James T. Hippel - Bio-Techne Corp. Charles R. Kummeth - Bio-Techne Corp..

Catherine Ramsey Schulte - Robert W. Baird & Co., Inc. Puneet Souda - Leerink Partners LLC Bryan A. Kipp - Citigroup Global Markets, Inc. Mike Sarcone - Deutsche Bank Securities, Inc. Robert Amparo - Wells Fargo Securities LLC Matthew G.

Hewitt - Craig-Hallum Capital Group LLC Paul Richard Knight - Janney Montgomery Scott LLC Daniel Arias - Citigroup Global Markets, Inc..

Good morning and welcome to the Bio-Techne Earnings Conference Call for the Second Quarter of Fiscal Year 2018. At this time, all participants have been placed in listen-only mode and the call will be opened for questions following management's prepared remarks. I would now like to turn the call over to Mr.

Jim Hippel, Bio-Techne's Chief Financial Officer. Please go ahead..

Thank you and good morning. Thanks for joining us today. On the call with me this morning is Chuck Kummeth, Chief Executive Officer of Bio-Techne. Before we begin let me briefly cover our Safe Harbor statement.

Some of the comments made during this conference call may be considered forward-looking statements, including beliefs and expectations about the company's future results.

The company's 10-K for fiscal year 2017 identifies certain factors that could cause the company's actual results to differ materially from those projected in the forward-looking statements made during this call. The company does not undertake to update any forward-looking statements as a result of any new information or future events or developments.

The 10-K as well as the company's other SEC filings are available on the company's website within its Investor Relations section. During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance.

Tables reconciling these measures to 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'll now turn the call over to Chuck..

Thanks, Jim, and good morning, everyone. Thank you for joining us for our second quarter conference call. As you saw in our press release, in Q2, we continue to build on our momentum from Q1 of our fiscal year.

The company delivered 14% organic growth in the quarter and our two divisions that primarily serve the life science research market, Biotechnology and Protein Platforms, collectively grew 18% organically. These are the best results since we started to transform the company nearly five years ago.

Importantly, the growth that we saw in Q2 continued to be broad-based in both geography and product category. Investments made in the core company and the synergies with our strategic acquisitions are beginning to display nice leverage and upside. Europe continued to deliver outstanding results with Q2 organic growth at nearly 20%.

Europe growth was also broad-based with solid contribution from both our reagent and instrument product categories. All major countries in Europe experienced growth in both the academic and BioPharma end markets contributing equally.

We have been talking about the strength of our subsidiary business model in Europe for many quarters now and for as many quarters, we have seen strong results. The synergies of cross-selling and commercial collaboration have been most apparent here, but we are seeing this model build momentum in our other key regions as well.

As in Europe, our Asia region also broadly delivered outstanding results. In China, growth of our Western brands grew 30% in Q2, just as they had in the two preceding quarters.

We were also pleased to see our local China for China protein brand, PrimeGene, returned to growth of over 20% in the quarter, with immunotherapy government crackdown otherwise known as the Baidu scandal, now well behind us and annualized in the numbers.

Japan continues to see a turnaround from what had been a multi-year decline, growing over 10% in Q2, while the rest of APAC grew over 15%. Here in the U.S., the year-over-year growth accelerated in the second quarter, with over a 15% increase in revenue.

Some of this growth was helped by an uncharacteristic (03:31) weak December quarter last year when our industry didn't see the normal calendar year end budget flush from our BioPharma customers.

But with less political uncertainty facing our customers this year, we saw a return to typical year-end buying patterns and experienced nearly20% growth in BioPharma as a result. Less political uncertainty and recent funding increases to NIH also drove strong growth from our academia customers in Q2, with 11% growth in academia.

This is the highest we have seen from this end market many years. While we are not expecting the same level of growth in our U.S. end markets that we saw in Q2 to continue going forward, the underlying market trends in both our BioPharma and academic end market remained strong. Now, for some color on our Q2 performance by division.

Our Biotech division grew 14% organically in Q2 with the core reagent product categories collectively growing around 10%, and ACD growing at another quarter north of 40%. Within Biotech's core products, our protein reagent business had a phenomenal quarter, growing over 15%.

One of our key strategies has been to focus our scientific talent on developing the most complex proteins that our customers, especially BioPharma, need to support their ever expanding research needs. Often these proteins are not available from any other source.

The metric for our scientists has not been just how many proteins we develop, but more importantly the quality and unmet need in these proteins. The results that we've had in our protein business, so far in fiscal 2018 would indicate that this strategy is taking hold.

But it wasn't just proteins within Biotech that performed well in Q2, our antibody, assay, and small molecule product categories all experienced mid-to-high single digit growth in the quarter. Standouts included our multiplex assay kits which grew over 30%, while our Novus branded antibodies continued its long streak of double-digit growth.

An example of the investments we have made to drive the sustained growth we found with our updated Flow Cytometry Panel Builder tool which is found on our website and supports the use of Bio-Techne's vast selection of over 18,000 conjugated antibodies across targets and colors.

The updated tool has better performance and offers new features that more efficiently streamlines the process of designing multi-color flow cytometry panels with Bio-Techne.

By automating the selection of cellular markers and fluorochrome-conjugated antibodies, researchers can reliably choose reagents for multi-channel cytometry experiments, avoiding errors from improper selection of reagents with significant spectral overlap.

Increased product visibility is also a clear advantage to Bio-Techne, as the Flow Cytometry Panel Builder offers researchers a clear view and experimental design to efficiently and successfully utilize R&D Systems and Novus Biologics reagents.

And finally there is ACD, which continued its streak of rapid market adoption in Q2 and hit a number of milestones during the quarter.

First and foremost, the business beat its $45 million calendar year 2017 revenue target, which was established at the time by Bio-Techne acquired ACD 18 months ago when the business had a trailing 12 months revenues of approximate $25 million.

Consistent with this rapid rise in revenue, ACD is also celebrating a milestone in the adoption of its RNAscope in situ hybridization ISH technology, reaching 1,000 publications and increasing to an average of more than one publication per day. Papers using RNAscope now feature regularly in top-tier journals.

This is clear evidence that scientists are applying RNAscope ISH as a robust and sensitive assay that yields the high-quality data necessary for cutting-edge studies. The surge, 400 publications featuring RNAscope in 2017 alone includes a notable increase in pharmaceutical and biotechnology industries.

Authors of recent publications include researchers at Bayer, Merck, and Eli Lily. The increase in these industries highlights awareness of the robustness, sensitivity, specificity, and high success rate of the RNAscope assay.

Reflecting confidence in the assay, ACD's ISH technology is also becoming a primary assay used in research, rather than just a secondary confirmatory assay.

In addition to the growing number of industrial publications in immuno-oncology, cancer, gene therapy, and many orphan diseases development programs, RNAscope is also being used in new areas of academic research.

These fields include neuroscience, metabolic diseases, and virology and infectious disease research, which have recently seen fast growth alongside RNAscope's established presence in oncology and stem cell research.

We see a long runway of revenue growth ahead of ACD as pathologists continues to appreciate and value its RNA ISH transformative technology. The clinical diagnostic markets for ACD's products are just beginning to be tapped and we barely started and tracking it.

We believe the best is still yet ahead for ACD, especially once full integration with the rest of the company is complete by the end of the fiscal year. In addition to driving organic growth for the company, we continue to bolster our Biotech reagent portfolio with acquisitions that supplement and leverage our legacy products.

Last quarter, we discussed the September acquisition of Trevigen, whose products enable researchers to better understand cell behavior and genotoxic events on cells complementing our current reagent offering.

This past month, we announced the January 1 acquisition of Atlanta Biologicals, whose product focus on supplying cell culture sera, media and reagents for life science research market.

Many of our products are used in tissue culture applications in the Atlanta Biologicals fetal bovine serum or FBS, product line strengthens and complements our current tissue culture reagents offering and furthers our efforts to provide more complete solutions to our research customers.

With the increasing interest in 3D cell cultures and other cell based clinical applications, we believe there is value in providing customers alternative and reliable sources of high quality FBS and other tissue culture reagents.

Having better tools to study cell behavior in physiologically relevant environments and high quality reagents increases researchers' confidence in the experimental findings.

The recent acquisitions of both Atlanta Biologics (sic) [Atlanta Biologicals] and Trevigen expands our franchise into cell culture and together will serve our customers better while leveraging Bio-Techne's sales channels.

Speaking of leveraging our sales channels, the results we discussed earlier by our cohesive sales teams in Europe and Asia continue to really shine through in our Protein Platforms division this past quarter.

This division, with 33% organic growth in Q2, reported the highest quarterly organic growth since we acquired ProteinSimple over three years ago. And that is on top of reference of a revenue base that is double what it was back then. Q2 of fiscal 2018 now marks the eighth quarter in a row of double-digit organic growth.

Seven out of eight of those with growth over 20% or better. All division's major product categories, Biologics, Simple Western, Simple Plex, and Single-Cell Western grew more than 20% in the second quarter, with Simple Western growing well over 30%, and Simple Plex growing nearly 200%.

The growth was well distributed between instrument sales, consumable sales, and service, demonstrating the increasing acceptance of these instruments as useful tools for protein analytics and the future potential growth from consumables to be used on the high number of instruments that are being placed today.

In fact the primary Simple Western instrument, recently hit an important milestone of 1,000 placements in the field.

As we have said many times before, the market's Protein Platforms solutions are collectively approaching $2 billion, and we still have less than 5% share, thus there is plenty of runway for continued double-digit growth well into the future.

Another important milestone achieved by Protein Platforms this past quarter was delivering over 20% operating margin to the bottom line. To grow from being unprofitable to over 20% profit in less than four years is a tremendous achievement.

It demonstrates a scrupulous detail to prioritizing investments for growth while driving and delivering operational productivity. I'm very proud of what this team has accomplished, and they're not even close to being done yet.

Next, our Diagnostics division bucked the trend of our life sciences businesses and had a tough quarter with a 4% decline in revenue.

While end-user demand still seems to be solid, as demonstrated by our short-shelf-life hematology controls products, which experienced high-single-digit growth, consolidation and reimbursement pricing pressure in the industry continues to motivate our large OEM customers to defer purchases whenever they can.

When they do place orders, they have been prioritizing lower-cost products plus lower margin to us. The combination of low overall volume and lower margin product mix caused a bit of a perfect storm impact in Diagnostics margins this past quarter.

However, we do see rays of light through the current storm clouds with orders returning in the second half of fiscal 2018. This is to be expected as our OEM customers cannot defer the control of reagents and kits they need to serve their customers indefinitely.

The indication we received from our largest Diagnostic customers would suggest that our growth in this division will return to mid-single digit levels in the second half of fiscal year with operating margins close to what we expect from this business, plus 30%. We believe the worst is behind us in the Diagnostics division.

The end markets are pretty relatively healthy, our business with our Chinese OEM customer is especially strong, and the project pipeline with our OEM partners is loaded to support growth for years to come. Finally, I would like to comment on our adjusted EPS performance in Q2.

With our operating margin met our expectations for the quarter, we saw a large additional benefit to EPS as a result of tax reform that was passed just before the New Year. Jim will provide the details. With lower U.S. corporate tax rates in the calendar 2018 brings down the company's blended effective tax rate for the fiscal year.

Thus we saw a benefit to our tax expense right away in our December ended quarter. With lower taxes expected going forward, we will continue to invest both internally in commercial expansion and product innovation as well as externally in opportunistic M&A just as we have over the past four years.

However, we want our employees to realize some immediate benefit from the lower taxes and therefore paid out $1 million worth of bonuses to all non-executive employees in early January. This cost is accrued for and recorded in December when the announcement to our employees was made thus it's included in our operating results in Q2.

We support the lower corporate tax rates and believe that it will allow both our shareholders and employees to benefit from even more investment in the future.

We were also glad to use some of these tax savings immediately to express our gratitude for the fine job our employees have done executing our strategy not just in Q2, but also in all the previous quarters since we started this new journey nearly five years ago.

With that, I'll turn the call over to Jim, who will provide more details on our financial performance for the quarter.

Jim?.

Thanks, Chuck. I'll provide an overview for our Q2 financial performance for the total company, and then provide some color on each of our three segments. Starting with the overall second quarter financial performance, adjusted EPS increased 26% to $1.02, while GAAP EPS for the quarter was $1.29 compared to $0.20 in the prior year.

The increase in GAAP EPS includes a one-time benefit of $0.94 from recently passed tax reform. Most of this one-time benefit was due to the revaluation of our deferred tax liabilities using lower future tax rates. Q2 reported revenue was $154.2 million, an increase of 17% year-over-year, with organic revenue increasing 14%.

Fourth quarter reported sales include a 1% growth contribution from acquisitions and a 2% contribution from favorable foreign exchange translation. By geography, the U.S. grew in the mid-teens with BioPharma growth in the high-teens and academia growth in the low-teens.

Europe's organic growth was near 20%, with BioPharma sales growth in the high-teens and academia over 20%. In Asia, China's organic growth was nearly 30% in the second quarter. Japan grew in the low-teens and the rest of the Asia-Pac region grew in the mid-teens.

Note that all references made to growth rates by region and end market exclude our OEM sales, which mostly occurred in our Diagnostics segment and, to a lesser extent, our Biotech segment. Moving on to the details of the P&L.

Total company adjusted gross margin was 70.2% in Q2, down approximately 80 basis points from the prior year due to product mix within our Diagnostics and Biotech division. Foreign exchange helped adjusted gross margins by approximately 50 basis points year-over-year.

Adjusted SG&A in Q2 was 26.2% of revenue, 60 basis points higher than last year, but down 120 basis points sequentially from last quarter.

The SG&A increase was driven by the $1 million bonus paid to employees, following the passage of tax reform and to a lesser extent the acquisition of Trevigen and strategic investments made in our core businesses to support growth. R&D expense in Q2 was 9% of revenue, down 110 basis points from the prior year due to volume leverage.

The year-over-year increase of R&D spend in Q2 was approximately 5%. The resulting adjusted operating margin for Q2 was 35%, a decrease of 30 basis points from the prior-year period. Looking at our numbers below operating income, net interest expense in Q2 was $2.2 million compared to $1.8 million of net interest expense last year.

The higher interest expense is due to multiple rate increases in the past year on our outstanding line-of-credit. Other non-operating expense for the quarter was $0.2 million compared to $0.9 million in the prior-year quarter. The higher expense last year was associated with transactional FX expense, which did not reoccur in the current quarter.

Our adjusted effective tax rate in Q2 was 24.7%, nearly a 6 percentage point improvement from the prior year due to tax reform. For the back half of fiscal year 2018, we expect our adjusted effective tax rate to be around 25%, plus or minus 100 basis points.

In terms of returning capital, we continue to pay our dividend and paid out $12 million in the quarter. Average diluted shares were up approximately 1% over the year-ago period at 37.9 million shares outstanding.

Turning to cash flow and the balance sheet, $38.8 million of cash was generated from operations in the second quarter and our investment in capital expenditures was $6.3 million. On our balance sheet, we ended the quarter with $162.4 million of cash and short-term available-for-sale investments.

Our long-term debt obligations at the end of Q2 stood at $362.5 million, up $19 million from the end of Q4, as we drew down on our line-of-credit facility prepared for the January 1 closing of the Atlanta Biologicals acquisition. Going forward, our capital deployment priorities remain opportunistic M&A, our dividend, and debt pay-down.

Now, I'll discuss the performance of our three business segments starting with the Biotechnology segment. Q2 reported sales were $101.4 million with reported revenue increasing 18%. Acquisitions contributed 1% to revenue growth. Foreign exchange contributed 3%, and organic growth was 14% led by our ACD and protein reagent product line.

Operating income for the Biotech segment was 17% higher in Q2 compared to the prior year, and adjusted operating margin was 45.6%, a decrease of 40 basis points year-over-year. The decrease from prior year was driven by the timing of unfavorable product mix, which we expect will improve in the second half of fiscal year 2018.

Turning to the Protein Platforms segment. Net sales in Q2 were $29.4 million, an organic increase of 33% from the prior-year period with currency translation having a favorable impact of 3%. Growth for the division was broad based in all major product lines and regions.

Operating income in Q2 for the Protein Platforms segment was over 3 times higher than last year, representing an adjusted operating margin of 20.8%, an increase of over 1,200 basis points from the prior year. Strong volume leverage and operational productivity drove the year-over-year improvement, partially offset by strategic growth investments.

Moving on to our Diagnostics segment. Reported revenue in Q2 was $23.4 million, which reported an organic growth decreasing 4% from the prior year. Our short-cycle OEM hematology controls business experienced high-single-digit growth indicating that the end markets are still strong.

However, as Chuck explained earlier, many of our large OEM customers have sharpened their focus on net working capital management and continue to push out to the long-cycle orders to the fullest extent possible. When they have placed orders, it has been for lower-cost products, which significantly impacted the division's operating margin in Q2.

At 16.1%, Diagnostic division's operating margin this quarter was down 770 basis points from the prior year.

The visibility we have for the second half of fiscal year 2018 currently reflects a release of long-cycle orders from our larger OEM customers that would allow the division to report more in line with historical norms of mid-single-digit growth and operating margins approaching 30%.

In summary for the quarter, our breadth of growth was large, both in terms of end markets and product lines. Our operational profitability was in line with our expectations despite the challenges faced with product mix.

We continue to prudently invest back into the business, especially to fuel the growth of our game-changing ACD and Protein Platforms product line. Protein Platforms' record operating margin shows how investing for growth combined with operational excellence can accelerate the bottom line.

This gives us even greater confidence in the ability for this division, along with the fast-growing ACD, to achieve 30% operating margins within the next five years.

On the bottom line, tax reform was a real positive for Bio-Techne, and it will bolster our future cash flows and enhance our strategy of investing for growth, both internally and externally as the opportunity arises. Our view for the remainder of the year remains upbeat, although we will face tougher comps in the second half of fiscal year 2018.

Thus, we expect overall company organic growth rate to remain healthy in the high-single-digit range. With regard to profitability for remainder of fiscal year 2018, our view hasn't changed in the past couple of quarters.

Total company adjusted operating margin should sequentially rise throughout the remainder of the year and be on par with last year's margin over the same time horizon. That concludes my prepared comments. And with that, I'll turn the call back over to Margaret to open the line for some questions..

Thank you. We will now take our first question from Catherine Schulte from Baird. Please go ahead..

Hey, guys. Congrats on the nice quarter and thanks for the questions. First one from me would just be on Protein Platforms, some nice acceleration there.

What's the main driver of that acceleration? Is it adoption by academics, by pharma, just maturation of the sales force, what would you say is the most important driver?.

Well, one nice thing about this quarter was, we had 33% growth, it was really good everywhere. So, we had accelerated growth really in all our major platforms.

The Starwood has become Simple Plex and that I would just say it's writing into the curve of acceptance and with really all the major pharmas now having it, and it's four years into the – with Roche as an example. So, 200% growth, and it's certainly not a small base anymore. So, I think it's running roughly 20 or so machines per quarter.

And remember, this thing really choose the consumables, right, it's a closed system so it's a 60%, 70%, 80% type of attach rate for consumables revenue. Biologics was probably still the biggest overall contributor, kind of remaining where it's been, and then Simple Western had a wonderful quarter, better than usual.

We've talked about Simple Western being strong double-digits, but it was – this quarter was one with over 20%. So, really picking up some steam, which was nice to see. We had a lot of big box orders this quarter too which helped some of that, but it's also nice to see a lot of big box orders. And that's still a strong platform.

So, all-in-all, very distributed. I would say, still more on the BioPharma side, strength-wise in academia side but strong growth in academia and really in all fronts, some NIH in the U.S. but also Europe was strong as well. So I mean we've been promising 15% or better and going forward and we've had 20% or so over the last quite a few quarters.

To get over 30% when this is over $100 million run rate business, from our point of view, it's just phenomenal so..

All right. Great. Thank you. And then what are your U.S.

academic and government customers saying just on the budget outlook for this year? It seems like the numbers have been pretty good, but is there any hesitancy based on uncertainty or is it business as usual? And then related to that, how much of your business would be impacted by a potential government shutdown and curious what you've seen in prior cases of that?.

Well, at the macro level, we've been talking about a drift more towards BioPharma from academia by the numbers for quite some time. The U.S. NIH portion of the company's revenue is less than 15%. In the U.S. portion now, we've actually drifted down to 35% to 65% academia versus BioPharma. So that's a big shift from few years ago. NIH is strong still.

We've not heard any real warning signs or any real drift from that type of thinking, but it's not the end of February. We know things have got to flush out, and there'll be new discussion. We'll see after this week in the market, but right now, it's going to be pretty (24:58) probably. But no warning signs yet.

I foresee kind of stable academic funding for the foreseeable future anyway. I don't think it's going to be double digit. But these nice add-ons of 5% to 8% or so that Congress has been doing, and I hope continues so..

Great. Thank you..

And we can now take our next question from Puneet Souda from Leerink Partners. Please go ahead..

Yeah. Hi Chuck. Outstanding quarter. Thanks for taking the question here.

So what's your sense on the growth in BioPharma and academic and the sustainability here in the fiscal quarter? Maybe if you can describe how much of this was a budget-flush phenomena and how much of it this is – are there any fundamental changes in the market and in preclinical discovery that's driving the growth that you're seeing in Simple Plex and across BTD and assays, as well in the proteins, if you could elaborate on that first?.

I think first you got to separate the markets and the trends and that macro level to (26:10) product platforms that we have that are just inflecting. There're just astounding acceptance of these, and they're just in the right place the right time, and they're going to grab more of the share out there because they're hot.

They're what the customers want. It's what they've asked for. This is why you bought ProteinSimple. They were a way ahead of the game five, six years ago. ACD, the same story, and they hit a real need, and that need is developing itself into real market acceptance and taking share. So, layered on top of that, I think, is just a strong market.

And I think our BioPharma, I'd say awareness is just increasing. People know who Bio-Techne now is after four years. We have a much stronger commercial presence. We have a much stronger commercial presence at tradeshows, publications.

It's regional not just U.S., and we're just, I think, getting to a, call it, a bit of a critical mass factor that it's affecting the size of this company where it's starting to really get some extra traction and you can see our liquidity is still small.

Still long way to go, but in terms of the products and the markets we serve which are vast, right, we are definitely a complicated little company still in my opinion with many, many markets to serve. And so, there's a lot of runway in all of them, to be honest.

I would say to your last part primarily, we still serve oncology research more than anything else....

Immunology..

In immunology, some neuroscience, those are the big hitters for us and those are all strong areas right now..

Great. That's helpful. And then ACD, obviously, another strong quarter. You pointed out to $45 million for the year maybe.

Could you give us the contribution in the quarter and maybe just in sense of the IHC market, a portion of that is in BioPharma, how penetrated are you there at the moment and sort of what's the expectation as we go towards Diagnostic longer term?.

Well, the Diagnostic component is still under a couple of million. So, it's just getting started. We're depending on partners for that. We don't have the army we need for a regulated type of marketplace, not yet anyway. And the traditional IHC area, the pathology that we're addressing with ACD is an early innings.

And this is $1.5 billion kind of marketplace. So, you talk about everything we serve there. So, we've talked about the growth continuing at north of 35%. Here we go another quarter well north of 40%.

And it's not so small anymore, it's a $50 million run rate business going forward here, and we expect it to continue growing very strong for quite some time, and share, we're still well under 10% (29:05).

And I think what speaks to the credibility and why there is still so much possibility is look at the publication count, and it's more than one a day now over a thousand. Everybody is using this stuff and they simply want to show off how great it is. And it's just getting more and more awareness and there's a long way to go.

We had very strong results as you saw in the numbers. Again, we really couldn't hire enough. We can't assimilate enough investment to actually warrant even more growth. So we're kind of at the limit you can handle. And that's why you see profitability actually increasing ahead of schedule, and yet we're still are over 40% growth.

So, we think it will – we're not going to promise 40%. We've been promising 30% or 35% or better, I think, for next year, so it should be in that range, at least. Drops under 30%, something's wrong, shouldn't be that. So, that's our point of view. We see this as a $200 million plus business in three years out or so..

Okay. That's very helpful. And just last one, Atlanta Biologicals, do you plan to extend that into Bio Production longer term from the research tissue culture or would this be a research cell culture application mostly? Thank you..

Short term, Phase 1 and Phase 3 search application, the synergy of short term are taking this thing outside the U.S. So, we have great channels we can sell with our current channels. It was really a small, insulated company, family-owned from different continent even, so not a lot of oversight. So, we think we really can do a lot with this.

We're already seeing with Trevigen the same story unfolds there, and we can take this portfolio within our current reagents portfolio on the road and get into Asia and Europe and other places.

So, as we go further with that and build more critical mass, it's not a very large business, I think your point is well taken, and we'll be going much more towards those other areas as well. So, there's a lot of, as you know, all the media manufacturers and we sell everywhere – they're customers, we sell our (31:10) a lot of spots.

And so, we have the ability actually to offer a very differentiated product line, if you give us a few years here..

Thanks. Appreciate all the details. Thank you..

We can now take our next question from Dan Arias from Citi. Please go ahead..

Hi, guys. This is actually Bryan Kipp on behalf of Dan. Just want to take a step back. Chuck, I noted your comment on the Simple Western side seeing big-box orders in the quarter.

How many of those box orders were new, too, or are they legacy customers?.

That's a good question. I would guess, I don't have it in front of me, it was a double-digit kind of quarter, which is very rare now for us and something that I won't really repeat regularly by the way, it's just kind of timing for us, for big box. And I would say half and half.

I would say about half the customers probably already had one are expanding and probably the other ones were new. There were a lot of new accounts actually and when you need throughput, you want to go to big box. I'll step out here and talk about one key customer is Roche.

They have been, obviously, a big facility in Basel and they centralized core lab all their Westerns. And it used to take a week of a team to do the Western for the site, and they do it really with a single person doing it overnight on big boxes now.

And they've been expanding because – and they'll never go back and they have become a nice advocate for the technology and probably a super user for us. They know how to use this technology really better than anybody. And so, it's just more of that I think and you'll see more of that..

Can I ask you a quick follow-up on that? I just saw recently a lot of new commentary or new studies out there on cell line development and it was interesting as you kind of piece through the instruments used. There was lot more references to this Simple Western platform and using automated Western blot.

Is that a trend that you guys are seeing, and is a lot of that the new customer demand, or is that supported by your legacy guys?.

We're hearing more and more of that. I think that's part of the strategy going forward. It's such a big diverse pond doing Western. The way people do them vary across – it's very diverse in academia especially. So, I think attacking Biotech and cell culture and to new uses is really a nice area for us.

And clearly, it makes sense because when you have an automated platform that has reproducible results, if you take the human error out of the whole process it's where people need to go. If you want to do really good science and you want to do BioPharma related science, and you really got to have process and paper trails to everything you do.

You really want to have a tool like this that automates (34:03). We've always thought that and quite frankly it's grown even slower than we thought because quite frankly (34:09) different. It's just not as easy fall off the table process as you think.

Reproducibility is key and you don't get reproducibility when you do them by hand and sooner or later the world's going to figure that out, so..

Helpful and just Simple Plex. I think it's an interesting platform that's obviously seeing increased momentum. Just taking a step back, I think, when you first acquired that asset there was a long-term contingent consideration if you guys achieved a $100 million revenue milestone.

Now, obviously you probably don't want to put a flag in the ground around that for 2020, but just getting a sense of how the deal model is playing out relative to expectations would be helpful, one. And two, the new announcement that you guys just had with BioAgilytix.

How do you expect that addition to support incremental growth going forward?.

Well first, I'll address the one. One is, yeah, there was a deal closing final milestone in the arrangement and that was the $100 million of revenue in 2020. Of course we had to wait about three years for dollar revenue one. So, I've put that behind the curve.

So even right now at our current rate, if we continue at a 200% growth per quarter for the next two years, we would not hit that $100 million, but we would be a lot bigger. It'd be really nice to see. Hard to see us growing that much that fast, that long.

But I don't see this platform as a $200 million platform like ACD and Protein Platforms, but it has the legs to get to $100 million as a platform, but I think it would take beyond 2020. And it will remain very strong growth because there's a lot of acceptance and there's a lot of place with the uses (35:52).

And your second question, maybe I'll – Frank (sic) [Bryan], I'm not really up on that..

Sorry..

Yeah, I don't have the press release, the recent press release; it was an application we put out. We'll get back to you on that..

Okay. Helpful. Thanks, guys..

Next question from (36:18) from William Blair. Please go ahead..

Hey, guys. Thank you for taking my questions. Just want to follow-up on the organic growth outlook for the second half of the fiscal year.

So, regarding the previously issued guidance of organic revenue growth for 8% for fiscal 2018, does this rate still seem consistent with what you would expect to see in the second half? I know that you mentioned that you have some tough comps coming out, but it seems like you feel Biotechnology and Protein Platforms segments will continue to accelerate, and that there will be an increase in OEM orders in the second half.

Can you maybe just describe what you're looking at here?.

Well, (36:53) said, we're pretty much ready for this question, expected it from me. We're still on track as an 8% to 12% grower. There's going to be timing. Our second half is definitely tougher than last year. This was an easier comp this quarter but even if you add the two together, it was a very strong quarter for us.

Consistent 12%-plus quarters going forward, probably not, but 8% to 12%, in that range is what we're kind of standing behind. As you said, there should be winds in our sail for Diagnostics the second half, and so that will help.

In fact, if Diagnostics would even hit plan, have been just on target, this core, which is really low single-digit growth, we'd have had two extra points of organic growth, we would have been 16%, even. So, you have that to layer in. So, we'd like to be able to come out and say we're a consistent 10% grower. I'm not quite sure we're quite there yet.

We need a little more credibility. But giving you guys a range of 8% to 12%, I think, is appropriate and we feel very good about that range of 8% to 12% right now for the next two quarters..

Great. Yeah. That's extremely helpful. Thank you for that. And then just following up on bit of an unrelated notes, just want to touch based on your M&A pipeline. Have you seen that be affected from the recent tax legislation? Now, the larger part is becoming more aggressive, given some of them obviously have just come into a lot more capital.

Are you seeing some increased competition in regards to your M&A pipeline?.

Well, it's probably too early. I think there's been a lot of commentary in the market this week, and most people don't think tax is really baked in anything yet, people – companies are trying to figure out where they fit. We're a fiscal year, so we kind of had to figure it out because we get a blended improvement already this past quarter.

A lot of companies are finishing up a calendar year they're just still kind of getting to it now, really. So, I do think you're right though. I think – I predict that it will lay out more available cash, and people put to work, and the M&A will be, I think, a top priority with that.

Plus, we got all those cash coming back into the country and it's going put to work. So, I don't think it will be less, I think there will be more M&A. I think there will be more competition and I don't see prices going down. But again, this is life sciences and Biotech, right.

There's lots of innovation, there's lots of new companies all the time, there's lots of new areas forming in every couple of years, and there's going to be a lot of interest in new things And I think that's what drives our industry, and it drives what I think other industries would call high prices in life sciences. But look what you can get from it.

I mean the things we do change the world in virtually overnight so..

Got it. Great. Thank you..

Next question comes from Dan Leonard from Deutsche Bank. Please go ahead..

Hey, guys. This is Mike Sarcone on for Dan Leonard. So, my first question, you had posted really nice organic growth for the quarter. I was a little surprised that the margin leverage wasn't what I would have expected.

Can you just comment on the margin and how that played out? Was it all the Diagnostics sales decline? Or – can you just walk me through that?.

Yeah. I want to give you a sound bite. I'm going to let Jim take some detail. So we are also ready for this question as well. One, we gave $1 million to the employee base, and otherwise we probably would have been over kind of what people expected, a rein-in (40:25) range. After that, we made a comment about mix. And we had mix.

It was definitely OEM-related mix. And of course, the one business where we do see scalable leverage is – because it's real manufacturing and volume matters and that is the Diagnostics area. So, as we talked about, we were the lighter (40:45) this quarter. So without that extra volume, we see a margin hit on that negative leverage.

So, Jim might want to comment for it..

No. I think Chuck's exactly right. Between the $1 million bonus we gave our employees and the deleveraging and bad product mix we had in our Diagnostics business, those two things alone cost us easily 1.5 of margin. So I think we would have had just definitely better margin without those two occurrences.

But I think the bonus was the right thing to do and it won't – obviously that won't be in the results going forward. And we do expect the Diagnostics mix to improve. So....

A final comment I'd make too would be – and I noticed this in a lot of results reported. There were a lot of – lots of commenting on mix, especially with respect to Europe. And I think when you have strong results in Europe and of the overhead of duty, tax, freight, and everything else that also can siphon a little bit of margin from you.

So, we've had exceptional results in Europe, 20% growth. So, you get that – you get a bit of a little bit of mix hit off of that too because the overhead of selling in the – Europe compared to the U.S. So, we'll take the gross sell (41:53). The growth is worth having, this extra little hit mix, so....

Got it. Thanks. And my follow-up is on just the Diagnostics industry health in general. I know you said you've seen good trends fundamentally.

Have you heard any customers talk about pulling back due to Medicare test reimbursement cuts under PAMA?.

No. We get asked about this PAMA a lot. We don't see it affecting us a whole lot and we're just not anything big enough in the food chain as there is – really the issue. But no, doesn't affect our business. We don't hear a lot about it either. We don't hear a lot of grumbling about it either to be honest.

So, I'm not sure I – and maybe overhyped in general, but....

Okay. Thank you..

Next question comes from Robert Amparo from Wells Fargo Securities. Please go ahead..

Thank you. Hey, guys.

You covered a lot already, but just going back to ACD, can you quantify how much the investments in commercial and infrastructure were dilutive to the Biotech segment's operating margin? And do you see that continuing for the rest of the year as you aim for that 50%? Also, how are you guys feeling about the retention of key ACD employees at this point? Thanks..

Well, we're not going to give an awful lot of color about the details within the division but – and Jim can follow-up on that in a minute here. But I will talk about retention, as this has been probably the best acquisition I've ever done in terms of retention.

So, we feel really good right now about the team of leadership going forward, the engagement. Just the morale of really wanting to be a part of Bio-Techne and almost asking ahead of time for this and that when they – typically, you see some resistance doing an integration. We see anything but, this acquisition. The culture there has been phenomenal.

The leader, the founder that created this company was really a great guy and really, really was careful in his hiring and they're just – they're just all rock stars. Love them..

Well, I would say, ACD from a margin perspective is that there – as we mentioned last quarter where they broke into double-digit operating margin for the first time, they continued that streak in Q2 and continue to sequentially increase our margins as well. So, we're still in the low- to mid-teens on the operating margin line.

But again, with that very high growth of 40%-plus that caused that pretty – a pretty diverse mix impact within the division of Biotech..

Thank you..

Or even half of the mix then, but they – we just – as I mentioned before, we were hiring, training as best we can, but it's a technical platform and so it takes special people. And this is a global issue now, with the growth targets everywhere, and it's not that small anymore. So, it takes a lot of investment.

We're trying to feed it that – as long as we can feed it and stay north of 30%, 35%, we're pretty happy. Staying north of 40%, we're really, really happy. So....

Next question comes from Matthew Hewitt from Craig-Hallum Capital Group. Please go ahead..

Good morning, gentlemen. Congratulations on that 10% threshold or double-digit threshold on the revenue growth..

Yeah. Thanks, Matt..

Just a couple questions from me. First, very strong operating margin improvement in the Protein Platforms segment.

What can that segment get to? Obviously, acquisitions can impact it, but when you think about that segment growing over the next few years, where do you see the margins extending to?.

we do have to keep funding it and keep investing. And we're very focused on investing. The head count in this division will be – by the end of this fiscal year, maybe calendar, would be nearly double what it was when we purchased the company. So there's been a lot of investments and that will continue.

It will be hundreds of millions of dollars someday..

Fantastic. All right. And then, Jim, maybe one question for you. Congratulations on another step-down in the DSOs this quarter. Is the target to kind of get back to the 2014-2015 levels of around 50%, or given the size and the growth that the company has experienced the last couple of years, is this kind of the normalized run rate? Thank you..

Yeah. Thanks for noticing that. We've actually put a lot of effort over the past year in focusing particularly on the receivables side of net working capital and bringing those balances down and getting our DSOs down. So – and you're right, we've seen some very nice improvement there over the past year.

I think we're at a point now where we probably were a couple years ago. And I think the rate of improvement will probably decrease, but I can tell you, internally we're laser-focused on collections and making sure our terms stay within commercial – reasonable term lengths of time.

So, I would – I'd model flat to slightly down, but not the kind of improvement you saw the past year..

Okay, great. Thank you..

There will be big improvements in the coming couple of years I think on how we manage our inventory and how we'll be able to process. This is still fairly lean (48:40) organization. I'm talking about the BTD, the Biotech Division where we have 40,000 products that we make and sell in this division alone and mostly in little tubes.

And we don't have a lot of limbs in place yet. We don't have a lot of barcoding. We don't have a lot of – or any RFID. There's a lot of things and steps we can do yet I think in – further improve our turns and our – our visibility of what we have. So, that's all yet to come – and save money. I mean, there's (49:07) productivity yet to come..

it's BTD as well..

We can now take our next question from Paul Knight from Janney Montgomery. Please go ahead..

Hi, Chuck. Could you go over what was going on in China, specifically what – did you say the growth rate there was 30%? And then could you go over – there was I guess a corruption probe.

Again, can you give us a little color and history what happened and why so good now?.

nobody's selling anymore until you get CFDA approval. So, our PrimeGene business literally (51:58) went to zero. And then as they've stepped up and given certifications hospital by hospital, our business has been picking up.

Our growth in China now, PrimeGene 20% and overall 30% is more – it's more about annualizing the event, and it's about it all coming back, right? It's going to take years for all that PrimeGene business to come back.

We're still focused on having business areas outside of immunotherapeutics in hospitals, that's why you see – that's why you saw 20% growth in PrimeGene. Even though we have very little back yet, I'd say we are 20% back probably on the hospital side for immunotherapeutics.

But the core business, the – our new systems branded reagents are going to everything else in China, including bioprocessing has been on a tear and it's still on a tear at 30% So, they are a little bit separate.

The whole thing obviously is a portfolio, and we want to keep pounding on China for China and biosimilars, bioprocessing, et cetera and things that are leading to infectious disease solutions and vaccines. Vaccine growth in China is nothing short of spectacular. So, it's where we want to be focusing on.

The business for the company was roughly $12 million to $14 million when I joined and it's north of $40 million now. So, good growth, but not that big yet. We got a long way to go in China. So, we see a 25% growth in China, I would like to say, forever, so....

Okay. And then, Chuck, you acquired a media company lately.

Can you talk to your strategy there, and what you think about what you want to be in the media market?.

Well, it's not to take over Gibco tomorrow or anything like that. We sell growth factors to virtually everybody in this segment and in Bio Production in general and you know that. But we're kind of downstream quite a ways, right? So, we're trying to increase our critical mass.

We even sell some very nichey stem cell media and quite a few different offerings. And so we've been dancing around this area for quite some time. We did take a shot at buying HyClone a few years ago in fact. So, we know it fits, we know our brand fits, we know how to deal with it. We have a lot of experts in-house in it.

And the whole franchise of cell culture is something that's very strategic to us. So, both Trevigen and Atlanta makes sense. They were done with very nice multiples, very nice deals. The ownership loved our company and we had great relationships, so we were able to really walk away with something really nice. And the synergies go well beyond the U.S.

very quickly. So, as I mentioned, phase one is to really extend these product offerings within our total bag with our current salespeople and our – to our contacts, those customers overseas, Asia in particular. And as we grow this platform, we're going to get more and more into this space, especially obviously in China and potentially India, so....

Thank you very much, Chuck. Congratulations..

The last question is from Dan Arias from Citi. Please go ahead..

Jim, Chuck, just wanted to get your view on the Yuling step back and taking more – I think he's doing more of a consultancy role for ACD going forward.

What was the strategy behind that and what's the plan going forward?.

Well, wasn't a strategy, was Yuling's decision. I always expect a founder to leave, usually within the first year. We had contracted, where – agree with Yuling, he'd stay on at least a year-and-a-half, maybe two years full time and run the business.

And he also wanted to see what he could do under me and my team's leadership of learning a little more about running and growing a business from a start-up into a real business. I've been (55:57) we plan on making ACD a Division next summer and it still has the growth and size to do that. In this timeframe, Yuling has been great.

Yuling has decided that, nice experience that – and he walked away with quite a bit of pocket change in this deal and he's decided to look at being in the VC world and other things, but also keep his hands in this with us and help us. So he's contracted as a consultant – at least for the next year, maybe hopefully longer, we'll see.

And working on next-generation roadmap product ideas. And that's where his focus is. He hasn't been the day-to-day on the current products and commercial operations really for quite some time actually, so....

Helpful. Thanks..

He's – at the end of the day, he's a scientist. He is a very creative scientist and – they tend to get bored. And the new leadership has been there, right. He's been Head of Commercial.

This is – Tom O'Lenic is the guy who – he was in Molecular Devices, he actually ran Molecular Devices for a short time as well, known by everybody in the industry, commercially, and he's the right guy. The team wants him.

He's got the – he's very strong technically as well – at least compared to me anyway, and we're just ecstatic that he's staying on and assume the reins of the overall organization. Using him (57:22) great and so is using (57:25) pick as well.

So, as I mentioned earlier, probably the smoothest transition and integration I've really ever had for me (57:32)..

There are no further questions in the line at this time. I would now like to turn the call back to the host for any additional remarks..

Well, that's great. We actually went the whole hour. I think that's a first. So, anyway thanks everybody for listening in and good luck with today in the market. We'll talk to you soon. Bye..

Thank you. That concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect..