Bio-Rad Laboratories, Inc.

Please stand by, your program is about to begin. If you need assistance during your conference today, please press star zero. Good day, everyone, and welcome to today's Bio-Rad second quarter 2024 earnings results conference call and webcast. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing the star and one on your telephone keypad. You may withdraw yourself from the queue by pressing star and two. Please note this call is being recorded. I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Head of Investor Relations, Edward Chung.

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

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

Thank you, Norman. Good afternoon and thank you all for joining us. The second quarter of the year reflected a continuation of the same macroeconomic and market trends we have experienced for several quarters in the biotech and biopharma segments in China, alongside a generally improved market environment for our clinical diagnostic platforms. Our clinical diagnostics business continued to show steady growth in the quarter, delivering solid gains both sequentially and year over year. Growth was broad-based across the portfolio in all regions, with solid performance in our immunohematology business when compared against the supply chain constraints we experienced in prior year. As we look toward the second half of this year, we are anticipating a continuation of normalized growth within our clinical diagnostics business. While it was in line with expectations, our life science group sales declined double digit year over year, reflecting ongoing low demand in biotech and biopharma and in China. However, sequentially, second quarter revenue for the life science group improved mid single digits. And when excluding process chromatography sales, core life science grew sequentially mid single digits in both biopharma and academic markets. Similar to the prior year, our process chromatography residents posted a year-over-year decline, reflecting the ongoing stocking trend across the industry. More importantly for us, this is the result of several very large customers who stocked up heavily during the prior years due to the critical importance of our products for specific key therapeutics. Outside of these key customers, we are starting to see a return to a normalized ordering pattern and are now looking to 2025 for a return to growth. We remain confident in the long-term outlook for this product area. Excluding process chromatography, our core life science business continued to stabilize, declining low double-digit compared to prior year and in line with our expectations. The declines were again concentrated in instrument sales, primarily reflecting constrained biopharma spending, whereas consumable and reagent sales were largely flat both sequentially and year-over-year. During the second quarter, we launched two new important life science platforms, the CHEMI.GO imaging system, which is getting strong interest from customers, and our new cost-effective single-cell sample prep solution, that is in the early phase of product introduction. Droplet's digital PCR franchise was soft in Q2 against a tough prior year compare that included the receipt of a one-time technology license payment and reduction of back orders created due to supply chain challenge from prior periods, mainly for QX600. However, excluding the one-time impact in the prior year, Revenue for DD-PCR declined a more modest mid-single digit. On a positive note, DD-PCR reagents and consumables grew low single digit year over year despite the constrained funding environment. We are seeing strong interest in our recently launched DD-PCR assay kits targeted at the oncology and cell and gene therapy markets, and we continue to maintain strong win-loss ratios for our digital PCR platform in our current market segments. Importantly, we continue to target a fourth quarter introduction of the QX continuum, which will allow us to enter the low-end segment where others have been primarily focused. In addition, we recently entered into a purchase agreement for a novel cutting-edge platform utilizing our core droplet technology that enables high-throughput discovery of novel antibodies and T-cell receptors. and complements our phase display library. This is a high-growth, high-value market segment, and assuming successful completion of development, we anticipate introducing this platform in the next two to three years. Reflecting on the current macroeconomic and market conditions, we were pleased to see the positive trend for capital raises for the biotech and biopharma markets continuing into the second quarter. As Norman alluded to earlier, we have yet to see this funding translate into improved orders as customers appear to remain conservative on capital deployment. Likewise, market conditions in China remain soft for the life science business, although we remain hopeful of some improvement in the outlook toward the end of the year and into 2025. In the academic segment, we are seeing a slight softening of the global funding environment after a long period of strong research support. In addition to the slightly lower than anticipated NIH budget for the year, key European markets remain a mixed bag, with lower funding in Germany, offset by more modest improvements in funding outlooks in the UK, France, and other EU countries. For Asia, the challenging research funding environment in China continues, And funding in Japan remains constrained, reflecting a shrinking economy, while Korean government spending on life science research remains soft as part of a deficit reduction. With these factors in mind, we remain cautious on the magnitude and timing of the recovery in life science markets, and now expect some more measured improvements in the back half of the year. We continue to expect steady, normalized growth for our clinical diagnostics business in 2024. Operationally, we continue our focus on cost and productivity initiatives that have provided offset to the softer top line. As we look toward eventual market recovery for our life science business, we believe that Bio-Rad remains poised for further margin expansion. Thank you, and I will now pass you to Rube to review the financial results. Thank you, Andy, and good afternoon, all.

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

And we will pause for a moment to allow questions to queue. And we will take our first question from Patrick Donnelly with Citi. Hey, guys. Thank you for taking the questions.

Maybe to start on the margin side, obviously, you know, pretty nice performance in 2Q. But then, you know, Rup, you just touched on, obviously, the cut for the year. Can you just talk about, I guess, what drove the strength in 2Q? And then, obviously, again, just that second half expectation, you know, margin down quite a bit there. Maybe just talk through the moving pieces as we work our way through the year and out of 2Q here.

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

Yeah. And then just the op margins as well. You know, just maybe talk through those with the SG&A line.

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

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

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

Patrick, this is Ruf. Maybe just to build on one part is the geo piece. And based on the customers that Andy spoke of, it's in various geos. So it's not concentrated in any one geo.

Oh, sorry.

Yeah. Yeah. No, it's – that's right.

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

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

Yeah, and I think the, this is Rup, I would just add, you know, we are going to see second-half strength in DDPCR over the first half. So, you know, when we think about that, you know, we're pleased with kind of as it's coming back.

Great. Thank you, guys. Thanks, Patrick.

Thank you. And we will take our next question from Dan Leonard with UBS.

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

Yeah, hey, Dan, this is Rup. Maybe I'll start. You know, in terms of spec, I think we framed it well in terms of what we're seeing and across the different areas. You know, obviously from a life science group, the process chrome is the area that, as Andy spoke of, you know, we're seeing the greatest headwind, if you will. And that really, you know, our position with these customers is very strong in terms of the therapeutics that they support. Those are market-leading therapeutics, and so we feel very good about that and can't be displaced. It's just a matter of that destocking that's occurring there. As we just talked about DDPCR, you know, we're seeing positive signals and expect that to grow. Clinical diagnostics has been positive throughout the year, and we expect it to have some normalized growth rate as we continue. The margin is the one area that I framed, which is maybe a little bit more conservative, but part of this is, is, you know, mix being a contributor to our positivity so far, you know, it's, it's hard to predict mix exactly. And so we're mindful of that. And then, as I mentioned, the under absorption, uh, beyond that, and I think, you know, we haven't touched on China, maybe in the questions, but China is the one variable that that's an open question, the new stimulus that's been introduced. You know, it's interesting, but, you know, not sure it'll have that much of an impact. So we're, again, mindful of that. So I think we're trying to be very prudent in our view of what to lay out for folks to expect in the second half, recognizing the markets are still dynamic and especially in a couple of the areas that we're playing in. And China is probably the one that's most variable for maybe not just us, but others as well.

Understood, and thank you for elaborating on all those assumptions. Just a quick follow-up. I know the single-cell product has been a very high visibility R&D effort at BioRad for a couple of years now. You launched it in June. I'm hopeful that you could give any color on your go-to-market strategy or how to think. We should think about framing that uptake.

Yeah. Thanks, Andy. Thanks for the question. And look, I think we're consistent in where we think the value proposition for the product offering sits, which is equal performance to the market-leading solution, better value, and a better workflow. And we think the long-term growth opportunity for single-cell is solid. It's a sizable market. We expect it to continue to grow. I think the obvious acquisition of Fluent by Illumina is a testament to that and I think that's going to put more emphasis on value for the end market. We believe we've got a very well positioned product with probably the best workflow of all the platforms. In terms of go-to-market, we've got a specialist focus in our early months of introduction to establish product performance and credibility out there with kind of key call apps and sensors. So that's the way we're approaching it as our platform value and how we're kind of thinking about what we'll do in the second half this year. anticipate material revenue contribution that would change our outlook this year. It's about building for next year.

Thank you, Andy.

Thank you. And we will take our next question from Tycho Peterson with Jefferies.

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

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

supply chain recovery during q2 so so i'll compare with a bit elevated to to perhaps other folks as well okay um capital deployment question you know why not do a bigger buyback here you've got peers buying you know five billion dollars at 30 times earnings you know you guys are five times extra curious why not why not do something more meaningful than the 500 million you just added to the repo

Well, that that's just the, that's the incremental authorization, I guess, and we're just mindful. I mean, those balance sheets that you referenced psycho are larger balance sheets. So that's 1 thing to keep in mind with that said, you know, we, we did close to 200Million through the Q2 period and through the blackout period, which we hadn't done. So I think our actions speak to our perspective that we're undervalued. the $500 million in incremental authorization, I think it's a strong message from the board and us. And when you consider where our balance sheet is, that's a pretty reasonable percentage of our cash.

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

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

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

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

Understood. Thank you.

Thank you.

Thank you. And once again, if you would like to ask a question, please press star and one on your telephone keypad now. And we will take our next question from Jack Meehan with Nefron Research.

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

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

Okay. And then also wanted to ask, your latest thoughts on the Sertoria stake and, you know, just thoughts around potentially monetizing that to fund buyback or near-term M&A if something presented itself. Just what's your latest thinking on kind of the strategic role of that stake?

Yeah, I mean, you know, we still do see it as a monetizable asset. You know, I think that, you know, the question is, you know, what – What's the future with Joachim not extending his contract? Certainly, his tenure has been really good for us. It has been really good for the company. Our investment has done really well. I think, candidly, it's given us a much more valuable monetizable asset. You know, I guess at the end of the day, his stepping down doesn't really impact our kind of overall views.

Got it. Okay. And then I did have one cash flow question, Rup. On the relative inventory levels, you know, I just kind of do some very basic benchmarking. It does look a bit bloated. Like if I look at inventory as a percentage of sales, maybe as one metric, Back in 2019, before the pandemic, it was around 24%. Today, kind of annualized, it's over 30%. So maybe just would be great to hear your thoughts, like ability to start drawing this down to generate some cash. Are there any hurdles to doing that? Thanks.

Yeah. Great, great point on that. You're spot on. Bloated. We haven't necessarily used that word, but we do think it's elevated. But, you know, I guess you pick your word. With all that said, we've got inventory. And some of it, quite honestly, has been purposeful because of the market, right? We needed to procure strategic materials to ensure continuity of supply. With that said, if I separate that out, we've got focused initiatives in terms of inventory reduction. Part of it is just operationally how we manage the sales and operations kind of alignment, and there's improvements that are being made there. And we expect over time that that inventory will come down. And I'll say it more from an inventory turn standpoint. Our inventory turns will improve. Obviously, with revenue growth, you may see additional inventory on the balance sheet. But from an overall turns perspective, where we are today is unacceptable, and we're focused on improving that turns. which obviously will then drive stronger operating in free cash flow.

Great. Thank you.

Thank you. And it appears that we have no further questions at this time. I will now turn the program back to our presenters for any additional or closing remarks.

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

Thank you. This does conclude today's presentation. Thank you for your participation. You may disconnect at any time.