Haemonetics Corp (HAE) CEO Christopher Simon on Q2 2019 Results - Earnings Call Transcript

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About: Haemonetics Corp (HAE)
by: SA Transcripts

Haemonetics Corp (NYSE:HAE) Q2 2019 Earnings Conference Call November 6, 2018 8:00 AM ET

Executives

Gerard Gould - VP, IR

Christopher Simon - CEO, President & Director

William Burke - CFO & EVP

Analysts

Anthony Petrone - Jefferies

Andrew Brackmann - William Blair & Company

Varun Kuchibhatla - Morgan Stanley

David Turkaly - JMP Securities

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2019 Haemonetics Corporation Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Gerry Gould, Vice President, Investor Relations. You may begin.

Gerard Gould

Good morning. Thank you for joining us for Haemonetics Second Quarter Fiscal '19 Conference Call and Webcast. I'm joined today by Chris Simon, CEO; and Bill Burke, CFO. Please note that our remarks today will include forward-looking statements. Our actual results may differ materially from anticipated results. Information concerning factors that could cause results to differ materially is available in the Form 8-K we filed today and in our other periodic reports and filings that we make with the SEC.

This morning, we posted our second quarter and first half fiscal '19 results to our Investor Relations website. We posted revised fiscal '19 guidance and tables with information that we will refer to on this call. Those tables are within the document entitled Analytical Tables and Supplemental Information to which we provided a link in our release. Today, Chris and Bill will discuss elements of our financial and business performance, trends in our served markets, our strategy, our complexity-reduction initiative and our revised fiscal '19 guidance. Then we will take your questions.

Before I turn the call over to Chris, I would like to mention the treatment in our adjusted results of certain items, which by their nature and size, affect the comparability of our financial results. Consistent with our past practice, we have excluded certain costs, charges, asset impairments, and income items from the adjusted financial results, which we'll talk about today. Such items included restructuring and turnaround charges, accelerated device depreciation, deal-related amortization expense, asset impairment, and related charges and a legal charge. In the first half of fiscal '18, we excluded the gain we realized upon sale of our SEBRA line of bench top and hand sealers. Finally, in all periods, we excluded the tax effects of excluded items.

Further details of second quarter and first half fiscal '19 excluded amounts, including comparisons with the same periods of fiscal '18, are provided in our Form 8-K and have been posted to our Investor Relations website. Our press release and website also include a complete P&L and balance sheet and a summary statement of cash flows as well as reconciliations of our reported and adjusted results.

With that, I'd like to turn the call over to Chris.

Christopher Simon

Thanks, Gerry. Good morning, and thank you all for joining today's call. We are pleased with our continued strong performance in the second quarter as we execute the accelerated growth phase of our multiyear turnaround. Halfway through the year, our results demonstrate that our three-pronged value-creation strategy to compete in winning segments with market-leading positions and deliver superior performance is building sustainable momentum. We are pursuing our turnaround and in many ways, the company is in launch mode. We are rolling out NexSys PCS and NexLynk DMS, a significant advancement in the marketplace and a major undertaking for our teams. We are expanding TEG 6s as it gains global momentum, and we are executing our corporate-wide complexity-reduction program to improve the way we work, all of which are fundamentally changing our performance.

In the second quarter, we grew revenue 7% driven by strong market demand for Plasma and TEG. We benefited from complexity-reduction to deliver adjusted earnings per share of $0.56 compared with $0.48 in the prior year's second quarter. In the first half, revenue grew 8% as reported and 7% in constant currency. Our adjusted earnings per share in the first half increased to $1.15 versus $0.82 last fiscal year.

I want to highlight our business unit results, which are evidents that our growth plans are on track. Let's begin with Plasma. Second quarter revenue increased 13% on strong volume growth in the core business driven mostly by North America disposables. Pricing from NexSys PCS began to contribute to growth and is expected to ramp in the back half of the year and beyond. We are mobilizing to keep pace with organic demand to ensure we have the capacity and resources to support and service our customers. We remain focused on NexSys' commercialization and all of our launch work streams are proceeding as planned. The first wave of our launch is being executed with great preparation and attention to detail. Our rollout schedule is on track, taking full advantage of our manufacturing and deployment capacity. In the second quarter, we placed more than 2,500 NexSys PCS devices to convert more than 60 collection centers. To date, these devices have completed more than 500,000 YES technology-enabled collections. In totality, through our clinical trials, customer experience programs and commercial use, NexSys devices have conducted nearly 1 million successful collections. Additionally, we are upgrading substantially all of our remaining North American customers to NexLynk DMS software, so that they can experience the full benefit of our integrated system.

The platform is performing exceptionally well and customer experience to date across a range of different settings confirms our value proposition. YES technology is delivering 18 to 26 milliliters more Plasma per collection. NexSys equipped centers are 15% to 20% more productive due to reductions in door-to-door cycle time and better equipment utilization. The integrated platform improves quality and compliance by eliminating paperwork and reducing donor over and under drawals by more than 90%. Donor survey feedback has been very positive, and we believe this will help improve retention, frequency and loyalty. It's exciting to see the new platform helping customers improve donor safety and satisfaction while lowering collection cost. Our incentives are fully aligned, and we are benefiting from improved margins and return on invested capital.

For competitive and customer confidentially reasons, we do not plan to disclose customer contracts and status other than to confirm that we continue to advance experienced programs and engage in commercial contract negotiations. We are progressing as planned and remain confident in our ability to meet our aggressive launch time lines. NexSys PCS device manufacturing is on pace to support contracted customer demand. We are managing our build schedule to ensure we can accommodate upcoming conversions, while minimizing inventory. We are incurring added rollout cost from scaling our capabilities to ensure we keep pace with timely, seamless conversions. This is a short-term effect on operating income growth. Our results were also impacted by higher freight cost, which are increasing as robust North American market demand drives volume. Bill will discuss these factors in more detail.

We are investing to expand our disposables capacity to keep pace with global demand. We have completed validation of our new bottle line, and we are on schedule to complete and validate our new bowl line by the end of the fiscal year. Together, they will increase our disposable capacity 50%. Overall, we are encouraged by the growth in the Plasma collection market, and we are pleased with the early progress of the NexSys launch.

Turning to our Hospital business unit. The team delivered another positive quarter with 11% growth. Hemostasis management grew 22% driven by TEG 6s. Capital equipment sales and disposable utilization are both accelerating as we are benefiting from investments we made last year in our sales and clinical specialist teams. Growth was global as tailored go-to-market strategies drove sizable gains in all of our key markets. We continue to be impressed with Hospital's potential as a good driver for the company, and in addition to our sales and marketing investments, we are investing to expand our product offering and clinical applications.

Moving to Blood Center. Declines are slowing over time in a difficult market as revenue was down 5% in the second quarter. We had modest situational growth in platelet apheresis that was offset by ongoing declines in whole blood collections. Our performance reflects changes we made to stabilize the business, focusing on contracting and pricing rigor, distribution management and reduced complexity. We continue to make targeted selective investments, such as the double dose protocol in Japan to protect market share and to be able to offer innovative technology in a challenging and highly competitive environment. Our Blood Center team overcame several product quality setbacks in the first half of the year, including a supplier formulation issue with the film used to produce Acrodose and a production control issue with our leukoreduction filters. Regardless of the origin and nature of these issues, we are committed to correcting these shortcomings and supporting our customers with the highest quality products at a reasonable cost. We will remain vigilant to earn back our customers trust.

In addition to delivering our annual plans and supporting our Plasma and Hospital launches, we are focused on a few company-wide program. Our complexity-reduction initiative is changing how we work and freeing up resources for investments to build on the momentum we have created in our turnaround. We are on track to deliver more than $40 million of annual plan savings this year. As part of our culture transformation, we continue to make changes to align pay with performance. In the first half, we increased performance-based incentive compensation for certain employee populations to stay competitive in the talent market.

We're committed to improving operating performance. Operation has been a drag on our results, but with new leadership in place, we are focused on improving product quality and customer service and support, reducing our cost of goods sold and creating sustainable processes to support the growth of our businesses.

Last year, we created our customer-centric business unit structure to strengthen our commercial execution. We believe we have a similar opportunity to reorganize our global supply chain to improve performance. We are committed to quality research and design, quality sourcing, manufacturing and supply and quality customer service and technical support, all at a lower more sustainable cost. We are embedding continuous improvement in every aspect of the company. We have important work ahead of us, but I am optimistic that these changes in our organization and supporting processes will enable us to strengthen our operating performance.

In closing, these various launch activities are transforming Haemonetics. As we enter the third quarter, I remain confident in our ability to deliver on our plans in both the short and long term. Based on our first half results and our prospects for continued profitable growth, we are raising our fiscal 2019 top and bottom line guidance, and now expect revenue growth of 6% to 8% and adjusted earnings per share of $2.25 to $2.35.

Thank you. I'll now turn the call over to Bill.

William Burke

Thank you, Chris, and good morning, everyone. Please refer to the tables we posted to our website with a link in our earnings release. We provided specific revenue and income dollar amounts that derived certain percentages I will refer to in my comments. Revenue growth rates I will discuss are in constant currency and compare with the appropriate prior year period. On that basis, we reported 7.2% revenue growth in both the second quarter and first half of fiscal '19. Plasma revenue increased 13.3% in second quarter and 13.6% in the first half of fiscal '19. North America Plasma, which accounts for about 80% of total plasma revenue, was up 17% in the second quarter and first half of fiscal '19. This included disposables growth of 16.2% in second quarter and 15.8% in the first half of fiscal '19. We are expecting these first half trends to continue. And accordingly, we're raising our fiscal '19 guidance for global Plasma revenue growth to 14% to 16%, up from our prior guidance range of 7% to 10%. This revised Plasma revenue guidance includes 17% to 19% growth expected in North America, an increase over the previous guidance of 10% to 14%.

We had 11.3% growth in our Hospital business in the second quarter and 8.8% in the first half of fiscal '19. Hemostasis management, our TEG business, grew 22.3% in second quarter and 21.4% in the first half of 2019, an acceleration over the low teens growth achieved in fiscal year '17 and '18. Both Hospital and TEG growth were broad-based geographically with TEG growth rates near or above 20% in key markets of North America, China and EMEA. For China, specifically, a portion of the strong growth was due to distributor order timing in the first half of fiscal '19. Also in the second quarter and in the first half of fiscal '19, TEG 5000 and TEG 6s each had double-digit percentage revenue growth validating the continued allocation of investment funding.

In Cell Processing, which includes our Cell Saver and transfusion management product lines, revenue grew 3.9% in the second quarter and 0.5% in the first half of fiscal '19. Excluding OrthoPAT disposables, a product whose commercialization in this fiscal year has been communicated to our customers, Cell Processing revenue growth would be 200 basis points higher. Excluding OrthoPAT, Cell Processing Second quarter growth was driven by a combination of higher pricing and customer order timing in the U.S. and market share gains in some of our international markets.

We're revising our fiscal '19 Hospital revenue guidance to 6% to 9% growth, up from our prior guidance range of 5% to 8% growth. This includes a high-teens percentage growth rate expected for TEG, an increase over the previous guidance of double-digit growth. The implied growth rates in the second half for TEG are lowered than the first half growth rates due to the distribution change in our TEG China business that I mentioned, resulting in an unusually strong order pattern in the first half of fiscal '19.

Blood Center revenue declined 4.7% in the second quarter and 3.9% in the first half of fiscal '19. Within Blood Center, second quarter fiscal '19 whole blood revenue declined 13% due mostly to strategic exits from business outside the U.S. that no longer met our profitability objectives and some customer order timing. We continue to expect a revenue decline of 3% to 6% in Blood Center in fiscal '19 in line with our original guidance range. We raised our revenue guidance for Plasma and Hospital, as I previously mentioned, and we are raising our overall revenue expectations to 6% to 8% or 300 basis points above our original range of 3% to 5%.

Adjusted gross margin in the second quarter of fiscal '19 was 48.2%, improving 170 basis points. We continue to benefit from focused programs driving complexity-reduction savings, foreign exchange, pricing and product mix, collectively driving over a 350 basis point impact on gross margin. Partially offsetting these benefits were higher depreciation from NexSys PCS device placements as part of the ongoing rollout and higher freight and logistic costs. Adjusted gross margin in the first half of fiscal '19 was 47.7%, improving 270 basis points with essentially the same factors influencing results as in the second quarter.

Adjusted operating expenses in the second quarter of fiscal '19 were $77.6 million, an increase of $9.4 million or 13.7%. As a percentage of revenue, operating expenses increased by 180 basis points to 32.1%. Adjusted operating expenses in the first half of fiscal 2019 were $145.2 million, an increase of $10.8 million or 8.1%. Adjusted operating expenses as a percentage of revenue in the first half of fiscal '19 and '18 were both 30.8% of revenue. There are 4 specific factors driving the increased operating expenses. First, we have ongoing investments required to support all aspects of the rollout of the NexSys PCS devices. Second, we increased sales and marketing investments in Hospital to further penetrate and expand our market presence. Third, we have experienced higher freight costs with increased carrier rates and greater volume. And fourth, equity and other performance-based compensation was higher. Partly offsetting these increased costs are productivity gains from complexity-reduction initiatives, affecting operating expenses.

Second quarter fiscal '19 adjusted operating income of $38.9 million increased 6.4%, and the second quarter adjusted operating margin of 16.1% was essentially unchanged. First half fiscal '19 adjusted operating income of $79.6 million increased 28.1%, and the first half adjusted operating margin of 16.9% improved 270 basis points over the prior year.

Our income tax provision and adjusted earnings was 17% in the second quarter of fiscal '19, significantly lower than 27% in the second quarter of the prior year. The first half fiscal '19 income tax rate on adjusted earnings was 18% compared with 27% in last year's first half. These lower tax rates were due to the impact of U.S. tax reform and continued favorable geographic income. Additionally, we had a 4 to 5 percentage point benefit in the second quarter and first half of fiscal '19 related to a high level of option exercises and share vesting, which were immediately deductible for tax purposes.

Second quarter fiscal '19 adjusted earnings per diluted share was $0.56 compared to $0.48 in the prior year second quarter, an increase of $0.08 or 17%. First half fiscal adjusted earnings per diluted share was $1.15 compared to $0.82 in the prior year, an increase of $0.33 or 40%. About half of the $0.33 increase is from strength in revenue and on track complexity-reduction savings, partially offset by higher freight costs and higher equity and other performance-based compensation. The remainder is from the lower tax rate in favorable currency, partly offset by higher interest from refinanced debt.

Our previous guidance was based on our belief that the $0.59 earnings per diluted share, we reported in the first quarter of fiscal '19 was not necessarily reflective of full year expected results. We do believe that first half results, revenue growth of 7.2% and adjusted earnings of $1.15 per diluted share, are indicative of fiscal '19 anticipated results that will exceed our initial guidance range. As a result, our expectations are elevated for the fiscal year. For fiscal '19, we reaffirm our expectation for adjusted operating margin in the 16% to 18% range. And we are raising our guidance for adjusted earnings per diluted share to $2.25 to $2.35, an increase compared with our initial financial guidance range of $2 to $2.30.

Given the revised fiscal '19 guidance, implied adjusted EPS growth in the second half will be in a range of 5% to 14% as compared with 40% in the first half. The majority of the lower growth rate is related to the tax rate and interest expense. In the second half of fiscal '18, the tax rate was unusually low at 15%. Tax reform and our own tax planning activities delivered benefits that began to be realized in the second half of fiscal '18. These benefits will have anniversaried in the second half of fiscal '19, and on a year-over-year basis, their impact is less meaningful. Higher interest expense as a result of the debt refinancing that occurred in the first quarter of fiscal '19 will also impact second half growth.

In addition, the cost related to the rollout of NexSys PCS devices, including depreciation, will be greater in the second half. The commercial launch is expected to occur throughout the remainder of fiscal '19 and beyond, and the benefit to growth on an annualized basis will accelerate in the second half and will be much more pronounced in fiscal '20. We will also incur a higher adjusted operating expenses in the remainder of this fiscal year due to accelerating investment spending as we had a slower ramp in fiscal '19 than originally anticipated and due to the continuing impact of higher equity and other performance-based compensation expenses.

We remain on track and reaffirm our expectation to realize $80 million of savings from our complexity-reduction initiatives. And to reach a run rate in excess of $40 million at the end of the current fiscal year. We remain on track to make significant investments supporting and enabling revenue growth acceleration and margin expansion as contemplated in our long-term strategy. These investments represent approximately $0.40 to $0.50 of earnings per share and are funded with our complexity-reduction savings. We incurred $2 million of restructuring and turnaround expenses in the second quarter of fiscal '19 and about $5 million of such expenses in the first half. Cumulatively, including amounts in fiscal '18, we have incurred approximately $42 million of the $50 million to $60 million of restructuring and turnaround expenses anticipated by our complexity-reduction initiatives. These expenses were excluded from adjusted earnings.

Free cash flow before restructuring and turnaround costs was $20.8 million in the first half of fiscal '19 compared with $75 million in the first half of fiscal '18. The lower free cash flow through the first 6 months is the result of $58 million of higher cash investment in capital expenditures and inventory, including the deployment of NexSys PCS devices and the expansion of capacity for disposables in our Plasma business. We finished the first half of fiscal '19 with $200 million of cash on hand, an increase of $20 million from fiscal '18 year-end.

Capital expenditures are included in our fiscal '19 cash flow projections at $150 million to $160 million, up from $75 million in fiscal '18, anticipating the completion of capacity expansions at Plasma manufacturing facilities to accommodate the next several years volume growth as well as production of NexSys PCS devices. We affirm our fiscal '19 adjusted free cash flow guidance before restructuring and turnaround costs of $25 million to $50 million.

During the first half of fiscal '19, we repurchased $80 million of our common shares under our $260 million share repurchase authorization. Together, with the previous $100 million repurchase we completed in May, 2018, 2.2 million of our common shares were repurchased at an average cost of about $81. Our share repurchase program is addressing recent dilution, however, further dilution from existing share-based compensation programs is offsetting the benefit.

Our earnings and cash flows are exposed to interest rate risks from future changes to LIBOR. Part of our risk management strategy is the use of interest rate swaps to mitigate exposure to changes in interest rates, which we believe to be especially prudent in the current economic environment.

During the first half of fiscal '19, we executed a new 5-year credit agreement under which interest is at LIBOR plus 1.13% to 1.75% depending on our leverage ratio, an effective rate of approximately 3.6% at the end of the quarter. During the second quarter of fiscal '19, we entered into 2 interest rate swap agreements securing an average fixed rate of 2.8% plus the 1.13% to 1.75% spread on $242 million of debt for 5 years through June 15, 2023. So 70% of the $350 million note within our credit facility has been fixed at the rate of approximately 4% leaving only 30% exposed to interest rate risk from future changes LIBOR. This action led stability to interest expense and reduced the risk inherent in interest rate fluctuations.

We appreciate you joining today. We will now proceed to your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from the line of Anthony Petrone of Jefferies.

Anthony Petrone

Maybe to start on Plasma, couple questions there. Chris, you mentioned just good productivity enhancements at centers that have NexSys, 2,500 devices installed here at 60 centers. I'm just wondering if there is a bifurcation between those centers that have both NexSys and NexLynk versus just NexSys. And maybe the follow-through there would be, do you envision possibly further share gains on the software end of the business as this cycle continues? And then I'll have a couple of follow-ups.

Christopher Simon

Yes. Thanks, Anthony. Let me answer in reverse order, if I might. So at this point, 7 of our 9 major customers in North America are operating some version of our donor management software. All of them are in the process of being upgraded to NexLynk, just having done the demos and seeing what we have to offer. I think the system's very compelling and that's certainly the market response, and we feel great about that. As I mentioned last quarter, that includes at least 1 competitive conversion to our systems. We feel great about it. All of the first wave customers, and hence, the data that we were quoting on the prepared remarks, are a combination NexLynk and NexSys enabled centers, and that's why we have such a powerful ability to help manage through all 4 quadrants of our value proposition, yield, cycle time and throughput, the quality and compliance, which is another version of yield and then the donor experience that I commented on.

Anthony Petrone

Maybe the follow-up would be, a couple of weeks ago, Grifols came out with some data on Alzheimer's using both IVIG and albumin. Maybe can you comment on what you're hearing just in the field as it relates to that data? And just anything high level - if this were to go through and obviously, Alzheimer's is a difficult category, but should this go through, what do you think would happen to demand for source Plasma over time? Any comments there would be helpful. And then the last one on restructuring. The goal there was $80 million in pretax savings. I just want - maybe to sort of benchmark it to that number, how much of that has been realized so far? And what do you expect to come in the next, say, 18 months?

Christopher Simon

Thank you, Anthony. I'll comment on source Plasma and let Bill address the restructuring charges - the restructuring opportunity. Source Plasma demand as you had seen through first half just continues unabated. And there is some variability from one customer to the next. Our largest customers in totality are really driving the bulk of that demand. I think they are to be commended for their commitment to innovation, both in terms of the end markets they serve on biopharmaceutical products, the Grifols release and other releases that have come out now, I'll would speak to that. And I think we're seeing a similar appetite for innovation in their collection center operations. So in the foreseeable future, as our guidance would suggest, we're really bullish on the organic demand in the marketplace.

William Burke

And Anthony, it's Bill. On the restructuring piece, we're still committed by the end of this fiscal year to achieve the run rate of $40 million coming out of fiscal '19, and then by the end of fiscal '20, coming out with the $80 million on a run rate basis. So we haven't moved it all from any of our expectations regarding the restructuring savings.

Operator

Our next question comes from the line of Brian Weinstein of William Blair.

Andrew Brackmann

This is actually Andrew on for Brian. Maybe just following up on Anthony's questions there a little bit. Maybe you guys could get a little bit more granular on the drivers of this market demand that you're seeing? And maybe talk about the sustainability of that beyond the second half of this year?

Christopher Simon

Yes, I think as we think about growth drivers for our business, Andrew, obviously, Plasma in North America looms large. And there's a whole series of downstream opportunities for them, obviously, the work that Grifols is doing on Alzheimer's, but all of our major customers have innovative programs that they've pushed forward and the success they have met with on the regulatory front. We look at it in terms of their fractionation capacity and what they're willing to do in terms of building collection volume to support that fractionation capability. Our strong sense is the demand continues unabated. Most of our leading customers still purchase source Plasma on the open market at a premium for their own collection cost, so that tells us that we haven't exhausted the opportunity to grow organically there. In this quarter, as in the first half, we were also really pleased with the continued strength in our Hospital business. That's first and foremost driven by TEG and really TEG 6s, which over the long-term is going to account for 90% of our growth there, and it's a global story. We grew faster over the first half internationally than we did in the U.S., but in the U.S. alone, we grew in excess of 20%. And I think that's a testament to the investments we've made and the focus and the energy that we've put against it, it's sales and marketing but it's also clinical and R&D more broadly. So we feel quite good that our growth drivers will continue to compel us. And I think increasingly through the complexity-reduction and just better day-to-day management, we're eliminating a lot of the detractors and things that kind of holdback, so see those growth drivers playing an outsized role in propelling us forward.

Andrew Brackmann

Great. And then following up on some of the investment commentary that you made, I think you said $0.40 to $0.50 worth of earnings this year. Maybe if you could talk about whether or not we should start penciling that in for next year? Or whether or not that's more of a fiscal 2019 spend?

William Burke

Yes. Andrew, on the fiscal '20 piece, we're obviously not going to issue any type of indication for what the investments will be. But for this year, going back to the May call, we did say that a lot of the - a lot or most of the complexity-reduction savings will be rolled into investments in the business. And some of those investments, for example, are the capacity expansion that we're undertaking with Plasma right now, as that machine and equipment comes online we'll have depreciation associated with that. And also as we rollout the NexSys PCS devices and as we continue to ramp up the number of devices play, that's a burden of depreciation that we would take. And then last year, in Hospital, we invested significantly in the sales force and clinical specialist, and we're seeing annualization of those cost this year, and we continue to invest more in the Hospital business. But we are on track for the $0.40 to $0.50 in investments overall for the company for fiscal '19.

Operator

[Operator Instructions]. Our next question comes from the line of David Lewis of Morgan Stanley.

Varun Kuchibhatla

This is Varun on for David. Just wanted to start out first, again, and I guess, coming back to Plasma guidance. Could you just give us more details there on how much of the guidance raise is the market which you had very positive commentary on earlier? And how much of that do you see as the NexSys ramp into the back half?

Christopher Simon

Yes. I don't think we're going to break down within our overall guidance on that, Varun. But what I would say is, it's important to think about Plasma along 2 dimensions. There is certainly the North American market demand, which is the primary market worldwide for source Plasma. There is also the international piece, some of which is source Plasma, some of which is what most of our international customers refer to as self-sufficiency for medical use. So there's 2 dimensions there, North America, far and away the larger driver as we've broken out in our guidance. We also think about disposables versus all other, and at the core, disposables are bowls, bottles and harnesses for us. We will also include liquids and we also think about the software both of which are interesting opportunities. The liquid number is a little hard to track just because we have some year-over-year normalization, we've now kind of phased into. And then software is a meaningful upside for us as we convert our customers, as I mentioned earlier, to NexLynk given the power of the integrated platform.

Varun Kuchibhatla

Got it, very helpful. And then last question, and I'll jump back into the queue. To get to the top end of your updated earnings guidance, we're estimating that operating margins maybe have to be flattish into the back half. Is that fair? And is that realistic as the pricing benefit steps up with NexSys even in light of the OpEx dynamics, you and Bill mentioned earlier?

Christopher Simon

Yes, they way I'd think about it is we set forth and we're very transparent about our goal to grow revenue in all of our categories faster than the market, right, that's what market leaders do and then to grow profit faster than we grew revenue because that's what good stewards do to capture operating leverage. Clearly, we haven't done that in the first half, and we're not guiding or expecting to do that in the second half due to the 4 factors that Bill laid out. What we face into, we feel good about those as investments in the main part, right? So the NexSys rollout, I mean, we're moving aggressively to meet our customer demand there and that's not without cost. There are onetime costs, they'll sunset on the other side of the rollout when we're on the other side of the launch and obviously, we'll return to leverage there.

The sales and marketing ramp in Hospital, in particular, again, it's a great investment, you see that in our top line. But as that annualizes and then we gain scale against that, it'll become an increasingly smaller part, but it is a fixed factor. We've added feet on the street clinical commercial otherwise. The freight fees, like a lot of other companies, we're facing into the increased charges per segment and then we've got meaningful volume left on top of it. I think we can do better in terms of what it cost us to move our product around the network, but we need to demonstrate that, and we're working hard at it. I think we'll get better over time. We're not there yet and you see that reflected in our numbers. Then the last piece is incentive comp. We are committed to pay for performance. We did some benchmarking work earlier in the year. We looked at what we were doing with our hourly workforce in the manufacturing sites and the number of our salary positions, and we didn't feel we were competitive in the talent market. So we made increases in the proportion of variable comp. It's directly tied to performance. We're having the performance, and therefore, we have an increased expense associated with it. Again, I feel good calling that an investment.

Operator

Our next question comes from the line of David Turkaly of JMP Securities.

David Turkaly

Just a follow-up there, you did mention the investments, I think you said sales and marketing, clinical, sales force, R&D. I'm just curious, is that kind of complete now? And if there is any way to quantify, like how many people did you add, maybe specifically to the sales force side? I'm just trying to get a handle on where that stands today given that is now - the growth in now coming back?

Christopher Simon

Yes, David, it's Chris. We're really encouraged by what we see, and I don't think we've seen the upper limits of that. In fact, we will continue to evaluate the opportunity to evolve our selling model, which in the main is more clinical people per salespeople just to help us drive the utilization revenue per device across the entire portfolio, which I think is the ultimate measure of our relevance with customers, and we're really excited by what we're seeing there. So as long as that continues to expand, we'll continue to challenge ourselves to push the envelope there. In terms of clinical, we're absolutely committed to broadening the shoulders of our product offerings. It's new indications, it's new evidence for existing indication, some of that evidence is pure clinical, some of it's health economics related. And that's the nature to what it takes to compete in today's environment, not only here in the U.S., but globally, and we feel really good that we have a value proposition that we can document and substantiate that value proposition and we're producing evidence that give our commercial teams chance to communicate that credibly in the field. So I don't think you've seen the last of our investments there. We're confident that they have very appropriate breakevens and really nice long-term leverage associated with them.

David Turkaly

And I guess, just as a quick follow-up. You know just looking at, obviously, really strong hemostasis management cell processing. Just remind us in the cell processing side, new product cycle and what's going on there specifically to possibly bring that rate higher?

Christopher Simon

Yes. Thank you, David. So I would be remiss in not keeping on a promise I made to our sales team. We really, internally, we don't even use the cell processing monitor anymore. That's - it's Cells Saver and it's transfusion management. The good news is both product families are delivering. On Cell Saver, we end of life worth of patents. It's a product whose time had come and gone, but what you see in the quarter and the first half results is real stability and some additional equipment sales which bodes well for the future in our Cell Saver line as we've doubled down our focus there and are doing our part to gain back and grow what is rightfully ours in the market. Transfusion management is poised for really exciting growth although that will be disproportionally in FY '20 and beyond for us on the back of several new clinical programs there, either complete or nearing completion, and we're getting to ramp for what we do with that business going forward with a guess the opportunity is surprise positively.

Operator

Thank you. And I'm showing no further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Everyone, have a great day.