Earnings Call Transcript - HAE Q1 2023

Operator, Operator

Good day, and welcome to Haemonetics Corporation's First Quarter Fiscal 2023 Earnings Call. As a reminder, this call is being recorded. I would like to turn the call over to Olga Guyette, Senior Director of Investor Relations and Treasury. You may begin.

Olga Guyette, Senior Director of Investor Relations and Treasury

Good morning, everyone. Thank you for joining us for Haemonetics' first quarter fiscal '23 conference call and webcast. I'm joined today by Chris Simon, our CEO; and James D’Arecca, our CFO. This morning, we posted our first quarter fiscal '23 results to our Investor Relations website, along with updates for fiscal '23 guidance in analytical tables with information that we'll refer to on this call. Additionally, we provided a complete P&L, balance sheet, summary statement of cash flows as well as reconciliations of our GAAP to non-GAAP financial results and guidance. Before we get started, unless otherwise noted, all revenue growth rates discussed today are on an organic basis and exclude the impact of currency fluctuation and strategic exits of product lines. As in the past, we will refer to non-GAAP financial measures 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 '22 and a reconciliation to our GAAP results. Our remarks today 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 pandemic on our results and other factors referenced in the Safe Harbor statement in our earnings release and our filings with the SEC. We do not undertake any obligation to update these forward-looking statements. Additionally, in order to protect customer confidentiality, we will not be able to discuss any customer-specific details except as disclosed previously. And now I'd like to turn it over to Chris.

Chris Simon, CEO

Thanks, Olga. Good morning, everyone, and thank you for joining. Today we reported first quarter organic revenue growth of 17% and adjusted earnings per diluted share of $0.58, an increase of 16% compared to the first quarter of the prior year. Building on our successful fourth quarter, our results affirm our strategy and updated long-range plan for transformational growth. We are accelerating our momentum to advance our market leadership and deliver robust revenue and adjusted EPS growth over the next several years. Plasma recovery is underway. As the established leader in the $800 million sourced plasma collections market, we are confident in our ability to achieve substantial growth and increase our gross margins as we help collectors replenish their depleted inventories. We are also investing in further advancements to distinguish our technologies and create new opportunities for customers. Hospital is increasingly playing an outsized role in our growth. Our products are helping hospitals raise the standard of care and improve health economics. Vascular closure led the way with another record quarter as we strengthen our leadership in the attractive and growing electrophysiology and interventional cardiology markets. Our work to build an agile and resilient global manufacturing and supply network enabled us to serve customers reliably without disruption. During the first quarter, we completed the move to our new manufacturing center of excellence in Clinton, Pennsylvania. It exemplifies our commitment to continuous innovation, network optimization, regionalization, and business continuity. And now, on to our business unit results and guidance. Plasma revenue increased 44% in the first quarter, with 47% growth in North America, our largest market representing more than 90% of our total Plasma revenue. Revenue growth in North America was driven by meaningful contributions from both volume and price. Excluding CSL, U.S. plasma collection volume grew 40% versus the prior year and 12% sequentially, which compares favorably to historical seasonal growth of about 6%. This is the third consecutive quarter of non-CSL volume growth meaningfully exceeding normal seasonality. We saw robust growth in collections across most centers, including mature centers that have seen only limited recovery previously. We also saw strong double-digit collections growth in Europe this quarter. Our technology plays an important role in enabling our customers to recruit and retain donors and improve Plasma center operations to safely reduce collection costs. We have the only fully integrated solution that addresses all of collectors critical needs, including our unique Persona yield enhancing solution that is now delivering at scale in the U.S. Our distinctive value proposition is backed by real-world evidence from tens of millions of Plasma collections. We are on track to transform the remainder of our U.S. customers to our fully integrated bidirectional Nexus platform by the end of our second quarter. We continue to deliver new innovative solutions to extend the benefits of our platform. We are advancing our devices, disposables, and software to drive even higher Plasma yield, faster procedure and door-to-door time, enhance compliance and improve donor recruitment and satisfaction. We are encouraged by our first quarter results, and we are nearly doubling our full-year Plasma organic revenue growth guidance from 7% to 12% to 15% to 20%, primarily due to the growth in volume. Moving to hospital, revenue increased 15% in the first quarter, despite staffing shortages and budgetary constraints in U.S. hospitals, and lockdowns in China. Vascular Closure revenue grew 36% this quarter. The business continues to outperform as we open new accounts and penetrate deeper into the top U.S. ET hospitals. With its $2.8 billion TAM, Vascular Closure represents our largest hospital growth opportunity. We are pursuing this opportunity by accelerating our penetration in the U.S., pursuing regulatory approvals to drive international expansion and strengthening our product portfolio through both pipeline innovation and inorganic investments. Hemostasis Management revenue grew 6% in the first quarter. North America, our largest market grew 11% due to increased utilization of our TEG technology and some benefits in pricing. First quarter growth in Hemostasis Management reflected a challenging comp, particularly in Europe, where we won a national tender and made shipments of capital and disposables for our ClotPro technology in the first quarter of fiscal '22. Transfusion Management revenue grew 21% in the quarter, driven by continuous market share expansion in North America and execution of software and hardware installations that were postponed from the fourth quarter of last year. Lastly, Cell Salvage revenue was flat in the quarter as strong disposable sales in EMEA helped overcome a tough comp in the U.S., driven by strong procedure recovery and capital upgrades in the first quarter of the prior year. We are excited about hospitals' performance and opportunities. Our fastest-growing business will also become our largest business over the long-range plan. We are raising our full-year hospital organic revenue growth guidance from 16% to 19% to 19% to 22%, primarily due to continued strength in Vascular Closure. Blood Center revenue declined 7% in the first quarter. Apheresis revenue declined 13% due to unfavorable order timing, lower revenue from convalescent Plasma, collection center staffing shortages in the U.S. and geopolitical risk. Whole Blood revenue grew 7% driven by favorable order timing among distributors in Asia Pacific, and EMEA and additional opportunities in North America as our supply chain resilience enabled us to serve customers in need. We are proud of the durability of our Blood Center business in the face of blood shortages in a difficult collections environment. We are updating our full-year Blood Center organic revenue guidance from a decline of 4% to 7% to a decline of 2% to 5%. The strength of our businesses now and over time due to our innovation pipeline, coupled with our resilience and productivity gains, will generate robust revenue growth, margin expansion, and free cash flow. Successful execution of our plan is anticipated to drive a five-fold increase in capital capacity, up to approximately $2.1 billion by the end of fiscal 2026. This will enable us to accelerate the rate of organic growth investments, strengthen our portfolio through targeted M&A, and return capital to our shareholders as appropriate. This morning, we announced a new three-year $300 million share repurchase authorization. This authorization will help offset shareholder dilution and is consistent with our value creation strategy to generate additional shareholder returns. I'll now turn the call over to James to discuss the rest of our first quarter financial results and fiscal 2023 guidance.

James D’Arecca, CFO

Thank you, Chris, and good morning, everyone. Let's discuss our business results and additional updates to fiscal '23 guidance. Our results for the first quarter of fiscal '23 show continued strength across the business, starting with a new record adjusted gross margin of 55.2%, which beat our previous record from the third quarter of the prior year and delivers additional adjusted gross margin expansion both year-on-year and sequentially. This 50 basis point margin expansion, when compared with the same period of the prior year, was primarily driven by volume and mix, particularly due to strong volume growth in Plasma and Hospital, price, and additional savings from our operational excellence program. These adjusted gross margin benefits were partially offset by inflationary pressures, higher depreciation expense, primarily related to the increasing installed base of our Nexus devices in the U.S., and some of the recent investments in our manufacturing network. Adjusted operating expenses in the first quarter were $99.5 million, an increase of $12.4 million, or 14% compared with the first quarter of the prior year. As a percentage of revenue, adjusted operating expenses remained flat at 38.1% when compared with the first quarter of fiscal '22. The increase in adjusted operating expenses was primarily driven by higher freight due to a combination of higher volume and increased freight costs, continued growth investments, and a return to normal spending levels, partially offset by productivity savings from the operational excellence program. Our first quarter adjusted operating income was $44.9 million, an increase of $7 million or 18%. As a percentage of revenue, adjusted operating margin was 17.2% in the first quarter, up 60 basis points compared with the same period in fiscal '22. Our operational excellence program is slightly ahead of schedule, and we now expect this program to deliver additional gross savings of approximately $26 million in fiscal '23 with total cumulative savings reaching $96 million by the end of this fiscal year. About half of these savings will be in cost of goods sold with the rest in operating expenses, helping us generate additional efficiency across our business. The challenging macroeconomic environment continues to put downward pressure on our adjusted gross and operating margins. In the first quarter of fiscal '23, the impact experienced from macroeconomic factors was broad-based, and included inflation, foreign exchange and geopolitical risk. We remain confident in our ability to grow our business and deliver consistent margin expansion driven by our existing product portfolio, additional growth investments, and the operational excellence program. In the near-term, however, we expect these macroeconomic headwinds will continue to put pressure on our margins, we affirm our adjusted operating margin guidance in the range of 18% to 19%. The midpoint of our adjusted operating margin guidance includes higher performance-based compensation, and about 250 basis points of impact from macroeconomic headwinds. The adjusted income tax rate was 24% in the first quarters of both fiscal '23 and fiscal '22. We expect our fiscal '23 adjusted income tax rate to be approximately 23%. First quarter adjusted net income was $30.2 million of $5 million, or 19%. An adjusted earnings per diluted share was $0.58, up $0.16 when compared with the first quarter of fiscal '22. The combination of our adjusted income tax rate, share count, and FX had a net neutral impact on our adjusted earnings per diluted share in the first quarter when compared with the same period in fiscal '22. We updated our fiscal '23 adjusted earnings per diluted share guidance to be in the range of $2.60 to $2.90. The midpoint of our adjusted earnings per diluted share guidance includes about a $0.13 headwind from fluctuations at foreign exchange, share count, and adjusted income tax. Cash on hand at the end of the first quarter was $214.9 million, down $44.5 million since the beginning of fiscal year, primarily due to earn-out payments related to acquisitions. Free cash flow before restructuring and restructuring-related costs was $5 million compared with $2 million in the first quarter of fiscal '22. The higher free cash flow before restructuring and restructuring-related costs was mainly due to higher cash flow from operating activities. These include higher net income, lower accounts receivable, and inventory partially offset by higher capital expenses, as we continued to convert our U.S. Plasma customers to our latest Nexus Plasma collection technology and improve our manufacturing footprint with additional investments, including our new facility in Clinton, Pennsylvania. Our guidance for free cash flow before restructuring and restructuring-related expenses for fiscal '23 remains unchanged in the range of $100 to $130 million. In the beginning of our second quarter, we refinanced our existing credit facilities and extended their maturity date through mid-June 2025. Our new unsecured facilities include a $280 million term loan and a $420 million revolving line of credit. We also have two interest rate swap agreements in place to help offset the impact of rising interest rates. As a result of the interest rate swaps, 70% of the notional value of the unsecured term loan is fixed at 2.8%. The interest rate swaps mature in June of 2023, at which point we will seek to establish additional interest rate protection as necessary. In summary, I'd like to conclude that we are encouraged by our first quarter results. Plasma collections are recovering and all of our customers in the U.S. will be on the latest Nexus PCS and NexLynk DMS platform before the end of our second quarter. The hospital business continues to deliver mid-teens growth despite the ongoing challenges in U.S. hospitals and geopolitical risks. Our vascular closure and hemostasis management products continue to penetrate the market and gain share. The operational excellence program is fully on track. This program is critical in establishing efficient, resilient, and agile operations, and has enabled us to have an uninterrupted supply of our products despite global supply chain pressures. The savings from this program are real. And once the macroeconomic headwinds subside, we will continue to benefit from the efficiencies that have been put in place. Our capital allocation priorities remain focused on creating value for all of our stakeholders. Our long-range plan is anticipated to drive expansion and capacity up to approximately $2.1 billion by the end of fiscal '26, including our recent $300 million share repurchase authorization. We plan to utilize this capital capacity throughout our long-range plan to accelerate growth both on the top and the bottom line. Thank you. And now I would like to open the line for Q&A.

Operator, Operator

Our first question comes from Larry Solow with CJS Securities. Your line is open.

Larry Solow, Analyst

Great. Good morning. Thank you for your questions. Chris, could you provide us with more details on the Plasma growth, which was the standout achievement of the quarter? You mentioned that some of the mature centers that had been underperforming are starting to show improvement. Can you share any additional insights on that? Additionally, while the overall economy has not been performing well, it seems there are signs that conditions may begin to favor you in terms of collections. Could you elaborate on that?

Olga Guyette, Senior Director of Investor Relations and Treasury

Yes, thanks for the question. So from our vantage point, what we're looking at, we obviously take our customers' forecast into account and work closely with them on this, we listen to what the experts are saying across PPTA and MRB. The numbers that we've looked at that are proving predictive or measuring for the donor demographic, what's going on with real wages, what's going on with real savings rates and amounts. And then we've added in a third metric around consumer sentiment. And when we look at those things, they're all pointing in a favorable direction for accelerated recovery. And as we said in the prepared remarks, this quarter, and I do think, we've had three sequential quarters of growth above historical averages. So that's a positive trend. It's mostly driven by the pace and the uptake in new centers. The first quarter of this year marked a change where actually the growth in mature centers was greater than the new center openings. New center openings kept their pace, but mature centers really moved in the quarter, and that's with no activity on the southern border. So we look at that, and we want to be conservative about this. We've had false dawns in the past, right, second quarter of last year, third quarter of the year prior. So we want to be thoughtful about that. But what we're observing is meaningfully different and gives us the confidence to raise our revenue guidance in the way we did.

Larry Solow, Analyst

Okay, great. Then maybe just switching gears a quick question for James. Just on the guidance from a high-level. Just obviously, you raised your sales guidance pretty significantly. And just on the EPS free cash flow relatively the same, really do narrowed your EPS upward a little bit. Is that just from a high-level, obviously more inflationary pressures, more FX impact? What's sort of the spread there, the difference there? Thanks.

James D’Arecca, CFO

Yes, thanks for the question, Larry. Yes, I think you're onto it. So I would say the biggest headwind that's impacting our leverage in fiscal '23 is macroeconomic. The inflation is still there, present, perhaps it's beginning to plateau, what we'll see in the remainder of the year. But you hit upon another one, FX as well, affects us too on the bottom line. And really, the third point is our performance-based compensation increases as well. As you can see, we're doing well on revenue. It's a good thing. I think they're working hard. We're happy to see the performance-based comp go up because we're doing well. So when you take all that into consideration, and then thinking about what Chris had just said, given some of the false that we may have had in the past, we felt like taking up that low end of the EPS guidance by $0.10 was prudent and appropriate at this point of the year.

Operator, Operator

Our next question comes from Drew Ranieri with Morgan Stanley. Your line is open.

Drew Ranieri, Analyst

Hi, Chris and James. Thanks for taking the question. Just maybe to go back to the Plasma guidance for a moment. But just to get it through my skull, the increase that you're seeing in organic guidance for the year this is predominantly driven by market recovery and not pricing. Is that the right way that we should be kind of thinking about that or, and next persona could be in addition to the guidance?

Chris Simon, CEO

No. So both the results in the quarter and our guidance include meaningful contribution, Drew, from volume first and foremost, but also from price, right. And the pricing is the ongoing rollout of Nexus to customers that hadn't yet converted and upgrades to persona. So the results from those have been fantastic. I think we feel great about the work we're doing with customers. We are fully on track, probably a little ahead of schedule, to complete the Nexus upgrade cycle, this quarter, second quarter, and then we're in discussions. We haven't included any additional persona contracts that aren't already agreed to in the updated guidance. We've looked at what we have today. We're going to complete the upgrade cycle. That's what factored in.

Drew Ranieri, Analyst

Got it. Thank you. Maybe just on the quarter's hospital performance. I just wanted to maybe dissect that a little bit more. Vascular Closure, Transfusion kind of came in above our expectations. Hemostasis a little bit behind. But could you maybe go into that segment a bit more? You talked about utilization in TEG and pricing being embedded in North America, but you had a challenging European comp, but maybe just parse out what that national tender might have cost in terms of growth?

Chris Simon, CEO

Sure. To start with the overall view, this business continues to perform well, achieving a 15% growth in the quarter, which indicates a strong and lasting trend that has allowed us to confidently raise our guidance for the year. Looking at the four product segments, Vascular Closure is the fastest growing. As mentioned earlier, it has nearly a $3 billion total addressable market, and our current performance is enhancing our penetration into existing U.S. hospitals and bringing new hospitals into our program. We have made significant investments in fellows programs, and those are starting to yield results. This is the main reason for our increased revenue guidance for the year. In terms of Hemostasis management, we faced a tough comparison in the first quarter, which we anticipated. This is due to the European tender and capital sales. However, we've generally fared better than some other medical technology companies regarding procedure rates and hospital staffing. We've been in a solid position for the most part. The challenge we’re facing is with the overall capital appropriations process, which is complicated for many hospitals as they navigate the current macro environment. When dealing with capital sales in the range of a few million, delays from one quarter to the next pose extra challenges. There's a lot of ground to cover this year, but we are confident that Hemostasis management will meet its targets. Cell Saver was flat, as that market has fully recovered. We will grow with the market and aim to capture a larger share, but it's a more mature segment. Interestingly, Transfusion benefitted in terms of order timing from delays in the fourth quarter, resulting in a growth of 20% or 21%, which we are pleased with. They have ambitious goals for the year, and we believe they will achieve them. It’s encouraging to see them contributing to our overall performance. Overall, we feel optimistic about our direction, despite the ups and downs.

Drew Ranieri, Analyst

Great. Thanks. And just to maybe go back to your commentary out of the Analyst Day. I mean, Chris, you were very adamant that you're going to see growth in fiscal 2024 on the top and bottom line. Your guidance for this year it's going up. Do you feel confident or even more confident that you'll be able to grow next year given kind of the higher base for 2023? Thank you.

Chris Simon, CEO

Yes, thanks Drew. When I look at that collectively, we are essentially measuring the non-CSL Plasma growth rates, the trends we're now experiencing, if we continue those that's even better than we had thought about in terms of earlier attainment of some of the long-range plan goals, which is great and will certainly help '24. Hospital continuing to do what it does as it advances as not only the fastest growing, but soon to be the largest business within Haemonetics is a real positive as well. And then we can't control the macroeconomic factors. So that's going to be what it's going to be. But we continue to invest in our operational excellence program that's creating meaningful improvements in our productivity. A lot of that is getting invested back in the business. But we are looking at those investments this year, over the remaining three quarters with an eye towards accelerating those things, those investments that can help us come out of the gate even stronger in FY '24. So, in short, yes, I think we are every bit as confident, maybe more so in our ability to grow each year, top and bottom line over the life of this plan.

Operator, Operator

Our next question comes from Andrew Cooper with Raymond James. Your line is open.

Andrew Cooper, Analyst

Hi, everyone. Thanks for the questions. Maybe first just back on Plasma and sort of the expectations through the course of the year. And I think in the past, you've historically said, the seasonal move from 1Q to 2Q was in that sort of high single-digit, maybe 8% type range. Just curious what you're thinking there and how we should be thinking about the pacing of CSL potentially having an impact versus what we would normally see in the U.S. plasma market?

Chris Simon, CEO

There are clearly big shifts underway. The pace of new center openings, and the uptake of those centers, the pace is unprecedented. And that's where our customers have been highly consistent. If they tell us they're going to open a dozen new centers, they open a dozen, maybe 13 or 14, right, and but they've really done a fantastic job of leaning in and hitting their mark in terms of those centers. And interestingly, even through the worst of the pandemic, the new center uptake pretty much fits the model that we've developed with our customers in terms of year one, year two, and year three growth on their way to maturity. So that's all there, it's just a much larger portion of the total volume now because they're opening more new centers and have for the last 2.5, now 3 years. So that piece is a little different structurally, but exciting. We think in terms of the mature centers and the relative seasonality, that'll continue. And our guidance reflects what our customers including CSL have told us about their internal plans in transition, et cetera. So, that's factored in and that hasn't changed from what we talked about last quarter, which was a good quarter for plasma as well or at our Investor Day in terms of our expectations about transition, et cetera.

Andrew Cooper, Analyst

Okay, great. Super helpful. Maybe just one more on Plasma. You mentioned that you're only including what’s already signed or contracted for Persona. Can you give us an idea of the proportion of the U.S. install base you have on Persona, what percentage you have agreements for, and how we should consider the pacing of the rollout of that tool throughout the year and into 2024 as well?

Chris Simon, CEO

Yes, as we've said, previously, Persona is a game changer. We're talking about 10% to 12%, additional Plasma yield, on average, for a collection, which is based on an algorithm that ties to the individual donor's percent plasma available. And we're building a robust database, certainly now more than 5 million collections on Persona, real-world evidence that we believe over time we will show that it's not only a step change improvement in yield, but also a safer collection for all donors involved. And we'll build that database one collection at a time. But we think based on the scientific reviews that we've done and done with our customers, there's a strong case to be made there. In terms of where we are on the rollout, I'd rather not go through the specifics of it, Andrew. I know you can appreciate that. But we're rapidly approaching a point where more than half of the collections that we're experiencing in the U.S. it is unique to the U.S. market. More than half of those collections will be done on Persona, and that's included in our guidance for the year.

Andrew Cooper, Analyst

Great. Appreciate the question. I'll jump back in the queue.

Operator, Operator

Our next question comes from Mike Matson with Needham & Company. Your line is open.

Mike Matson, Analyst

Yes, good morning. Thanks for taking my questions. So I suspect you're not going to break out the amount of sales that went to CSL in the quarter. But was there any sort of bolus out of that $88 million in the first quarter? And how should we expect that to kind of be spread out to the remaining quarters? Is it going to be pretty even throughout the year?

Chris Simon, CEO

Yes, Mike, I've been and I know you know the sensitivity on that. Appreciate you acknowledging it upfront. No, CSL has done a good job of forecasting their demand through the first quarter. So the performance in the first quarter was exactly what we anticipated. From CSL, there's some vagaries because of prior buy-ins, et cetera. But it's exactly what they forecasted. In our revenue guidance for the year, we've made no change to the previously communicated $88 million in revenue. That's the minimum commitment from CSL. So that's where we stand as of now.

Mike Matson, Analyst

Okay, I understand. From a high-level perspective, you experienced impressive revenue growth, and earnings per share exceeded expectations. However, there wasn't significant leverage this quarter despite the strong top-line performance. I assume this was primarily influenced by macroeconomic challenges, but I wanted to confirm if that is the correct interpretation.

Chris Simon, CEO

Yes, I’ll share my perspective on this. James discussed the details of our profit and loss statement and the clear challenges we face due to inflation. The foreign exchange situation is new and significantly impacts our original guidance, alongside some pressures, including positive aspects like performance compensation. When we take a step back, we aim for accelerated revenue growth, which you’re beginning to see, as well as an increase in operating income margins. However, we must be aware of macroeconomic factors, as James mentioned, and I could also add supply chain disruptions. We have managed to handle those effectively, but it comes at a cost, along with geopolitical risks that we cannot control. China and Russia are significant markets for our Blood Center business, which is also a factor to consider, along with general market dynamics. We don’t operate the collection centers, and hospital procedures depend on patient availability, which is outside of our control. Our teams have risen to meet these challenges and will continue to do so. I feel confident about the additional performance-based compensation we’re providing as a result. However, considering what we went through during the pandemic, Mike, I think you’ll understand if we are hesitant to declare a definitive turnaround just yet regarding what ultimately comes to fruition.

Mike Matson, Analyst

Yes. No, that's very helpful. Just on the performance comp, I mean, if that's something that would continue, if you continue to have strong performance with that, continue to flow through it every quarter or is it kind of more loaded into the first quarter or?

Chris Simon, CEO

No, it would flow through somewhat ratably over the remaining quarters is the way the accounting works for.

Mike Matson, Analyst

Yes. Okay, got it.

Chris Simon, CEO

It's an interesting dynamic, Mike. Our expenses are fairly consistent throughout the year. However, because of seasonality and the significant growth we're experiencing in both the collection and hospital procedure businesses, as revenue increases, the costs remain relatively stable. Additionally, we've made adjustments to our compensation structure as part of our long-term plan, emphasizing revenue over profit, with both being considered in the short term. The long-term goals are closely aligned with shareholder returns, and this also influences our approach. We're not going to hold our teams accountable for foreign exchange or adjustments impacting EPS; they are performing well, and we are pleased to reward their efforts.

Mike Matson, Analyst

Okay, got it. And then just one final one on the hospital business. I think everyone kind of understand what's going on with pricing in the Plasma business. But I want to ask about pricing in your hospital business. I think you called out you were getting favorable pricing there. But are you able to get any additional pricing, given what's happening with inflation, the fact that you virtually everything, prices are going up across the board and hospitals are probably a little more accustomed to that these days.

Chris Simon, CEO

Yes, you're exactly right, Mike. We are looking carefully at that and have factored some of it into our original guidance. We've revised some of that based on our current market experiences. There are challenges associated with it. I would say the hospital business, like Plasma, is benefiting from a favorable mix, with more high gross margin products such as VASCADE and Hemostasis being key growth drivers. Additionally, we have made strides in operational excellence to lower our cost of goods sold and benefit from the pricing you've mentioned. On the other hand, we are continuing to invest, including investments from last year that have not yet fully annualized. Therefore, the cost base, especially on the sales side, will increase, and we are comfortable with that. We are making significant investments. The operational excellence program is freeing up funds that allow us to engage in R&D and sales force expansion, which we believe is crucial for driving growth over time, and we expect improvements from here.

Operator, Operator

Our next question comes from Joanne Wuensch with Citi. Your line is open.

Unidentified Analyst, Analyst

Good morning. This is Anthony speaking for Joanne. Thank you for taking our question. I wanted to follow up regarding the hospital. With the updated guidance, does that include any new indications for TEG or VASCADE this year, or are you seeing improvements mainly through deeper utilization and penetration? Thank you.

Chris Simon, CEO

Anthony, the primary drivers are as we said, it's really is VASCAD. And I'm saying VASCADE for shorthand. It's mostly VASCADE MVP in the electrophysiology space, right. And that growth what we're factoring in is exclusively U.S new and existing accounts adopting the therapy. We are aggressively pursuing additional indications. We are aggressively pursuing market expansion into Europe and parts of Asia as well. So more about that when it comes. We tend to be pretty conservative about not factoring those items in because we don't control them. If they are meaningful, we'll talk about that at the time. But for what we've guided across all four segments as I outlined earlier, it's really what we have in hand and what we believe we can deliver from where we sit with the normal puts and takes around procedure volume and challenges in China for example with lockdowns and such. But all in all, we feel good with what we can see and what we can deliver against that.

Operator, Operator

Our next question comes from Michael Petusky with Barrington Research. Your line is open.

Michael Petusky, Analyst

Hey, good morning. Great pivot from Investor Day to such a great quarter. Congrats. So a quick question going back to Plasma. Do you guys have an assessment or does the Plasma fractionator is having assessment of sort of how badly sort of the college student donation, part of their business lagged for the past couple of years. I'm just wondering if there's an opportunity with students going back here the next couple of weeks, if there's an opportunity sort of incremental that people aren't maybe completely thinking about. I suspect college is basically completely normalized at this point relative to the past couple of years. I know what certainly improved last year, but any thoughts on that?

Chris Simon, CEO

Good morning, Mike. Thanks for the question. Thoughtful, as always. College is one of a half a dozen sub-segments we look at, right. We talk about borders, we talk about large urban centers, we talk about smaller metropolitan areas, we talk about suburban areas, we talk about military installations close to a military base. Across the board, they are in recovery. College is certainly participate. They are not back to where they were pre-pandemic. And college is closer than some other segments, but they're not leading the way and they're not there yet. We do think, as we talk to customers extensively about their forecasts that the recovery in college is factored in. But it's a modest segment relative to the total and it is underway, but I think it's going to take a bit longer to get back to pre-pandemic levels in those mature centers.

Michael Petusky, Analyst

Okay. And just, I guess, another one then on Plasma. And I felt like you really spoke to this well at the Investor Day, but I'm not sure. This is a concern we hear constantly and I'd love for you to sort of speak to this on this conference call. In terms of the potential competitor, Chris, can you just talk about at a high-level, what you think your ability in terms of being able to compete going forward with a potential competitor in the market, and just any thoughts around that? Because that is probably the number one thing that we hear as far as concerns around this company as an investment idea? Thanks.

Chris Simon, CEO

Yes, it's completely understandable, Mike. I think there are lingering effects from two years of the pandemic and previous changes in market share. When considering your goals in Plasma, we focus on three factors: volume, share, and gross margin expansion. Regarding volume, we've broken that down clearly in this quarter and our future guidance. Although we don’t provide specific gross margin figures at the corporate level or for individual business units, it's important to note that having a record gross margin in this quarter indicates that our largest business is performing well. This reflects the real value of our technology and the growing enthusiasm among customers to adopt it and replenish their depleted inventories. When we discuss market share, we emphasized at our Investor Day that we are currently the industry leader and will maintain that position no matter when CSL completes its last shipment. Our commitment to defend our leadership includes providing excellent customer service and support. Throughout the various challenges of the pandemic, we have fulfilled every order for our Plasma customers while continuing to innovate. Nila highlighted during the call that based on comprehensive customer feedback, we focus on yields, speed, compliance, and donor set. We are continuously improving, and our customers recognize the value of our superior technology. We are optimistic about expanding our market share as we pursue our long-term goals both domestically and internationally.

Michael Petusky, Analyst

Perfect. Thank you.

Operator, Operator

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

David Turkaly, Analyst

Hey, good morning. Maybe it's a quick one on the buyback. That seems like a sizable one. I think it might give you the shadow buying back 10% of the company over time, based on where we sit today. But I love your thoughts on capital allocation, stock under 70 here. What we should think about sort of from a timing standpoint?

Chris Simon, CEO

Thank you for the question, Dave. Yes, we view this as a significant buyback and a commitment on our part. In the context of what we shared during Investor Day, we discussed generating around $2.1 billion in capital over our projected timeframe, which represents a considerable portion. However, it still allows us to concentrate on two primary drivers of organic growth and invest in some of the technologies we're currently developing. Additionally, we are looking at inorganic growth through mergers and acquisitions. This decision was essentially about finding a balance. Considering the current price and the dilution we've experienced over the past couple of years, it made sense to allocate part of our capital capacity to share buybacks. Regarding timing, we have a three-year window. We'll be strategic, monitoring our stock price and comparing it with other opportunities, and will take action accordingly.

David Turkaly, Analyst

Thank you for that. At the Analyst Day, you mentioned the capacity investments, indicating a goal of a fivefold increase in the coming years and referenced a new facility in Pennsylvania. When considering these figures, it seems this will enable the hospital to better address its total addressable market, especially since it is currently under-penetrated. Is that the intention behind such investments?

Chris Simon, CEO

Yes, there's a couple parts to it, Dave. Let me clarify the 5x. So today, based on our cash on hand and free cash flow and et cetera, we have about $400 million of capacity to put to work however we choose to. Over the life of this LRP, the long-range plan in the next 4 years, that increases fivefold to the $2.1 billion that James just highlighted. And we assume within that, that we're going to fund all of our organic growth, which includes not only increasing our footprint on the commercial front here in the U.S. and internationally, hospital is a big part of that. But also our R&D projects and the things we're really excited about in terms of advancing our leadership. And yes, we've meaningfully invested in our global manufacturing and supply network. The new facility in Pittsburgh is actually in Clinton, Pennsylvania, is part of that. We initiated full operations this past quarter. It is a state-of-the-art 200,000 square foot facility, and we think it'll be an important part of driving further increases in product quality as well as capacity to meet the growth that comes, that capacity is both Plasma and hospital. And we continue to invest against them to make sure we can be the business partner that we are and aspire to be over time with our customers in terms of reliability and the resilience, right? For the longest while, it was lean, lean, lean. I think we may have been a little ahead of the curve in emphasizing agility and resilience. And we're seeing the benefits in our current performance as a result.

Operator, Operator

Next question comes from Anthony Petrone with Mizuho. Your line is open.

Anthony Petrone, Analyst

Thanks, and congrats on a good quarter here. I'll have a couple on Plasma and follow-up with the hospital. So Chris, on Plasma, you mentioned the border centers, just maybe a quick update there. And as we look at the long-range plan, is it safe to assume that for the bulk of the long-range plan, the border centers will potentially be at a steep discount for the good part of that horizon. And then the follow-up on Plasma would be when you look at sort of the performance of past couple of quarters, how much of what we're seeing is fractionators meeting real-time demand versus building safety stock? And I'll have a couple of follow ups.

Chris Simon, CEO

So, Anthony, it's great to have you back in this discussion. Regarding the Plasma collections along the border, we aren't directly involved in that area. Some of our largest customers operate most of those centers, and their legal and regulatory teams are working diligently on the matter. They are somewhat optimistic, leaning more towards optimism. We will be ready to support them once the borders start to recover, although that hasn't occurred yet. In this market, changes tend to happen slowly. These centers have largely been inactive, so they will need to re-engage their donors. The current economic conditions, as I mentioned earlier, are quite favorable for that, but it will take time. Our customers will update their forecasts accordingly. We did not anticipate a significant recovery along the border in this fiscal year. Regarding Plasma volumes, we lack full visibility. We analyze the situation closely, and there's substantial evidence that during the lowest points of the pandemic, our customers had to significantly use their existing frozen Plasma inventories to meet the demands of fractionation and their customers. They have done everything possible in that regard. Our long-range plan indicates that it will take several years for them to drive the recovery. From our discussions with them, we don't foresee them reducing their efforts in incentivizing donors or opening new centers anytime soon. This gives us confidence that this recovery will differ from previous temporary recoveries we mentioned earlier. However, they still have a considerable distance to cover to rebuild inventories. A significant event like the pandemic leaves a lasting impact, and I believe we will all reconsider what appropriate inventory levels are for reliably supplying our customers in the future.

Anthony Petrone, Analyst

That's helpful. I have two follow-up questions. First, regarding hospitals, Chris mentioned a commercial effort involving 600 key accounts in the U.S. during the Analyst Day. Can you provide an update on how many of those targeted 600 are currently active users of MVP and/or VASCADE? Second, for Jim, when considering the adjusted operating margin target for 2026, which is in the high 20s compared to our current level of around 17%, how much of that outlook considers ongoing inflation and potentially adverse currency conditions? Thank you.

Chris Simon, CEO

Yes. Let me start with the targeting for VASCADE and MVP. MVP is the clear leader in electrophysiology. As Stew mentioned, we are engaging with 600 accounts, and we began the year approximately halfway through that list, actively working to add new accounts. We are prioritizing the largest and most influential accounts first while also focusing on enrolling the remaining accounts. MVP is a key driver in this initiative, and we are optimistic about its progress. In the near term, the primary performance driver is increasing utilization. When introducing a notable offering to the market, it's crucial to ensure sustainability and repeated use, which we are experiencing. This is the main factor allowing us to raise our guidance. Additionally, the VASCADE and MVP sales team works together, engaging with interventional cardiologists where VASCADE is prominent. One positive outcome of expanding our sales force is that individual representatives now have more time to converse with interventional cardiologists and their teams, which benefits VASCADE. There were some challenges this quarter due to contrast media affecting the number of procedures performed by interventional cardiologists, but this issue is mostly resolved. We anticipate that VASCADE will gain traction in interventional cardiology as the year unfolds. James?

James D’Arecca, CFO

Yes, Anthony. Regarding your question about the operating margin, let’s start with inflation. We don’t expect prices to drop back to pre-pandemic levels. Instead, we anticipate maintaining higher price levels for the next few years, with a projected moderation of about 10% per year in 2025 and 2026. Essentially, we predict that the elevated price environment will persist throughout our projection period, although there may be some gradual easing over time. As for your second question on foreign exchange, our plan incorporates the rates that were in effect at the start of this calendar year. The dollar appreciated significantly during the first quarter of the year, marking a substantial shift in a short period. Therefore, our rates are based on the conditions from earlier this year. If the dollar strengthens further, it could benefit the operating margin, but if it worsens, it might negatively impact it, although we have seen some recent stability in certain foreign currencies against the dollar. That’s the current situation. After we complete our strategic planning process this year, we will adjust all rates as necessary.

Anthony Petrone, Analyst

Thank you.

Operator, Operator

There are no further questions. I would like to conclude the program, and you may now disconnect. Everyone, have a great day.