something that is critical especially as there is a need to expand the active donor base. We also see an additional benefit of 70 milliliters in our trials with Persona. We feel optimistic about these developments and the ongoing discussions. Previously, we mentioned that we have gained market share in our software business, specifically with the DMS Persona center software, and changes are being implemented. However, we haven’t discussed details about specific customers and likely won’t in the future. When we return to provide guidance, we will include the expected gains from those contracts in our projections. Bill mentioned that contracting plays a role in our gross margin improvement. With the launch of NexSys, we have aimed to align better with customers regarding the productivity they gain from our equipment. We know they are achieving faster and more efficient operations. We have introduced incentives based on utilization rates. While we acknowledge that in a COVID context it became more challenging, we made some temporary adjustments to support our customers through the pandemic. Moving forward, we do not expect a repeat of those circumstances, but those changes were made. The mention earlier pertained to our historical ROIC-based contracting with existing NexSys customers, which we don’t anticipate continuing.
Dave Turkaly, Analyst
Got it. And then you talked a couple of times about the structural and attitudinal factors. I would imagine the structural ones may have been dealt with largely at this point, but maybe not the attitudinal ones. I'd love to get your just updated thoughts on those and where they stand now, if they're improving, I would imagine they are. But how that looks now versus maybe last quarter?
Chris Simon, CEO
Yes, thanks. Clearly, they're improving. We discussed that the structural aspects are significantly better, but not entirely so. There isn't a free flow of donor traffic across the Mexico border due to ongoing restrictions. These can be either voluntary or mandatory, but there are controls in place. Colleges have resumed operations, although some may be remote or have limitations on student gatherings. We've certainly observed improvements on college campuses, which is part of the seasonal trend we see in our business. However, I would be cautious about labeling this a return to normal; it may be more of a new normal, but it doesn't resemble what we experienced historically. The biggest challenge lies with new centers that haven't had a chance to establish their donor base and are now impacted by the pandemic. This has historically been the key driver of growth. Before NexSys, plasma collectors grew their base by launching new centers, and that process has been disrupted. We are monitoring the situation closely and have effective models to predict developments as they unfold. I believe we'll be positioned to recognize those changes as they happen, but there’s an ongoing attitudinal shift that will need to evolve.
Operator, Operator
Our next question comes from Mike Matson of Needham & Company.
Mike Matson, Analyst
Just curious on the $8.8 million year-over-year decline in OpEx. Do you have any feel for how much of that was due to kind of temporary COVID benefits like decreased travel and things like that?
Bill Burke, CFO
Yes, there was a significant decrease this quarter, totaling $8.8 million, which is a 12% reduction in our overall operating expenses. Year-to-date, the reduction is nearly $17 million, reflecting an 11% decline. Most of this can be attributed to our cost containment measures, including travel restrictions and adjustments in compensation-related expenses. While it's uncertain if these savings are sustainable moving forward and whether travel will return to previous levels, the primary source of our cost savings has been these containment actions, along with some contributions from the OEP.
Mike Matson, Analyst
Okay. That is helpful. And then just on this transition with your software to a cloud-based model, can you just talk about how that would affect the sales and kind of the payment scheme, I assume it moved to some sort of subscription fee or something like that?
Chris Simon, CEO
Yes, Mike, we're still working on that. What I can say at this point is that historically, we have been somewhat hesitant or at least not fully committed to providing the software. However, it's evident that our customers are moving towards world-class, cloud-based, integrated global offerings that can support the entire process from donors at home to the production site. This is where the industry is headed, and we aspire to lead this shift. We are being very deliberate about this transition, considering important factors such as data privacy and cybersecurity, along with various other software applications that are relevant. We successfully launched the Donor 360 app in our second quarter, which is a straightforward service that is fully compliant with health regulations. It aims to assist our customers and has been deployed across the industry to help them safely regain foot traffic in their centers. The app allows for medical reviews online and includes features for managing queuing so that individuals don’t need to physically be at the center to hold their spot when a bed becomes available. This has proven to be quite beneficial and is part of the momentum we see in the recovery. It's just the initial step in a multi-year program, demonstrating our commitment to leading with software. We recognize the significance of SaaS and the digitization of our platform as vital growth enablers. Our ability to leverage data and analytics from NexSys collections has been crucial for initiatives like Persona. We're just beginning, and there will be more developments in the Persona project, including trials 2.0 and beyond. In many respects, we are only starting to harness the potential of data and analytics on a digital platform to help our customers excel.
Operator, Operator
There are no further questions. Ladies and gentlemen, this does conclude the conference, and you may now disconnect. Everyone, have a great day.