Qiagen N.V.

Ladies and gentlemen, thank you for standing by. I am Katie and I will be your conference operator. Welcome and thank you for joining QIAGEN's Q2 2024 earnings conference call webcast. At this time, all participants are in a listen only mode. We will be, please be advised that the call is being recorded at QIAGEN's request and will be made available on their internet site. The prepared remarks will be followed by a question and answer session. If you'd like to ask a question, you may press star followed by one on your touchtone telephone. Please press the star key followed by zero for operator assistance. At this time, I would like to introduce your host, John Gilardi, Vice President of Corporate Communications and Investor Relations at QIAGEN. Please go ahead.

Thank you, Katie, and welcome to all of you for joining our call. We appreciate your interest in QIAGEN. Our speakers today are Terry Bernard, our Chief Executive Officer, and Roland Sackers, our Chief Financial Officer. This call is being webcast live and will be archived on the Investors section of our website at www.kaizen.com. You can also find a copy of the quarterly results, press release, and presentation on our website. We will begin with remarks from Terry and Roland, followed by a Q&A session. So let's go over the Safe Harbor Statement. I would like to remind everyone that we will be discussing forward-looking statements. Actual results may differ materially from those projected in any statement that we make. The factors that could cause our actual results to differ materially are discussed in our most recent Form 20F on file with the SEC and also available on our website. Additionally, we will refer to certain financial measures not prepared following generally accepted accounting principles or GAAP. All references to EPS refer to diluted EPS. You can also find a reconciliation to the most directly comparable gap measures in our press release in the presentation. Now I'd like to hand over to Terry.

Thank you, John, and hello and very good morning, good afternoon, or good evening, depending on where you are in the world, and thank you once again for joining us. Our teams at QIAGEN executed well in the second quarter, delivering growth over quarter two of 2023. as well as sequential growth from the first quarter of 2024. In fact, our results position QIAGEN as among the fastest growing companies in the diversified tools sector. They also signal our conviction to accelerate our performance and achieve our updated outlook. Executing on our 2024 targets, will put us on a good trajectory to achieve the new mid-term targets we outlined at our Capital Markets Day that are underscored by our commitment to solid and profitable growth. Let me get you to our key messages for the quarter. First, QIAGEN marked another quarter of exceeding our outlook for sales and adjusted earnings. Net sales were 496 million dollars for the quarter, an increase of 1% at CER, constant exchange rates, over the second quarter of 2023. Most important, results at CER of 502 million dollars were 7 million ahead of the outlook for at least 495 million dollars. and sales were up 2% CER excluding pneumotics, and also up 8% CER in our diagnostic solutions product group, in light of our decision announced in June to phase out the pneumotic system. Our highly recurring revenues business led the performance, with consumable sales rising 3% CER and making up nearly 90% of our total sales. A trend that we have seen in the industry this quarter was the impact on instrument sales. In quarter two of 2024, overall, our instrument sales were down 10%. And if you include pneumatics, they were down 6% CER. Customers are indeed still cautious on capital investment and that includes larger scale instrument purchases as well. Adjusted earnings per share were 55 cents and also 55 cents at CER. This is 3 cents above our outlook for at least 52 cents. Second key message, our teams delivered important product advances in our portfolio serving customers from life science to clinical diagnostics. Let's start with Kyastat, our system for syndromic testing. Our teams delivered a very strong 12% CER growth in the second quarter, and we see this trend improving in the second half of the year on the back of two important product launches in the United States. First, our teams launched the new gastrointestinal panel in a record time in early July after we received FDA clearance in June. From marketing to operations to the sales force, this was a tremendous execution. And second, we also received FDA clearance during the second quarter for our upgraded respiratory panel, which now covers 21 pathogens, including the SARS-CoV-2 virus. Those milestones are important catalysts to attracting new customers in the U.S., and more new tests are on the way. The meningitis and encephalitis panel is on track with U.S. submissions this year, along with three new mini-panels, one involving respiratory targets and two for the gastrointestinal targets. We are also extremely excited about the expansion of Chiastat into new application with our pharma partners for companion diagnostic that will help guiding treatment decision for patients. If you remember, we noted at our capital market day that we now have in place the first pharma collaborations for chiostat diagnostic, and those involve panels test for chronic diseases. Our goal together with our pharma partner is to offer tests on chiostats that can be done rapidly while the patient is still undergoing a clinical examination and could live with a prescription if deemed a candidate for a given medicine. This indeed embodies our approach to clinical molecular diagnostics, decisive when it matters. On Quantiferon, we welcome the recent update to the American Academy of Pediatrics guidelines in the U.S. for latent tuberculosis screening in children. Children of all age groups are now eligible for testing using Quantiferon, and this could open incremental latent TB tests to be converted every year. In any case, the potential for further growth in Quantiferon is strong, given that skin tests still make up well over 50% of the global annual latent TB testing market, including in the US. As you know, a key element of our strategy also involved reviewing our portfolio in light of market trends. You saw this this year again with the announcement in June about our decision to phase out pneumotics. This was indeed a difficult decision involving what we see as a great system and a great platform. But the market dynamics changed after the pandemic COVID-19 and we did not see a realistic pathway to developing this system in a value creating way. These decisions underscores our unwavering commitment to focus where we can develop profitable leadership positions. And last message, we have updated our 2024 outlook based on the solid core business performance in the first half along with the new MODX decision. Our sales for the first half of 2024 were about $15 million CER above our outlook. And this played a very key role in our decision to update the full year sales outlook for at least $1,985,000. at CER, while also taking into consideration our decision on pneumatics. We have also raised the outlook for adjusted EPS by 2 cents to $2.16 as we step up to our commitment for solid, profitable growth. This is also underscored by the adjusted operating income margin target at 28.5% of sales and the outstanding free cash flow generation. And now I would like to hand over to Roland for a review of the financial results.

Thank you, Thierry. Hello, everyone. Thank you as well from me for joining our call, and it was a pleasure to see many of you at our Capital Market Day event. Let me also go through some highlights and provide some perspectives on our performance. As a first point, Our results for the second quarter show the improving sequential trend from Q1 24 and these results put us on the trajectory to achieve the goals we have set for the year. Compared to the first quarter 24, there was no material change in non-operational results. The adjusted tax rate was at 19% and the share count at 224 million, both in line with our guidance. As a result, adjusted operating income and adjusted net income both grew at the same rate of 4%. Our outperformance in the first half of 24, both in terms of sales and profitability, played a key role in our updated outlook for the year. For the second half of 24, we are on track to see an acceleration in the year-on-year sales growth rate, along with an improvement in the adjusted operating income margin. Let me dig into some of the highlights now. The adjusted operating income margin rose by 1 percentage point to 28.4% of sales for the second quarter over the year-ago period. This gives us confidence in achieving the target for at least 28.5% for the full year and a step towards our goal for an adjusted margin of at least 31% in 2028. On cash flow trends, free cash flow rose 56% in the second quarter to US$129 million over the year-ago period and was up an even more impressive 86% to US$225 million for the first half of the year. We are seeing the impact of measures to ensure a high level of cash conversion from the rising level of adjusted net income. These actions include upscaling our accounts receivable and accounts payable teams at our hubs in Wroclaw and Manila. While keeping an eye on inventory levels, we are taking steps to ensure that we have adequate supplies to avoid disruption, especially in light of concerns about the current macro environment and supply chain stability. Let me now give you some additional views on our results for the second quarter. Among the product groups, we saw higher sales in the second quarter on sample technologies, diagnostic solutions, and PCR Nucleic Acid Amplification over the year-ago period. In sample technologies, the 1% CER growth came in from consumables and particularly strong growth in kits used on our automation systems. And this comes after the launch of upgraded systems, in particular Kaya Cube Connect and EZ2 Connect. While we saw some weaker sales trends for manual kits, the increase in automation consumables is a testament to our conversion ability. In diagnostic solutions, we were pleased with the ongoing strong performance of Quantiferon, which sales up 11% CER in marking the fifth consecutive quarter above $100 million in revenues. Kayastat DX sales also rose at a robust pace, growing 12% CER over the second quarter of 2013 on significant gains in consumables and an ongoing good level of instrument placements. The recent expansion of the US test menu gives us increasing confidence in exceeding the 24 sales target of at least 100 million US dollars. In the PCR product group, QIAcurity delivered robust growth in consumable sales. We continue to see good demand trends for instruments as well. We are especially pleased with the demands for the higher throughput QIA-QT 4 and 8 versions that are popular with biopharma and manufacturing customers as well as larger academic research facilities. We believe this will translate into an even higher consumable pull-through. In the Genomics NGS product group, sales of the QIA-Gen Digital Insight business rose at a high single-digit pace and here we saw good sales trends for both the research and clinical portfolios. However, we faced a tough comparison to the strong results in the year-ago quarter. At the same time, we anticipate improving demand trends for our NGS portfolio in the second half of the year and for this product group to return to growth as we saw in the first quarter. Let's now move to results for the regions. Sales rose 7% CEI in the Europe-Middle East-Africa region, with a top performance in Germany, Italy and the United Kingdom. Kyastati X sales in this region were robust, with double-digit growth in both consumables and instruments. We also saw growth above the global average for Quantiferon on continued conversion from the tuberculin skin test. In the Americas, sales were stable compared to the second quarter of 2023, as single-digit consumer growth was offset by the cautious spending environment for instruments. In the Asia-Pacific-Japan region, sales declined 3% CER in the second quarter and led by higher sales in Japan, Australia and India. Results for China showed a single-digit CER decline over the second quarter of 2023 but grew at a significant double-digit rate sequentially from the first quarter of 24. We currently anticipate the challenging macro conditions in China to continue. Let me just remind you, China makes up less than 6% of our global sales. Let's now review the rest of the income statement. The adjusted gross margin was 67.2% of sales an increase of about 30 basis points from the second quarter of 23 on beneficial changes in the product mix towards higher consumable sales. Additional margin benefits came from lower operating expenses in R&D, selling and marketing expenses, and administrations in the second quarter over the year-ago period. This led to the adjusted operating income margin expansion by one percentage point to 28.4% from the second quarter of 23 and a marked step up from the 25.7 margin in the first quarter of 24. The favorable trends show the impact of our initiatives on effective cost management while making targeted investments to fuel growth and supports our targets of at least 28.5% for the full year of 24. As for NeumodX, given that the decision came in June, we did not see any material impact on operational expenses other than the restructuring charges taken in the second quarter that was excluded from adjusted results. The restructuring charge for the second quarter was 351 million US dollars, of which 80% was non-cash. About 280 million dollars was included in the cost of goods sold, and about $70 million in operating expenses. We continue to expect the restructuring charges to total approximately $400 million through the completion of the program in 2025 and with about 75% involving non-cash items. As for the third quarter of 2024, we currently expect the charges to total approximately $30 to $40 million related to this decision. As for adjusted EPS, results at constant exchange rates were at $0.55 and $0.03 ahead of the outlook for at least $0.52. The adjusted tax risk was at 19% and the average number of diluted shares at $224 million were both in line with our expectations. Turning to cash flow, results for the second quarter were a continuation of the good outcome seen in the first quarter of 2024. Operating cash flow for the first half was up 63% to $300 million over the same period in 2023. In terms of work and capital management, accounts receivables fell by nearly $30 million since the end of 2023, while our days of sales outstanding was 58 days and has remained within this recent trend. Another contributor was the reduction in inventories by about $80 million since the end of 2023. This was partially due to the decision to continue NeumodX, but also improvements in other areas of the portfolio. Free cash flow also improved in the first half of 2024, rising 86% to $225 million from the first half of 2023. At the same time, we saw increased capex levels for software development, including for the upgrade of our SAP system that is tracking well against our plans. For the second half of 2024, we anticipate an ongoing strong level of underlying cash flow generation largely in line with levels seen in the first half of the year, excluding one-time cash charges related to restructuring. The same is true for free cash flow levels with similar levels of capex spending as in the first half. As for our financing, we had a payment of about $100 million for a German private placement that reached maturity in the second quarter. We also have $500 million of convertible notes reaching maturity in September and anticipate having to repay another $500 million of convertible notes in 2025 as well. I would now like to head back to Thierry.

Thanks a lot, Roland. And now let me give you an update on some progresses across our portfolio. First, on Kayakuity. we are ramping up our commercial presence as we seek to drive dynamic growth and gain share in the digital PCR market. If you remember, initially we started with academia and then biopharma. And now we are targeting new markets, including forensics and clinical application. In forensics, where we have a top three leadership position driven by our sample prep portfolio, we have a new partnership with the US Federal Bureau of Investigation, FBI, to develop a first-of-its-kind digital PCR assay. It is designed to enhance DNA quantification in human samples, which boosts forensics analytics and ultimately contributes to improving public safety. And as for the clinical market and digital PCR, the launch of the QIAQUITY diagnostic version is perfectly on track for later this year. The first assay for FDA submission, a BCR-ABL assay for use in hematology patients is also on track for approval in 2025. We still have ample room for growth in the academia and biopharma markets, and our teams are ramping up customers' activation campaigns. If we move now to QIAgen Digital Insights, powerful analytics to understand genomics, our bioinformatics portfolio, we are harnessing the power of AI-driven content combined with human curation to provide the industry-leading bioinformatics portfolio. Customers rely on QDI by QIAGEN for results in minutes, even seconds, that would have taken days and weeks with other options. This speed is possible today. At our capital market days, if you remember, we outlined the accelerated investment going into QDI to strengthen this portfolio. and this is distinguished in our industry given the high level of profitability. We are deepening our commercial teams with new sales specialists and we invest further into research and development. This will help us to deliver at least 14 AI enhanced products to our customers by 2028. In sample technologies, This is the foundation I remind you of our offering in the life science and molecular diagnostic, where QIAgen is enabling endless possibilities with DNA RNA from the first step in many lab workflows. We are moving ahead with plan to launch two important instruments, an upgrade with the QIA Symfony Connect. This is planned for the second half of 2025. And our entry into high throughput automation will be anchored with the launch of KIA's Pre-Connect early 2026. The introduction of this instrument will increase the capacity to process nearly 200 samples in a few hours. A host of new kits are being developed and ready for launch, including new kits for free circulating DNA and microbiome target isolation. Across our portfolio, you can therefore see that Kayagen is stronger than even before. We have a differentiated portfolio targeting growth above the market we serve, and we will continue to invest in strengthening this differentiation. Now back again to Roland with the details on the outlook.

Thank you, Thierry. Let me now provide more perspectives on our updated outlook for 2024 and also for the third quarter. As we mentioned earlier, the new outlook for net sales is for US$1.985 billion CER, and this compares to the previous outlook for at least US$2 billion. This takes into consideration the strong first half of 2024 that was ahead of our outlook by US$15 million CER, especially with the solid performance from Kaya Static and Quantiferon. It also reflects an update due to the NeumodX decision, as we now expect these sales to be about $25 million CER compared to previous target for at least $55 million. Consumables and related revenues are expected to continue driving growth, while larger-scale instrument sales remain challenging. For the third quarter, we have set an outlook for net sales of at least $495 million CER an increase of about 4% CER from the third quarter 23, sales of 476 million US dollars. This includes a headwind of about 1 percentage point from the Neumodix decision. In effect, an underlying 5% CER growth over the third quarter 23. This confirms our expected sequential growth that we anticipate for the second half of 24 over the same period in 23. On adjusted earnings per share, our updated outlook for the year is for at least $2.16 at CER, and this is an upgrade from our previous outlook for at least $2.14 CER. I want to also note that there is an increase of $0.06 from the initial outlook at the start of 2024 as we double down on our commitment for solid profitable growth. Adjusted earnings per share for the third quarter are expected to be at least $0.55 per share, also at CER, compared to $0.50 in the third quarter of 2023, so a nice improvement. As for the impact of currencies, based on recent movements, we are now expecting a negative impact on full year net sales of about 1 percentage point and an adverse impact of about $0.02 per share on adjusted EPS results. I would like to now hand back to Thierry.

Thanks a lot Roland again and we are coming to the end of our call. So before we move into the Q&A session, let me quickly summarize today's key points. First, we are very pleased with the results for the first half of 2024 and what we see as a company delivering among the fastest growth and improvement in profitability in our industry. The solid results for the first half give us increasing confidence in achieving the updated 2024 outlook. Second, our strategy of balance and focus is proving its value as we roll out new products and strengthen our offering to customers from the life sciences to the molecular diagnostic field and capitalize on our broad global presence. A key element is the fact that nearly 90% of our sales are coming from highly recurring revenues, and this bolsters our business in a challenging macro environment marked those days by slower capital investments. We have, as you know, focused on our sharpened growth drivers. Kayakuity, Kayastat, and Kayagen Digital Insights are areas where we are accelerating investment for growth. We also invest in our proven leadership in sample technologies and also in quantifieron. Those major focus do not prevent QIAgen from having all the significant growth potentials, such as genomics, precision medicine, companion diagnostic, and also HID, human identification, and forensics, where QIAgen is already a top player. Above all, The karyogen of today is about delivering sales growth combined with improved profitability, in line with our commitment to solid profitable growth for the coming years. This is what we have demonstrated with our results for the first half of 2024, and we are determined to do so in the second half as well. With that, I'd now like to hand back to John and the operator for the Q&A session. Thanks a lot for your attention.

Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchstone telephone. If you wish to withdraw your question, you may press star followed by two. To ensure we can accommodate as many people as possible, please limit yourself to one question and, if necessary, one follow-up. Your microphone will also be muted after finish asking the questions. Anyone who has a question may press star followed by one at this time. One moment for our first question, please. The first question comes from Catherine Schultz with Baird.

Hi, thanks for the question. Maybe just first, as we think about the back half guide, third quarter looks like you're getting back to about mid-single digits or growth and probably exiting the year in the solid mid-single digit range. How should we think about that as a jumping off point for 25 and maybe compare that with your 7% long-term CAGR that you laid out at your CMD last month? Thanks.

Thanks, Catherine. I would say that what it shows is that we are perfectly executing on what we said at the beginning of the year. You remember we signaled clearly to you and to the market when we get our guidance for 2024 that we would have a slower H1 and then progressively accelerate. And coming back to a performance in H2, that would be very comparable to our performance in 2023. And this is why that you have our Q3, which is at 4% growth. If you exclude pneumotics, it's 5% growth. And 5% also growth in Q4. Q3 will be driven by, first of all, the input of new products in our portfolio. In H1 of 2024, you have no impact of the GI approval in the U.S. You have no impact on the CAIA QITI diagnostic approval also in the U.S. This is impacting the second half. Second, in H2, you have also the confirmation of the investment that we are doing for now a bit more than six months into our bioinformatics QDI business. And this is going to show acceleration. Third, you probably know that traditionally, the second half of the year is always stronger and faster in growth for Quantiferon because it's impacted by impactful marketing activities, especially in the U.S. with our back-to-college, back-to-school campaign. So it's fundamental for us to accelerate. We have the pipeline and the portfolio to do so. And this would position QIAGEN then to deliver on the expected three-year plan guidance that we gave in our Capital Market Day in New York.

All right, great. Thank you. And then great to see consumables returning to growth as well. What are your expectations for instruments versus consumables in the back half of the year?

We have always signaled to the market that for many factors, first of all, an influx of capital sales during the COVID pandemic era. Second, let's never forget that this year is very specific in the world. It's one of the few years where half of the world is going into election and notably in key markets such as the US. So anytime you have election, you have a bit of a wait and see attitude. So there is clearly some caution in capital expense in many labs, especially in life science. situation to be short-lived. We have always said that laboratories are traditionally, and on a regular basis, investing into upgrading their capital sales. So we expect this movement to normalize progressively, moving into 2025. Thank you.

We'll go next to Michael Reiskin, America.

Great. Thanks for taking the question. I want to dig in on some of the portfolio developments you talked about, particularly the digital insights. It sounds like you're making a lot of progress there and seeing some strength in the software business. Just wondering if you could talk about the underlying state of that end market, customer purchasing decisions, and broadly just what you're seeing in genomics. Thanks.

Thank you, Michael. You know that we have basically two main classes of customers, as we have highlighted during our Capital Market Day in June for QDI. What we call the discovery, which are the research and academia customers, and also the clinical customers. There is a significant need for bioinformatics, especially driven by the demand for genomics data. But the market is also driven by the fact that when you have an explosion of available genomics data, you still need to have very smart softwares to allow clinicians and laboratories to make sense of those data. In other words, to transform those trillions of data into actionable research or clinical insights. And this is why it's pushing the dynamic of that market. The specificity of QIAGEN here is that not only we have invested for many years into artificial intelligence, but we have built also an incomparable knowledge base thanks to years of manual data curation. And this is that combination of automation and AI and manual curation that makes QIAgen so specific. In addition to that, especially when you compare with all our competitors on that segment, this activity is highly accretive for QIAgen at every level. Gross margin, EBIT margin, EPS. When our competitors are rather basically bleeding money. This is why we believe that it's a market that it's interesting to invest in marketing and also research and development.

Okay. Thanks. And if I could squeeze in a follow-up on Quantifier on, you know, the solid quarter, double-digit CR growth, continued strength there. Obviously, there's been a lot of discussions about potential competition in that market. It's been another quarter since there's been some updates from BlackRock. potential competitors down the road. Just wondering if you've had any change of conversations with your customers or what you're seeing in the market in terms of people's expectations for the future there. Thanks.

Michael, Kyogen is like you. We hear and we listen to comments from competitors even when they are extremely contradictory. But this is not our focus. The first focus for us is to deliver on 450 million guidance in 2024 for QuantiFerron. We are on good track. Fifth quarter in a row exceeding 100 million of sales. Once again, double digit. Second is to make sure that we capture the skin test market because this is the main competition in that market. There are still probably around 60 million test in the world, of which 1616 million in the US alone. So you understand that we have still a lot of room to grow. Third, it's to deliver on the commitment we took during our Capital Market Day in New York, which is bringing that franchise to $600 million. by 2028, which is showing a 7% CAGR. Those are our focus, and this is what matters, I believe.

Thank you. We'll go next to Jack Meehan with Nefron Research.

Thank you. Good morning, good afternoon. I wanted to start just to get your latest thinking on end market trends on the life science side for academic customers and also pharma customers. Um, how just, you know, in terms of spend trends, you know, how are you feeling about funding conditions and, um, just kind of the pace, the recovery here into the second half?

I believe Jack, thanks for the question that, uh, the situation should normalize on the backs of one main reason. People will have more and more visibility on the funding situation. Remember that for a good part of H1, at least until April, if you just take the U.S. as an example, many labs did not know what the budget, for example, for NIH 2024 would be. Now they know. It's flat this year. Will it be flat forever? I don't believe so. We have never seen that in the history, for example, of NIH. So we have highlighted this cautious in capital spending. But I believe that given the power of innovation in life science, once again, look at microbiome. Who was talking about microbiome six years ago? Now, minimal residual diseases. Every year you have a new push for expenses or more discoveries. So that means that we are very confident that this market will continue to grow. Clear this year, it's a bit softer in capital sales, but that shouldn't last forever.

Great. Okay. And then on high acuity, just how do you feel like you're tracking relative to the over $90 million target? I think it implies a little bit of a step up in terms of the growth rate in the second half of the year. Just would love to hear more about your confidence in that. Thanks.

Thank you, Jack. So first of all, let's not forget that KayaQuity is probably the fastest growing install base ever in life science. Since the very first day we launched KayaQuity, we achieved a remarkable number of placements, converting QPCR customers or converting competition. Second, It's clear that because it is, up to now, mainly a life science play for QIAGEN, yes, QIAQUITY, even if we see a nice demand for our instrument, is slightly impacted by the caution on capital expenses in labs. But the good thing is that we are extending the reach of QIAQUITY in two dimensions. First of all, the clinical business. And this is the launch and the approval, the FDA approval of the platform in the second half, but also the pharma. So QIAQUITY now becomes also a very valid solution for companion diagnostic. And this is why we believe that we have the guidance for 2024 of 90 million within REACH.

Thank you. We'll go next to Dan Arias with Stifel.

Hey, good morning, guys. Thanks for the questions. Terry, obviously, Quantifyon is an important product for you guys here. And as a capital markets day, part of the discussion on maintaining your competitive position was just related to workflow. So I'm just curious about the timeline associated with some of the automation improvements that you highlighted there. I don't think we covered that. If we did, I apologize. But I think automation was one of those critical elements of the offering there. So we'd just sort of love to understand when the workflow is expected to change and then maybe how the workflow is expected to improve over time.

With all due respect, Dan, what we insisted during the Capital Market Day is, first, On the strength of our partnership with Diasorin, let's not forget that this is one of the major install-bases in immunoassays in the world. So we have already an extremely competitive back-end workflow. Second, and sometimes the market forgets that, is that we have also agreements with two leading front-end automation companies, Sikan and Hamilton. And therefore, when you combine both, this is an unparalleled automated workflow. Second, what we said in New York is that our agreement with Diasorin allows us potentially to add an automation partner. We have not taken on a formal decision. We review options. And obviously, we would inform the market in due time.

Okay. Thanks.

Thank you. We'll take our next question from Odysseus Menasiotis with Berenberg.

Hi. Thanks for taking my questions. One on Roland on margins. I mean, you're at 28.4%. Percent this quarter up a decent bit from Q1. I just want to get a feeling of how much of that is NEMO DX, which I'm assuming is two-thirds of the month. And just to think on the latter quarters to where you can get to and respectively the exit rate in 2025, it does seem like you can sort of cross 29 here. Is that a logical way to think about it? And then I have a small follow-up.

Yeah, thank you, and thanks for the question. In the second quarter of 24, I think there's no material impact at all from non-modics on the operational expense side outside the restructuring charge. The decision came very late in the month, and of course there's even, I would probably even argue, some extra costs which we had to take. But what is clearly important is that that is going to change in the second part of the year. And clearly also continue into next year. I think we laid out to you and the market ahead of the Capital Market Day that the transition out of non-Modi X goes somewhat into mid of 2025. And that also means the ramp up in terms of contribution on the profitability will phase in over time. And I do think what you're seeing here in the second quarter is clearly a contribution from the core business, which also, and I think clearly you want to mention that as well, will continue. So we feel comfortable in both that we will clearly be north or at least at the 28.5 for the full year if you do the math forward. you clearly see that we have to be quite quickly north of 29% within that year. But I do think it gives us clearly also good comfort on our 2028 goal of 31% that we achieved that. And as we said before, it's beginning a larger contribution from the operational expense side. Over time, there's clearly also contribution even outside NOMODX from the gross margin side.

All very clear, thank you. And a follow-up on the instrument front. So, I mean, looking at the instrument sales are down 10%, you have a comment there saying that it does overshadow trends you're seeing on the rental reagent front. So, I just wanted to know which franchises did better on instrument placements in H124 compared to H123. Thanks.

Sorry, I was on mute. We said minus 10. I mean, the real comparison for me is rather minus 6 because we stopped promoting pneumatics. So basically, we need to account for this base effect. The first message is that, first of all, we continue to place or sell instruments. It would be a wrong perception that we are either losing market shares. We continue to increase the market penetration of kayak witty. of KayaStat or of our sample tech instrument. We simply highlighted that customers, especially in life science, are a bit slower to take decisions or sometimes they are postponing because, as I said before, they are waiting for some more visibility. So, as we said, this is a movement that we expect and consider to be rather short-term. Never forget that when you are in life science, it's very difficult when you cannot sell the instrument to do placement, but you can do placement in the clinical. So this is why having that balance between both life science and clinical help us to mitigate that situation. But this is a situation that we monitor, obviously, very carefully. But I insist, kaya quiti, kaya start. and sample tech instruments are increasing quarter after quarter on placement.

Thank you. We'll go next to Doug Schinkel with Wolf Research.

Hey, good morning, good afternoon. Thank you for taking the questions. Terry, I want to start on the topic of portfolio optimization. So first, just really a quick question on new MODECs. is there any chance you still will find a buyer for that asset? Just kind of want to level set on that. And then second, and this is really the more important thing I want to get at, recognizing that the focus of your capital markets day was understandably on the growth pillars of your portfolio, around $600 million of your revenue, or I think that's about 30% of total revenue, falls outside the growth drivers. How active are you in evaluating other options for components of that part of your business? I'm just wondering if there are other opportunities to optimize and reallocate resources while improving the overall growth and margin profile of the business beyond what you impressively described back at New York a month or so ago.

Thanks, Doug. So first of all, on Pneumodics, while a company like Kayagen is and will never be dogmatic, we need to be clear. We have started a process to discontinue, to phase out the system. I confirm that this system will be phased out. Now the priority for us is to go along and accompany our customers to make sure that it's a smooth transition. Second, since 2008, 20 we insist on that balance and focus strategy for kyogen focus on growth drivers That doesn't mean that outside of those growth drivers, we do not have significant growth potential, sometime above double-digit. I gave some example today. Forensic and HID is a double-digit growth potential for KLGEN. Precision medicine and companion diagnostic is another double-digit growth potential for KLGEN. But at the same time, if you remember, especially the presentation of Roland in the Capital Market Day, we have that clear commitment of 250 basis points from our current level of EBIT margin to go above the 31% EBIT margin that Roland was highlighting again. And Roland gave some details that it was divided between, if you remember the graph, 100 basis points, 50 basis points, and another 50 basis points across different activities, of which continuing to optimize our portfolio was a key part. So we said you see pneumatics because it's a big one, but we are actively looking at the rest of the portfolio to prune what is not either making sense for QIAgen anymore or what could be better in another company. That's the strategy, and it will continue.

Thank you for that. And if it's okay to just sneak in a quick modeling question for Roland. Roland, you know, we have about 52% of quantifier on sales in our model in the second half, with Q3 being seasonally stronger, as we've seen in the past. You know, Kyostat, you know, even more in the back half. But with more in Q4 than Q3, is that the right way to directionally think about things?

I think it's quite obvious that we believe, and I think Thierry was very clear in his prepared remarks, that we continue to believe that Kayastat has a strong environment, not only on all the respiratory activities going on, but clearly now with the launch of the GI panel in the U.S., we can address the U.S. market much better, not only with GI, but we clearly can even address more tender opportunities So that will have a large impact. Quantiferum will stay and remain strong for the year. I think there's also no concern about that. I still would expect that Chiostat also sequentially grows in the third and fourth quarter, just because also of what I just said in terms of GI. But do not underestimate also what we should see from QDI and QIACurity over the rest of the year. Thuy was clearly referencing the investments we made over the course of the year, particularly earlier this year, into QDI and QIACurity has a strong environment, particularly with now selling even the larger instruments into that market that will have an impact on consumer will pull through as well.

Thank you. We'll go next to Patrick Donnelly with Citi.

Hey, guys. Thanks for taking the questions. Maybe just one for me. Just on China, it sounds like it got a little bit better sequentially. It doesn't sound like you guys are expecting much improvement for the rest of the year. But can you just talk about what trends you saw there, maybe peel back the layers a little bit in terms of what looks better, what looks worse, and just the expectations for the rest of the year as we look into 2025 as well? Thank you, guys.

Thank you, Patrick. Roland was also clear in his comments that, first of all, our exposure to that market is rather limited, a bit less than 6% of our sales. The second comment is confirmation of what we keep repeating for the last two years. It's a specific market, but it's too large a market for being ignored. So we take all the actions to remain competitive despite the difficulties locally. This goes through further localization of our activities in research and development in manufacturing on products that make sense to become local in China. Second, I remind you that we are quite differentiated in the sense that we do have a second brand in China as well. It's a company which is consolidated with QIAGEN, but which is managed differently than QIAGEN locally. and selling local products to Chinese companies. And third, we have said and we confirm, we do not see any structural improvement on the market, at least before the second half of 2025. But once again, it's a significant potential, it's a significant size, it's the second market in the world, it cannot be ignored.

Thank you. We'll go next to Matt Sykes with Goldman Sachs.

Yeah, thanks for taking my questions. Good morning. You made some comments about confidence in trends in the NGS business improving the second half. Could you just talk a little bit about what's giving you that confidence and what you're seeing in that market specifically to show improvement in the second half this year?

I mean, it's a rather balanced view. It's just that you remember, Matt, that... Back in 2019, we took a very fundamental strategic decision at QIAgen, which was in genomics and sequencing to focus where we are strong and where are we relevant and strong. It's in chemistry, i.e. providing a platform with kits, and in bioinformatics. And we became completely platform agnostic on those two dimensions. And I believe that the market evolution confirmed that decision because since 2019, you see the growth of more and more relevant players in next generation sequencing beyond Illumina. Look at PacBio, look at Element, look at SingleX, look at MGI, for example. So our offer, both in bioinformatics and in chemistry, fit the needs for those players. And so this is why we said we have a base effect in Q2 of 2024, but the market remains significantly active, and we provide added value solution. So the demand is there.

And just one quick follow-up, just on Kaya Cutie, on your comments about share gains. Can you kind of talk about how much you're seeing in terms of displacing existing competition versus converting those QPCR customers?

It's a very fair question, Matt, but when we have a very differentiated platform like Kayaquiti, we go after every opportunity, competitive deal, new deal, i.e. conversion to customers to the technology of digital PCR. So it's a balanced set of wins. What is clear is that given the feature of the system, specific technology, not droplet-based, fully integrated boxes, capacity to address different workflows, because I remind you that we have a small workflow, medium throughput, higher throughput, so we address different needs. Plus now covering menu not only in research academia, but biopharma and tomorrow clinical. We have fundamental good assets that are allowing us to not only win against competition, but also bring newcomers to digital PCR.

Thank you. We'll go next to Dan Leonard with UBS.

Thank you. Just one cleanup on the CHI acuity. Did you give the growth rate for that platform in the quarter? And then, Terry, can you help me better frame the importance of the BCR ABLE product? Thank you.

So what we said that we have a significant healthy and good growth in the consumable for Kayaquiti Q2. I can tell you that it's above double digit. And we said as well that we continue to have a healthy demand for our platform, especially the higher throughput platform.

And then BCR Able?

For BCR Able. Yeah, for BCRAB also, the play here, let me go back to history first of all. When we decided to move kayaquiti from life science to also clinical diagnostic, we made another decision. We said we will focus in oncology. When we said we focus in oncology, we made a third decision. We said where we are going to be very relevant here is on what we call hemato-oncology, of which BCR-ABL is the main marker. So I'm not going to give you a specific size of the market. I'm just telling you it's the most relevant marker. there is a significant potential where we can prove the superiority of a digital PCR approach, more precise ability to quantitate results versus other technologies, especially qPCR. And for us, it's also making a lot of sense because you might remember that we have a range of products in hemato-oncology, what we call the IpsoGen range of product, which is coming not at the end of its life cycle, but which is quite mature in life cycle. So converting it to digital PCR will be very helpful as well.

Thank you. We'll take our next question from Falco Fredericks with Deutsche Bank.

Thank you. My question is on the GI panel launch for the Kaya stat. Can you give us some insight as to what extent that is already making a bit of a difference in your discussions with customers? And how should we think about the financial contribution of that panel launch in the second half of this year? Thank you.

You have to see it in two ways, Falco. It's exactly what Roland said. So first of all, highlighting that The very healthy performance of H1 on chiostat, 12% growth, is absolutely not impacted by GI. That shows you the strength of the solution. Second, we always disclose that part of the acceleration of chiostat for H2 would come from GI. And it's very simple, because in the U.S., we had customers already using chiostat for respiratory, and they were waiting for this new panel to complete their solution to patients. But you had also other customers saying, I'm very interested, but as long as you don't have at least two panels, I cannot justify the investment. Now they can. So the fact that we have it now, and as I said in my comments, it has been a tremendously quick movement from approval to launch, explains why Kayastat will be one of our main growth drivers in the second half of the year.

Okay, thank you.

We'll take our next question from Hugo Solveit with BNP Paribas.

Hi, this is Curtis Moyles on for Hugo. Thank you for taking my question. The first one here is I'm looking at the slide on page 8 how you're talking about the adjusted EPS outlook for the rest of the year. It looks to me like we only included two cents out of the three cents about performance in H1. I'm just curious, can you give a little bit of color? Have you done this to keep some room to maneuver? Or maybe are you planning to invest a little bit more than you had initially planned? Thank you.

Roland, would you like to take the EPS? Sure, happy to respond. No, I think a fair question. As you noted correctly, we had overperformance not only in revenues for Q1 and Q2, but we also had the same thing for EPS. Clearly, we increased already our outlook quite significantly when we started with 210 into the year to 240, now to 216. At the same time, we also confirmed that our EBIT margin improvement goes from 28 now to 28.5%. And as you said, with that, we clearly will have a significant improvement. And if you do the math, you see that we're even climbing very close to 30% leaving the year. So I would say not too many companies out there with a significant profitability profile with us and having some room to even do better wouldn't be a bad thing. Let's see.

Okay, thanks. And if I could just have one follow-up on coming back to Quantifair and TB. I mean, it's been obviously relatively strong in H1. Can you discuss maybe your confidence level around potentially delivering above the guidance in the full year? And also maybe just to tag on the end of there, I think we understood recently that Revity will be launching the new workflow in the U.S. and China soon. Do you expect this to kind of impact the competitive intensity at all, or maybe will that impact your business at all going forward? Thank you.

So to the second half of your question immediately, let's be clear. We respect every competitor. The product announced by Revit is nothing new. It has already been on the market. It has not changed so far the paradigm of growth for Quantiferon or the paradigm of market shares between the two companies. Just best of luck to them. But it's already on the market and it's not new. Second, are we going to beat the guidance? I mean, we are always trying, Roland, John, myself, and this company to be ambitious and realistic. So let's go to the guidance first of $450 million. Believe us, if we can beat that, we will not hesitate to do so. But first, let's go to $450 million.

Thank you. We'll take our final question from Dan Brennan with TD Cowan.

Last but not least, guys, congrats on the quarter. Maybe just one for Roland to start, just on the back half of your margin ramp. So I think you've got pneumatics, what, at about a point benefit in the back half. So can you just kind of unpack how we think about, you know, gross margins and the different OPEX lines in the back half and, you know, how is the leverage coming through there?

Yeah, I know. I have in mind, good question, Dan. I have in mind that, as I said before, we will be phasing down non-MODeX slightly, right? And that means we still have clearly impact on our profitability also in the second part from non-MODeX. I don't think that cross-margin changed too much this year. There is probably more to come next year. But we clearly do expect an operational side to get some incremental impact. Again, step by step, because clearly some sales and marketing activities and R&D, you ramp down sooner than operational activities, but it will take some time. So I think we will see a combination of what I would call probably as of today core improvements or business outside NowModX still gaining traction and efficiency and NowModX is sliding in into that as well.

Great. And then maybe just one on sample prep. That was a nice beat versus our expectation. We took pretty healthy growth ex-COVID. What are you seeing there? What do you think happens or what's kind of baked into the guy in Q3 and Q4? I mean, we could argue that there's kind of maybe deceleration baked in, which could look conservative. So just kind of walk through some of the drivers and the assumptions there. Thanks.

I think first, the first thing I would say is that we can be happy to see sample tech coming back to a positive evolution. That's the first highlight. The second highlight is that we said that it was mainly driven by our performance in automated sample tech. I see that as the translation that our strategy to upgrade our instruments is the good one. Remember, Kaya Cube became Kaya Cube Connect. The EZ-1 was upgraded to EZ-2, and we announced in New York that we would launch two new platforms. So it justifies that strategy. It validates that strategy. At the same time, I still see this market for QIAGEN as a low single digit. And so we need to continue to develop added value application and assets, especially as we said in New York, in the field of liquid biopsy, in the field of microbiome, in the field of minimal residual diseases. And if we do that, we will continue to grow at a low single digit, but it's a recurring business and highly profitable.

With that, I'd like to close this conference call and appreciate all of you for your participation. If you have any questions or comments, please do not hesitate to reach out to us. Thank you very much.

Ladies and gentlemen, this concludes the conference call. Thank you for joining and have a pleasant day. Goodbye.