Bio-Techne Corp (TECH) — Q3 2022 Earnings Call Transcript

Good morning, and thank you for joining us. On the call with me this morning are Chuck Kummeth, Chief Executive Officer; and Jim Hippel, Chief Financial 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, as well as the potential impact of the COVID-19 pandemic on our operations and financial results. The company's 10-K for fiscal year 2021 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 because 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 most comparable GAAP measures are available in the company's press release issued earlier this morning on the Bio-Techne Corporation website at www.bio-techne.com. I will now turn the call over to Chuck.

Thanks, Dave and good morning, everyone. Thank you for joining us for our third quarter conference call. The Bio-Techne team once again delivered outstanding results across segments and geographies with 17% organic growth, continuing the momentum from the first half of fiscal 2022 into our third quarter. Demand from our biopharma end market remains strong, particularly in cell and gene therapy, where our workflow solutions and GMP proteins continue their fantastic growth trajectory. Other notable growth drivers in the quarter included our biologics instruments, as well as our best-in-class portfolio of research reagents and assays. Additionally, our prostate cancer test ExoDx Prostate had a record volume quarter as the urologist offices continued the reopening process and we gained increased mindshare in the benefits of this novel diagnostic offering. Once again, this performance was delivered with a focus on profitability, leading to a 130 basis point sequential increase in our adjusted operating margin of 39.6%. On the human capital front, Bio-Techne received two important awards during the third quarter. First, Bio-Techne was selected as one of the 500 mid-sized companies on the Forbes 2022 list of America's Best Employers. Additionally, we were included on the Forbes 2022 list of Best Employers for Diversity. These awards are testament to the exceptional culture and workplace we've built at Bio-Techne and I am proud of the team for these achievements. Awards and recognition like these, as well as targeting employee recruitment and retention strategies are fortifying our efforts to build the team necessary to support our future growth plans. I am pleased to report that we filled several key positions in the company during the quarter, including key business, technical, operational and commercial roles. We are still behind our original hiring plan for the year, but I am encouraged with the progress we made in the quarter. Given the state of the global supply chain, let me briefly discuss our operations. Once again, the team did an incredible job effectively managing our supply chain. I am pleased to report that we have not had any supply chain-related issues that impact our ability to fulfill our customer orders. Also, we continue to leverage our strategic pricing model across our portfolio to combat inflationary pressures on the business. As you can see from our margin performance in the quarter, these strategies are bearing fruit and we are leveraging our value proposition to offset rising labor and other costs in the business. Now let’s discuss specifics around our trade performance this quarter, starting with our geographies and end markets. China continued with its banner year delivering over a 30% organic growth in the quarter. This is just tremendous execution by our China commercial team, especially considering the COVID-related lockdowns that took hold late in the quarter in Shanghai. As these lockdowns are still currently being enforced, it is difficult to predict what the temporary impact would be for Q4. The impact of these lockdowns to date are primarily on our recurring research reagent business that is dependent on researchers being at the bench to run experiments. In the end, our China team will persevere just as they did in the early days of the pandemic two years ago, when they outperformed all of their peers. And there will likely be a spike of demand when the lockdowns are over, and researchers are trying to catch up on their projects. It is also important to mention that we have minimal supply chain and manufacturing exposure in China, so we anticipate any impact on the shutdowns to be isolated to this geography. Meanwhile, our growth across the rest of the globe continues to be strong. We experienced robust growth in the U.S. where our business increased in the high-teens as well as in Europe where we experienced upper-single digit organic growth. From an end-market perspective, global sales to our biopharma customers remain very strong increasing nearly 20% for the quarter. Meanwhile, academia markets started to improve, growing mid-single digits as the latest COVID pandemic wave started to wane, and there was more clarity on NIH funding with the federal budget in place. Now let’s discuss our growth platform, starting with the Protein Sciences segment, where we grew 16% organically in the quarter. During the quarter, we continued to further our cell and gene therapy strategy as our portfolio of proteomic reagents, technologies and analytical tools continue to deliver the cost-effective solutions needed to push these therapies forward. During the quarter, we increased the number of commercially available GMP proteins manufactured in our state-of-the-art GMP protein manufacturing facility, adding two high-quality, lot-to-lot consistent GMP proteins with the scale and capacity to meet current and anticipated demand. I would also like to highlight the strong performance of our cell culture portfolio, particularly from our Cultrex line of Basement Membrane Extract, BME, matrix products which act as scaffolds for the growth of organoid cell structures, induced pluripotent stem cell expansion and other 2D and 3D cell culture applications. All in, our portfolio of cell and gene therapy workflow solutions increased over 40% in the quarter with both GMP proteins and cell culture specifically growing well ahead of this rate. Once again, demand from our cell and gene therapy customers created a halo effect across our portfolio driving incremental demand for our proteomic analytical tools and spatial biology solutions. We are incredibly well positioned to benefit across our portfolio as research continues in this area and the rich funnel of these next-generation therapies progresses through the regulatory approval process. Next, I want to provide an update on Wilson Wolf. As a reminder, Wilson Wolf is a manufacturer of the GRx line of single-use devices, which are quickly becoming an industry standard for fast, easy and cost-effective cell therapy scaling solution. In our second fiscal quarter 2022, we entered into an agreement with Wilson Wolf where Bio-Techne can make a 20% ownership investment followed by full acquisition of the company upon achievement of certain milestones. I'm very pleased to report that Wilson Wolf made continued progress in achieving in the trailing 12 months $92 million revenue or $55 million EBITDA milestone, which will trigger our initial 20% investment. Wilson Wolf exited the quarter at a $72 million revenue run rate as they continue to execute on their growth plan and approach this important milestone. Now let's discuss our core research-use-only (RUO) proteomic reagents, including our industry-leading portfolio of RUO proteins and antibodies. Here our growth was also fantastic with these reagents growing at a 20% in the quarter. Researchers continue to rely on our catalog of over 6,000 R&D systems branded proteins for the highest quality bioactive and lot-to-lot consistent proteins on the market. Our R&D systems and Novus branded antibodies also continue to deliver the reliable and consistent performance needed by researchers globally and are increasingly being selected as content to enable the emerging class of next-generation proteomic technologies. Moving on to our proteomic analytical tools, which include our Simple Western, Simple Plex, and biologics instruments, as well as our leading portfolio of immunoassay solutions. Our ProteinSimple branded instruments and consumables increased mid-teens in the quarter. This growth is particularly impressive considering the prior year comparison where ProteinSimple increased over 50%. Once again, the performance of our biological instrument namely Maurice led the way, increasing over 30% for the sixth consecutive quarter. Maurice is easy to use, cartridge-based format simplifies protein characterization and charge analysis, delivering the ideal tool for our biopharma customers. The Maurice results reflect ongoing traction within CRO, CDMO as well as cell and gene therapy end markets. We believe we are taking share not only from competing systems but also converting accounts from high-performance liquid chromatography where Maurice offers comparatively higher quality data as well as labor and time savings. Our Simple Western portfolio our fully automated western blot solutions continues to penetrate the large manual Western blot market opportunity as a reproducibility and time savings value proposition continues to resonate within our end markets. We are also seeing building interest in the platform for applications that go beyond traditional Western blotting, including cell and gene therapy, protein degradation and even the support of dose-response curves. As a reminder, we introduced the Stellar kits for our Jess Simple Western platform in January. These kits enable the detection of low-abundance proteins while multiplexing multiple analytes within the same detection lane. In the first partial quarter since launch, Stellar Detection kits surpassed legacy fluorescent detection kits and contributed to a record quarter for Simple Western consumables. We continue to develop new cell and gene therapy applications for the Simple Plex or Ella multiplexing immunoassay system. For example, Bio-Techne and Cygnus Technologies as a part of Maravai life sciences recently announced the launch of the Simple Plex HEK 293 HCP 3G assay for automated process and purity testing on the Ella immunoassay platform. Purification of viral particles to minimize whole cell protein contaminants is a crucial part of the viral production workflow in cell and gene therapy applications. The Ella assay development roadmap remains very full with additional neurological biomarker, cell and gene therapy, bioprocessing and immuno-oncology assays in the pipeline. Layer the untapped clinical opportunity onto this rich assay pipeline and we believe Ella remains in the early innings of reaching its potential. Now let’s discuss the Diagnostics and Genomics segments, where organic growth increased 19% for the quarter. Our spatial biology business branded ACD, remains the largest spatial biology business globally as our highly sensitive biomarker identification technology with single-cell detection resolution and quantification capabilities continues to enable the transition from discovery to translational research. Spatial biology increased upper-single digits in the quarter as a soft academic market and a challenging year-over-year comp weighed on performance. Encouragingly, we made progress fortifying our North American commercial team with all our key sales territories now fielded. We augmented our commercial efforts with a full slate of conferences, including a presentation at the U.S. and Canadian Academy of Pathology or USCAP Conference, as well as the presentation of two posters at the American Association for Cancer Research or AACR meeting. We have a full slate of upcoming conferences, including ASGCT and AGBT. With our sales territories largely occupied and a growing presence on the conference circuit to build awareness and expectations for the academic market to improve following NIH budget clarity, we are expecting steady improvement in our spatial biology growth rates in the upcoming quarters. Moving onto our Molecular Diagnostics division, let's start with the significant progress our Exosome Diagnostics business delivered in the quarter. ExoDx Prostate or the EPI test benefited from increasing traffic to the physician office for initial or follow-up visits, which in turn drove improving diagnostic testing volumes, including PSA tests, which is a prerequisite for our EPI test. This improving physician office environment combined with our digital and traditional marketing initiatives drove over 50% year-over-year for ExoDx Prostate test volume growth as testing levels represented a quarterly record. We have several initiatives in place to build on this momentum including renewal of our Fight Like Cal marketing campaign with Baseball Hall of Famer Cal Ripken Jr. As a reminder, Cal Ripken Jr. took the EPI test and opted for a biopsy based on his results, enabling the discovery of his aggressive prostate cancer in its early stages. Mr. Ripken will be an active component of our live presentations at the upcoming American Urology Association Conference and our ongoing digital marketing initiatives. During the quarter, we continued to publish data supporting the value ExoDx Prostate delivers to men in their prostate cancer journey. A publication in the World Journal of Urology demonstrated the utility of the ExoDx Prostate test to address limitations related to prostate biopsy sampling year, prostate biopsy bias as well as multifocality of the disease with a study suggesting that the test can be used in decision-making for active surveillance and enabling them to avoid unnecessary radical prostatectomy. Separately, we announced an agreement with Thermo Fisher Scientific to exclusively complete the development of and commercialize the ExoTRU kidney transplant or rejection assay. ExoTRU is a non-invasive multi-gene urine-based liquid biopsy assay that provides critical allograft information to assist clinical decision-making in managing kidney transplant patients and optimizing care for these patients. Financial terms of the agreement were not disclosed but include payments for achieving various milestones, as well as an ongoing royalty. The first milestone payment related to a successful technology transfer to Thermo Fisher Scientific was achieved in the quarter. The legacy assured in portfolio of leading carrier screening and oncology diagnostic kits continue to gain market traction, including several evaluations of the recently launched AmplideX CFTR kit enabling broad coverage of the gene variant linked to cystic fibrosis. Additionally, we have positioned the business to increase its penetration of the largely untapped European markets adding to and leveraging our commercial presence in this geography. In addition to the geographic expansion, the Asuragen’s pipeline remains full and is positioned for strong growth in the quarters and years to come. Finally, our diagnostic reagents business continued its trend of steady growth in the quarter. The return of patients to the doctors' office is sparking demand for hematology, coagulation and clinical chemistry tests, which is driving demand for our clinical controls and reagents. Improving patient office visit trends, a full pipeline and opportunities to gain additional shared with our OEM partners set the stage for sustainable growth in our diagnostic reagents business going forward. In conclusion, we are incredibly well positioned for the proteomics evolution that is in the initial stages of unfolding, with high demand for our content-rich research reagents and highly sensitive yet simple-to-use analytical tools that move our customers' discoveries forward. Our cell and gene therapy initiatives continue to resonate with our biopharma customers with increasing demand for our GMP proteins and cell culture media products translating into growth across our entire portfolio. Given Wilson Wolf's current growth trajectory, the pathway to our initial 20% investment stake and eventual acquisition is accelerating. Our diagnostic strategy is gaining momentum, as testing volumes continue to improve with a proven ability to find partners that can help drive our next disruptive exosome-based test forward. I am proud of the team's Q3 accomplishments and look forward to continued execution against our long-term strategic goals. With that, I'll hand over to Jim.

Thanks, Chuck. Beginning with our financial performance for the third quarter, adjusted EPS reached a record $2.14, up from $1.81 a year ago, marking a 19% increase. However, foreign exchange had a negative impact on EPS of $0.03. GAAP EPS for the quarter was $1.48, compared to $1.12 last year. Revenue for Q3 hit $290.4 million, reflecting a 19% increase year-over-year on a reported basis and 17% on an organic basis. Our acquisitions contributed positively by 3% year-over-year, while foreign exchange had an adverse effect of 1% on revenue growth. Regionally, China experienced the highest growth at over 30%, the U.S. saw an increase in the upper teens, and EMEA grew in the upper single digits. The rest of the world grew in the mid-single digits. By end market, biopharma performed very well, growing nearly 20%, while academia showed an increase in the mid-single digits compared to last year. Moving on to the specifics of the P&L, the total adjusted gross margin for the company was 73.2% this quarter, up from 73% the previous year, primarily due to a favorable business mix, although this was slightly offset by foreign exchange impacts. Adjusted SG&A for Q3 was 26.1% of revenue, compared to 25.6% the previous year. R&D expenses for the quarter were 7.5% of revenue, compared to 7.0% the previous year. The increments in SG&A and R&D were attributed to the acquisition of Asuragen in the fourth quarter last year and to investments aimed at fostering our long-term growth strategies. Consequently, the adjusted operating margin for Q3 was 39.6%, a decrease of 80 basis points from the same period last year, but a rise of 130 basis points over Q2. Excluding the effects of the Asuragen acquisition and foreign exchange, the adjusted operating margin aligned with the previous year. In terms of financial aspects below operating income, our net interest expense for Q3 was $2.2 million, down by $0.2 million compared to the previous year due to a continued decline in our bank debt. Our bank debt stood at $259 million at the end of Q3. Other adjusted net operating expenses were $1.1 million for the quarter compared to $4.3 million in the prior year, mainly reflecting the foreign exchange impact from our cash pooling arrangements. For GAAP purposes, non-operating income accounts for unrealized losses from our investment in ChemoCentryx. Moving further down the P&L, our adjusted effective tax rate in Q3 was 21.2%. Regarding cash flow and capital returns, we generated $73.1 million from operations in the quarter and invested $15.1 million in capital expenditures. Additionally, in Q3 we returned $60.8 million to shareholders through stock buybacks and $12.5 million in dividends. We concluded the quarter with an average of 41 million diluted shares outstanding. Our balance sheet remained strong with $231.2 million in cash and short-term investments, which keeps our net debt position very low. Now, let's look at the performance of our reporting segments, starting with Protein Sciences. Q3 sales amounted to $213.2 million, representing a reported revenue increase of 15%. Organic growth for this segment was 16%, although foreign exchange had a negative impact of 1%. Growth was broad-based across nearly all reagent assay and instrument categories. Cell and gene therapy achieved over 40% growth, RUO proteomics research reagents grew nearly 20%, and our ProteinSimple instruments and consumables saw growth in the mid-teens despite challenging comparisons. The operating margin for the Protein Sciences segment was 45.4%, down 250 basis points year-over-year, with favorable volume leverage more than offset by strategic growth investments and, to a lesser degree, foreign exchange impacts. Shifting to the Diagnostics and Genomics segment, Q3 reported sales were $77.7 million, reflecting a 34% increase. Organic growth for this segment was 19%, bolstered by a 15% contribution from the Asuragen acquisition. The Diagnostics Reagents business grew in the mid-single digits, while the ACD branded spatial biology portfolio saw upper-single-digit growth during the quarter. With clearer academic funding and a nearly fully staffed sales force, we expect improved growth in our spatial biology segment moving forward. For Exosome Diagnostics, revenue growth accelerated, with prostate cancer test counts surging over 50% compared to last year, setting a quarterly volume record. We are optimistic about this trend and expect ongoing improvement as our marketing strategy resonates more with physicians and patients. As Chuck noted, we received an initial milestone payment related to the ExoTRU kidney rejection test technology transfer to Thermo Fisher Scientific, although the financial details remain undisclosed. In the Diagnostics and Genomics segment, the operating margin stood at 25%, which reflects a significant increase of 710 basis points from the previous year. This improvement is attributed to volume leverage and product mix benefits, including the milestone payment for ExoTRU. Overall, our business growth momentum remains robust. Using fiscal year 2019 as a pre-COVID benchmark, the company's revenue growth CAGR, excluding acquisitions, foreign exchange, and milestone payments, has consistently been in the low to mid-teens for the past seven quarters. As Chuck highlighted in his closing remarks, we believe we are still at the early stages of a proteomics revolution that lies ahead in the life sciences sector, and our top-tier research tools and cell and gene therapy solutions are poised to lead this transformation for years down the road. That wraps up my prepared comments, and now I'll turn the call back to Maria to open the line for questions.

Good morning, guys. Thanks for the questions. Chuck, can you just talk a little bit more about the scale-up in GMP proteins, whereas demand highest, how is it evolving and then what you need to do on your end at the end of the year into the end of the year? And then for the outlook there, you've talked pretty consistently about that piece of the business being on this trajectory where revenues can double for a few years, are you tracking ahead of the initial revenue expectations there? So does the outlook for the doubling still hold on what looks like it will be just a higher base for 2022?

Sure. Well, we launched two new proteins, which is, it's only two, but we only had two or three before that, so it's a big percentage increase. These, of course, are—a short catalog for doing proteins for GMP as you know. We have around 40 on the market total and most companies our competitors have less than a dozen. So very different RUO. The difference, of course, is we can make them in, at the gram level even. So, lots and lots at a very, very high quality state and very lot-to-lot consistent. The growth rate while under 100% this quarter, we were over 40% for the category and we’re just under 100% for proteins this quarter. We’ve been above 100% every quarter before. We will end the year over 100% probably the way it looks. And are right around 100 at the very least, I think that's pretty safe. And we told you, it would be about that, and it should be about that all year, and next year should be the same again. From that point on, we hope to accelerate as we get into more and more down the road with more clinicals. We get more and more pull-through with GRx with Wilson Wolf, who has a lot more customers than we do; they’re involved in a lot more clinicals. And as we work towards what we call the Holy Grail here, when we can—we'll be doing media at some point here, along with a very, very high-quality version of our proteins that can be supplied within GRx to the customer in a sterile environment, so consider it like a closed loop, which would be the only one in the market that can do that, we think. That's a year or so away, but that's what we're after, and that should really help accelerate even more growth. On top of all that, this is all cell and gene therapy, but we're also seeing explosive growth for our GMP proteins in regenerative medicine as well, so we've got a lot of customers that are scaling up around regenerative and that's equally exciting to us. Since it's another large area, we don't talk much about, but it's growing so much now and we've got so much more activity, we're probably going to start talking about it. So we've got additional growth levers that might help explain why we've been well north of 100% growth all year and for the last couple of years, to be honest. I think that addresses most of what you said.

Got it. Thank you. And then maybe just on ACD, it looks like there were some sequential deceleration in that business from 2Q levels and you're averaging something in I guess like the high singles for the year, and that's down from at least in my model like 30% plus in 2021. So is the hiring that you did really the key there and once, now that you have the sales reps in and presumably functional in the market. What do you think that the run rate growth can be like going forward there?

Well, the other two components around from headcount, of course, are the comp, super high comp from last year, as well as the academic reopening. So everything's coming together at once, along with a full sales force again. We're only down one. Even one is important, so this is not a huge sales force, but we're back to, I would say, full strength, and it will come on strong now. We should be back to double-digit or higher here. I think this quarter, we were pretty close to double-digit this quarter anyway, but we're getting there. It's pretty key now that we've got funding kind of out there and open now for academia that come back is going to happen. The comps get much easier going forward, that's also given. And while we are pretty strong in the U.S., it was softer in Europe and Europe is kind of lumpy back and forth and where we see that picking up as well. We're also positioning some more support and more help in Europe to help them, and all bodes well, but we still see this as a 15% to 20% growth platform going forward. And we're in the early innings. We have a new team to high levels in the team, so all the way to the VP run the Division, Head of R&D is fairly new. And they are just hitting their stride now ready. So that's also going to help.

Yeah. Hi, Chuck. Thanks for taking the question and congrats on the solid print here. First one, maybe for you and Jim both when we look at the top line here, you obviously seeing incredible growth here in the Exosome Diagnostics with the recovery, protein segments continues to do well. You mentioned are you protein, cell and gene therapy, Maurice, Simple Plex and I mean just across the board portfolio seems to be working. I mean I hear you on the comments, but just help us understand how should we be thinking about the sort of the top line as we go into fiscal year 2023. Is mid-teens that is still the right way to sort of think about this given the acceleration here and potential pickup from cell and gene therapy as well?

Yeah, all hear. As you know, we don't give quarterly guidance; we give annual targets. And we've given targets all year that we should be in the mid-teens for the year, and I think we're close enough for you guys can see we're going to be in that range for sure. Real question is, can it be 17% and 19%. I think we have to wait on a couple of things. China might have a minor impact in Q4, it could cure Q4, but it wouldn't hurt any more of that. Going to next year, it's mid-teens and up, and I think it comes off first a strong layer of momentum off our reagents. I mean we're at 20% growth in our proteins and antibodies. We are taking share everywhere. We're in double-digit growth in our assays. We're in over 30% growth in our Luminex line. We're number two in Luminex now; whoever thought that would have happened. So we're not going to—I mean we’re out of the park on the core. And as long as that core stays with the momentum we're seeing, which we do, then it's a mid-teens and up and then the accelerator from there, of course, is how do these smaller segments scale. They've got the higher growth rate to impact the overall portfolio. So number one again cell and gene therapy and on a $70 million run rate growing at 30%, 40% next year as a category that's going to start having a bigger impact. ExoDx is getting really interesting now. So we had a record quarter on tests. We're already seeing a big impact with the Cal Ripken campaign. We didn't really get a fair shake in that being, we went into that rate in the month of the pandemic, and it's been amazing interest. I can't wait to get an AAU myself and meet Cal and we’re going to do some things together there and we're expecting a big year going forward. And ExoTRU, we are working on the next thing now because we've got a great partner. We worked hard. This partner is actually blown our socks off. They’re almost doing a great job. They are ahead of our skies, they are pushing us to get the Tech transfer done quicker than we thought they would. They paid us, it's a good number. We didn't lay it out. We've got more deals to do, so we didn't want to talk about those numbers, but we had solid results without the extra payment to be honest. Anyway, so I think that's the future. I think it's all about staying with the momentum in the core, solid execution which we're doing, what's also helping this whole baseline momentum in our core is our digital backbone and it just keeps getting better and better. We got our one Bio-Techne needs site up and running. We had something like 80%, 90% attraction rate to that website as we start migrating a lot of smaller sites into the one, so we can have one-stop shopping experience for customers which you’ve been asking for years. That's all coming together great. We are doing a great job measuring our customers online and helping them with their purchasing decisions in real time and that's working. Our advertising spend continues to grow and continues to give us fabulous payback. So already all parts of running the company along with the innovation side are really doing well. As you know, we have a Tech Council that we put all these top scientists of all our divisions together. They meet virtually every month and working on new platforms together, and there is an incredible pipeline. That we do have an extensive prioritization process here; we just concluded that process it takes us three or four months, it helps us roll into our budget plan for next year. And we analyzed 400 different work streams in this company, of which we knew figured out where the draw line, we’ve never had a bigger pipeline of new-to-the-world innovation in this past year, things are—now we're reaching the size of a company where we're really getting a good collaborative impact across the company. So we're pretty jazzed here.

That's super helpful, Chuck. Jim, on the op margin obviously really strong in the quarter, almost 40%. Just wanted to understand in terms of near-term China hiring and other initiatives sort of ongoing sort of how should we think about the sustainability of this op margin and just maybe take us through the puts and takes there, in the near term, and sort of if you could provide anything on FY ‘23 and how should we think about op margins sort of longer term. Appreciate it. Thank you.

Yeah. So on the real near term, I mean we're not only we're coming off of our guidance and target that we started the year with which is that we would end the year at the same, roughly the same adjusted operating margin that we ended fiscal year ;21. We're still on track to do that. Now, I understand that that would mean from Q3, a sequential decline in operating margin, but however, we are making improvements—vast improvements in our hiring, which we talked about. And the ExoTRU that piece of it was a bit of a margin lift that won't reoccur next quarter. So we're basically right on track to do as we said we would do in terms of how we expect to finish this year from a margin perspective. FX will be a bit more of a headwind in Q4 than even it was in Q3, but I think we'll overcome that to still hit our year-over-year, roughly flat operating margin for Q4. Looking ahead obviously, we'll give more clarity next quarter as we finish up our operating plans for next year, but it's the same message, we've been saying all along, which is that we expect there to be incremental slight but incremental margin improvement over the course of the next four or five years of strategic plan, and we expect that to start next year – that continue next year.

Hey. Good morning. Congrats on the nice quarter. Maybe just Chuck, I think you touched on a little bit, but just flush out the point. Just on the Academic end market, it sounds like it picked up a little bit this quarter. And—but NIH funding finalize, kind of hopefully improves from here. And maybe I mean answering the question for you, but what's your outlook for that end market as we think about the next couple of quarters?

Yeah. Well, the clarity on NIH funding didn't happen quite in time to really boost U.S. a whole lot. We were ending up in low-single digits. Europe was in teens, actually, so the net-net was mid-overall. So that's why I say, looking forward, we're going to see the bigger lift in the U.S. going forward this quarter. And if Europe stays in the mid-teens, we'd be thrilled. So, and I think it's a good story going forward. It's finally starting to break loose. And again, the momentum is there overall, we've got great platforms that have a lot of interest from Academia, so that's just, that's always a fundamental, you've got to have, you've got a new-to-the-world stuff that they get some excited to do and go after new academic frontiers, which we continue to do in this company, so we have no doubt we'll be fine.

Got it. And then maybe as a follow-up. Appreciate the details on the Wilson Wolf performance in the quarter. If my math is right, it sounds like if they keep going the way they're going the kind of Phase 1 20% ownership, maybe that could happen in the next year. Can you just talk about the timing of owning a piece of that and then owning the entire company?

Yeah. The original plan would be kind of really Q3 next year, but we're ahead of schedule. There is a possibility it could be this calendar year. I mean they are on a $72 million run rate right now and they're literally getting record-breaking sales days like every week. So it's hard to say, I'm trying to pin down John Wilson when it will be and it's hard to pin down, but the good news here is they're moving towards strong financial execution. So we're seeing all their numbers. We're helping operationally so the read of the integration kind of already occurred, to be honest, and the team has worked well together for a couple of years and some now with scale ready anyway, so it's—we have a good viewpoint on how it's coming and I don't think it will be a year, I think it will be under a year from now.

Good morning, everyone. We discussed the diagnostics business earlier, and I believe it has experienced significant growth and profitability that aligns with my expectations. Could you provide more detailed information on what contributed to that improvement? ACD seems promising, but Exosome Diagnostics is also performing very well, which is a smaller part of the business. Additionally, I believe there may have been a one-time item from Thermo Fisher, if I understood correctly. What revenue run rate and operating margin should we anticipate moving forward? Thank you.

Yeah. We aren't breaking out the revenue of that division if highly competitive; we've got two or three competitors I'm sure even listening right now. So we don't get into that, but we have talked about the test rates, that are 50% up is real. It's still largely we’re being paid via Medicare. We're still working the private payer, but we're getting, we're getting better. It's—we are very close to going from cash to accrual, that's also going to help probably next quarter is our goal maybe, but we’ll see, but you know, we're getting there and we have a whole new team for surgeon taking the helm there especially commercially, it's really worked wonders. We are seeing record test days again this area too or pre-pandemic every week.

Got it. Understood. And then, Chuck, you just— it sounds like in the freight remarks you mentioned inflation, but also the ability to push through pricing. So did I hear you correctly that you are in fact, pushing some price increases through on the core kits and reagents business, and this is—how much headroom do you have there before that worry about competition?

Well, net-net, I always been big on price, it's just in my DNA, and we've put in place processes and structure here years ago and went after kind of an annual 1% net year kind of target and we're well above that this year. And we had to be focused on obviously costs are going up, but we've got wage inflation to cover. And as Jim pointed out in his numbers, we more than covered, but we need to cover with price to give us a strong margin. I don't think there is an upside beyond the steady state we're at right now, but if inflation continues to happen, well then, we'll continue to raise prices like everybody else. We've offset a lot of efficiencies and productivity as well. It's just can be—we can pass everything on. But there has been a good mix, and we've been doing really well with it. Well north of the 1%, probably 2-ish or better.

Hey, guys. Congrats on the quarter and thanks for the questions. I guess first on China, anyway to help us think about the magnitude of the impact of lockdowns for your fiscal fourth quarter. What are you seeing now from customers and how do you expect that unfold over the next couple of months?

Yeah. We've had a few meetings with our team obviously, and they are actually very bullish about this quarter yet. They were the same way when we look at the pandemic and China was first kind of, staying to the jaws of that, and we are all very concerned and then they came roaring back next quarter beyond any of our belief and we were—we outpaced all of our peers, I believe back then. We expect the same; there may be shut down right now on a lot of sites but demand will be pent up. It doesn't affect anything but run rate reagents. I mean the instruments and stuff and there is no issue with the orders of there; the bookings are there. We're stacking up bookings right now and we've got a lot of orders to fulfill once they unlock. I know there is petitions to the government to be in the first wave of companies that come out of lockdown. I know we're on that list along with many of our peers in our industry because we're all considered highly valuable to the economy there to the government. There literally can do research there. If they don't have R&D systems-based proteins. So we'll be ready to go and I can't imagine is being more than a one-quarter blip. And I can't imagine being more than—it's hard to say what the material impact would be maybe nothing, maybe a couple of points. We don't know enough yet. Now if the lockdown continues and go with another quarter or two, but then I think we'll have to have more discussion, but right now we're not seeing any of that. No one is predicting any of that. The government there seems to be working very hard to try and unlock even sections of the city, institution-by-institution even if it comes to that. So they really are engaged with the private and public sectors together there. It appears to us, but from our team's point of view. So I think everyone's going to impact, but in terms of looking at who has a least might impact that will be to top of that list like usual. Yeah. We will all take it through their MAC. They'll finish and do another study. We have one-off that we've got a great paper with good data, but they don't want to beef it up with another outcome dataset, and they'll use that to try and get their approval through with their MAC. We have kind of rough that obviously there we got—you've got to present out there and their jurisdictional ready. So it's going to be a lot easier process to get qualified than it would be for us going through NGS. So we think it shows a year of commercialization if we were going to do it ourselves. Along with that, they've got a juggernaut of a business unit with that division and Thermo Fisher with a channel and sales force and technical team and regulatory army; everybody—they're all raring to go and there, like I said, they're pushing us. So this is fantastic. I think it's roughly a year from now, maybe for guessing; I don't know. They'll go as fast as they can and whatever they do it will beat us by a long—long way as I'm sure. And it allows us to work on the next one. So we're already working on a couple more and whether we partner with them or somebody else or do it ourselves remains we’ve seen. I know that Thermal has two other organ rejection tests, they like us to work on for them. So the pipeline is growing. We have more projects than we have people to work on.

Hey. Thanks for taking the questions. Chuck, maybe just on Europe, you put up another kind of nice high-single digit there. Any change in demand from what's happening there on the geopolitical side, any shift in funding or anything that you're seeing on the Academic side? Just wondering kind of what the outlook is on Europe please?

No, Europe is Europe. If one country has a bad year, it affects the region overall. Following Brexit, we are opening another warehouse in Ireland to support exports to the Mainland. We have also relocated some employees from the UK back to their home countries, leading us to establish operations in Germany, Italy, and France, where we are expanding our presence. Our strongest projects are coming out of Italy, where we previously acquired our largest distributor in Europe. The leadership there is strong, and we are adding more resources. Since my arrival, we have probably tripled in size and are reaching a tipping point. Funding remains stable, but we face challenges with execution, particularly in spatial biology, while our core reagents and assays are performing well. Overall, Europe has been stable, although we may be slightly behind the U.S. in instrumentation. There is potential for growth in this area since selling is technical and requires Field Application Scientists alongside sales representatives, which lengthens the sales cycle. We are focused on improving this situation. This year, our growth has been mid to high-single digits, but I am optimistic that we can return to solid double digits next year, contingent on effective execution rather than market conditions. The market opportunities are certainly there. Well, you know hang tight. We're always working deals and they range from small to mid-size . We don't really have any monsters things going high. The whole world kind of waiting on a new evaluation level before things are going to price. Things that are helping the IPO front is kind of dead. So there is probably more interest at the private level and smaller company founder is trying to exit. So we're hopeful, we're still looking at the same kinds of things, things in cell and gene therapy and our cell sorting other areas like that there's, there are four or five categories we’re very interested in. We have, as Jim pointed out, we're about net debt zero. So we've got capacity and then some. We have an LLC that still pretty rich for us to go into—should we want to and it comes down to finding the targets and getting them at the right prices. So we have a decent ROIC with them. So, but it has not—it's as good as—it’s not gotten any worse. I mean our pipelines as full as ever and we're pretty active right now so we’ll see.

Well, thanks everybody for participating. It was a great quarter. Two quarters in a row for us at 17%. We have got a good quarter yet to come here and finishing off an outstanding year and we think we're on track with our strategic plan and look forward to telling you more about that next quarter. Thank you.