Bio-Rad Laboratories Inc (BIO) — Q2 2024 Earnings Call Transcript

Thanks, operator. Good afternoon, everyone, and thank you for joining us. Today, we will review the second quarter 2024 financial results and provide an update on key business trends for Bio-Rad. With me on the call today are Norman Schwartz, our Chief Executive Officer; Andy Last, Executive Vice President and Chief Operating Officer; and Roop Lakkaraju, Executive Vice President and Chief Financial Officer. Before we begin our review, I'd like to remind everyone that we will be making forward-looking statements about management's goals, plans, and expectations, our future financial performance and other matters. These statements are based on assumptions and expectations of future events that are subject to risks and uncertainties. Our actual results may differ materially from these plans, goals, and expectations. You should not place undue reliance on these forward-looking statements, and I encourage you to review our filings with the SEC where we discuss in detail the risk factors in our business. The company does not intend to update any forward-looking statements made during the call today. Finally, our remarks today will include references to non-GAAP financials, including net income and diluted earnings per share, which are financial measures that are not defined under generally accepted accounting principles. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings release. With that, I'll now turn the call over to our CEO, Norman Schwartz.

Thanks, Ed. Again, we appreciate your joining us on the call today. Overall, despite a challenging market environment, we did have a solid quarter with revenue in line with expectations and margins actually ahead of expectations, driven by product mix, productivity gains, and overall good cost management. While we have seen some positive signs with the improved biotech funding, we are continuing to see constraints in biotech and biopharma spending globally. As such, we do think it's prudent to revise our full-year 2024 financial outlook to better reflect what I believe was a more modest pace of market recovery than originally predicted. Roop will cover this in greater detail as we review our updated 2024 financial guidance. During the quarter, we continued to make progress establishing the new leadership team. You've already met Roop, our new CFO, and have gotten a sense of his priorities as he comes up to speed. Our new heads of life science and clinical diagnostics have also hit the ground running and are working closely with Andy Last to align on key initiatives. We have made good progress on our search for a new Chief Operating Officer and have identified several finalist candidates. We do hope to share an update with you on this front in the coming weeks. We are continuing our corporate transformation path, more recently with efforts in supply chain and core process improvements, which are really starting to contribute to our margin expansion. We expect to build on this progress, and when our life science business rebounds in future quarters, we anticipate we'll see further benefit here. On the capital deployment front, we've continued to be successful with share repurchases having bought back $100 million worth of Bio-Rad stock during Q2 and an additional $96 million during the month of July. This week, the Board authorized an additional $500 million, which further positions us to make opportunistic repurchases going forward. All in all, I would like to reiterate that we view our strategy and focus for the future growth of the company to be really very much intact. In clinical diagnostics, we have leading market positions globally for our core platforms and continue to invest in supporting their growth while building a position in new molecular diagnostics segments. In Life Science, we both continue to maintain a focus on biopharma, especially for digital PCR and process chromatography products, as well as new products in development around cell biology. We also continue to invest to enhance our leadership in digital PCR and other areas in the academic market. This is a very important area for us. As such, we believe we are well-positioned to drive long-term growth in both the academic and biopharma markets in life science as we move through this dynamic period. Now I'll turn the call over to Andy to provide an update on global operations.

Thank you, Norman. Good afternoon, and thank you all for joining us. The second quarter of the year reflected a continuation of the same macroeconomic and market trends we have experienced over several quarters in the biotech and biopharma segments in China, alongside a generally improved market environment for our clinical diagnostic platforms. Our clinical diagnostics business continued to show steady growth in the quarter, delivering solid gains both sequentially and year-over-year. Growth was broad-based across the portfolio in all regions, with solid performance in our immunohematology business compared against the supply chain constraints we experienced in the prior year. As we look toward the second half of this year, we are anticipating a continuation of normalized growth within our clinical diagnostics business. While it was in line with expectations, our Life Science Group sales declined double-digit year-over-year, reflecting ongoing low demand in biotech and biopharma and in China. However, sequentially, second quarter revenue for the Life Science Group improved mid-single-digits, and when excluding process chromatography sales, core life science grew sequentially mid-single digits in both biopharma and academic markets. Similar to the prior year, our process chromatography resins posted a year-over-year decline, reflecting the ongoing destocking trend across the industry. More importantly for us, this is the result of several very large customers who stocked up heavily during the prior years due to the critical importance of our products for specific key therapeutics. Outside of these key customers, we are starting to see a return to a normalized ordering pattern and are now looking to 2025 for a return to growth. We remain confident in the long-term outlook for this product area. Excluding process chromatography, our core Life Science business continued to stabilize, declining low double-digit compared to the prior year and in line with our expectations. The declines were again concentrated in instrument sales, primarily reflecting constrained biopharma spending, whereas consumable and reagent sales were largely flat, both sequentially and year-over-year. During the second quarter, we launched two new important life science platforms: the ChemiDoc Imaging Systems, which is getting strong interest from customers, and our new cost-effective single-cell sample prep solution that is in the early phase of product introduction. Our Droplet Digital PCR franchise was soft in Q2, against a tough prior year comparison that included the receipt of a one-time technology license payment and the reduction of backorders created due to supply chain challenges from prior periods, mainly for QX600. However, excluding the one-time impacts in the prior year, revenue for ddPCR declined a more modest mid-single digits. On a positive note, ddPCR reagents and consumables grew low-single-digits year-over-year despite the constrained funding environment. We are seeing strong interest in our recently launched ddPCR assay kits targeted at the oncology and cell and gene therapy markets, and we continue to maintain strong win-loss ratios for our Digital PCR platform in our current market segments. Importantly, we continue to target a fourth-quarter introduction of the QX continuum, which will allow us to enter the low-end segment where others have primarily focused. In addition, we recently entered into a purchase agreement for a novel cutting-edge platform utilizing our core droplet technology that enables high throughput discovery of novel antibodies and T cell receptors and complements our phage display library. This is a high-growth, high-value market segment, and assuming successful completion of development, we anticipate introducing this platform in the next two to three years. Reflecting on the current macroeconomic and market conditions, we were pleased to see the positive trend for capital raises for the biotech and biopharma markets continuing into the second quarter. As Norman alluded to earlier, we have yet to see this funding translate into improved orders as customers appear to remain conservative on capital deployment. Likewise, market conditions in China remain soft for the Life Science business, although we remain hopeful of some improvement in the outlook towards the end of the year and into 2025. In the Academic segment, we are seeing a slight softening of the global funding environment after a long period of strong research support. In addition to a slightly lower-than-anticipated NIH budget for the year, key European markets remain a mixed bag with lower funding in Germany offset by more modest improvements in funding outlooks in the U.K., France, and other EU countries. For Asia, the challenging research funding environment in China continues, and funding in Japan remains constrained, reflecting a shrinking economy, while Korean government spending on life science research remains soft as part of the deficit reduction. With these factors in mind, we remain cautious on the magnitude and timing of the recovery in life science markets and now expect more measured improvements in the back half of the year. We continue to expect steady normalized growth for our clinical diagnostics business in 2024. Operationally, we continue our focus on cost and productivity initiatives that have provided offsets to the softer top line. Looking toward the eventual market recovery for our Life Science business, we believe that Bio-Rad remains poised for further margin expansion. Thank you, and I will now pass you to Roop to review the financial results.

Thank you, Andy, and good afternoon. I'd like to start with a review of the second quarter 2024 results. Net sales were $638 million, which included approximately 1% currency headwind and represents a 6.3% decline on a reportable basis versus $681 million in Q2 of '23. On a currency-neutral basis, the year-over-year revenue decline was 5.4%. As Andy mentioned, this was the result of ongoing weakness in key life science end markets, somewhat offset by continued growth with the Clinical Diagnostics Group. Sales of the Life Science Group were approximately $251 million compared to $300 million in Q2 of '23, which is a decrease of 16.5% on a reported basis and a decline of 15.9% on a currency-neutral basis. The year-over-year decline impacted most product and geographic areas. Excluding process chromatography sales, which can fluctuate quarter-to-quarter, core Life Science Group revenue decreased 11.6% on a currency-neutral basis. Sales of the Clinical Diagnostics Group were $388 million compared to $380 million in Q2 of '23, which is an increase of 2.1% on a reported basis and 3.2% on a currency-neutral basis. Growth of the Clinical Diagnostics group was primarily driven by increased demand for quality controls and blood typing products. On a geographic basis, currency-neutral year-over-year revenue for the Diagnostics group posted growth across all three regions. For the company, Q2 reported GAAP gross margin was 55.6% as compared to 53.2% in the second quarter of '23. The increase in gross margin was primarily driven by cost control initiatives, product mix, and lower logistics costs, partially offset by lower sales volume and continued higher material prices for constrained or strategic materials. Note that 90% of the improvement was driven by cost controls, product mix, and logistics. SG&A expenses for Q2 '24 were $195 million or 30.5% of sales compared to $208 million or 30.5% in Q2 of '23. The decrease in dollars of SG&A expense was primarily due to lower employee-related expenses, restructuring costs, and discretionary spending. Research and development expense in the second quarter was $59 million, or 9.2% of sales compared to $65 million or 9.5% of sales in Q2 '23. The decrease in dollars of R&D expense was primarily due to cost control and lower restructuring costs. Q2 operating income was approximately $101 million or 15.9% of sales compared to $90 million or 13.2% of sales in Q2 of '23. Higher operating income is primarily driven by our proactive expense management initiatives and product mix, partially offset by lower sales. During the quarter, interest and other income resulted in net other income of about $8 million compared to about $5 million in the prior year. The effective tax rate for the second quarter of '24 was 22.3%, largely consistent with the 22.5% rate in the year-ago period. The change in fair market value of equity security holdings, which are substantially related to the ownership of Sartorius AG shares, resulted in a $2.9 billion loss and drove the reported net loss of $2.2 billion or $76.26 diluted loss per share compared to a net loss of $1.2 billion or a diluted loss per share of $39.59 in Q2 of '23. Moving to the non-GAAP results. Non-GAAP financial measures, which exclude certain atypical and unique items that impact both gross and operating margins and other income are detailed in the reconciliation table in our press release. Second quarter non-GAAP gross margin was 56.4% compared to 54.4% in Q2 of '23, primarily reflecting various expense management initiatives we've implemented. Non-GAAP SG&A dollar spend was slightly lower on a year-over-year basis, but as a percentage of sales, was higher due to lower revenue in Q2 '24. Specifically in the second quarter of '24, SG&A as a percent was 30.4% versus 29.2% in Q2 of '23. Non-GAAP R&D as a percentage of sales in the second quarter of '24 was 9.3%, which is flat to Q2 of 2023. Second quarter non-GAAP operating margin was 16.8%. Our non-GAAP operating margin has expanded by 100 basis points from Q2 of '23, with reported non-GAAP gross margin of 15.8%, driven by the improvement in gross margin and proactive operating expense cost management initiatives. The non-GAAP effective tax rate for the second quarter of 2024 was 23.4% compared to 22.5% for the same period in '23. The higher rate in '24 was driven by a geographical mix of earnings. Finally, non-GAAP net income for the second quarter of 2024 was $89 million or $3.11 diluted earnings per share compared to $89 million or diluted earnings per share of $0.03 in Q2 of '23. Moving on to the balance sheet. Total cash and short-term investments at the end of Q2 2024 was $1.62 billion, compared to $1.65 billion at the end of Q1 2024. Inventory at the end of Q2 was $804 million as compared to $783 million at the end of the first quarter. The increase is due to the strategic purchases of difficult-to-source raw materials that are critical to our supply chain. For the second quarter of 2024, net cash generated from operating activities was approximately $98 million, the same as Q2 of '23. Net capital expenditures for the second quarter of 2024 were approximately $42 million, and depreciation and amortization was $36 million. Second quarter of 2024 free cash flow was approximately $55 million, which compares to $63 million in Q2 of 2023. Adjusted EBITDA for the second quarter of 2024 was $138 million or 21.6% of sales and was approximately $138 million or 20.2% of sales in the second quarter of 2023. During the second quarter, we repurchased 346,226 shares of our stock for about $100 million at an average purchase price of about $289 per share. During July 2024, we repurchased an additional $96 million at an average purchase price of about $293 per share. We also announced today that the Board authorized a $500 million increase to our existing share repurchase program. In total, we now have approximately $578 million available for share repurchases as we continue to be opportunistic in our approach with buybacks. Moving on to the non-GAAP guidance. As referenced in Andy's commentary, we have seen improved funding for the biotech end market that has yet to fully translate into customer orders. Given the pace of customer bioprocessing, destock, and the expectations of a much more moderated pace of biopharma recovery, we have tempered the outlook for our Life Science Group in the back half of the year. We continue to expect healthy normalized growth for the Clinical Diagnostics Group in 2024. Taken together, we now estimate currency-neutral year-over-year revenue to decline 2.5% to 4% for 2024 versus growth of 1% to 2.5% in our prior guidance. The 500-basis point change in our revenue outlook is because of lower process chromatography demand and slower-than-expected biopharma recovery, offset by higher levels of clinical diagnostics sales. For the second half of the year, we expect about 2% year-over-year currency-neutral revenue growth versus a 7.5% year-over-year decline in the first half of 2024. This represents about 6% revenue growth in the second half of 2024 over the first half. For the Life Sciences Group, we expect between 10% and 12% currency-neutral revenue decline for 2024. The full-year Life Science Group year-over-year sales decline, excluding process chromatography-related sales, is expected to be about 4%. In this business group, we expect low double-digit revenue growth for the second half of the year over the first half. For the Diagnostics Group, we are now guiding currency-neutral revenue growth to be between 3% and 3.5% for 2024. This represents revenue growth for the Diagnostics Group of about 2% for the second half of the year over the first half. Full-year non-GAAP gross margins are now projected to be between 54.5% and 55% versus 54% to 54.5% previously, reflecting a combination of better product mix and cost improvements we've implemented. Our updated gross margin outlook is higher than our prior guidance, but below the 55.3% we achieved in the first half of the year due to the expected lower revenue in the second half of 2024, which will drive a higher level of fixed costs under absorption than previously forecasted. We now expect full-year non-GAAP operating margins to be between 12% and 13% versus 13.5% to 14% in our prior guidance, reflecting a lower level of cost leverage in the second half, while we continue to carefully manage operating expenses. Full-year adjusted EBITDA margin is expected to be between 18% and 19% versus 19.5% to 20% in our prior guidance. Finally, we expect to close the acquisition of certain technology assets that Andy mentioned earlier in the call and are anticipating a one-time in-process R&D charge of approximately $30 million likely in the third quarter or at the latest by the end of 2024. This will be incremental to the full-year operating margin profile we've laid out above. That concludes our prepared remarks. We'll now open the line to take your questions.

Hey guys. Thank you for taking the questions. Maybe to start on the margin side. Obviously, a pretty nice performance in Q2, but then, Roop, you just touched on to the cut for the year. Can you just talk about, I guess, what drove the strength in Q2? And then, obviously, again, just that second half expectation margin down quite a bit there. Maybe just talk through the moving pieces as we work our way through the year and out of Q2 here?

Yes, certainly, Patrick. Good to talk to you. First of all, just to remember, we are taking the overall gross margin up from a guide perspective based on the performance. Even in the second half of the year, we expect stronger gross margin than what we had originally guided. Q2's strength in the gross margin specifically is associated with mix. But the other part of it is really sustained improvements based on our cost initiatives and efficiency improvements and things like logistics costs that we've been very proactively managing. So those are the things that really helped Q2. And as we looked at these initiatives, the magnitude and timing can be a bit variable, so we saw it flow through in the second quarter. We do expect that to sustain into the second half of the year and beyond. With that said, as we look at the revenue and what we expect to flow through our factories, we anticipate more under-absorption in the factories. So we've been a bit conservative in giving what that margin outlook is in the second half while still taking up the overall range of the margin for the year.

Yes, and then just the op margins as well? Just maybe talk through those with the SG&A line?

Yes, of course. Op margins, when I look at the actions we've taken on proactive cost management and efficiencies, productivity that we're driving throughout the different areas of OpEx, that's taking hold as well. I think part of the headwind on the OpEx, which then affects the op margin, is just the fact that sales are coming down from where we originally expected. Therefore, the cost leverage isn't as strong yet even though we've got the gross margins improving. That's simply flow through, and we've been very proactive in terms of that headcount management through the year. One thing to keep in mind is from an operating expense standpoint, we've been very prudent in how we looked at headcount management and cost management. We'll see a little bit of uptick in the second half of the year just because of some of the projects and other things that we want to drive execution on it in the second half.

Okay. That's helpful. And then maybe just on process chromatography. It seems like, obviously, some of the stocking lingering here and that seems to be a big part of the Life Science decline for the year. Can you guys just talk about what you're seeing there? It seems like, again, you're taking out any sort of recovery for this year. But just what you need to see to kind of believe in a recovery there and visibility and just is it different geographies? I know it seems like it's concentrated to a few customers, but maybe just pull the card back a little bit on that piece?

Hey, Patrick, it's Andy. Yes, I'll take that one. Yes, I think the story here is a mixed bag. There are some positives. We're seeing a number of projects that we're engaged in improving in the first half and actually low double-digit improvement. So that's a positive trend line. But those small projects in the early phase are not material revenue contributors in the first year. The kind of pullback on our overall guidance on process chromatography is very much the same story as Q1. It's just a more acute understanding of the magnitude of destocking that a small handful of large customers have to go through. They've got multiple manufacturing facilities, and it's been that struggle of getting full line of sight to all their sources of inventory. So we're just being very prudent in our view on process chromatography for the rest of this year, and we expect to see recovery in '25.

Patrick, this is Roop. Maybe just to build on one part is the geo piece. Based on the customers that Andy spoke of, it's in various geographies, so it's not concentrated in any one geo.

Okay. And then maybe just one last quick one. Just on the digital PCR side, obviously, always a focus for investors. Are you seeing anything different in that market, both competitively and just on the demand side? It would be helpful. Thank you guys.

I don't think we're seeing any real shift competitively that we've not already been seeing. Within the mix of life science overall, digital PCR instrumentation was the major factor again. Consumables were actually held up pretty well. Sequentially, quarter-to-quarter, we saw improvement. In fact, we saw quarter-to-quarter improvement broadly. It's really the case of digital PCR; it's a pretty tough comparison in Q2 of last year, the call-out in the script of the one-time licensing fee and some of the supply chain challenges that we actually managed to overcome in Q2 of the prior year. As for the competitive situation, look, we are maintaining our win rates in the segments we're focused on, and we feel very positive about the long-term outlook for digital PCR still.

Yes, and I think this is Roop. I would just add, we are going to see second-half strength in ddPCR over the first half. So when we think about that, we're pleased with how it's coming back.

Great. Thank you guys.

Thanks, Patrick.

Thank you and good evening. At a high level, with the current guidance, do you think you've framed the operating environment appropriately? Or are there any areas where you're trying to be conservative or any further areas where you're speculating on improvement that you don't yet have visibility on?

Hey, Dan, this is Roop. Maybe I'll start. In terms of spectrum, I think we framed it well in terms of what we're seeing across the different areas. Obviously, from a Life Science Group, the process chromatography is the area that, as Andy spoke up, we're seeing the greatest headwind. Our position with these customers is very strong in terms of the end therapeutics that they support. Those are market leading therapeutics. We feel very good about that and it can't be displaced. It's just a matter of the destocking that's occurring there. As we just talked about ddPCR, we're seeing positive signals and expect that to grow. Clinical diagnostics has been positive throughout the year, and we expect it to have some normalized growth rate as we continue. The margin is the one area that I framed, which is maybe a little bit more conservative, but part of this is mix being a contributor to our positivity so far. It's hard to predict mix exactly, so we're mindful of that. I think we haven't touched on China, which may be in the questions. China is the one variable that's an open question. The new stimulus introduced is interesting, but I'm not sure it will have that much of an impact. We're being very prudent in our view on what to lay out for folks to expect in the second half, recognizing the markets are still dynamic, especially in a couple of the areas that we're playing in. China is probably the most variable, not just for us but for others as well.

Understood. And thank you for elaborating on all those assumptions. Just a quick follow-up. I know the single-cell product has been a very high visibility R&D effort at Bio-Rad for a couple of years now. You launched it in June. Hopeful that you could give any color on your go-to-market strategy or how to think we should frame that uptake?

Yes, Dan, it's Andy. Thanks for the question. Look, I think we're consistent in where we think the value proposition for the product offering set is, which is equal performance to the market-leading solution, better value, and a better workflow. We think the long-term growth opportunity for single-cell is solid. It's a sizable market, and we expect it to continue to grow. The acquisition of Fluent by Illumina is a testament to that, and I think that's going to put more emphasis on value for the end market. We believe we've got a very well-positioned product with probably the best workflow of all the platforms. In terms of go-to-market, we've got a specialist focus in our early months of introduction to establish product performance and credibility out there with key core labs and centers. That's the way we're approaching it as our platform value, and we're thinking about the work we'll do in the second half of this year. We don't anticipate material revenue contribution that would change our outlook this year, but it's about building for next year.

Thank you, Andy.

Hey, good afternoon. Maybe you look at Life Sciences and backing out chromatography, you're still down kind of 4% in the year. Most of your peers are flat. Can you maybe just talk a little bit about why that might be the case?

Yes. I think we've got an element of mix that's playing into our disadvantage here, Tycho, amongst others and with the biopharma and digital PCR component. Maybe also a little bit with our qPCR business since it was the beneficiary of a massive uplift in the COVID period. We're still seeing some relative softness on recovery in qPCR instrumentation. I think we've got that mix that's a little bit against us relative to others, and depending on other folks on the reagent instrumentation mix, where reagents are holding up better this year overall. The last piece that I would call out, which we should not forget, is Q2 was a tough compare for us. We had the one-time license fee and despite the market starting to pull back by the end of Q1 last year, we actually were doing a fair bit of supply chain recovery during Q2. So our comparison was a bit elevated to pass other focus as well.

Okay. Capital deployment question, why not do a bigger buyback here? You've got peers buying $5 billion at 30x earnings. You guys are at 5x extra carriers. Why don't do something more meaningful than the $500 million you just added to the repurchase?

Well, that's just the incremental authorization, I guess, and we're just mindful. I mean, those balance sheets that you referenced, Tycho, are large balance sheets. So that's one thing to keep in mind. With that said, we did close to $200 million through the Q2 period and through the blackout period, which we hadn't done. Our actions speak to our perspective that we're undervalued. The $500 million in incremental authorization is a strong message from the Board and us. When you consider where our balance sheet is, that's a very reasonable percentage of our cash.

And then are you committing to prioritizing that over M&A? I mean, that's the other side of it. Your peers are saying multiples are still too high.

Yes. I'll start, and maybe Norman would like to add. Prioritization, I think, part of it is the technical aspect of the share repurchase and where intrinsic values are, and that's more of a technical answer. I wouldn't say we're necessarily prioritizing, but we're mindful. At the same time, the right deals have to come. As you mentioned, valuations have to be appropriate for the right technologies and they have to contribute to our product roadmap and strategy. Timing is an important part of that. We look at both as opportunities to drive long-term shareholder value creation.

And then maybe last one on digital PCR. Just with the continuum launch coming, any risks ahead of the launch freezing the market? It's been delayed a couple of times.

Yes, nothing outside of the normal risks that go with new product introduction and all those final steps you go through. We're still targeting an initial entry in Q4. Really, it's about staging for next year, Tycho. Nothing more to add at this point, I don't think.

Understood. Thank you.

Thank you.

Thank you. Good afternoon. Norman, I wanted to ask you about the COO search. It sounds like there's still a few folks in the mix there. As you look at the group, is CEO potential still a high criterion? How do you think about that relative to some internal candidates you might have in terms of succession planning?

Yes. I think as we said before, part of evaluating the candidates has been a CEO succession, and that's still a critical part of the mix.

Okay. I also wanted to ask your latest thoughts on the Sartorius stake and just thoughts around potentially monetizing that to fund buyback or near-term M&A, if something presented itself? What's your latest thinking on the strategic role of that stake?

Yes. We still see it as a monetizable asset. The question is what the future is with your team not extending its contract. His tenure has been really good for us, and our investment has done really well. This has given us a much more valuable monetizable asset. At the end of the day, his stepping down doesn't really impact our overall views.

Got it. Okay. I had one cash flow question, Roop. On the relative inventory levels, if I do some basic benchmarking, it does look a bit bloated. If I look at inventory as a percentage of sales, maybe is one metric back in 2019 before the pandemic, it was around 24%. Today, it's kind of annualized at over 30%. It would be great to hear your thoughts on the ability to start drawing this down to generate some cash. Are there any hurdles to doing that?

Yes. Great point on that. You're spot on that we do think it's bloated. With all that said, we've got inventory, and some of it has been purposeful because of the market. We needed to procure strategic materials to ensure continuity of supply. If I separate that out, we have focused initiatives in terms of inventory reduction. Part of it is just operationally how we manage the sales and operations alignment, and there are improvements being made there. We expect over time that inventory will come down. From an inventory turn standpoint, our inventory turns will improve. Obviously, with revenue growth, you may see additional inventory on the balance sheet. However, from an overall turns perspective, where we are today is unacceptable, and we're focused on improving that, which will drive stronger operating and free cash flow.

Great. Thank you.

Thank you for joining today's call. We will be at the Wells Fargo Healthcare Conference in Boston in early September and hope to catch up with some of you in person. As always, we appreciate your interest, and we look forward to connecting soon. Take care.