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Haemonetics (NYSE:HAE)
Q2 2020 Earnings Call
Nov 01, 2019, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Haemonetics second-quarter 2020 conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions]. I would now like to hand the conference over to your speaker today, Olga Guyette, investor relations.

Please go ahead.

Olga Guyette

Good morning. Thank you for joining us for Haemonetics' second-quarter fiscal '20 conference call and webcast. I'm joined today by Chris Simon, our CEO; and Bill Burke, our CFO. Today, we will discuss our second quarter and half fiscal '20 results.

All revenue growth rates are on an organic basis and exclude impacts from currency, product end-of-life 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 the results to differ is available in the Form 8-K we filed today and in periodic filings that we make with the SEC. This morning, we posted our second quarter and first half of fiscal '20 results to our investor relations website.

We included updated fiscal '20 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 past practices, we have excluded certain charges and income items from the adjusted financial results and guidance. Details on excluded items, including comparisons with the same period of fiscal '19, are provided within the Form 8-K and have been posted on our investor relations website. Additionally, our press release and website include a complete P&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.

Chris Simon -- Chief Executive Officer

Thank you, Olga, and good morning, everyone. Haemonetics delivered strong second-quarter result and a positive first half fiscal '20 performance as we continue to accelerate revenue growth and improve profitability. Our teams grew revenue by 8.6% in the second quarter and 8.3% year to date. Our innovation agenda is propelling us with the launches of NexSys, the TEG 6S trauma indications in 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 second-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 530 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 second 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 second quarter and 16% in the first half of contributions from volume, mix and pricing. North America collection volume grew in the mid-single digits, and we were aided by a NexSys PCS device premiums, pricing initiatives within our liquid solutions business and discreet items in software.

Based on conversations with your customers and input from the recent PPTA industry forum, we forecast collection volume to increase to approximately 10% in the second half.NexSys is performing exceptionally well, nearly 7 million 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 connect more plasma to meet a 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 NexLynk. We are excited about software's role and helping customers realize the full potential of NexSys and software's strategic value for the Plasma business. We also benefited first -- 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 plasmapheresis 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% to 15%. Moving to our hospital view. Revenue was up 10.1% in the second 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 lead to our FDA clearance with senior experts at the American Association for the Surgery of 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 second quarter, we also launched a TEG 6s four 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 Cell Salvage market continues to experience downward pressure from declining transfusion rates and competitive pricing. Against this backdrop, cell saver had low single-digit revenue growth in the second quarter, which, while modest, was an improvement over first quarter results. With decreased 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 capability 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 stranded in hospital blood lab management information systems. We continue to see hospital as a growth engine for Haemonetics. Our new global hospital president, Stewart 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 2020, 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 pressures. 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 '20 year-to-date results and the momentum our employees have generated. The company is fully on track and powering through its multiyear turnaround. We remain committed to driving profitable growth and to create enduring long-term value. We expect to deliver our fiscal '21 aspirations of doubling fiscal '16 adjusted operating income and quadrupling fiscal '16 free cash flow before restructuring and turnaround.

Thank you. I'll now turn it over to Bill.

Bill Burke -- Chief Financial Officer

Good morning, everyone. Chris has already discussed revenue, so I will start with adjusted gross margin, which is 52.6% in the second quarter, improving 440 basis points over the second quarter of fiscal '19. This expansion reflects benefits from improved product mix, pricing and productivity saving related to both are 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 '20 was 51.9%, improving 420 basis points from the prior year first half with essentially the same factors influencing results as in the second quarter. Adjusted operating expenses in the second quarter of fiscal '20 were $75 million, a decrease of $2 million or 3% compared with the prior year's second quarter. We continue to realize productivity saving 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 expense in the first half of fiscal '20 were $147 million, an increase of $2 million 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 cost.

As a percentage of revenue, adjusted operating expenses both in the second quarter and in the first half of fiscal '20 were 29.8% of revenue, down 230 and 100 basis points, respectively. Second-quarter fiscal '20 adjusted operating income of $58 million increased by $19 million or 49% compared with the prior year's second quarter. In the first half of fiscal '20, adjusted operating income of $109 million increased by $30 million or 37% compared with the first half of fiscal '19. Adjusted operating margins were 22.9% in the second quarter and 22.2% in the first half of fiscal '20, an expansion of 680 and 530 basis points, respectively.

This expansion primarily came from a combination of improvements in pricing, product mix and savings realized within our cost of goods sold. We remain confident in our companywide efforts to improve our operating performance and raise our adjusted operating margin guidance for fiscal '20 to a range of 21 to 22%. The tax rate contributed favorably to our second quarter fiscal '20 results as our adjusted income tax was 14.7% or 270 basis points lower than the second-quarter of fiscal '19. The first half fiscal '20 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 the similar to the full-year adjusted income tax rate from fiscal '19. Our second- quarter fiscal '20 adjusted earnings per diluted share was $0.87 compared with $0.56 in the prior year's second quarter, an increase of $0.31 or 55%. First half fiscal '20 adjusted earnings per diluted share was $1.67 compared with $1.15 in the prior year, an increase of $0.52 or 45%. Our adjusted earnings per diluted share included a $0.02 net benefit in the second quarter and a $0.07 net benefit in the first half of fiscal '20 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 '20. Based on the strong performance in the first half of fiscal '20, we are raising our full-year fiscal '20 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 '20 guidance, complied adjusted EPS growth in the second half will be in the range of 15% to 23%. In the second half of fiscal '20, 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 '20 as compared to the first half of fiscal '20, largely impacted by four factors. First, based on the assumptions included in our revenue guidance, the NexSys pricing premiums, as well as software pricing will fully anniversary in the second half of fiscal '20, and therefore, will have a lower impact on a 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%. Second, 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.

Third, our blood center business benefited from favorable order timing and pricing initiatives within our apheresis 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 benefit from increased share vestings and option exercises, which are not expected to repeat in the second half of fiscal '20. 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 cost was $31 million in the first half of fiscal '20 compared with $21 million in the first half of fiscal '19. We had a working capital cash outflow of $29 million in the second quarter and $92 million in the first half of fiscal '20. 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 timings 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 receivables, driven by collection timing. In the second quarter of fiscal '20, we entered into an accelerated share repurchase agreement to buyback approximately 400,000 shares for $50 million. Coupled with the buyback we did in the first quarter fiscal '20, we have purchased over 1 million shares for $125 million at an average price of $119 per share under the current share repurchase authorization. We finished our first half of fiscal '20 with $112 million of cash on hand, a decrease of about $57 million from fiscal '19 year-end.

We are pleased with results in the first half of fiscal '20. 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. The increasing leverage had enabled us to update our adjusted operating margin and adjusted EPS guidance for fiscal '20. And now I'd like to turn the call back to the operator.

Questions & Answers:


Operator

[Operator instructions] And our first question comes from Anthony Petrone from Jefferies. Your line is open.

Anthony Petrone -- Jefferies -- Analyst

Hi, good morning, thanks and congratulations on a 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.

In 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.

Chris Simon -- Chief Executive Officer

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.

Proud of the team is working hard with combination of liquids and software to close the gap for our original forecast. And we did that quite well, it's contributed to the strong first half. We anticipate based on the long-term modeling that we've done, and we've gone back and look at this now over the course of the decade, as well as the conversation we have with each of our customers as recently as two 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 facing 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 toward that 10% collection volume.

Anthony Petrone -- Jefferies -- Analyst

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 Haemonetics 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.

Chris Simon -- Chief Executive Officer

So on the new center rates, it varies from one customer to the next, they each have different priorities. Some have chosen grow through acquisition, other grow strictly through organic, and there is lots of combinations they're 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 as 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 NexSys, they open with NexSys. If it's with a PCS2 they open with PCS2s.

Anthony Petrone -- Jefferies -- Analyst

OK. That's helpful. And then last just on cost, obviously, the margin, better sequentially, better year over year. There is now two cost reduction programs.

Can -- Bill, can you clarify, the savings we're seeing so far, is this still steal the first program? Or you're starting to see the second program actually roll in as well?

Bill Burke -- Chief Financial Officer

So on the cost programs, we are on the first program, which was the Complexity Reduction Initiative, we had committed to 25 to $30 million of additional savings this year. We are a third of those savings dropping through the operating income. And we are seeing that, we are achieving those numbers. So 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 saving related to that program, too. So they're both contributing nicely to our overall margin.

Anthony Petrone -- Jefferies -- Analyst

Thanks.

Operator

Thank you. Our next question comes from David Lewis from Morgan Stanley. Your line is open.

David Lewis -- Morgan Stanley -- Analyst

Good morning. Just a few questions for me. Maybe, Bill, just starting with you, picking up on margins. Obviously, another -- a second quarter with kind of significant margin improvement.

If I think about the guidance into the back half, operating margin guidance step down -- steps down almost two 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?

Bill Burke -- Chief Financial Officer

So our year-to-date operating margin is at 22.2%. We're guiding 21 to 22%. So on an average basis for those first six months, we're pretty close to the range. But we are seeing -- yes, we are anticipating that in the second half, we might revert a little bit closer to where we were in the first quarter.

But there's no overall deterioration. Longer term, we still see these individual programs that we're running contributing to the expansion.

David Lewis -- Morgan Stanley -- Analyst

OK. But so no discrete spending items you can sort of address in the back half that would drive that?

Bill Burke -- Chief Financial Officer

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.

David Lewis -- Morgan Stanley -- Analyst

OK. And then Chris, I wanted to come back to plasma market growth because sort of the commentary you're making sort of stands -- it's slightly different than what sort of some of the larger plasma players are saying in terms of what they're seeing in their core businesses. You've seen basic acceleration at CSL and Grifols here in the most recent periods. So obviously, I was going to flesh out a little bit 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 some of the difference in those two things because just trying to very about what you're saying about collections versus what they're saying about demand and finished product growth?

Chris Simon -- Chief Executive Officer

Yes. Appreciate the question. And it is a complicated supply chain, it passes from collection and cold storage to fractionation and refinement and ultimate distribution to the end markets. And there is meaningful lags over that process, which can be in excess of the 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 source plasma market. There's no change in share or a portion 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 growth 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 when you get the owners through the door in the conversations we've when they lay out their supply chain for us end-to-end. They need to collect more plasma, and that's why we see the uptick in the second half of the year.

David Lewis -- Morgan Stanley -- Analyst

OK. 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 just coming to script, the sustainability of that kind of improvement into the back half of the year?

Chris Simon -- Chief Executive Officer

Sure. So we're very bullish on hospital. And we actually see hospital accelerating over the next several quarters, driven primarily by TEG. We've had the benefit now from the success with our innovation agenda in R&D.

We have TEG success trauma indication in the U.S., which is -- came through quickly and has led some real uptake there, it has us quite bullish. We have quite platelet mapping cartridge for the channel, cartridge which lets us compete broadly at the site of care, which is the only product which 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 is really started to come into its own.

The combination of those factors are driving TEG. We also see the 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.

Cell 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.

Operator

Thank you. Our next question comes from Lawrence Keusch from Raymond James. Your line is open.

John Hsu -- Raymond James -- Analyst

Good morning, this is John on for Larry. If we could start on NexSys, Chris, perhaps you can give us an update on real world data on the use of NexSys supporting the economic argument, just an update there would be great.

Chris Simon -- Chief Executive Officer

Yes. Thanks, John. So rapidly approaching 7 million collections, and the basic math on that and what we've said in the prepared remarks, at on average 23.1 milliliters per collection is arranged, obviously, 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 resting at 160,000 additional leaders provided for the customer's using NexSys.

That's really the first the dimension of that value proposition yield. Those customers have sped up. They're doing faster turns per device or bed per day, that's great, it's improving their collection capacity as a 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, it's -- they enjoy the experience, it's just a better environment to donate plasma. And so we feel very confident with 7 million collections that our value proposition is being affirmed.

John Hsu -- Raymond James -- Analyst

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?

Chris Simon -- Chief Executive Officer

So we don't have reasons 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 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 in -- and having some imbalances of supply across the supply chain or across manufacturers. And there's a long history of this playing out in the industry when there is just this higher level of demand, there's always going to be some frictional gaps that need to be covered.

And the industry has done a great job of responding to those in the past. I'm sure they'll do so here.

John Hsu -- Raymond James -- Analyst

And then last one for me, just on whole blood, that business has projected a little bit better than we were expecting in the quarter. It 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 an even previously. So, what's your viewpoint there?

Chris Simon -- Chief Executive Officer

I think fundamentally, our viewpoint is unchanged. We observed that same plateauing. And 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 rates going to continue to come down, the market will be continue to challenge. We're pleased with what our team is doing to hold their own there. But we don't see a reversal in 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.

John Hsu -- Raymond James -- Analyst

OK, great. Thank you so much.

Operator

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

Dave Turkaly -- JMP Securities -- Analyst

Great, thanks. You mentioned the sales force expansion in hospital. I was wondering if you could put that into context of how big that force is and how many you're adding or maybe 1% that you're increasing. And I know in the past we've talked the about capacity to do acquisitions here.

Wondering if that's still the case, maybe an update on if there's something that could -- you could add to that portfolio as well.

Chris Simon -- Chief Executive Officer

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 built that base out and 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 care in terms of the use of the actual TEG devices. So that expansion is still under way. And we're still hiring out. And I think for us, particularly with a new global hospital business unit President and Stewart 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&A acquisition agenda will also fall not only to myself, but to Stew. And together, we intend to get after that to help build out this portfolio and stay relevant.

Dave Turkaly -- JMP Securities -- Analyst

Got it. And then I missed the -- some of the early part of the call. So I apologize if you've discussed this. But we're two 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 we're looking at some of the cost savings and the benefits coming through, but can you comment on -- 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?

Chris Simon -- Chief Executive Officer

Yes. So there has been no new contracts, and we don't -- we haven't changed our position that we won't include contracts until elected in long term [Inaudible]. 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 conversions, what I would say is -- I'll steal a page from -- our Bill's talk track on this.

He's come with our own versions of the 4Ps, which is priorities, proof, price and a paradigm shift. In terms of priorities, we said from the outset that we will move with the pace that our customers are ready to move. They have competing priorities, and we meet them and work through that. In terms of proof, it's what, I said earlier on this call, with 7 million collections, we have a very strong reference case library now.

It's been built. We think we can answer any of the questions that exist around the economic value proposition for NexSys and the full 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 is 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, we know that, but we'll be patient and I think we'll be successful.

Dave Turkaly -- JMP Securities -- Analyst

Thanks a lot.

Operator

Thank you. [Operator instructions] And our next question comes from Larry Solow from CJS Securities. Your line is open.

Larry Solow -- CJS Securities -- Analyst

Great, thanks. Just a few follow-ups. Most of my questions have been answered. Just on the last point, Chris.

Obviously, you had a nice bolus of early adopters last year. Do you have contracts that are expiring over the next six, 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?

Chris Simon -- Chief Executive Officer

Yes. 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, etc. 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.

Larry Solow -- CJS Securities -- Analyst

OK. 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 the mix and pricing helping on the top?

Bill Burke -- Chief Financial Officer

Yes. The -- those costs programs are definitely helping. I want to quantify, it's the third or 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 little long term.

Larry Solow -- CJS Securities -- Analyst

Right. And just on a free cash flow guidance, it's maybe the second quarter in a row where you have increased the income guidance but not free cash flow. Is there any reason for that?

Bill Burke -- Chief Financial Officer

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 the range and cash flow. If you look at where we stand on a year-to-date basis, we'll definitely pick up in the second half.

Larry Solow -- CJS Securities -- Analyst

And just last question, more of global longer-term question. Any thoughts, I think, you guys have spoken about this a little bit on the FCR and antagonist, any thoughts of them potential taking some of the plasma there out of pharmaceutical market?

Chris Simon -- Chief Executive Officer

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 -- it's basic economics, anytime you have $20 billion 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 healthcare and public health and patient perspective, I hope they're successful when we look at the time line and what that will likely mean, we see it ideally as complementary therapy. And the time horizons race is much longer than I think young biotechs would otherwise want them to be, but that's just the reality of the science.

So five to 10 years, best case scenario, and even then probably adjunctive, not fully disruptive here.

Larry Solow -- CJS Securities -- Analyst

OK great. Thanks, I appreciate that.

Operator

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.

Chris Simon -- Chief Executive Officer

Thank you, operator, and thanks all of you for your questioning and dialing in. We've 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. NexSys, TEG 6s and SafeTrace Tx coupled with increased productivity, primarily from our complexity reductions.

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 '21 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 operation excellence, leading to significant expanded capacity and long-term value creation. Thanks for listening in today.

Operator

[Operator signoff]

Duration: 44 minutes

Call participants:

Olga Guyette

Chris Simon -- Chief Executive Officer

Bill Burke -- Chief Financial Officer

Anthony Petrone -- Jefferies -- Analyst

David Lewis -- Morgan Stanley -- Analyst

John Hsu -- Raymond James -- Analyst

Dave Turkaly -- JMP Securities -- Analyst

Larry Solow -- CJS Securities -- Analyst

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