Earnings Call: Q2 2020

Nov 1, 2019

Ladies and gentlemen, thank you for standing by, and welcome to the Haemonetics Second Quarter 2020 Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Olga Gayet, Investor Relations. Please go ahead. Good morning. Thank you for joining us for Haemonetics' 2nd quarter fiscal 2020 conference call and webcast. I'm joined today by Chris Simon, our CEO and Bill Burke, our CFO. Today, we'll discuss our second quarter and first half fiscal 2020 results. All revenue growth rates are on an organic basis and exclude impacts from currency, product and supply decisions and divestitures. Our remarks today will include forward looking statements and our actual results may differ materially from anticipated results. Information concerning factors that could cause results to differ is available in the Form 8 ks we filed today and in periodic filings that we make with the SEC. This morning, we posted our 2nd quarter and first half fiscal 2020 results to our Investor Relations website. We included updated fiscal 2020 guidance and posted analytical tables with the information we will refer to on this call. I would like to remind everyone that consistent with our best practices, we have excluded certain charges and income items from the adjusted financial results and guidance. Details and excluded items, including comparisons with the same periods of fiscal 2019 are provided within the Form 8 ks and have been posted to our Investor Relations website. Additionally, our press release and website include a complete P and L, balance sheet, summary statement of cash flows as well as reconciliations of our reported and adjusted results. And now, I'd like to turn it over to Chris. Thanks, Olga, and good morning, everyone. Haemonetics delivered strong second quarter results and a positive first half fiscal 'twenty performance as we continue to accelerate revenue growth and improve profitability. Our teams grew revenue by 8.6% in the 2nd quarter and 8.3% year to date. Our innovation agenda is propelling us with the launches of Nexus, the TEG-6s trauma indication and platelet mapping cartridge and SafeTrace Tx. Today, we are reaffirming total company organic revenue guidance of 6% to 8%. Improvement in operating leverage led to 2nd quarter adjusted earnings per share of $0.87 up 55% from the prior year quarter and up 45% in the first half. Complexity reduction, operational excellence, pricing and the transformation of our product portfolio are driving higher margins. Adjusted operating income margin expanded by an additional 5.30 basis points year to date due to improvements in our business and disciplined spending. Bill will provide more detail, but overall, we are proud of the work our teams are doing to strengthen our trajectory and we are increasing our adjusted EPS and adjusted operating margin guidance based on our positive first half performance. Let's talk about our business unit results and trajectory. Starting with plasma, revenue grew 14.6% in the 2nd quarter and 15.4% in the first half. North America accounts for about 93% of our plasma business and drives the majority of the growth. In North America, we grew 14.7% in the 2nd quarter and 16% in the first half with contributions from volume, mix and pricing. North America collection volume grew in the mid single digits and we were aided by NexSys PCS device premiums, pricing initiatives within our liquid solutions business and discrete items in software. Based on conversations with our customers and input from the recent PPTA Industry Forum, we forecast collection volume to increase to approximately 10% in the second half. Nexus is performing exceptionally well. Nearly 7,000,000 YES collections averaging 23 additional milliliters per collection have resulted in an estimated 160,000 more liters of plasma collected. The benefits are clear, yield enhancement, collection efficiency and donor safety and satisfaction. We are busy innovating the platform, PCS devices, DMS software, disposables and service to further strengthen our value proposition to safely and efficiently collect more plasma to meet the strong market demand for IgG. As noted, software was a positive contributor for us again this quarter. We have leading DMS market share and continue to convert and upgrade customers to NEXISLINK. We are excited about software's role in helping customers realize the full potential of NexSys and software strategic value for the Plasma business. We also benefited in the first half from price and volume increases in our liquids business. However, as expected, this business is under pressure from high volume, low cost liquids providers with aggressive pricing strategies. On an as needed basis, we will continue to offer liquids to our customers as part of a full plasma apheresis offering, but we expect our volumes to decline in this rapidly commoditizing market. We are bullish about the prospects for plasma and we remain confident in our fiscal 2020 plasma growth guidance of 13 percent to 15%. Moving to our hospital DU, revenue was up 10.1% in the 2nd quarter and 9.2% in the first half. TEG continues to be the primary growth driver in our hospital business, growing 16% in both the quarter and in the first half. The early stages of our TEG-6s U. S. Trauma launch have been encouraging with positive customer feedback and increased adoption. We continue to build clinical evidence and scientific exchange around our technologies. We recently shared the results of the TEG trauma comparison study that led to our FDA clearance with senior experts at the American Association For the Surgery at Trauma Meeting. The manuscript has been accepted for publication in the Journal of Trauma. TEG was recently featured in a JAMA Surgical Innovation Review, which notes that the technology could become part of routine practice to treat trauma induced coagulopathy. In the Q2, we also launched a TEG6S 4 channel platelet mapping cartridge, enabling us to offer hospitals one device for both overall hemostasis and platelet function analysis at the site of care. The self salvage market continues to experience downward pressure from declining transfusion rates and competitive pricing. Against this backdrop, CellSaver had low single digit revenue growth in the 2nd quarter, which while modest was an improvement over 1st quarter results. With increased focus, we expect performance to strengthen. Transfusion management grew robustly in the first half despite an uneven demand cycle for hospital management information systems. We are encouraged by the market opportunity and customer enthusiasm for our new product line. We are strengthening our sales execution capabilities and expect double digit growth powered by the recent full market launch of the next generation of SafeTrace Tx, a product we expect to become the standard in hospital blood lab management information systems. We continue to see hospital as a growth engine for Haemonetics. Our new global hospital President, Stuart Strong, is committed to tapping this market potential. We anticipate improved second half performance and we expect to deliver hospital full year revenue growth in the 11% to 13% range. In Blood Center, we saw a slight revenue increase of 0.2% in the quarter and a 1% decline in the first half. Apheresis grew 4.7% in the quarter and 1.9% in the first half. Performance was particularly strong as we benefited from favorable order timing and the long anticipated stabilizing of double dose collection rates in Japan. However, the benefit of order timing will likely reverse in the back half of the year. Our Blood Center Apheresis business continues to experience pricing pressure and as such, we anticipate revenue declines beginning in the second half of fiscal twenty twenty as certain customers convert to alternate sources of supply. We are assessing the situation and taking action to compete effectively while maintaining our margin objectives. Whole blood was down 5.7% in the quarter and 4.9% in the first half as transfusion rates continue to decline compounded by pricing pressure. We anticipate these factors to continue in the second half with additional impact from previously exited unprofitable business. In addition, Blood Center Software remains a challenging segment, largely tied to whole blood collections. We expect a full year revenue decline for Blood Center of minus 4% to 6%. In summary, we are pleased with our strong fiscal 2020 year to date results and the momentum our employees have generated. The company is fully on track and powering through its multi year turnaround. We remain committed to driving profitable growth and to create enduring long term value. We expect to deliver our fiscal 2021 aspiration of doubling fiscal 2016 adjusted operating income and quadrupling fiscal 2016 free cash flow before restructuring and turnaround. Thank you. I'll now turn it over to Bill. Good morning, everyone. Chris has already discussed revenue, so I will start with adjusted gross margin, which was 52.6 percent in the 2nd quarter, improving 4.40 basis points over the Q2 of fiscal 2019. This expansion reflects benefits from improved product mix, pricing and productivity savings related to both our complexity reduction initiative and operational excellence program. We continue to have higher depreciation related to both NexSys device placements and expansion of our plasma production capacity that offset some of the improvements. Adjusted gross margin in the first half of fiscal was 51.9%, improving 420 basis points from the prior year first half with essentially the same factors influencing results as in the Q2. Adjusted operating expenses in the Q2 of fiscal 2020 were $75,000,000 a decrease of $2,000,000 or 3% compared with the prior year Q2. We continued to realize productivity savings and had lower research and development costs, which were partially offset by investments in sales and marketing, particularly in our Hospital segment as we continue to expand our sales organization. Adjusted operating expenses in the first half of fiscal twenty twenty were $147,000,000 an increase of $2,000,000 or about 1% compared with the prior year first half, as sales and marketing investments and higher performance based compensation were partially offset by productivity savings and lower research and development costs. As a percentage of revenue, adjusted operating expenses both in the second quarter and in the first half of fiscal twenty twenty were 29.8 percent of revenue, down 230 and 100 basis points respectively. 2nd quarter fiscal 2020 adjusted operating income of $58,000,000 increased by $19,000,000 or 49% compared with the prior year second quarter. In the first half of fiscal twenty twenty, adjusted operating income of $109,000,000 increased by $30,000,000 or 37% compared with the first half of fiscal twenty nineteen. Adjusted operating margins were 22.9% in the 2nd quarter and 22.2% in the first half of fiscal twenty twenty, an expansion of 680 basis points and 5.30 basis points respectively. This expansion primarily came from a combination of improvements pricing, product mix and savings realized within our cost of goods sold. We remain confident in our company wide efforts to improve our operating performance and raise our adjusted operating margin guidance for fiscal 2020 to a range of 21% to 22%. The tax rate contributed favorably to our Q2 fiscal 2020 results as our adjusted income tax was 14.7 percent or 2 70 basis points lower than the Q2 of fiscal 2019. The first half fiscal twenty twenty adjusted income tax rate was 12.7% or 500 basis points lower than the same period of the prior year and was due to higher share vestings and option exercises. Our second half adjusted income tax rate will be less impacted by these benefits and is expected to be similar to the full year adjusted income tax rate from fiscal 2019. Our 2nd quarter fiscal 2020 adjusted earnings per diluted share was $0.87 compared with $0.56 in the prior year 2nd quarter, an increase of $0.31 or 55%. First half fiscal twenty twenty adjusted earnings per diluted share was $1.67 compared with $1.15 in the prior year, an increase of $0.52 or 45 percent. Our adjusted earnings per diluted share included a $0.02 net benefit in the 2nd quarter and a 0 point 0 $7 net benefit in the first half of fiscal twenty twenty from the lower adjusted income tax rate and reduced share count, partially offset by higher interest expense. This net benefit is not expected to repeat in the second half of fiscal twenty twenty. Based on the strong performance in the first half of fiscal twenty twenty, we are raising our full year fiscal 2020 adjusted earnings per diluted share from our previous guidance range of $2.95 to $3.15 to be in the range of $3.10 to $3.20 Given this revised fiscal 2020 guidance, implied adjusted EPS growth in the second half will be in the range of 15% to 23%. In the second half of fiscal twenty twenty, we anticipate accelerating revenue growth in our hospital business driven by new product launches in TEG and transfusion management and the completion of our latest sales force expansion. We expect total company revenue and earnings growth to be lower in the second half of fiscal twenty twenty as compared to the first half of fiscal twenty twenty, largely impacted by 4 factors. First, based on the assumptions included our revenue guidance, the NexSys pricing premiums as well as software pricing will fully anniversary in the second half of fiscal twenty twenty and therefore will have a lower impact on our year over year growth rate. This also implies the majority of the plasma revenue growth in the second half will be driven by improvements in volume as forecasted growth in North America collections volume improves to approximately 10%. 2nd, we expect to see declines in our liquid solutions business later this year as we made a strategic decision not to compete on price with low cost, high volume providers in a rapidly commoditizing market. 3rd, our Blood Center business benefited from favorable order timing and pricing initiatives within our MAPFREZYS portfolio that limited the first half revenue decline to 1%. These benefits will likely reverse in the second half and growth will also be impacted as a few of our customers convert to alternate sources of supply. And finally, we had a $0.10 favorable impact from our income tax rate as we realized benefits from increased share vestings and option exercises, which are not expected to repeat in the second half of fiscal twenty twenty. In line with our revenue guidance that Chris reaffirmed this morning, we are on track for another year of strong organic growth and income performance. Free cash flow before restructuring and turnaround costs was $31,000,000 in the first half of fiscal twenty twenty compared to $21,000,000 in the first half of fiscal twenty nineteen. We had a working capital cash outflow of $29,000,000 in the second quarter $92,000,000 in the first half of fiscal twenty twenty. Contributing to the increase in working capital was higher inventory, which included the continued manufacturing of NexSys devices and a build in our disposable safety stock levels. We also had a decrease in accrued liabilities related to the performance based bonus, the timing of payments to our offshore service provider and other miscellaneous items such as accounts payable and prepaids. Offsetting these two increases was a decrease in accounts receivable driven by collection timing. In the Q2 of fiscal 2020, we entered into an accelerated share repurchase agreement to buy back approximately 400,000 shares for $50,000,000 Coupled with the buyback we did in the Q1 of fiscal 2020, we have purchased over 1,000,000 shares for $125,000,000 at an average price of $119 per share under the current share repurchase authorization. We finished our first half of fiscal twenty twenty $112,000,000 of cash on hand, a decrease of about $57,000,000 from fiscal twenty nineteen year end. We are pleased with the results in the first half of fiscal twenty twenty. We continue to allocate resources into growth areas of our business and the investments made are generating appropriate returns, while our productivity programs are enabling expansion of our margins. Increasing leverage has enabled us to update our adjusted operating margin and adjusted EPS guidance for fiscal 2020. And now I'd like to turn the call back to the operator. Thank you. And our first question comes from Anthony Petrone from Jefferies. Your line is open. Hi, good morning. Thanks and congratulations on another strong quarter here. Maybe to begin with a few on plasma and then I'll shift over to cost. In terms of plasma, Chris and Bill, you mentioned this 10% growth rate is accelerating into the second half. And maybe just to sort of clarify how that comes about at the Plasma Business Forum. Our understanding, it's a long run average that the industry sort of commits to just based on their forecasting. So maybe just a little bit of clarity around that second half outlook, and I'll have a couple of follow ups. Sure. Anthony, it's Chris. Thanks for the question. So as we called out in our prepared remarks, first half collection demand was mid single digits. I'm proud of the team working hard with a combination of liquids and software to close the gap for our original forecast, and we did that quite well, which contributed to the strong first half. We anticipate, based on the long term modeling that we've done, and we've gone back and looked at this now over the course of a decade, as well as the conversations we had with each of our customers as recently as 2 weeks ago at the PPTA forum. World Needs More Plasma. They're amping up their collection activities. They work against some challenges in the marketplace in terms of a strong economy that makes it difficult to get donors through the door. But they're taking the actions they need to take and we'll be ready to meet that, which is why we think the second half will trend more towards that 10% collection volume. The follow ups here would be all of the collectors have committed to new center construction and those are coming online at various different rates. So maybe just what are you seeing in terms of new center construction? What is the unitix win rate at those new centers? And to what extent is NexSys being placed at those new centers? And then the last one will be on cost. So on the new center rates, it varies from one customer to the next. They each have different priorities. Some have chosen to grow through acquisition, others grow strictly through organic, and there's lots of combinations there in what I think a 10% rate is consistent in terms of the number of new centers. So if you think we're in 800 plus centers now, you're going to see something in excess of 50 new centers opening this year. It could be many as 100, just depending on how quickly they can get their plans together. With regards to the new centers, in all of our contracts, they're governed by the existing agreements. So where we have exclusivity, all the new centers are opened today. If that's with Nexus, they open with Nexus. If it's with the PCS II, they open with PCS IIs. Okay. That's helpful. And last, just on cost, obviously, the margin better sequentially, better year over year. There's now 2 cost reduction programs. Bill, can you just clarify the savings we're seeing so far? Is this still the 1st program? Or are you starting to see the 2nd program actually roll in as well? Thanks again. Yes. Thanks, Anthony. So on the cost programs, we are on the first program, which was the complexity reduction initiative, We had committed to $25,000,000 to $30,000,000 of additional savings this year with a third of those savings dropping through to operating income. And we are seeing that. We are achieving those numbers. So it's part of the operating margin expansion is due to that. And then last quarter, we announced the operational excellence program, and we are seeing some early savings related to that program, too. So they're both contributing nicely to our overall margin expansion. Thanks. Thank you. Our next question comes from David Lewis from Morgan Stanley. Your line is open. Good morning. Just a few questions for me. Maybe I'll just starting with you picking up on margins, obviously another second quarter of kind of significant margin improvement. If I think about the guidance into the back half, operating margin guidance stepped down almost 2 points second half versus first half. Just trying to understand why what are some of the drivers sort of behind that as we think about the back half of the year? So our year to date operating margin is at 22.2 percent and we're guiding 21% to 22%. So on an average basis for those 1st 6 months, we're pretty close to the range. But we are seeing we are anticipating that in the second half, we might revert a little bit closer to where we were in the Q1. But there's no overall deterioration. Longer term, we still see these individual programs that we're running contributing to the expansion. Okay. But there's no discrete spending items you can sort of address in the back half that would drive that? Well, we have we continue to invest in the hospital sales force. And during the first half of this year, we were ramping up the sales force. And in the back half of the year, we have that entire expansion complete. So we do see a little bit more spending in the second half related to the expansion. Okay. And then Chris, I wanted to come back to plasma market growth because the commentary you're making stands slightly different than what some of the larger plasma players are saying in terms of what they're seeing in their core businesses. We've seen basically acceleration out of CSL and Grifols here in the most recent period. So I was just going to flush out a little more what you're specifically you're saying. Obviously, there is a book to bill or a lag time between sort of finished product and collected product. Are you talking about sort of the difference in these two things? Because I just want to be very clear about what you're saying about collections versus what they're saying about demand and finished product growth? Yes. I appreciate the question. It is a complicated supply chain that passes from collection and cold storage to fractionation and refinement and ultimate distribution to the end markets. And there's meaningful lags over that process, which can be in excess of a year from start to finish. What we are seeing, we fully understand and buy into the long term market demand, and we just take those projections directly from our customers. We've had we've retained 100% of our share in the North American sourced plasma market. There's no change in share or apportionment there. What we are seeing is the reflection that as they expand to new centers, new centers are less productive for a period of time. As they grow through acquisition, you have your normal integration challenges and the unevenness in collection volumes there. And I think they face the additional headwind of a very robust economy, which, as I said, makes it more challenging to get donors through the door. In the conversations we've had, when they lay out their And then the hospital business, your biggest acceleration this quarter was in segments of the hospital business. Any one time dynamics you'd call out there, Chris? And I'm just curious the sustainability of that kind of improvement in hospital into the back half of the year. Thanks so much. Sure. So we're very bullish on hospital, and we actually see hospital driven primarily by TEG. We've had the benefit now some real success with our innovation agenda in R and D. We have TEG success trauma indication in the U. S, which is came through quickly and has led some real uptake there that has us quite bullish. We have a platelet mapping cartridge, 4th channel cartridge, which lets us compete broadly at the site of care, which is the only product that can do that and we're seeing the benefits. And we're rolling against that. We have the benefit of the sales force expansion, which has really started to come into its own. The combination of those factors are driving PAG. We also see with SafeTrace Tx and BloodTrack, our transfusion management software services offering in hospital blood banking, we're having some real uptake there. Hospitals are going through a meaningful overhaul of their enterprise support systems. We're participating nicely in that. And I think that will continue to accelerate. It's chunky because it's tied to capital expenditures and such, but we're building out our capabilities, and I think that will propel us. Self salvage was a little bit of a lagger on that regard. Thankfully, we got it back on the positive this quarter, but we look at that business and we look at what we're doing there, and we think, again, purposeful execution can drive acceleration in the back half of the year and that's what we're counting on. Thank you. Our next question comes from Lawrence Klush from Raymond James. Your line is open. Good morning. This is John on for Larry. If we could start on Nexus, Chris, perhaps if you can give us an update on the real world data on the use of Nexus supporting the economic argument. Just an update there would be great. Thanks, John. So be great. Yes. Thanks, John. So rapidly approaching 7,000,000 collections. And the basic math on that and what we said in the prepared remarks at, on average 23.1 milliliters per collection, there's a range, obviously, it can be 18 up to 30 additional per depending on the weight of the donor. But on average, 23.1 multiply that out and we're cresting 160,000 additional leaders provided for the customers using NexSys. That's really the first dimension of that value proposition yield. Those customers have sped up. They're doing result. We know, because of the paperless interface that these collections are more compliant and it's more easy. It's easier excuse me to demonstrate that compliance to the regulatory authorities or to your own teams. So it is both better and safer, and we're hearing that from donors in terms of ongoing exit surveys. They enjoy the experience. It's just a better environment to donate plasma. And so we feel very confident that with 7,000,000 collections that our value proposition is being affirmed. Great. And then just on the IG shortage, specifically in the U. S, in your viewpoint, we've heard different things. Is it a fractionation capacity issue? Or is it more of a collection issue? Or are there some other factors we should consider? So we don't have any reason to believe it's a collection issue. What we observe in the market, and it is more of an observation because we don't participate directly in this aspect of the supply chain is very much at the end of the chain and it has to do with contracts and individual business being won or lost and having some imbalances of supply across supply chain or across manufacturers. And there's a long history of this playing out in the industry when there's just this higher level of demand. There's always going to be some frictional gaps that need to be covered. The industry has done a great job of responding to those in the past. I'm sure they'll do so here. And then last one for me. Just on Whole Blood, that business has checked a little bit better than we were expecting in the quarter. It's also our sense in talking to industry experts in that space that the transfusion rate in the U. S. Is starting to stabilize maybe a little bit more than even previously. So what's your viewpoint there? I think fundamentally, our viewpoint is unchanged. We observed that same flat towing. Again, you have variability East Coast, West Coast, it becomes actually quite local and quite specific to the individual markets in terms of blood supply and availabilities. That said, we look at the U. S. At roughly 33 or 34 transfusions per 1,000 in the population in comparison to Canada, to Europe, to what we see in Japan or Australia, and we see the rate is going to continue to come down. The market will be continued to challenge. We're pleased with what our team is doing to hold their own there, but we don't see a reversal on the long term systemic decline in the rate of transfusion and therefore the price pressures and the compression overall that that market is going to experience. Okay, great. Thank you so much. Thank you. Our next question comes from Dave Turkaly from JMP Securities. Your line is open. Great. Thanks. You mentioned the sales force expansion in Hospital. I was wondering if you could put that into context how big that force is and how many you're adding or maybe a percent that you're increasing. And I know in the past we've talked about the capacity to do acquisitions there. Wondering if that's still the case, maybe an update on if there's something that you could add to that portfolio as well? Yes. Dave, it's Chris. Thanks for the question. In terms of the sales force expansion, I feel quite good about what we're doing there. That's roughly a 50% expansion off the current base and it comes in different flavors. We have both your traditional sales reps, we call them sales managers. We've built that base out. We feel we have a good overall coverage now of the target market in North America. And we are still building out behind them with our clinical representatives who basically are in the accounts once capital has been placed, educating and advancing the state of care in terms of the use of the actual TEG devices. So that expansion is still underway. We're still hiring out. And I think for us, particularly with a new global hospital business unit president in Stuart Strong. I think we now have the ability to apply the learnings from North America. It will look different country by country throughout the world, but we do have a broad spectrum of use for TEG. And I think what we've learned about this model and its advancement here in the U. S. Will apply in variations, of course, but will apply more globally. We're excited about getting after that here in the second half of this year and beyond. The M and A acquisition agenda will also fall not only to myself but to Stu. And together, we intend to get after that to help build out this portfolio and stay relevant. Got it. And then I missed some of the early part of the call, so I apologize if you discussed this. But we're 2 quarters into the fiscal year, you've raised your guidance twice. And I know you had said that guidance is based on contracts signed to date. I mean that we're looking at some of the cost savings and the benefits coming through. But can you comment on I mean, have we seen significant new customers come on board? Or is this kind of more your programs coming through driving the upside and those are still largely to come? Yes. So there's been no new contracts and we don't we haven't changed our position that we won't include contract We see a return to robust collection rate in the second half of the year that will allow us to stay within our guidance range. In terms of the actual customers and conversion, what I would say is, and I'll steal a page from Blue that our Bill's talk track on this. He's come up with our own version of the 4 Ps, which is priorities, proof, price and a paradigm shift. In terms of priorities, we said from the outset that we will move at the pace that our customers are ready to move. They have competing priorities, and we lead them and work through that. In terms of proof, it's what I said earlier on this call, the 7,000,000 collections. We have a very strong reference case library now that's been built. We think we can answer any of the questions that exist around the economic value proposition for NEXUS and the whole platform. For price, we need to command a premium for the value you can pay, and that gets into the paradigm shift, which is historically, on the collection side. This has not been an industry that's valued innovation or paid for innovation. We're working with our customers to explain our view and drive that paradigm shift. So it will take time, and we know that, but we'll be patient, and I think we'll be successful. And our next question comes from Larry Solow from CJS Securities. Your line is open. Great. Thanks. Just a few follow ups. Most of my questions have been answered. Just on that last point, Chris. Obviously, you had a nice bolus of early adopters last year. Do you have contracts that are expiring over the next 6, 12 months where customers can actually stay on the old plasma machine? Or is there some type of does that can that be a stimulus tick for conversion? Larry, I don't want to get into specifics with individual customers. What I would say is it's actually quite a complicated structure, right? We have contracts with the devices and disposables. There are separate contracts for software. There's contracts for liquids, etcetera. So they all have different durations, different expiries. We're at the table having the right conversations with all of our customers and remain optimistic on the pace of change here. Okay. In terms of the gross margin improvement, obviously driven by a lot of factors. Is it fair to say that the cost cutting and the productivity gains are more than half of that? Is that driving the majority of that with mix and pricing helping on the top? Yes. Those cost programs are definitely helping. I don't want to quantify it's a third or a half, but the combination of the pricing, the mix and those savings programs are definitely all contributing to the margin increase. And we continue to see benefits in those programs and anticipating margins to continue to improve over the long term. Right. And just on the free cash flow guidance, maybe the Q2 in a row where you increased net income guidance but not free cash flow. Is there any reason for that? In my prepared remarks, we do talk about an increase in our overall working capital related to inventories and some other items. So we're at we still intend to get to the range and cash flow, if you look at where we stand on a year to date basis, will definitely pick up in the second half. Okay. And just last question, more of a global longer term question. Any thoughts, I think you guys have spoken about this before, but on the FcRn antagonist, any thoughts of them potentially taking some of the plasma derived pharmaceutical market? We monitor it closely, Larry, as do our customers. What we read in the literature and what our scientific advisory committee informs us on is, anytime basic economics, anytime you have a $20,000,000,000 market with significant unmet need in this growth rate, you're going to have a bunch of folks on the periphery working to innovate. And from a health care and public health and patient perspective, I hope they're successful. When we look at the time lines and what that will likely mean, we see it ideally as complementary therapy and the time horizons are much longer than I think young biotechs would otherwise want them to be, but that's just the reality of the science. So 5 to 10 years best case scenario and even then probably adjunctive, not fully disruptive here. Got it. Okay, great. Thanks. I appreciate that. Thank you. And I am showing no further questions from our phone lines. And I'd like to turn the conference back over to Chris Simon for any closing remarks. Thank you, operator, and thanks all of you for your questioning and the dial in. We put a lot of information out this morning between our downloads and the prepared remarks here. Let me just at the risk of being repetitive, I'll give you a quick summary, which is we had a really strong first half propelled by revenue growth from our product launches, Nexus, Tag 6s and SafeTrace Tx, coupled with increased productivity primarily from our complexity reduction. As we highlighted, there are challenges to second half revenue growth rate that we are calling out. We, of course, will do what we can do to address it, but those challenges remain. We are reaffirming our FY 'twenty one aspiration of doubling operating income and quadrupling free cash flow, and our long term value drivers will continue to propel us, plasma, hospital, innovation and operational excellence, leading to significant expanded capacity and long term value creation. Thanks for listening in today. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.