Hamilton Thorne Ltd.

Welcome to the Hamilton Thorne Limited second quarter 2023 earnings conference call. Before turning the call over to your host today, please be reminded of our standard public company policy on forward-looking information and use of non-IFRS measures. Certain information presented or otherwise discussed on this call may contain forward-looking statements. These statements may involve but are not limited to comments relating to strategies, expectations, planned operations, product announcements, scientific advances, or future actions. This information is based on current expectations that are subject to significant risks and uncertainties that are difficult to predict. Should one or more risks or uncertainties materialize or should assumptions underlying the forward-looking statements prove incorrect? Actual results, performance, or achievements could vary materially from those expressed or implied. by these forward-looking statements. These factors should be considered carefully and prospective investors and other parties should not place undue reliance on these forward-looking statements. The company assumes no obligation to update such forward-looking statements or to update the reasons why actual results could differ from those reflected in the forward-looking statements unless and until required by securities laws applicable to the company. Additional information identifying risks and uncertainties is contained in filings by the company with the Canadian securities regulators, including, without limitation, the company's management discussion and analysis for the quarter in six months ended June 30, 2023, which filings are available under the company's profile at www.cedar.com. During this call, the company may reference adjusted EBITDA, constant currency, and organic growth. as non-IFRS measures, which are used by management as measures of financial performance. Please see the sections entitled Use of Non-IFRS Measures and Results of Operations in the company's management discussion and analysis for the periods covered for further information and a reconciliation of adjusted EBITDA to net income. Now let me turn the call over to Hamilton Thorne's CEO, David Wolf.

Thank you and good morning, and welcome everybody to Hamilton Thorn's second quarter 2023 earnings conference call. I would like to introduce Francesco Fragasso, who our CFO, will also be with me on the call. Our call today will have the following format. First, I'll provide a summary of operational and financial results for the quarter and six months ended June 30, with a focus on our sales, markets, and operational performance. Francesco will follow with a more detailed discussion of our financial results for the periods, as well as a review of our financial position and liquidity. I'll then return for a few minutes to provide some information on our outlook for the balance of 2023, and we'll open the lineup for questions. I would remind all participants that we do not provide financial guidance, so I'd ask you to limit questions to either historical periods or general trends in the business. I'll begin with our sales results. I am pleased to report that our strong start to 2023 continued when we posted sales of $16.4 million and adjusted EBITDA of $2.8 million versus sales of $14.2 million and adjusted EBITDA of $2.4 million in the prior year for this most recent quarter. This represents 15% sales growth for the quarter and 17% sales growth for the year date. Our organic growth, which eliminates the effect of both acquisitions and exchange rates, was up 5% for the quarter. This comes following an exceptionally strong 15% growth, organic growth in Q1. Therefore, we're about 10% for the year, which is essentially unplanned. As we have discussed in prior calls, due to stabilizing exchange rates, currency fluctuations and translating financial statements into our presentation currency of U.S. dollars had a minimal impact this quarter, but did have an impact for the year to date, reducing reported revenues by approximately 2% to 3%. Fortunately, these headwinds are easing, and I'll discuss this a little bit more in our Outlook section. I'm also happy to report that while supply chain issues continue from time to time, as mentioned in our last call, they are far more normalized, leading to fewer delays in production and shipping, and even some cost reductions in some commodity products, which had increased prices significantly over the past year. Let me summarize the highlights from our performance. As I mentioned, sales increased 15% year-over-year to $16.4 million for the quarter. Sales for the six months increased 17% to $33.1 million. Sales increased 14% for the quarter and 19% for the six-month period on a constant currency basis. Gross profit increased 21% to $8.5 million for the quarter and 22% to $17 million. million for the six-month period. Essentially, gross profit growth is outpacing sales growth. Adjusted EBITDA increased 16% to 2.8 million for the quarter, increased 15% to 5.7 million for the six-month period. As mentioned, organic growth was 5% for the quarter and 10% non-plan, 10% for the six-month period. Cash generated for operations was 1.8 billion for the quarter, leaving us with total cash on hand at June 30 of just over $16 million. Looking a little more deeply into the sales performance, equipment sales growth was in the single digits for the quarter and year-to-date, reflecting some delays, which we mentioned on our last call, on orders until Q3, while consumable software and services grew over 20% in both periods. Sales dropped across all the geographic areas that we served, with our Asia Pacific region showing the strongest growth in the quarter. Sales in China returned to more normal levels following the relaxation of COVID restrictions early in the year, and our Australian business picked up significantly as well. Our strategy to increase sales of higher margin proprietary equipment and software services and branded consumables combined with increased direct sales of products yielded gross profit margin increases to 52% for the quarter and 51.3% for the six months. ending after six months, it ended in June versus 49.8, 49.3 in the prior periods. So approximately a 200 basis point improvement over those prior periods. I'll now turn the call over to Francesco to provide more detailed results on the numbers.

Thank you, David. Good morning, everyone. I'm Francesco Fragasso, CFO of Edmonton Thorne. I will briefly highlight the second quarter 2023 financial results. David has already provided an update on sales and gross profit, so I will focus on the other elements of the income statement, as well as the cash flow and liquidity of the company. Operating expenses in 2023 were $8.9 million for the quarter and $16.9 million for the first six months, an increase of 36% for both periods versus the same periods of 2022. Expense increase was mainly due to the addition of macro-optic expenses for the full period of 2023, expenses related to M&A, increased costs associated with investment in sales and other personnel to support growth, and increased share-based compensation. The return to a pre-COVID level for the sales and marketing activities is also a factor for expenses increase in 2023 compared to the same period of last year. Overall increases in operating expenses were in line with our expectations. Net interest expense in Q2 2023 increased by $255,000 to $358,000 due to additional term debt incurred to finance micro-optic acquisition in November 2022 and higher use of a bank line of credit to fund working capital, partially offset by the repayment of outstanding principal on-term loans. In the second quarter, income tax expense decreased to a 271,000 tax credit from a 226,000 tax expense in Q2 2022. This was primarily due to the reductions in income before taxes and to deferred income tax recovery of 456,000 in Q2 2023 compared to a deferred income tax expense of 20,000 in the same period of 2022. The change relates to the temporary differences between income tax value and the carrying value of assets and liabilities. Net loss for the second quarter was $439,000 compared to a net income of $275,000 in the prior year quarter. Net loss for the six-month period was $362,000 versus a net income of $830,000 in the prior year period. This is primarily due to the increase of rating and interest expenses I previously mentioned, partially offset by decrease in income taxes. Adjusted EBITDA, which we consider an important metric of our financial performance, increased by 16% to $2.8 million for the quarter and increased 15% to $5.7 million for the six-month period. This was mainly due to revenue gross profit growth. offset by planned increase in operating expenses. As a reminder, adjusted EBITDA is a non-IFRS measure. Please see the reconciliation of adjusted EBITDA to net income for the quarter and the six months in our MD&A report filed today on both CEDAR and on our website. Turning now to the company's cash flow and balance sheet. The company's cash balance at the end of June 2023 was $16.4 million compared to $16.7 million at the end of 2022, a decrease of $320,000. The decrease in cash balances was primarily due to investment in working capital to support expected growth, investment in product development and in expanding our manufacturing capacity, and payment related to M&A activities. The company generated cash from operation of 1.7 million for the first six months of 2023 after having invested in inventories, increased account receivable, and reduced account payable. In the first six months of 2023, cash used in investing activity was 1.6 million. Of this, approximately 800,000 were related to the normal expenditure in PP&E and for ongoing investment in capitalizing tangible of product development activities. And approximately 800,000 were related to these old improvement equipment and furniture related in expansion of manufacturing capacity in some of our operating recessions. Cash used in financing activities was 386,000 for the six months of 2023. Those were mainly related to payment of scheduled term loan and lease obligations. Net of $1.6 million proceed from a working capital line of credit. Note payables and term loans outstanding total $14.4 million at the end of June 2023, equal to about 1.3x the last 12 months adjusted EBITDA. At the end of Q2 2023, the company continued to have a strong liquidity position of $26.4 million, including $16.4 million in available cash and $10 million in unused borrowing capacity, including $8 million line of credit for M&A, which was approved in May 2023. This liquidity availability makes us well positioned to support our acquisition program and finance the expected growth. I will now turn the call back over to David to comment on the company outlook. David.

Thank you, Francesco. Looking forward into the balance of 2023, we continue to feel our company is in a great position as demand for our products and services remain strong based on the positive trends in our field. For example, the World Health Organization's latest research revealed an increase in the prevalence of infertility from one in eight families less than 10 years ago to one in every six families of reproductive age today. While there are a number of factors driving this, the societal trend of deferring family formation until later in life, when conception obviously becomes biologically more difficult, plays a significant role. In addition, improved affordability, whether due to overall income growth, particularly in developing countries, added governmental benefits or private health insurance, is also a trend that will continue to drive growth. As an example of this trend, adding to the benefits they already offer in the US and Canada, just last week, Amazon announced a partnership with benefits provider to offer family building support to its employees in the other 50 countries, over 50 countries in which they operate. We have seen the direct effect of this increase in demand, in the more recurring revenue parts of our business, including sales and consumables, software and services. As we expected, first half capital equipment sales growth moderated as several of our distributors who built up inventory during periods of supply shortages worked through those positions, which dampened our organic growth in Q2. We reiterate that the underlying demand for our products remains strong. and given our current order backlog and pipeline, we expect to continue to have organic sales growth in the 10% range in the second half of the year. As previously mentioned, exchange rate headwinds have stabilized, and if this trend continues, we expect foreign exchange fluctuations to actually provide some tailwinds in the second half of the year. Regarding our M&A activities, we continue to have an extensive pipeline and actively are working on multiple acquisition opportunities As Francesco mentioned, with a total liquidity of over $26 million from our significant cash on hand, unused lines of credit, further debt capacity, we are well positioned to continue to execute on our acquisition program. In summary, we feel extremely positive about our market position and our confidence in our team's ability to execute on our long-term strategy of sales, growth, and EBITDA expansion. by investing in our own organic growth while building scale, which enhancing our product operates and expanding our geographic and direct sales footprint through acquisitions. We will now open the line up for questions. Operator, please assemble the queue and let me know when we're ready for our first question.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question is from David Martin of Bloom Burton. Please go ahead.

Good morning, David and Francesco. First question, when you acquire businesses in geographies where you haven't had sales previously, you transition to direct sales from distributors over time. I'm wondering how far you've proceeded along this path in the new markets you've entered over the past few years.

All right. Great. Thank you. So, yes, I think you've articulated both our strategy and the fact that it does, in fact, take some time to accomplish that. And we also do value growth. even though ultimately our long-term plan is to move as much as we can to direct sales, we do value distribution partners in particular markets where, for some reason, with rich relationship or capability, they might in fact have, or segment, they might in fact have additional capabilities. So overall, I would say those plans are well on track. Our Most mature major acquisition, now again, it's almost over five years ago that we completed this, which is the acquisition of Guidamed in Germany, which has a direct sales team servicing the entire Dodge region of Germany, Austria, and Switzerland. I would say the conversion of our direct sales from distribution to direct is essentially complete. We don't really work with any continued distributors in that market in our core markets of IVF. Now, we may, in fact, work with distributors in the more tangential research and particularly in the animal market where there's a really strong specialty. In other markets, it's a work in process. I think we've made great, even though it's not technically an acquisition, we did change our strategy by beginning to offer direct sales in the U.S. in the late 2000s teams. So I would say there as well, we're very far along in converting direct sales, and this is sort of the difference in ways. from newly acquired entities or even, you know, some of the agencies we've helped for a while, sales from distribution to direct. There's always, as I mentioned, there are always exceptions, but generally speaking, people will come to us to buy direct. Going along the timeline, I would say the UK is well along as well. And then our most recent acquisitions, which we completed in 2021 and 2022, which are in IVF tech in the Nordic region and Micro-Optic in the Spain region in Spain, are still works in process. I would say in Nordics, making good progress, essentially have a full sales team, well-trained, and again, nothing happens overnight. And Spain, I would say we're still kind of relatively in the early days. So maybe a little more granularity than you wanted, But clearly, the goal is continuing. Again, I don't want to cherry pick one particular piece of data, both because it just happens to be very good, and I don't want to find myself every quarter having to report on this. But in Q2 of this year, we actually had our highest percentage of sales from direct sales you know moving from our normal kind of ish 60 percent direct versus distribution into the into the high 60s mid to high 60s so very very strong now that may be just one quarter and I don't want to again paint a strong trip you know paint a picture about a trend but that's one of the things that help translate directly into improved margins and actually my next question is about the margins um

Do you think there's still room to move the gross margin up going forward, you know, gradually, you know, putting aside quarter-to-quarter differences in product mix? Is there still room to move the gross margin up?

So, again, over, and I don't want to pin myself to a period, over the longer term, absolutely. The key drivers in our short-term growth margins you picked up completely as product mix. We may just in one quarter have one or another, be it just be a somewhat higher, somewhat lower margin. But our key drivers for longer term margin growth are increasing our direct sales, percentage of sales that we sell direct versus through distribution, because then we effectively keep the entire margin that we normally would have paid to a distributor and and I'll come back in a second and talk about how that impacts EBITDA, and more and more increasing sales of products that we make ourselves or have made up for us by contract manufacturers versus third-party distribution. And third-party distribution, as you can imagine, we're earning a distributor's margin, which is well below what has been our historical for the past few years, blended margin of 50%, whereas if we buy the product and own it, we're certainly going to be much closer to, and in many cases, depending on the product category, far in excess of 50%. In terms of impact on EBITDA, and that maybe ties back into your first question, in the short term, investing in greater direct sales actually has a dampening effect on EBITDA, and I think that's pretty obvious here. You're hiring a direct sales team. They're not necessarily fully deployed at that point. But over the longer term, as we can continue to increase the effectiveness of that force, that sales force, get more performance out of them, we can accomplish what I described, which is more and more direct sales. And while we may still have to add some direct sales personnel over time, we'll get essentially positive leverage from that sales team.

Okay, thanks. I'll get back in the queue. Thank you.

Again, if you have a question, please press star, then 1. The next question is from Justin Keywood of Stiefel. Please go ahead.

Good morning. Thanks for taking my call, and nice to see the double-digit growth in both sales and EBITDA. Just on the equipment sales that got pushed into Q3, are you able to quantify that amount?

Yeah, so I would say the quick answer is no. We're not going to quantify that enough, but it's really a question of over the course, and I discussed this a little more in our last call, but I'll repeat it. Over the course of the first half of the year, it became obvious to us, and maybe we shouldn't have picked up on this earlier, that a couple of our large stocking distributors, three of our large stocking distributors, purchased significant amounts of stock in really whether it's late 2021 or through 2022 as we were experiencing supply chain issues in order to protect themselves against those supply chain problems. As our supply chain issues have diminished along with others in our category, they began to work through those inventories. So it's not like we had a big order teed up at the end of Q2 that for whatever reason fell into Q3. That being said, we clearly are seeing those, I don't want to imply the flood dates are opening, but we're clearly seeing that backlog in inventory being worked through. We received an order, I'd have to actually check whether it was in the end of Q2 or early in Q3, from one of those stocking distributors for essentially a significant order that will continue to draw down through the balance of the year enough to make that product category back to really significant sales. And we're working on the others with various timings associated with them. So, you know, it's not like a discrete event. It's more of a trend. But as I mentioned, you know, I feel confidence that we'll return to, you know, kind of showing, you know, we should have at least double-digit growth. on those products in the second half of the year.

Okay, that's helpful. And then one of Hamilton's larger peers, Vitrolife, reported growth that missed estimates for their calendar Q2 and spoke to a pandemic cycle that was returning to more normalized levels. This appears to be contrary to Hamilton's outlook, including the 10% organic growth in the back half of the year. Are you able just to speak to that dynamic, why Hamilton continues to achieve what appears to be higher growth than some of the other peers in the industry?

Yeah. So, first of all, I don't want to spend my call either commenting too much on or company in our field because they're a strong business and we should never, never, never, I just don't think that's the right thing to do. But clearly, you know, Vitrolife has some discreet issues that we don't have. They have a fairly robust but not, you know, doesn't cover every base in the laboratory, but a fairly robust line of consumables. And I think you noticed in the quarter their consumables business actually performed pretty well. Their capital equipment business is very narrow, really only two-point solutions versus our capital equipment business, which is very broad. And I think it's just classic portfolio theory. When you have two products, you can have ups and downs that impact those. And that's one of the reasons that we've adopted our strategy of being able to provide a broad, broad range of products because, as I mentioned, we had our ups and downs in the quarter. particularly with one category, one set of orders that didn't come in but now have. And if that were our only product, we would have probably shown a fairly, what I would call, disappointing quarter. But again, it's balanced by the other broad product that we have. And I'm not thrilled with single-digit growth, but in one category, when you can understand it and explain it, I think that's fine. And then, again, not to get too hung up on VitroLife, they clearly did an acquisition of a genetics business, a genomics business, a year ago that they were working through. That business has declined. Not clear to me whether it's because that business is actually declining for them, you know, for the specialty players, or it's got to do with their execution or But I think those are kind of secular issues in a way relating to the vitro life, not so much the trends in our field. That being said, I think we have consistently outperformed the overall growth in our field for some of the reasons that we've discussed. We're continuing to invest and expand in direct sales, which is an opportunity to grow. We're getting better synergies from the resale of our and cross-selling of our products across our multiple sales territories, and those all contribute to driving above-average growth.

That's helpful context. If I could just ask one follow-up question, maybe in a different way. Is the higher interest rate environment impacting the consumer at all as far as the demand for IVF services? Are you seeing any early indication of this?

So the quick answer is no, but that would be somewhat delayed, as you can imagine, and also maybe somewhat skewed from a geography perspective in the sense that well over 50% of our business is based in Europe, where there's very strong geography. Social support, basically governmental support and subsidies for IVF doesn't mean people don't pay anything out-of-pocket, but the out-of-pocket payments are substantially limited. People aren't, let's say, getting second mortgages on their house to be able to afford IVF or doing home equity lines of credit. The U.S., that's a different story. It's still largely private pay, though, as I mentioned in the call, that trend is moving, both state-adding additional fertility benefits, again, slowly over time, and large employers. Walmart last year added a fertility benefit. Amazon has always had one in the U.S., but now it's adding it worldwide, and we're seeing more and more fertility benefit momentum. Again, I think the fact that somebody else is paying for it or largely contributing to it, that reduces the sensitivity, I guess, to to interest rates. And, you know, again, there's a fairly big lag in this. So quick answer is we haven't seen it, but I wouldn't, you know, I don't want to be completely, you know, sanguine about it and say it won't have an impact over time.

Understood. Thank you very much.

Again, if you have a question, please press star then one. And next we have a question from Devin Schilling of PI Financial. Please go ahead.

Hi, David. Good morning. Just a question here on your guys' overall strategy. I know over the last few years here you guys have been really pursuing market share gains over focusing on pre-cash flow growth. Has this changed at all now given where the business is currently at with the current scale of the business? And I guess Will the near-term focus continue to be on grabbing more share here, or is there now more of an opportunity to start pulling on that free cash flow lever?

Yeah, so let me respond briefly at sort of the high level on the strategy and how that has evolved over time. Then I'll let Francesco give a little more color on how we think about free cash flow and the emphasis that we have on that. So overall, I would say it is still relatively early innings in this long-term game that we're playing. Hopefully I haven't mixed too many sports metaphors in that. We are still a meaningful player. We're one of the largest players, certainly top ten, if not top four or five in our field. But, you know, it's still highly, highly fragmented. So there's lots of opportunity for us to continue to gain market share, whether it's through our – even though, you know, it can be seen – on one hand, it's actually fairly aggressive, by far the most aggressive acquisition approach in our field, and through – investing in all the things that drive, drive organic growth. So I would say we are going to continue with a, our balanced approach to not necessarily maximizing sales growth and market share gains versus let's say what we could do if we dial back investments in those things and, and be able to improve, um, you know, even which ultimately obviously translates to free cashflow. We, we, um, we're going to take a balanced approach. I think there is opportunity, even in that balance, to improve. And it's somewhat dependent on gross profit margins continuing to stabilize at the levels they are at or near the levels they are at and us being able to manage expenses. But I think this EBITDA, potential EBITDA expansion, while we can continue to have that emphasis on growth, But we're clearly not, you know, I think it's too early for us to sort of dial back on the growth side and say that we should become what I think we can be at some point, particularly when we get greater scale, which is, you know, much more of an EBITDA engine with much higher operating leverage. Francesco, if you don't mind maybe giving some comments on our perspective on, you know, free cash flow, how we measure it and, you know, how we're thinking about that, that would be very helpful.

Yes, yes. Yes, we continue to focus on profitability and cash flow as well. Of course, just to pick up from what David just said, we have to invest in supporting future growth, and that creates some timing effect from a cash flow and even EBITDA point of view. So how we measure our growth it's a free cash flow conversion, is trying to eliminate what is not recurring in a normal course of business. I mentioned, for instance, first of all, on the expense side, we detail in our MDMA what are the non-recurring or one-off items that bring us to the adjusted EBITDA. But there is also a... a capital expenditure component to it. And I mentioned before that this year, out of 1.6 million of capitalized expenditure, half of it was related to unusual activity, which was a major expansion in our production capacity. Of course, all of that is reported in our financial. So how we measure our theory cash flow conversion is trying to exclude those one-time expansion costs so that our adjusted free cash flow conversion is defined as adjusted EBITDA, less cash taxes, less interest expenses, less lease payments, less normal level of capitalized expenditure tangible and intangible. And if you do that, you will see that for the last 12 months, our conversion rate of adjusted EBITDA to previous flow was slightly about 50%. I don't know if I answered your question.

Yeah, that was very helpful and detailed there. Thank you so much. That's everything for me.

The next question is a follow-up from Justin Keywood of CECL. Please go ahead.

Hi, thanks for taking the follow-up. Just on the commentary around M&A, obviously the balance sheet remains in solid shape here. Any indication of the timing when we could see some additional M&A, and has there been any change in target multiples?

Yeah, thank you. So I appreciate the question, but as you probably know, we've tried to be pretty careful in the past and we'll continue in the future about not signaling anything on the M&A front until we're ready to actually disclose a transaction. So on the timing question, I think I'm just going to, again, nip my support metaphors. I'm just going to have to punt on that one. In terms of multiples, as I somewhat mentioned, we are by clearly the most active acquirer of mature, sometimes relatively small, but mature businesses, and we've been pretty influential in a way in setting the multiples. We don't view that they've changed materially, over the last couple of years, maybe over the last eight years since we started this, and there was no acquisition activity, and it was a little bit easier to get lower multiples. But now I think we're seeing for good, solid businesses with the kinds of dynamics that we want with sales, sales growth, earnings momentum, some proprietary growth, products and again that can that can vary you know sales multiples uh even done multiples in the six to eight range we could clearly see um lower multiples if the you know there's lack of some of those things that we've talked about that they may be less desirable to us but uh or higher multiples you know again if we said this in the past maybe somewhat glibly but Show me a business with 90% like a software as a service business with 90% gross profit margins, 90% recurring revenue, and 50% EBITDA, and 30%, 40%, and 50% growth, and that will deserve a greater multiple. So we try to be attuned to the multiples that we're seeing. In our relatively small private company world, we're There's not a lot of private equity retrading and not a lot of private equity competition. We haven't really seen, except in our attitude about things and our DCF models, a direct translation of higher interest rates into lower multiples, which I think you will definitely see for larger transactions and particularly private equity-led transactions that depend on high leverage multiples to make sense. And lastly, just in terms of recent transactions, there have been a couple of recent transactions in our field. One was beyond startup, but a non-profitable business with nice products but not necessarily fitting our our model so we you know even down large and even down multiples were are not relevant but multiples of sales was sort of like 3x multiple sales so you know maybe you can argue that but it has some pretty good technology and pretty good technology protections uh and then a recent transaction of a product in the in our field a little bit more on the pharma side actually bought by a pharmaceutical company that traded about uh nine and very very nice financial performance traded about nine times EBITDA. So again, I think we're seeing reasonable EBITDA multiples continue in our field, or reasonable valuations continue in our field.

Okay, good to hear. And if I could just slip in one more question, just around the AI strategy. I know with Micropic, there was a level of AI within that business. Just how that's going as far... you know, potentially, um, deploying that technology in a broader scenario across the business. Thank you.

Yeah. So thank you. So, so we believe, um, you know, AI is, I'm not sure where it is on the, you know, the, the Gardner hype curve where, you know, things get hyped and then you enter the, the, the, the valley of failed expectations. But, um, we, we've never really been on, you know, high on hiking things and then therefore maybe a little lower, um, to the lower expectations, but then you tend to beat them. But we view AI in general and specifically in the Microtik product as not some standalone, game-changing, going to change the world kind of product, but a valuable adjunct to the products that we sell that are going to make our products work better and therefore more competitive and more desirable in the laboratory environment. You know, overall, you know, that, you know, is, you know, some cumulative effect, maybe AI, you know, with a kind of like a capital A, capital I, can have a more impactful effect. But it's really, you know, our view is how do you make it actually useful by doing something better? So that, you know, that being our strategy, it's worked out very nicely. You know, we continue to see growth in those products. We continue to get, you know, strong results. product acceptance and accolades for the performance of our product, and we believe those will continue. Over time, again, I'm not going to talk specifics here, we intend to incorporate other elements of AI into other, either parts of our product line or potentially even parts of our operation to get to improve performance or, you know, or efficiencies. But, you know, we haven't hyped ourselves as an AI company, and I think, you know, we're much more focused on delivering something that, as I said, really has value and improves performance than, you know, as being a little more, you know, just to send a number of buzzwords that people are getting excited about.

Thank you for the follow-up.

The next question is a follow-up from David Martin of Bloomberg. Please go ahead.

Yes, I just wanted to go back to the large stocking distributors who are working down their inventories. I'm wondering, is there any way to quantify how far through the workdown of the inventories they are in a combined sense? Or if not, quantify at least... Are they early in the process, midway through the process, or almost done the process?

So I would say clearly almost done. So I'm glad you gave me that as opposed to an approach to quantifying because it's very difficult to quantify and something I wouldn't be comfortable with. But in terms of how you described it, I would say we're nearly done. One of our major stocking distributors has in fact placed large orders Um, and we're expecting from one other and, and again, this is not like a hundred stocking strip. It's really just, just a handful and we're, we're working through with the other. So I would say we're, we're nearing the end of that, that curve. And I know where we're going to face, you know, COVID style, um, uh, supply chain issues in the past, but probably a good, good lesson learned for us to keep a better handle on, um, you know, our inventory levels and our distributors.

Okay. Okay, thanks. That's it.

This concludes our question and answer session. I would like to turn the conference back over to David Wolf for closing remarks.

Okay, well, thank you very much. I'd like to reiterate my thanks to everybody on this call for good and insightful questions. But I would say, as and more importantly, our thanks to our employees for the great work they do and the dedication they've shown to our business, to customers, to our business partners around the world, to our shareholders for the support they've shown our company, which has allowed us to be proud participants in our field where we play our part, whether large or small, in helping millions of families have babies and fulfill their dreams. So thank you very much for participating and hopefully we'll see you all in October.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.