Bio-Techne Corp (TECH) — Q4 2016 Earnings Call Transcript

Good morning, and thank you for joining us. On the call with me this morning is Chuck Kummeth, Chief Executive Officer of Bio-Techne. Before we begin, let me briefly cover our Safe Harbor statement. Some of the comments made during this conference call may be considered forward-looking statements, including beliefs and expectations about the Company’s future results. The Company’s 10-K for fiscal year 2015 identifies certain factors that could cause the Company’s actual results to differ materially from those projected in the forward-looking statements made during this call. The Company does not undertake to update any forward-looking statements as a result of any new information or future events or developments. The 10-K, as well as the Company’s other SEC filings, are available on the Company’s website within its Investor Relations section. During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to the most comparable GAAP measures are available in the Company’s press release issued early this morning on the Bio-Techne website at www.bio-techne.com. And with that, I’ll turn the call over to Chuck.

Thanks, Jim, and good morning, everyone. Thank you for joining us for our fourth quarter conference call. As you saw in our press release this morning, we ended the year on a strong note, and I’m very pleased with our fourth quarter results, as well as the execution of our strategic plan all year. The Company delivered 10% organic growth in the quarter and achieved 6% growth organically for all of fiscal year 2016. This is a nice improvement over the 4% organic growth we had last year. In each of the past three years, we have improved organic growth each year. The biotech division had a great year, with 6% organic growth. And nice momentum at the finish, with 8% organic growth in Q4. Margins remained strong in the low-50s, due to leverage and scale and a strong year for productivity programs, which largely paid for our investments to drive growth. Europe had a solid year with mid-single-digit organic growth. The only issues we had with Europe happened in the final week, currency due to Brexit. Germany continues with a strong market, especially our biopharma customers. The UK finished the year with 6% growth and we see no changes to any of this momentum in the near term. Our team has now expanded under new European leadership, and we have full subsidiaries in the UK, Germany, Scandinavia, Switzerland, and Italy, with good local distributors forming in the Middle East, Spain, and Eastern Europe. Europe now represents 22% of the total Company’s revenues and nearly 30% of the biotech division. In the APAC region, we have had double-digit growth for three years in a row, with China again leading the way with 20% organic growth in fiscal 2016. Also, unfortunately, once again, Japan had a poor year due to research funding being delayed due to government bureaucracy. With the addition of strong new leadership in our APAC region, we have made further investments into building our businesses in countries outside of Japan and China. We now have great partners in Korea, Australia, India, and Singapore. Our headcount and critical mass continues to increase with this region now representing 4% of global sales in the biotech division. Back in the U.S., where we achieved high-single-digit growth for the year in the biotech division, we believe the biggest contributor to growth has been our new website. Last time we launched a complete overhaul of our main R&D Systems website, complete with 30-plus active pathways that are interactive with researchers to allow them to select the reagents they are looking for to advance their science. Thousands of products can be selected on our website. Search engine optimization, known as SEO, is also greatly improved, as is the speed to order. We have double-digit increases in traffic and purchases. This key difference, combined with our partnership with Fisher, has allowed us to return to solid growth in the academic sector of the market. Our pharma and biotech business remains strong, largely driven by the growth in demand. Another large contributor to growth is new product vitality. Last year, I spoke about our increased vitality in the biotech division with the first year of sales nearing $6 million. This year, we exceeded this number dramatically and topped $12 million in sales of products sold in the first year. This is just our reagents; and does not include our instruments, which adds to the significant overall number. This is an improvement of 500% from three years ago. Innovation is the lifeblood of the science Company and we strive to deliver to our goals of 10% vitality to 100%. Speaking of instruments, the protein platform division had a good year with 14% organic growth. We spent the first half of the fiscal year redesigning the marketing and commercial approach for the business. As a result of these changes, ProteinSimple experienced 25% plus organic growth in the two final quarters of the fiscal year. We still feel strongly that this business will become a $200 million business built on three important platforms: First Simple, biologics, and the SimplePlex platform. All three are seeing double-digit growth as they are becoming more widely accepted as novel new methods within their respective markets. Lastly, the clinical controls division achieved over $100 million in revenue in fiscal 2016. Margins remained strong at around 30%, and the integration of four businesses into a cohesive division that can leverage each other with OEM customers is working. Cliniqa, our latest acquisition in this division, had an incredible year with double-digit growth. This division makes us number one in this market and we have solutions for virtually every instrument in this space. Our next expansion in this division is in core diagnostics applications and will be leveraged with our leading content portfolio. Following the acquisition of Cliniqa, the integration of our BiosPacific business into this segment in early 2016, diagnostic immunoassays as well as bulk and customer agents for the diagnostics industry have become an increasingly important revenue stream in this segment. Thus beginning in fiscal year 2017, our clinical controls segment will be referred to as the diagnostics division. Given the broader focus on diagnostics products other than controls and calibrators, we believe diagnostics division more accurately captures the future direction of this segment. As I mentioned in my opening remarks, fiscal year 2016 was a strong year in executing our strategic plan and our best year in three for growth, especially organic growth. With nearly $500 million in revenue puts us halfway to our strategic target of $1 billion. It will take a combination of more acquisitions as well as strong organic growth to reach this goal, but we do see a vision on how to get there. The team has never been more energized and our results this year have invigorated the entire Company. As in the past three years, much of our strategic plan is based on acquisitions and we did complete Zephyrus in March, Advanced Cell Diagnostics, or ACD, in August. Both are strong additions to the portfolio. Zephyrus is an instrument Company, which has just launched a new platform branded as Milo that performs single-cell western blot. It is based on a single-cell electrophoresis process, so it fits perfectly into the ProteinSimple line of instruments. Our latest acquisition, which closed just a couple of weeks ago, was ACD. ACD marks Bio-Techne’s entry into the genomics field and market. Second, and more importantly, its innovative and versatile technology has the potential to change pathology practices. RNA-ISH is a transformative technology facilitating and improving the monitoring of gene expression patterns at the single-cell level while retaining the morphological context of the tissue being analyzed. ACD’s technology serves both research and diagnostic markets expanding Bio-Techne’s presence in clinical lab settings. These last two acquisitions take our total to nine in the past three years since coming together as Bio-Techne. All but ACD are nearly fully integrated and we are proud of the way the employees from all the sites have worked together to build a new and exciting innovative culture here. Commercial synergies are a priority. We now have a sales force that has expertise in both instruments and consumables, which together provide our customers with world-class solutions in science. Progress has also been exceptional with our Cyvek, PrimeGene, and Novis acquisitions. Novis has had a stellar year with growth now running at near 10%. Cyvek, or SimplePlex, as it’s now called, is filling as a business, coming off of some recent successes. We still see huge potential with this business. Roche, as an example, is using this technology in three clinical studies and has offered support for technology by hosting webinars with our staff. PrimeGene completed a new state-of-the-art factory in Shanghai dedicated to the development and production of GMP proteins. With the help of PrimeGene, our China for China business has experienced strong double-digit growth. Following the ACD acquisition, our pipeline of potential M&A targets remains strong. And importantly, our strong balance sheet and cash flow leaves plenty of dry powder for the ongoing execution of our disciplined M&A strategy. We plan to continue to augment our organic business with acquisitions that strengthen our position in existing businesses and geographies or leverage our reagent expertise in adjacent markets. In closing, our leadership team has spent a lot of time this year reviewing and thinking about our strategy and strategic plan. We are three years into the five-year plan we initiated in 2014, and we have stayed very true to our objectives. Nine acquisitions later, 230% growth in headcount, 22 sites versus 7, and 100 people in China instead of 12, a subsidiary model with three well-designed divisions in three regions, are all a testament to the significant progress we have made. And the growth isn’t bad either, with $304 million in revenue in 2013 versus nearly $500 million this year, in 2016. This is all great, but we want to become a $1 billion plus business with continued strong profitability. Toward this goal, our strategic plan pillars have remained the same. Enable and sponsor innovation in the core product lines; geographic expansion; commercial execution, operational excellence, account recruitment and retention. We have tactical plans for all of these strategies and resources and the people to achieve them. I’m very proud of our teams and the progress to date. The Company is coming to a true inflection point in growth as we integrate the strategic acquisitions to date, as well as improve internal operations for growth. Fiscal 2017 will be a great year. And I look forward to having our leadership team share more details about our strategic plan at our inaugural Bio-Techne Investor Day in New York City on September 15. I hope to see you all there. With that, I will pass the call over to Jim for a more detailed review of the fourth quarter financials before we open the line for Q&A.

Thank you, Chuck. As on our prior earnings calls, I will provide an overview of our Q4 financial performance for the total Company and then provide some color on each of our three segments. Starting with the overall fourth quarter financial performance, adjusted earnings increased 3% year over year to $34.5 million, while adjusted EPS was $0.92 a share versus $0.90 in the prior year. The impact of foreign exchange fluctuations represented a large headwind to EPS, approximately $0.06. The more pronounced foreign exchange impact on our adjusted EPS results is due primarily to the British pound volatility related to the Brexit outcome at the end of the quarter. As a reminder, our European headquarters is in the UK, making the British pound our functional currency in Europe, which unfavorably impacted our European transactional assets in the quarter. GAAP EPS for the quarter was $0.69 compared to $0.71 in the prior year. Q4 reported revenue was $134.8 million, an increase of 15% year over year, with organic revenue increasing 10%. Fourth quarter reported sales include a 6% growth contribution from acquisitions, partially offset by a 1% unfavorable foreign exchange headwind. Moving on to the details of the P&L. Total Company adjusted gross margin was 70.1% in Q4, decreasing 70 basis points from the prior year. Strong volume leverage and productivity gains were more than offset by the lower margin Cliniqa acquisition and unfavorable FX impact. Excluding the impact of acquisitions and FX, core gross margins improved 7 basis points year over year in the fourth quarter. Adjusted SG&A in Q4 was 22.5% of revenue, 160 basis points higher than last year. The SG&A increase was driven by the acquisitions made since the beginning of the fourth quarter of last year, investments made in China, and Chinese corporate-related expenses. R&D expense in Q4 was 8.6% of revenue, 60 basis points lower than last year, reflecting the volume leverage achieved while purchasing platforms and biotech division. The resulting adjusted operating margin for Q4 was 39.1%, a decrease of 170 basis points from the prior period. Looking at our numbers below operating income, net interest expense in Q4 was $0.4 million compared to $0.3 million of net interest expense last year due to higher draws on a line of credit which partially funded our Cliniqa acquisition last July. Other non-operating expense in the quarter was $1.9 million compared to $0.9 million of non-operating income in the prior year quarter. This unfavorable transactional FX explains this year-over-year variance. Our adjusted effective tax rate in Q4 was 31.6%, an increase of 40 basis points in the fourth quarter of last year due to a greater percentage of taxable income being generated in the U.S., driven in part by the Cliniqa acquisition. In terms of returning capital, we continued to pay our dividend and paid out $11.9 million in the quarter. Average diluted shares were relatively flat over the year ago period at 37.4 million shares outstanding. Turning to cash flow on the balance sheet, $36.3 million of cash was generated from operations in the fourth quarter and our investment in capital expenditures was $3 million. We ended the quarter with $95.8 million of cash in short-term available-for-sale investments. Our long-term debt obligations at the end of Q4 stood at $126.5 million, a decrease of $31.3 million from the end of Q3. Going forward our capital deployment priorities remain opportunistic M&A, our dividend, and debt pay down. Now I’ll discuss the performance of our three business segments, starting with the biotechnology segment. Q4 reported sales were $84.4 million, with organic growth of 8%. Foreign exchange negatively impacted reported results growth by approximately 1%. By geography, the U.S. grew in the high single digits, with upper single-digit biopharma sales growth and mid-single-digit academia results. Europe increased approximately 10% organically, with biopharma and academia sales in this region growing in line with the overall geography. As we discussed in the third quarter earnings call, timing of the Easter holiday impacted our European results, representing a favorable 5% impact to growth in this geography. China experienced organic growth in the mid-teens during the fourth quarter and delivered 20% organic revenue growth for the fiscal year 2016. Excluding Japan and China, the rest of APAC grew 20% organically in the fourth quarter. Japan continued to be a drag on growth, given the challenging government funding conditions there. Adjusted operating income for the biotech segment increased 5% in Q4 compared to the prior year, and adjusted operating margin was 52.4%, a decrease of 100 basis points year-over-year, due to the timing of website enhancements and certain commercial investments, particularly in China, partially offset by volume leverage and productivity initiatives. As we look ahead to fiscal year 2017, our latest acquisition, Advanced Cell Diagnostics, or ACD, will be included in our biotechnology segment beginning in the first quarter. Turning now to clinical controls, segment sales in Q4 were $28.5 million, with reported growth of 33% over last year. The acquisition of Cliniqa contributed 30% to growth while organic revenue increased 3%. Strong growth in the hematology controls business was partially offset by the timing of new OEM projects in our blood glucose business. Separately, beginning in Q1 of FY17, we have analyzed the Cliniqa acquisition, and this business will be included in our organic growth going forward. Clinical control adjusted operating income increased 36% in Q4, and adjusted operating margin was 31.4%, an increase of 80 basis points from the prior year. The higher adjusted operating margin was primarily attributable to productivity initiatives, partially offset by the mix of a lower margin Cliniqa acquisition. Moving on to our protein platform segment, net sales in Q4 were $22 million, an organic increase of 29% from the prior year period, with unfavorable currency translation impacting revenues by approximately 1%. Growth for the segment was broad-based with most major regions and product lines growing by solid double digits and also includes a favorable contribution from the full quarter sales from our next-generation iCE instrument, Maurice. Adjusted operating income in Q4 for the protein platform segment was $1.6 million, representing an operating margin of 7.5% compared to approximately breakeven operating income one year ago. Strong volume leverage drove a year-over-year improvement, partially offset by the operating costs associated with the Zephyrus acquisition. We continue to expect additional improvement in protein platform’s profitability, as topline growth and productivity gains drive operating leverage next year and beyond. In summary, Q4 was a strong quarter for Bio-Techne with solid commercial and operational executions driving the best organic growth performance in many years. This capped off a solid full year with 6% organic growth in fiscal year 2017. Looking ahead to fiscal year 2017, we expect overall Company organic growth to be similar. Additionally, the acquisitions made in fiscal year 2016 and this past July should add another $35 million of revenue to the topline in fiscal year '17. Foreign exchange, however, will continue to be a revenue headwind at approximately 1%, if rates stay where they’re at today. We are very pleased to include ACD and the other recent acquisitions in our upcoming fiscal year results although I would advise that collectively these businesses are currently projected to be dilutive to our operating income in the coming year. Overall, we anticipate adjusted total Company operating margin for fiscal 2017 to be in the mid-30s, with this metric improving throughout the year as we realize volume leverage from the acquisitions. I’d also like to remind everyone that Bio-Techne assumed an additional $250 million in debt to fund the ACD acquisition, with the associated interest expense expected to also impact our bottom-line results for the year. That concludes my prepared comments, and with that, I’ll turn the call back over to Rachelle to open the line for some questions.

I have two questions. The first one is about ProteinSimple. This business line has been performing well, and you mentioned a few quarters ago that there was some sales force turnover. Could you provide more context on how you have managed to turn that business around so quickly? I'm looking for more details on its performance.

Sure, Amanda. Well, we were very transparent starting about a year ago and we saw the growth rates slipping dramatically. And when you do an acquisition in Silicon Valley, you can expect about a quarter of the people to leave and head on and buy the next lottery ticket. We did see a lot of that. In fact, four of the top five managing teams moved on, and we expected that. We kept some key guys; the Head of R&D and Development has run the business for us and has done a great job. The commercial team, however, was definitely a little more lacking than we thought and we had to make additional changes quite early, and you guys know all about that. So overall, we turned over roughly 60% of the commercial organization, including marketing in some of those early first couple of quarters, which obviously is going to cause a big hit to the business and top lines. But those changes were made, I think, very well and very soundly and with great new people, great new head of marketing. We’ve changed the whole way we go to market, we’ve changed the way we address the customer, we’ve changed the collateral, we’ve changed the way we address customers at their trade shows. And most importantly, we’ve done a lot of synergy work with the biotech divisions. The instruments need reagents. Now we did this acquisition because there are a lot of synergies with reagents of R&D Systems branded products. They’ve been working together quite strongly and quite well. Our head of our commercial organization in North America, Europe, and Asia biotech has worked closely with the organization there in protein platforms, and that also has paid off. We actually have new organizational work together on leads, driving the leads, both reagents and the hardware side, and so we get new customers from both sides of this, which is working. Which we thought it would work. I guess that’s really whether we can say right now. The marketing looks solid. Our lead generation is up dramatically over a year ago, and we’re making progress. Now, say we were 25% last quarter, 29% this quarter. Also the first two quarters of last year were about flat or negative. I don’t we’re not going to sit here and say we’re going to be 30% or plus going forward. But I do think double-digit growth going forward is what we’ve been telling people, and we expect that. If we don’t get that, we will make more changes. This is a great business and it’s not a one-trick pony anymore. It’s not just a western blot platform. As we mentioned, we’ve got three solid platforms in this division, all driving growth, all working at double-digit growth right now. So, that provides more safety as well. It should get near to $100 million business this year, and we hope, as we mentioned, we think it’s got legs to get to $100 million or so higher. This year, positions in western blot and below is still single digits here. We’ve got a lot of room. And the biologics side is a nice surprise, the way it’s growing. It’s also a decent market. Then there are new applications coming out all the time. New papers are coming out. We’ve been very thrilled with the acceptance we’ve seen, and we’re hoping we’re actually crossing an inflection point, continuing the strong growth we’re seeing. We will see.

I think you said in the past that you think you can get to roughly $750 million revenue with the businesses you have now incorporating synergies. Is that still a fair assessment?

I believe that with ACD included, we are looking at around $650 million to $700 million when accounting for all currency impacts. However, reaching $1 billion will require additional acquisitions. Based on our calculations, models, and an anticipated growth rate of about 8% or more going forward, we should be able to come close to that figure. Additionally, we aim to strengthen our margins, which is a key consideration.

That was going to be my next question on the margin side. So obviously, you had some underlying margin expansion, but then offset by currency and transaction. So maybe just give a little perspective on what you’re doing just from an underlying perspective. And then when you think about margin, I think you’ve been pretty disciplined about the platforms you’re bringing online and where they sit from a margin perspective in your business. But just remind us what your target margins might look like.

No one is more disappointed than us to see the last week of the quarter, the Brexit hit and what we took with that, because we’re UK based in Europe; we’re a U.S. based business here. So, it is what it is there. We’ll dig out of that pretty quickly we think. Last quarter, we beat pretty soundly at 42.5% operating margins. I think we’re closer to plan, I think 39% or right around that range. And as Jim mentioned, with the dilution this coming year with ACD and then Zephyrus, what we’re doing, mid 30% is a safe number. And we’ll be climbing back to that 40%, working on productivity, working on synergies and doing what we’ve done already a couple of times. We have been in this high 30% before and clawed our way back to 40%, and we’ve mentioned that and we’re going to drive that. So productivity is going to be key. We will not over-invest. We’re going to try to invest in systems and people and things that create synergies and can create value. We’ve got a pretty good team, a lot of experience and a lot of big companies that know how to do this. We actually have more opportunities, more things prioritizing than we can even do. So the list of things we’d like to do is a pretty long list. So I mentioned, we’re disciplined; we think we are very disciplined. And we understand how important it is to keep the margin in focus, and I think we’ve done a really good job.

So are you thinking you can be back to 40% within, coming out of next year?

That’s hard to say. I doubt it. I think we will see how, ACD is in the press release. We bought them, and in the trailing 12 months, they were over a 50% grower. If we can keep that going, then who knows? It’s a business like our business. They make reagents, put them in little tubes, stick them in a box and sell them as kits with very high gross margins; we like that kind of business. And if that growth rate continues, it’s going to climb in the profitability range very quickly. And we’re going to, we have not discussed where the synergy is commercially. We’ve invested as a Company commercially, and that’s why they’re at where they’re at. And we have to wait out an 18-month earn out, work together with them, but there are a lot of synergies. But for sure, China and Europe; there’s a little Company that did not leverage the reach we have. So we’ll see how fast they can dig into the land of profitability. But to say they’re going to give us 3, 4, 5 points of margin for the Company, that’s probably a reach. But we’ll see.

Good morning, guys. Congrats on the great quarter. You’ve had pretty impressive growth in the biotechnology segment over the last few quarters. What do you think has been the biggest factor in that? How sustainable is the mid to high single-digit pace going forward?

If you back up a year or two, we talked about when you annualize these acquisitions, they were strong growers. We should be in that 8 to 12 range, which is a pretty big band, I understand that, and we’re kind of there now. It really comes down to, if ProteinSimple stays in that 20% region or better, we're going to be, should be at 1% or better. The better question is, why is the biotech division doing so well? It’s continued to do well five, six quarters in a row. We had an 8% quarter; this is really sound. And it’s just not just one reason, thank God for that. The website has been an amazing success. But academia, which is still a big portion of our business, it’s something like $800,000 or whatever report you want to believe. But our average order size, remember, is still like $900 or something like that. So, you have to deal with this model of growth through the web. You can’t touch all of these people with just sales. You have to have a model that has a really nice quick, sharp-type web engine, an SEO engine, and then delivery mechanism. And we’ve overhauled ours and it’s working well. With more online activity and more touches on our website, you get more orders, and that’s one piece. Fisher Helms started out slow last year for us but ended pretty well and things were improving. I think they had their own growing pains with absorbing life tech. Movement internally with their TSRs, which we’re constantly retraining now and stuff. So that’s improving as well. We’re depending on Fisher still, and it’s helping. And then biotech pharma has been strong and remains strong, and it’s even getting better. And we’re doing a lot more, we’ll call it custom work. We’re getting more known in the industry and we’re being approached more and more for very difficult assignments for developing reagents, proteins, antibodies, etc. for these customers and being paid an amazingly nice premium for it. And there’s a nice reorder benefit as well. Roughly about half of that work is going in our catalog, so we like it. And that’s why we see this 500% increase. There are a lot of those things, those three things we stay in place, I think you’re going to see the biotech division in the mid-single digits or better in the growth region. That’s what we expect. That was the plan and we are executing to that point.

Okay, that’s helpful. And then on your last earnings call, you mentioned starting phase one of your ERP system in July. Any color on how that is progressing?

Oh, ERP. I’ve been involved in five of them, and none have ever been flawless. We’ve all heard the horror stories, and some of our peers are really struggling. I come from a large company that had operations shut down for weeks. Although we haven't experienced that, we are definitely feeling the challenges in the first month of the preliminary ERP. We are prepared for it; we have temporary staff in place and are actively working through the issues. We expect to be in decent shape by the end of the quarter. There are the usual challenges, like an increase in back orders. Orders can be delayed because one stock number might be incorrect or not right, which holds up the entire order. A significant percentage of customer information is inaccurate, causing further delays. We need to work through all of that. We’re not manufacturing airplanes; it’s a complex business with many products, orders, and SKUs, which ERP is designed to manage. Even though we’re a $500 million business, we face complexities typical of much larger operations. Overall, I’m actually pretty impressed. This ERP implementation is one of the better ones we’ve done. However, we still have some work ahead to claim victory and perform at the level we do with our website design. I think it will take a quarter or two to resolve all the kinks, but that’s just the reality of ERP.

Hello, good morning. This is Katerina Ivana Vintasoe standing in for Paul Knight. What are the end markets responsible for the strong growth you are observing in China? Additionally, which segments or product lines are gaining more momentum there?

That's a good question. I'm not particularly pleased with our performance in China this last quarter; it's our worst in years, showing mid-teen growth. The issue stems from the recent bayou scandal. We sell many products into what we refer to as academic therapeutics, where numerous institutions were working on therapies without the necessary re-approval from the CFDA. Now, the CFDA is closely monitoring this area, and the government has placed significant restrictions on academic activities. It's important to note that academia in China represents a much larger portion of the overall market compared to other countries due to substantial funding from the government. We're talking about hundreds of institutions. Consequently, we experienced a setback there, though for the year, we achieved 20% growth, which is a solid number compared to the 25% seen last year. We anticipate this trend to continue as we grow, although our presence in China is still relatively small. When combining all our businesses with PPD, we are roughly a $40 million operation; we were at $12 million three years ago, so there has been significant progress, but we still have room to grow. The key to success in China is customers. It's a direct model, and we keep expanding our sales team, covering it by province and city. Strong leadership is essential, and we've managed to maintain almost zero turnover, which is impressive. Our leadership in China, as well as in Asia overall, is excellent. We have successfully recruited outstanding talent and continuously attract high-quality individuals. The R&D Systems brand is well-established in China. Many of the leaders in academic institutions there are Chinese who have returned after studying in the U.S. These individuals, often referred to as sea turtles, are familiar with our brand and our company. Therefore, we hold equal esteem in China as we do in the U.S., known for our premium brand, quality, and service. That's crucial, and we hope to leverage that across our new businesses. Our ACD personnel, along with others, have not yet faced that chapter, which is still to come. Once that part takes off, it will further enhance our position.

Okay, great. And then outside China, have you started seeing a pickup in academic spending, and in particular, in the U.S.?

You’re asking, is there an academic increase?

Yes.

We did see an academic increase this quarter. We did pretty well. In China, I would say it’s about like the same thing I mentioned. I think it’s mostly academic anyway. We would still put the business we had supporting therapeutics there with academia, and that took a little bit of a hit this quarter. We think it will take about a year to work through that; it’s not going to be near as tough as the last couple of years, as they run through their corruption scandal policies, etc. So we will see.

Thank you.

We enjoy a wonderful POL network in China. The team there are doctors and scientists themselves; they know each other pretty well. I’m very pleased with our POL network and the visibility we get, the trade shows we drive; there are literally dozens. We run a good operation and so it’s for selling new hostages for agents and so we’re now, our focus going forward is really getting instruments pretty aligned and synergistic with that core business, just like we’ve done here. It’s working well.

Good morning, gentlemen. Congratulations on the strong quarter.

Thank you.

A couple of questions for me. First, regarding the academic market here domestically NIH funding. I think with the 6% increase this year, I think there was a lot of expectations that it was going to take a year before you really started to see the benefit from that increase, paying salary increases and all of that. But it appears that you’re actually starting to see some benefit already. Is that the case? And what does that mean or imply for next year with the additional increase?

We went through the math on this a few quarters ago, what we were going to get from this. And we came to the conclusion we’d probably achieve about a 1% gain because we’d have a tailwind from the NIH funding. The amounts that trickle down through all that actually hit the reagents budgets, okay? So, I think there is some help. You’ve heard a lot of our peers have talked about they think the second half of this calendar year is going to see more of a funding hit. I think we’re in the reagents side, and we’re seeing some growth. I tease my commercial folks that they’ve got their chests puffed up pretty hard this last quarter with such strong growth. But they’re getting some help for sure. They’re probably at least in that 1% range is probably NIH funding, and just a better attitude. We’re going the other direction. They’re not cutting anymore; they’re starting to figure out where to add.

Okay, great. And then maybe a little bit of a strategic question, but with the acquisition of Advanced Cell Diagnostics, this is your first move into genomics. Do you envision essentially building out a fourth reporting segment, where this will be the building block of that division? Or was this just an opportunity to expand a little bit more for that existing segment?

A couple of things. First of all, when you think of our core business, we really are a picks and shovels provider to areas like cancer research, stem cell, and we’re known for quality. So we’re the selection of choice by, especially biotech pharma. And coming back hard in the academic side. We see ACD as the same thing. To say that we’re right in the sweet spot of genomics with ACD is probably a reach. It’s really a picks and shovels Company as well, in genomics. Certainly GM aided in 9,000 probes is products. But we like it because it’s reagents. It’s a kit business, it’s just like our business, and it gets us into that area where we know how to provide picks and shovels. On the clinical control side, same thing, diagnostics. We’re not a full-fledged diagnostics Company, but we supply the upstream reagents, chemistries, kits to the big guys, every one of the big guys that make true diagnostics that are, they go through the pain and agony of the qualifications and regulatory, and we haven’t had to do that. We’re drifting in that direction. We’ve been very clear we would like to get into some of that, maybe in China and some things. We’re very opportunistic, but we’re not going to go full into it. You look at this last quarter on diagnostics: there’s not many doing so well in diagnostics; it’s been a rough quarter. It’s an area you’ve got to be careful, we think. Same thing for genomics. We like the reagents, the support side of the business to start with, and we’ll see. Now with that business, growth beyond $100 million or so, I’ve been very clear, we’d like to continue to build out our regional subsidiary model. We have three divisions today, work on three regions. Five or six divisions would be great, and could be diagnostics, could be genomics, could be media. These are all areas that are very strong adjacencies to what we do today. And as we build critical mass, we’ll make new divisions and in the reported segments. To start with, we won’t be doing that with ACD. They have an 18-month earn out, so there’s a lot of work to be done; but if they get big enough, maybe. More likely initially they’ll be part of the biotech division, but it is too early to call that one.

Alright. Well, our strongest quarter in years, we have certainly enjoyed seeing 10%. We’re definitely focused on our margins and we’re focused on synergy. We have got more to bake in here. We’re working hard on it, you can be sure of that. Thank you all for joining the call and we will see you hopefully soon. And if not, in New York. Okay? Bye.