TECH - NASDAQ

Good morning, and welcome to the Bio-Techne Earnings Conference Call for the Second Quarter of Fiscal Year 2024. . At this time, all participants have been placed in a listen-only mode and the call will be open for questions following management's prepared remarks. [Operator Instructions] I would now like to turn the call over to David Clair, Bio-Techne's Vice President, Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining us. On the call with me this morning are Kim Kelderman, Bio-Techne's Chief Executive Officer; Chuck Kummeth, Bio-Techne's former Chief Executive Officer and current Senior Advisor to the company, and Jim Hippel, Chief Financial Office. 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 2023 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. Separately, we will be participating in the Barclays and KeyBanc Healthcare conferences during the next three months. We look forward to connecting with many of you at these upcoming events. I will now turn the call over to Chuck.

Thanks, Dave, and good morning, everyone. Thank you for joining us for our second quarter conference call. As many of my official tenure as Bio-Techne's Chief Executive Officer ended yesterday, and Kim Kelderman is now in this leadership role. He's taking over a company that is incredibly well-positioned in several of the highest growth life science and diagnostic end markets. I heard Kim to lead a diagnostic and genomic segment in 2018. In November of 2023, he was appointed Chief Operating Officer, as soon as all operational responsibilities for the company. Prior to Bio-Techne, I worked with Kim for four years at Dental Fisher Scientific. I'm excited for the future of Bio-Techne as it continues to flourish under Kim's leadership. When I joined Bio-Techne in 2013, we were a much smaller organization. With approximately $300 million in revenue at the time, the business was a leader in its legacy $3 billion, total addressable market. But growth had largely styled out at the company. This legacy business of research reagents, immune-supply, and diagnostic controls and calibrators, which we refer to as our core, accounted for almost $650 million in revenue in fiscal 2023, and grew at a 7% figure over that period. Through a combination of 19 acquisitions, prioritized organic investments, and execution from our top-notch leadership team, we leveraged these core products and capabilities and grew the business to over $1.1 billion in fiscal 2023, while expanding our cam to an estimated $27 billion. Under the Bio-Techne umbrella, we now augment this core with high-growth market-leading franchises and proteomic annulment instruments, well-engineered therapy, spatial biology, and their leprosy-gnostics. Our team of over 3,000 global employees has accomplished its magnificent growth while maintaining one of the most attractive profitability profiles in our industry. It's been a pleasure getting to know many of you on this call today and leading this talented team over the last 11 years. I have never been more confident in the long-term growth potential of this business and look forward to its continued evolution in the cam leadership. With that, I'll turn the call over to Kim.

Thank you for your kind words, Chuck. And please know that all of us here at Bio-Techne wish you the very best going forward. Now to our Q2 results, the Bio-Techne team continued to execute well in a dynamic and constrained market environment. Our industry has faced several headwinds for over a year now, and those also impacted our second quarter, which resulted in an organic revenue decline of about 2%. The sources of these headwinds continue to be a very soft biotech funding environment, destocking by our large OEM and pharma customers, as well as a broad economic challenge in China, which happens to be historically our high-growth geography. Despite the negative impact from these headwinds, the long-term growth potential of our company remains intact. Our strategic growth pillars, such as the protein simple branded portfolio of analytical tools for protein, our spatial biology franchise, as well as our ExoDx liquid biopsy business, all delivered solid growth during the past quarter. In the years ahead, we will continue to bolster these high-growth businesses with market-leading, high-quality content from our core portfolio of research reagents. By the way, our core portfolio with over 6,000 proteins and more than 400,000 antibodies has been a solid growth business by itself, by delivering an average growth rate of about 7% over the past decade. We will continue to drive growth in this core portfolio and leverage a unique follow-catalog, as well as our expertise to enable industry discoveries, fortifier existing growth pillars, and ultimately improve global healthcare. During my transition period to become CEO, I also spent time understanding the efficiencies of our global operational footprint. We evaluated resource needs across all the businesses. We analyzed relatively strategic importance, as well as profitability of various product categories across our overall portfolio. As our operating margins show, Bio-Techne is already a very efficient organization, but with that said, we have been able to identify opportunities to increase efficiencies throughout the global Bio-Techne operating model. In the face of the current environment, we will remain focused on driving our growth pillars, while executing on those aforementioned efficiency increase opportunities. Before I proceed with the specifics of the quarter, I'd like to officially welcome Matt McMannis to Bio-Techne as the president of Diagnostics and Genomics segment. Matt might be familiar name to several of you as he was formerly Executive Vice President and Chief Operating Officer for Azenta. Prior to that role, he was leading Bio-Techne's molecular diagnostics business, following our acquisition of Asuragen, where he was the CEO. We are excited to have Matt back at the Bio-Techne family, given his existing knowledge of the business, strong cultural fit and breath of life science leadership experience. He is the ideal leader to take our diagnostics and genomics business to the next stage of growth. Matt runs out the Bio-Techne leadership team that has deep experience and a proven track record of driving growth through market cycles, and I'm excited to lead this talented team going forward. Now let's start with a discussion on our end markets and geographies, biopharma. Biopharma are growth-declined low single digits in the quarter. As we noted at last call, the trajectory for the global biotech sales stepped down at the end of our first quarter and into the early part of our second quarter. This trajectory continued throughout the remainder of that second quarter. The biopharma customers remained very engaged with their sales force, but given the overall funding environment, they took a much more cautious stance on spending in front of their 2024 budget cycles. Onto the academic market -- on the academic side, demand remains very consistent and healthier across the geographies. We drove up a single digit growth in the quarter, and even though we saw a challenging biopharma market, the team has done an excellent job pursuing and converting opportunities in the academic market. From a geographic perspective, you have grew mid single digits. Our strengthened European leadership team continues the positive momentum which we have experienced over the last four quarters. The team executed well, despite the aforementioned spending behavior from our former customers. In North America, we experienced a flatish year-over-year performance. It's worth noting that this is the region where we continue to experience the most significant impact from the soft biotech funding environment. Now moving on to China, you might recall that while accessing our first quarter of the fiscal year, China was highlighted as a geography where we experienced deceleration and spend mostly impacting our portfolio within the protein science segment. These headwinds led to a year-over-year decrease of over 20% in the geography for the quarter. The good news is that following a particularly challenging October and November, the run rate stabilized as we closed the calendar year, and this trend has continued at the start of calendar 2024. While it's difficult to pull the bottom based on two months of performance, we are encouraged with the current trend stabilized. Access to improved healthcare remains the top priority for the China government, and we remain very bullish on the long-term prospects of our product portfolio serving researchers in this region. Now let's discuss our growth pillars, starting with those within our protein science segment. A protein-simple branded portfolio of novel, productivity-driven, analytical tools had a challenging quarter when it comes to new instrument placement. This is related to the budget constraints across biopharma having in China. However, there were a number of green shoots within that portfolio, namely the consumables used specifically on the protein-simple platforms. For the fourth quarter in a row, these consumables have grown by at least 20%, which means that our customers are utilizing our instruments at record levels even when budgets are constrained. Another green shoot has been our Simple Plex platform, an automated multiplexing ELISA instrument, branded Ella. Overall, the platform experienced double-digit growth in Q2 as Ella is becoming the go-to platform in the high-volume accounts, such as CROs and Cell Therapy QC Lab. These accounts perform large translational studies that increasingly rely on the high sensitivity and ease of use of the platform for their multiplexing ELISA needs. As a reminder, we recently received ISO 13485 certification of our Wallingford Connecticut facility. With this important certification in hand, we are now ready to pursue clinical diagnostic opportunities on this instrumentation platform. This will open up a large potential end market for this fast, highly sensitive and easy to use multiplexing immuno-essay instrument. We are encouraged by the number of discussions we are having with potential diagnostic partners and we are taking steps to further position Ella as the platform of choice for high-value diagnostic application. The third green shoot, the narrow protein simple growth pillar has been our biologics platform, branded Maurice. Excluding China, this platform grew over 20% in Q2. We see significant traction of the recent launch of Maurice's flex, specifically in biological drug development and drug production. This makes a lot of sense because in addition to protein charge, protein size and identity capabilities, this next generation platform is also an easy to use replacement for the legacy mass spectrometry fractionation methods including Ion Exchange Chromatography. Following the Maurice's flex launch in March of last year, we are seeing a growing number of publications which is driving awareness and demand for this instrument. I'll shift now to our other major growth pillars within the protein science segment, cell and gene therapy. This business vertical includes our portfolio of proteomic reagents as well as scalable workflow solutions that enable our customers to accelerate progress towards the commercialization of their next generation cell and gene therapies. The customers for these solutions are mainly biotech companies and our Q2 results were therefore equally impacted by the same funding constraints that I talked about earlier. However, short-term funding constraints have not changed our conviction that cell and gene therapy is here to stay. In fact, we believe that these technologies will play a significant role in treating and curing terrible diseases and therefore we will continue to invest in the strategic growth pillar. During the quarter, we filed the first Drug Master File or DMF for an animal free accelerate GMP expansion medium. This filing joins a growing list of almost three filings that span our GMP product portfolio. These DMFs enable our cell therapy customers to cross-reference that filing when submitting to the FDA making their IMD process much easier. This way, our products effectively can expect into our customers workflow. We're also expanding our market leading GMP portfolio to include additional media formulation, gene engineering capabilities and GMP antibodies. These activities will further solidify Bio-Technes market position in this rapidly growing industry. In addition, we are finalizing the closed-to-air-out immune cell therapy manufacturing solution which pairs our GMP proteins and our GMP media with the Wilson-Wolves G-REX. Overall, the protein science segment experienced a full percent organic revenue decrease in the quarter. It's been impacted by the current biotech funding landscape, the order timing among a handful of large biopharma customers, as well as the constrained macro environment in China. But as the green shoots that I discussed already indicate, this segment is positioned for accelerated growth than the macro funding challenges abate. Now let's discuss the growth pillars within our diagnostics and genomics segment starting with our spatial biology franchise. This division includes our ACD-branded products, as well as the Lunaphore branded spatial biology automated solution. ACD's RNA scope continues to play an important role in advancing gene therapy, neurosciences and cancer research. Despite the challenging macro environment, this portfolio remains in high demand, growing mid-teens globally for the quarter. We're also excited about the traction we are experiencing with the recently acquired Lunaphore platform. As a reminder, we are currently commercializing the Comet instrument, a fully automated, high-throughput, high-perplex platform that does not require use of conjugated primary antibody. Comet's high-value proposition is resonating with the translational research community, which is driving significant interest and rapid growth in our installed base. In fact, demand for the Comet instrument exceeded our manufacturing capacity, which created a backlog during this quarter. We are currently scaling our Comet production capacity to meet this strong demand. A final note around our spatial biology business is that we recently announced the upcoming lounge of fully automated spatial multiomics workflow with detection of RNA and protein markers on the same tissue section. This workflow pairs ACDs, RNA-scoped technologies of Lunaphore's fully automated Comet platform, and we will be showcasing this complete solution at the upcoming HBT next week in Orlando. Now, let's discuss our other growth pillar within DGS, the Molecular Diagnostics business. Our ExoDx prostate test provides valuable information on whether a man with a gray-zone PSA score should proceed with an invasive and potentially dangerous prostate biopsy or not. With 30% volume growth in our second quarter, the value of this test continues to resonate with both patients and physicians. Our Exosome-based development pipeline includes single gene mutation tests for monitoring various cancer markers, as well as a colorectal cancer screening test designed for early detection of both colorectal cancer and pre-cancerous pellets. We look forward to sharing additional data on this exciting pipeline in the coming quarters. Overall, the diagnostics and genomic segments grew by 5% organically in the quarter, but was muted by the de-stocking and strict inventory management from our core diagnostics OEM customers. As these OEM customers return to normalized buying patterns, the results from our spatial biology and molecular diagnostic growth pillars will become more visible at the segment level. In summary, I'm extremely proud of the team's ability to navigate the transitory challenges that are impacting both biotechne and the broader life sciences tool industry. Our portfolio of coorley agents, our growth pillars in proteomic analytical tools, in cell and gene therapies, in spatial biology, and in molecular diagnostics are well positioned to improve the quality of life by catalyzing advances in sciences and medicine. Thank you very much, and with that, I'll turn it over to Jim. Jim?

Thank you, Kim. I'll start with some additional detail on our Q2 financial performance, then give some thoughts on the financial outlook. Starting with the overall second quarter financial performance, adjusted EPS was $0.40, compared to $0.47 in the prior year quarter. Foreign exchange benefit EPS by $0.02. GAAP EPS for the quarter was $0.17, compared to $0.31 in the prior year. Q2 revenue was $272.6 million, a decrease of 2% year-over-year on an organic basis, and was flat on a reported basis. Foreign exchange translation had a favorable 1% impact, while acquisitions also contributed 1% to reported growth. Looking at our organic growth by region and end market in Q2, North America declined slightly year-over-year. Europe increased mid-single digits, and China declined over 20% in the quarter. As Kim mentioned, the soft biotech funding environment combined with overall conservatism from our biopharmic customers, were both a drag on our North American business, and to a lesser extent also represented a headwind to our European performance relative to more recent quarters. APAC, outside of China, increased low single digits overall, with government funding constraints in South Korea, partially offset by growth in Japan and India. For China, the soft government funding environment continue to impact the region. Following many months of decelerating run rates in China, we experienced a stabilization in our run rate business in December. Encouragingly, the stabilization has continued as we began calendar 2024. It is challenging to call the bottom in this dynamic geography, that we are optimistic that headwinds going forward will be less severe. It'll likely be a while before we return to the kind of growth rates that we historically achieved in China. But we remain confident that China will still be the fastest growing major region in the world for life science tools over the long term. By end market and Q2, excluding China, biopharmic declined low single digits, while academia grew upper single digits. U.S. revenue on the P&L total company adjusted gross margin was 69.7% in the quarter compared to 71.7% in the prior year. The decrease was primarily driven by lower volume leverage, unfavorable product mix, and the impact of the Luma-4 acquisition. Adjusted SG&A and Q2 was 31.2% of revenue compared to 27.9% in the prior year, while R&D expense in Q2 was 8.4% of revenue compared to 8.3% in the prior year. The increase in SG&A was driven primarily by the Luma-4 acquisition, partially offset by diligent cost management across the business. The price increases implemented during fiscal year '23 continue to offset the dollar impact of inflation to operating income, with pricing also largely offsetting the inflationary impact on our operating margin in Q2. Adjusted operating margin for Q2 was 30.1%, a decrease of 540 basis points from the prior year period. Excluding the Luma-4 acquisition, which closed at the beginning of Q1, adjusted operating margin was 300 basis points lower than the prior year, due to the impact of unfavorable volume leverage and product mix. Looking at our numbers below operating income, net interest expense in Q2 was $3.4 million, increasing $1.2 million compared to the prior year period due to higher debt levels. Our bank debt and the balance sheet as we ended Q2 stood at $447 million, an increase of $7 million compared to last quarter. Other adjusted non-operating income was $3.1 million a quarter, an increase of $3.1 million compared to prior year, primarily reflecting our 20% share of Wilson-Wilson Adjustment Income and the foreign exchange impacts related to our cash pooling arrangement. Moving further down the P&L, our adjusted effective tax rate in Q1 was 22%. Flat sequentially, but up 100 basis points compared to the prior year due to geographic mix. Turning to cash flow and return of capital, $83.1 million of cash was generated from operations in the quarter, and our net investment in capital expenditures was $14.9 million. Also during Q2, we returned capital to shareholders by a way of $12.5 million in dividend and completed an $80 million buyback of 1.4 million shares. We finished the quarter with 160.1 million average diluted shares outstanding. Our balance sheet finished Q2 in a strong position with $135.6 million in cash, and our total leverage stood below one time due to that. Going forward, M&A remained the top priority for capital allocation. Now I'll discuss the performance of our reporting segment starting with the protein science assignment. Q2 reported sales were $107.7 million, which reported revenue decreasing 3% compared to the prior year period. Organic revenue decreased 4%, but foreign exchange having a 1% favorable impact. As a reminder, is our protein science assignment that has the most exposure to the China geographic region as well as to the biotech and market. Operating margin for the protein science assignment was 40.3%, a decrease of 350 basis points compared to the prior year quarter, as unfavorable volume and product mix were partially offset by cost management initiatives. Turning to the diagnostic syndrome segment, Q2 reported sales were $75.4 million, with reported growth increasing 11% compared to the same quarter last year. Organic revenue growth for the assignment was 5%, with acquisitions having a 5% impact and foreign exchange having a favorable impact of 1%. As Kim previously mentioned, organic growth was driven by our spatial biology and molecular diagnostic growth pillars, partially muted by the de-stocking and older timing of our core diagnostic region-only customers. Moving on to the diagnostics and genomic segment operating margin, at 6%, the segment operating margin decrease compared to the prior year's 12.2% due primarily to the impact of room for acquisition. However, Q2 operating margin improved 530 basis points sequentially from Q1, due to improving volume leverage and favorable mix. As we turn the page on Q2 and look ahead to the back half of our fiscal year, there are still reasons to remain cautious, but there are also some reasons or green shoots, as Kim called them, for optimism in the near term. On the macro front, biotech funding has not dramatically started flooding back, nor has the Chinese economy and funding of life science research returned to its pre-COVID strength. But inflation and interest rates are period of stabilize. And according to some analysts reports, biotech funding has already been reduced to a level not seen since 2016. Having recently bended China and Q2, Kim, Chuck and I all witnessed the local economy on the move with crowded streets and restaurants and busy regional airports. And for several years of COVID shutdown, the local economy is starting to bustle once again and likely generating tax revenue for their government. As for biotech, our growth pillars are continuing to shine even these typical macro conditions. We are closely monitoring sequential run rates in our reagents business to help determine where we are at in this bottoming process. It's early in the new quarter, but thus far we are encouraged that the worst may be behind us. This does not mean we expect a quick acceleration of growth. But we do expect that the trend of decelerating growth that has been pervasive throughout this macroeconomic cycle may have subsided. Down cycles like we experienced over the past 18 months or so are never fun. But the resiliency of our growth pillars throughout this cycle has given us even greater confidence that our company will grow at a double digit growth rate when markets normalize in the long-term. As our markets start to normalize and prepare for the inevitable return to growth, we will continue to diligently manage our cost structure and invest in the business for the future. As Kim mentioned in his opening comments, we continue to identify opportunities for efficiencies and by executing on these opportunities. We'll protect and even grow our adjusting operating margins sequentially for the remainder of the fiscal year. That concludes my prepared comments. And with that, I'll turn the call back over to the operator to open the line for questions.

Thank you. [Operator instructions]. Our first questions come from the line of Puneet Soda with Learink Partners. Please proceed with your questions.

Yeah, hi, guys. Thanks for taking the question. And Chuck, it was really great working with you and good luck ahead. Kim, welcome on board again. It's good to have you in the role leading the company. And Matt, really glad to have you back at Biotech.net as well. So maybe let me ask my question. It's really around the headwinds that have existed for the last few quarters. You have known them. We have seen that across the industry, China, Biopharma. I think the question really here is what changed in the quarter within your assumptions? You were expecting a flat result in this quarter. You ended up down 2%. So maybe just walk us through, is there something in the portfolio? Is it specific to customer orders? Or is there something in the forecasting process that's not working well that yielded this result versus what you were expecting? And then I have a follow-up.

Thank you, Puneet. Good morning. And thanks for your kind words towards our team. A great question. I, of course, have an opinion on which of these headwinds are going to be most significant going forward. But in that area of view, we certainly have a good understanding of which ones are most significant. So I'll let Jim talk about that.

Yeah, I got Puneet. Good morning. I was the one that called that forecast, so I speak. So I need to speak to it. As we ended the last quarter, we were pretty transparent on the call that in the last couple of weeks, as we closed Q1 in the first few weeks, as we opened Q2, that we've seen a step down in deceleration in our biotech especially, but even a bit in pharma. And so the reality is, and we've talked about this in various conferences throughout, that that trend had continued. And the time of the call, a few weeks doesn't necessarily make a trend. So we took a view on our growth rates decelerating from where they were in Q1. But obviously that trend ended up being longer and deeper than we anticipated. So that's kind of how and why we ended up where we did. That being said, as we look forward, and again, more optimistic view coming out of last quarter and going into this quarter than we did prior quarter in that run rates as we talked about it stabilized in China. And we're just seeing overall stabilization in our business as we enter this quarter relative to how we entered Q2. But I will temper that a bit by saying just like last quarter, a few weeks or even a month doesn't necessarily make a trend either. But we definitely have seen a bit of a momentum shift or at least stabilization from where we are at this point going into this quarter versus last quarter.

Okay, that's helpful. Maybe on the guide, Jim, I just wanted to clarify that you expect this quarter to be a low point based on the comments you mentioned about China early signs and stabilization there and Biopharma remaining status quo. Maybe just help us think about the next two quarters or for the full year just in terms of where models are? If you could walk us through your assumptions on how you're thinking about the growth rate here. I appreciate any context on that.

Sure. Well, I would say this. I mean, I talk about that we have a sense that the deceleration is slowing and perhaps stopping. And so what I mean by that is, and I think you've heard this many of our peers already, that kind of expect our Q3 to be somewhat similar to our Q2 in terms of organic growth. Beyond that, it's difficult to call. The whole bottoming process has been difficult to call. But I pretty much agree with what's being set out there by our larger companies who have even greater overall market access that it feels like the first half of the year, '24 will be more difficult than the second half. But we'll obviously get into our planning process here in about three or four months and have more to talk about our fiscal year, '25 following that. But that's pretty much, our view is pretty much consistent with what you're hearing from our peer companies.

Thank you. Our next questions come from the line of Jacob Johnson with Stephens. Please proceed with your questions.

Hey, thanks. Good morning. Maybe just first to unpack the biopharma commentary. The release suggests those kind of headwinds increased in December. Can you just talk to kind of what you saw then? What caused that or what you think caused that? Maybe the evil CFOs, Jim. And then just as we look ahead, kind of what are you seeing from that end market to start the year? Have you seen any kind of change in customer behaviors, the calendar's turned?

I'll start off and I like to comment perhaps, since you mentioned the evil CFO comment. I think that's partly what it was in a sense that I talked about in some prior conferences that in talking to our customers, the interest is as high, it's not highest it's ever been in our products, but getting purchases through, particularly large, any larger purchases through their internal purchasing departments or their finance departments was difficult and there was a sense of hold off until the next calendar year and calendar year budgets are set. And so we'll see if that actually materializes this quarter but there was definitely that conversation, those conversations going on with our customers. But I think, quantitatively, there's been a number of reports put out there by analysts who file very closely the biotech funding and they all basically say that biotech funding was down over 20% in the December quarter and I think down sequentially, like in the mid-teens even. So there was definitely a drop off in biotech funding and that's a decent chunk of our business. So I think that goes without saying that was a clear driver for what occurred within the quarter.

Yeah, let me add to that. You know, obviously, biopharma market has been constrained by lower funding than usual. If not mistaken, we've probably hit the lowest point since 2016. However, our portfolio is well positioned, right? So we have in the quarter the highest quality products that will produce and give you the best results. So you don't have to repeat your experiments, which of course is important in a constrained environment like this. And secondly, our implementation portfolio is to optimize efficiency. So to have fewer people in the laboratory to automate clunky processes, that will give you the efficiencies you need and the reproducibility in your results that you need. So overall, a portfolio is tailored to a constrained environment like this one and I think therefore that we will come out strong once funding normalized.

Now I'll just reiterate what Kim talked about in his opening comments to reinforce that, is that our consumables on our instrument platforms were up again this quarter nearly 20% and they'd been up 20% or more every quarter for the past four quarters in this has been a declining market overall the past year. So I think that's a clear sign of how our tools provide the productivity that our customers need in an environment like this. Not to mention the potential pent-up demand for new instruments once funding becomes more prevalent.

Got it. Thanks for all that. And then my follow-up. Kim, you mentioned earlier this year and then on this call again that given the current environment you can look more internally at your footprint and efficiencies. I think there was a restructuring charge in the quarter as well. Can you just elaborate on that statement and kind of what efforts are you taking right now and maybe for Jim how we should think about the impact of those on margins?

Yeah, thanks Jacob. As I think about the constraint environment you always got to make sure that you tailor your organization to be most efficient in such environments. Not only to protect the bottom line but also to make sure that you're most efficient coming out of such constraint period. So yes, we've looked at level loading the capacity of our employees over certain businesses in certain pockets, volumes and revenues are more down in others. So we of course want to make sure that we do the right things there from a worse power point of view. And then secondly, it's a good time to look at which businesses are core and strategic to you. And in our case we found some businesses where there's either a growth profile and or a bottom line profile that doesn't fit our long-term financial strategies and expectations and or businesses that take this proportional amount of management attention and that do not have synergies with our current channels or products. So those are businesses that we will evaluate and over time we'll divest.

Got it. Thanks for taking the questions. Oh, sorry, go ahead Jim.

I was going to say with regards to the impact to margins. So what this does is some of the actions we're taking gives us a much higher level of confidence that the margins reported this quarter will be the low point for the year and we'll progress sequentially going forward. And I know you're going to ask me how much and I think we're targeting to get back into the mid-30% range by the end of the year for Q4.

Thank you. Our next questions come from the line of Dan Arias with Stifel. Please proceed with your questions.

Good morning guys. Thanks for the questions. Kim or Chuck can you just maybe talk a little bit about the antibodies business and the antibodies market just given that there are a decent number of moving parts in the mix when it comes to the environment and environment, It would just be great to get some color on what you think is relevant when it comes to the portfolio, pricing, share changes, etc.?

Yeah Dan, thank you so much for your question. Our antibody business has done quite well. I think it's been running at the low single digits even in this environment. So with the Headwins in Biopharma, we certainly have to make sure that some of our sales force focuses on academic markets and make sure they close deals over there and we get better in that space. Our quality of our antibodies is world renowned and we know that we can compete even at higher prices with other antibody companies and we are really confident that we will be able to continue to do so. Of course, we have had some head-wins in addition from de-stocking where people would have fewer or less antibodies on the shelf. However, we feel confident that that symptom is now towards the end of its face so that we feel that HAT win will abate.

Okay, helpful. And then Jim, I hate to ask about 2025 since the second half of this year is tough to call, but if I go back to the analyst's day and I think about the growth platforms that you guys highlighted, four or five of them had double digit market growth rates attached to them. So does it feel like six to 12 months from now your growth verticals are ramped up enough and the comps are favorable enough to where a two-digit growth number that's more typical of what you've done in the past comes back into the picture?

Yeah, what I'd say is this, Dan, is that we have a high level of confidence given our relative performance of our growth pillars even in this environment that once the market gets back to its long-term four or six, let's call it mid-single-digit growth trajectory, that we will be well into the double-digit growth once our core is back up there and then, of course, the growth pillar is on top of that. So, asking how long it takes to get there is also asking how long it takes for the market, overall market to normalize, and I don't have a crystal ball on that, but assuming it does normalize as we get into the end of calendar year '25 and, hopefully by then, then the answer would be yes.

Thank you. Our next question has come from the lawn of Patrick Donnelly with Citi. Please proceed with your questions.

Hey, guys, good morning. Thanks for taking the question and Chuck, a second. My congrats there. You know, maybe Jim, on the near-term, just to recue a piece, we're getting a good amount of questions just in terms of how to think about it. You know, is it flat? Is that the right organic, kind of near over-near number to think about 3C? If you could just help us kind of frame up the near-term, it would be helpful on the organic roadside.

Yeah, I mean, specifically, right now, our base case is that the growth rate we experience in Q3 will be similar to the growth rate we saw in Q2. So the deceleration of our growth rate that we've seen, the deceleration of our growth rate that we've seen in the past three or four quarters we think is behind us.

Yes, I understand. Okay. And then maybe in China, it sounds like, obviously, Jim, we chatted and you were over there. Maybe just talk about your expectations for the recovery in that region?

I know in the past, whether it was government or whatever it may be, you guys saw some real snapbacks quarter to quarter. Last time we chatted, it sounded like that was a little less likely, maybe a little more of a stability into a gradual recovery. But maybe just talk to us about what you saw over there and again, the expectations over the next few quarters relative to some of the past cycles that we've seen. Thank you, Patrick. I'm going to hand this over to Kim. I know we feel exactly the same way about this, but he was there actually more recently than I even was. So go ahead, Kim.

Yeah, Patrick. Well, thanks for the question. What we feel is that, obviously, China is an important country to us, right? Ten percent of our revenues come from there. We have been able to outgrow most of our peers over the last half decade. But that also made it tough over the last couple of quarters where China truly came to a standstill. And we feel that the activity in China is stabilizing. We do not see a clear light at the end of the funnel. Our comparables are going to be a little bit better in the coming quarters, but not for instruments, right? So it's not that we are over that hump. We do think, though, that China is going to be a fast growing market in the future. We do expect that China will have a kind of a bias towards China for China. Therefore, we are building a local GMP facility to serve the local market. And then at the end of the day, we feel that our products with the high quality and the automation aspects will increase efficiency and will continue to find a real good spot in China. And I think that the current pull-through of our consumables shows that the instruments are getting used at a record pace at the moment. As I mentioned, we are long-term believers in China, and we believe that China will get back to normalized funding and use the funds to prioritize health care. So we are very optimistic over time. But if you ask when or what will trigger a V-shaped recovery that I won't be able to answer, we think it will be a slower recovery than usually.

Thank you. Our next question has come from the line of Dan Leonard with UBS. Please proceed with your questions.

Hi, thank you. I just want to make sure I understand the decline in the protein sciences business. You commented on the antibody trends to Dan Arias, low single-digit growth. But can you speak to the growth rate of core reagents and aggregate, so your antibodies, proteins, ELISA? And how steep was the decline in instrument revenue?

Yeah, I'll jump on this one and then can comment further. Dan, thanks for the question. We're not going to give specifics at that level of detail, but what I would say is that in general, our overall, our reagents were down year over year, even though antibodies were slightly up. And our instruments were down as well, given the capital constraints in particular from our customers. However, again, as I mentioned again, the cartridges and consumables that are used specifically on those instruments were up nearly 20%. Cell and gene therapy is a big user of our reagents and also a high concentration of our biotech customers. And so that also impacted, we think, temporarily our reagent sales within the quarter.

Understood. And Jim, possibly you could comment on the growth rate for the cell and gene therapy portfolio specifically, either just GMP proteins or more holistically as you measure all the touch points you have in that market?

Yeah. Well, it was down year over year. I'm not going to give specifics to how much it was down, but I think an encouraging point is that the actual number of orders, invoices, et cetera, that we sold was still at an all-time record level. So what that tells us is that the customers were being more conservative in their purchases in terms of quantities, but still very active in their research within cell and gene therapy.

Okay. Thank you. I can add some information there. I think that, as Jim mentioned, the volume of orders was higher than usual, but we did have a couple of larger orders push out. The thing that we can do as a company is make sure that we have new product introductions and the team is set to add five new GMP proteins to be released in the coming quarters so that we have a broader portfolio that serves more customers, and we'll also increase share of wallets.

Thank you. Our next questions come from the line of Matthew Larew with William Blair. Please proceed with your questions.

Hi. Good morning. I just wanted to go back to the biopharmic comments because obviously you referenced sort of a further deterioration in the quarter, which you had set up on the last call, but on the press release mentioned conservatism from a subset of biotech customers. So I guess if I just think about sources of the Edwin being funding-related versus being perhaps budget-related at biopharma companies that may have commercial assets, but again, we're just going through the budget process. What do you view as more of the gain factor? Are you waiting for turnaround and funding, or is it more just budgets had to get put in place and now there might be more constructive conversations?

Yeah, I think for us, given our waiting of customer base, the biotech funding was the biggest driver. I think the conservatism from pharma was secondary and hopefully much more transitory. So I think that's our view. Kim?

No, I would agree. Okay, fair enough. And then obviously you referenced M&A continuing to be a high priority and looks like some deals are starting to get done.

Just curious, obviously you had the Lunaphore acquisition here recently, either from a size portfolio perspective. What are you seeing out there that's interesting and are you starting to see evaluations move more in line with public markets?

Yeah, thanks for the question. To quickly jump on to the Lunaphore acquisition, it's obviously, we are very, very happy with the acquisition itself. The assets, the team is amazing. Integration is going well. And of course, it will give us a fantastic position in the lucrative and fast-growing spatial biology market. As this instrument, the Comet, will give us fully automated capabilities and multi-alcoholic aspects where we can look at proteins and RNA in the same slide and then combining that with the ACD portfolio and our antibodies here in our systems. It's an unbelievable value proposition. We would love to do more of those. So we are always on the lookout. We have interest in looking at filling out our sub-engine therapy portfolios. We would like, if there's opportunities, to strengthen our core. We've talked about the four growth verticals and if we can bolt something on to make those even stronger and get our positions more differentiated, that'd be fantastic. And any opportunity that pulls through our core reagents is really on our list. And as we always maintain the long list, but we will be disciplined in picking opportunities that would meet or exceed our financial expectations over time, which is basically contributing to the financial expectations that we've all set to by technique overall. And whether this would be a small or large or public or private company, we really don't select between that. We are open to any target that fits the mold that I just described.

Thank you. Our next questions come from the line of Catherine Schulte with Baird. Please proceed with your questions.

Hey guys, thanks for the questions and congrats Chuck on the retirement. Maybe first in pharma and biotech, I think you said down low single digits outside of China. You just talk a little about what you're seeing from emerging biotech versus kind of mid-sized and large customers and how you see those two groups playing out going forward?

Yeah. Hi Catherine. Thanks for the question. It's difficult to ascertain exactly small, sometimes smaller and larger biotechs, as many of these are private companies and hopefully they are, isn't always easy to determine. But I would just say, in generally speaking, the smaller the biotech, usually the more difficult the funding situation is. That being said, we haven't been at the JPMorgan conference, called another green shoot perhaps, but the level of activity that we saw around VC firms, private equity firms in general, out sniffing around for all kinds of investment opportunities, whether it was in tools or whether it was in biotech, et cetera, was some of the highest levels that I've seen in many years there. So, again, encouraging that perhaps the drought and funding has hit its low point and might come back this calendar year and that will obviously benefit our smaller biotech customers. Yeah, I never can add to that. I think that the smaller and newer biopharmac companies obviously are in a different life cycle. So they typically still have to build out their labs and define their processes and validate the way they measure things. So that's where we see, our automation platforms, of course, being placed. And then the midsize ones are often running and they might have repositioned a number of projects to run in parallel, but certainly they typically already have our instrumentation. They're a little bit more consumable-oriented because they are pulling through these consumables. And then large pharma has gone through a phase where they repositioned the portfolios just as well. And there we see a mix, right? So there's a capacity expansion by buying more instruments and there's, of course, the pull-through and consumable. So that's how I look at the influence versus size.

Okay, got it. And then you talked about these decelerating trends, hopefully being behind you here and three-q organic growth, both looking similar to the second quarter. Do you think we could see a return to positive organic growth in 4Q, or is that more likely going to be a fiscal 25 event?

Anything's possible, Catherine. Sure. I mean, is that within the wiggle room of possibilities? Yes, in fact, the tide is turning some momentum and China truly stabilizes. I think there's a potential for it. I'm not, I would say, I'd mute it by saying it would be flight growth probably, but I think there's a potential for it. We're seeing sequential improvement in our businesses, so that's encouraging.

Thank you. Our next question has come from the line of Alex Nowak with Craig Hallam. Please proceed with your questions.

All right. Good morning, everyone. How is Wilson Wolf progressing since you made that investment there? Just curious where they deployed the cash, the cash infusion, and just how they're handling the biotech funding environment?

Yeah, thank you for the question. So Wilson Wolf has tremendous progress behind them now in this last year. Overall, the year was hard because the, some of the early stage activities and clinical projects have been canceled. So overall, they're down mid-single digits, but the last quarter and last has been much, much better back in the black, and we do see a progress in the pipeline. We see that there are various clinical studies rolling into next phases, and we even see an approval upcoming where the G-REX is packed in. So overall, we believe that Wilson Wolf will be doing great again, and we know that John Wilson has invested in activities that bolster the adoption of our G-REX and the Wilson Wolf franchise. As we have a very genius deal structure around the Wilson Wolf, and at the latest, it's the end of calendar year 2027 that Wilson Wolf will be fully part of the biotech new family. I'll just add too, with regards to their financial performance, they had a tough calendar year '23 like we all have, but they actually did see significant sequential improvement in their December quarter and are expecting continued sequential improvement from there. So that's encouraging also. Given their, they have even much wider visibility into the cell and gene therapy market than we do.

Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to Kim Kellehrman for any closing remarks.

Yeah, thank you, and thanks everyone for joining the call. Of course, one last time, thank you Chuck for your leadership over the last decade plus. As you can hear, I'm excited about the long-term position and our prospects as a company. We have a great strategy in place. I'm also very proud of the biotech need team for executing so well in this constrained environment. And I'm absolutely looking forward to navigating these constraints and I'm looking forward to speaking again at our next earnings release.