Bio-Techne Corp (TECH) 2016 Q3 法說會逐字稿

We are about to begin. Good day, and welcome to the Bio-Techne Q3 2016 financial results call. Today's call is being recorded. At this time, I would like to turn the call over to David Claire, Investor Relations for Bio-Techne. Please go ahead, sir.

Good morning, and thank you for joining us. On the call with me this morning is Chuck Kummeth, Chief Executive Officer of Bio-Techne, and Jim Hippel, Bio-Techne's Chief Financial Officer. Before we begin, let me briefly cover our Safe Harbor statement. Some of the comments made during this conference call may be considered forward-looking statements, including beliefs and expectations about the Company's future results. The Company's 10-K for fiscal year 2015 identifies certain factors that could cause the Company's actual results to differ materially from those projected in the forward-looking statements made during this call.

The Company does not undertake to update any forward-looking statements, as a result of any new information or future events or developments. The 10-K as well as the Company's other SEC filings are available on the Company's website within its Investor Relations section. During the call, non-GAAP financial measures may be used to provide information pertinent to ongoing business performance. Tables reconciling these measures to most the comparable GAAP measures are available in the Company's press release issued this morning open the Bio-techne website at www.Bio-Techne.com. With that I will turn the call over to Chuck.

Thank you Dave, and good morning everyone. Thank you for joining us for our third quarter conference call. This morning we reported revenue growth of 15% for the third quarter, with the majority of our end markets remaining strong organically, plus a solid contribution from our recent acquisitions. I'm extremely pleased with the achievement of 8% organic growth corporate-wide, with our core Biotech business growing 6% organically, in fact this is Bio-Techne's strongest quarter since I joined the Company three years ago, providing evidence that the strategy to reaccelerate Bio-Techne's top line by growing our core business, and to expand into adjacent markets continues to be in traction. Protein platforms increased over 25% organically in the quarter, with our commercial reorganization and focus strategy beginning to yield results.

I'm also very pleased that our team's operational performance in the quarter with both gross and operating margins exceeding our internal plan, deriving operating margins once again about 40%, and contributing to a 14% year-over-year increase in our adjusted gross net income. In the biotechnology business, overall we experienced broad based growth across the portfolio with proteins, antibodies and assays all contributing to solid performance. I would like to highlight the performance of our antibody portfolio in the quarter, which grew high single digits overall, including a 20% increase in our Novus Biologicals brand. In the US, our biopharma end markets remained strong, with revenue increasing mid-teens for the quarter. Our biopharma customers continue to partner with Bio-Techne for the outsourcing of complex molecules, with our reputation for ultra pure highly bioreactive reagents, driving additional business within our existing biopharma client base and creating opportunities with customers. Our academia and government end market grew in the low single digits similar to a trend we have experienced in recent quarters.

We have been experiencing growth in this market since the major update of our website last summer. We will continue to invest in the ongoing evolution of our website, by making navigation improvements and adding content and active links to thousands of products that resonate with our academia customers. Since the release of our updated website, internet traffic has a continuous increase, and encouragingly the visitors at our site are spending more time on the site increasing theprobability of ordering.

We are also investing in search engine optimization to drive traffic to our website. These investments are starting to pay off, with our Novus Biologicals brand which was the first of our brands to use the enhanced website. Seeing an upper single digit increase in website visits, and a mid-teen increase in web generated revenue. Overall, we are making tremendous progress with our website redesign, and view this as a key for long term growth within our academic customer base.

Moving on to other regions, Europe organic growth was flat overall in Q3. However underlying trends within our European biotech business remain healthy. Adjusting for the timing of the Easter holiday, which occurred in Q3 this year versus Q4 last year, as well as the timing some of large biopharma orders but for normalized growth rates would have been a mid-single digit increase. Thus as these timing issues reversed in Q4, we expect to end 2016 with mid-single organic growth rate for the year.

China remains a very strong geography for Bio-Techne with organic revenue increasing in the mid-20s year-over-year. We are particularly impressed to see sustained growth in China, especially considering the 30% increase we experienced in this geography last quarter. Our new GMP factory for PrimeGene is complete and fully functional giving Bio-Techne a competitive edge in our China for China strategy, and supporting our expectations for continued strong double-digit growth in this geography. We anticipate the growing Chinese middle class will be driving ongoing demand for improved access to healthcare, driving additional investments in Life Science research and benefiting our rapidly growing business in this geography.

Overall we are very pleased with the strong performance within our core biotech product portfolio, with Q3 representing the fourth consecutive quarter of at least mid-single digit in the segment. Getting our core back to consistent mid-single digit growth has been the most challenging and complex part of our strategic plan, and I'm proud of our team's effort to get us there, and have confidence in their ability to maintain this momentum.

Moving on to our Clinical Controls Division, we experienced a strong performance from our acquired business Cliniqa, although the timing of OEM delivery dates have impacted organic growth in the quarter. As a reminder, our Bionostics and Cliniqa business both include chemistry based reagent product lines with longer shelf lives, allowing OEM customers to buy in bulk. Introducing the potential for quarter-to-quarter volatility.

Our legacy hematology controls business remains stable growing mid-single digits. Given the relatively shorter shelf life of our hematology control products, we view growth of these products as an indicator of stable underlying demand within our clinical controls and marketing. Cliniqa the controls and reagent supplier for the diagnostic market that we acquired last July, continues to outperform our expectations.

Importantly, the addition of Cliniqa to the Bio-techne clinical controls division, continues to open up additional pipeline opportunities for the business, making Bio-techne even an more important supplier to the biopharma and diagnostics industries. With Cliniqa under the Bio-Techne umbrella, we are now focused on filling and expanding the growing pipeline of opportunities for our Clinical Controls Division. I would like to point out that the gross of our organic business combined with Cliniqa has created a business with critical mass, and an annualized run rate approaching $100 million.

Lastly the work that we have done over the last couple of quarters to improve our protein platform sales force and commercialization strategy, is beginning to bear fruit. Organic growth above 25% for the quarter. I want to update everyone on some of the positive developments within our protein platform segment that give us confidence in our ability to maintain double-digit growth in this business exiting fiscal 2016 and beyond. Our strength in Simple Western sales force has been in place for two quarters now. And given the six to nine month instrumentation selling cycle, I believe we are in the early innings of realizing the efforts of our strength in commercial teams.

Additionally we continue to augment the Simple Western sales force with the entire R&D systems commercial team, to generate leads, cross-sell, and demo this game changing western blot technology. This game changing technology continues to resonate with the scientific community, and we anticipate significant western blot share capture by automating a time consuming manual to a fully reproducible process that has been in place for over 35 years. We remain very pleased with the performance of the Simple Plex product line, and the protein platform segment this quarter.

As a reminder, this is the rebranded CyVek start-up business we acquired a year ago in November, consisting of the Ella line, multiplex, lighted instrument and associated assay cartridges. We continue to see growing interest from our customers for the workflow enhancements that the Simple Plex testing platform delivers. We remain in the very early stages of Ella instrument adoption, and the associated revenue ramp, and anticipate Simple Plex to become a significant revenue contributor in future quarters.

During the quarter we strengthened our protein platforms offering with the launch of Maurice, an advanced imaging capillary electrophoresis, or iCE instruments. Biopharmaceutical customers utilize iCE instruments for the quantitative analysis of the identity, purity and heterogeneity. Maurice improves our legacy iCE platform by delivering higher sensitivity, easier work flow, and shorter run times compared to legacy technologies, allowing researchers to shorten drug development timelines. We are very pleased that the early traction Maurice is gaining with biopharmaceutical customers, with the initial launch exceeding our expectations. We anticipate Maurice to be a solid addition to the growing line-up of protein platform instruments. We further strengthen our protein platform segment through the acquisition of Zephyrus Bioscience, adding a single cell Western blot instrument, Milo, to our growing portfolio of instruments. Zephyrus is currently a pre revenue business, although we plan to commercialize Mile in July of 2016. We view Zephyrus' single cell Western blot technology is a natural fit with our Protein Simple business, and are excited to leverage our protein platform sales force to bring another innovative instrument to market.

To summarize we are very pleased with the protein platform's overall performance in Q3, and believe we remain on track for continued momentum in this business in coming quarters. Based on the sales pipeline and positive momentum in both lead regeneration and quote activity, we believe Q1 was the start of a new long-term trend of double-digit growth of the protein platform segment. I also want to provide a quick update on our M&A pipeline. Following the Zephyrus acquisition, our pipeline of potential M&A targets remains stronger than ever, with our strong balance sheet and cash providing Bio-Techne flexibility in our disciplined M&A approach. We plan to continue to augment our organic business with acquisitions, and strengthen our position in existing businesses and geographies, or leverage our reagent expertise in adjacent markets.

With that I will pass the call over to Jim for a more detailed review of the financials, before we open the line up for Q&A. Jim.

Thank you Chuck. As in the prior earnings call I will provide an overview of our Q3 financial performance for the total Company, and then provide some color on each of our three segments. Starting with the overall third quarter financial performance, adjusted earnings increased 14% year-over-year to $37.6 million, while adjusted EPS was $1.01 a share, versus $0.88 in the prior year. The impact of currency translation represented a headwind EPS of approximately $0.02. GAAP EPS for the quarter was $0.81, compared to $0.65 in the prior year. Q3 reported revenue was $131 million, an increase of 15% year-over-year, with organic revenue increasing 8%. Third quarter reported sales included 7% growth contribution from acquisitions, partially offset by a 1% unfavorable foreign exchange headwind. Please know that the components of Q3 growth do not sum due to rounding.

Moving on to the details of the P&L, total Company adjusted gross margin was 71.6% in Q3, decreasing 80 basis points from the prior year. Strong volume leverage and productivity gains in our protein platforms and biotech divisions, were more than offset by the lower margin Cliniqa acquisition and unfavorable FX impact. Excluding the impact of acquisitions and FX, core gross margins improved 50 basis points year-over-year in the third quarter. Adjusted SG&A in Q3 was 20.7% of revenue, 30 basis points higher than last year. The SG&A increase was driven primarily by investments made in improving our website capabilities and commercial execution, as well as the additional SG&A from the acquisitions made since the beginning of the third quarter of last year.

R&D expense in Q3 was 8.6% of revenue, 90 basis points lower than last year,reflecting the volume leverage achieved in protein platform. The resulting adjusted operating margin for Q3 was 42.4%, relatively flat to the prior year, and a sequential improvement of 300 basis points from Q2.

Looking at our numbers below operating income. Net interest expense in Q3 was $0.4 million, compared to $0.3 million of net interest expense of last year, due to higher draws on our line of credit which partially funded our Cliniqa acquisition last July. Other non operating expense for the quarter was $0.7 million, compared to $0.4 million of non operating expense in the prior year quarter with unfavorable transactional FX explain the year-over-year variance. Our adjusted effective tax rate in Q3 was 31%, down 50 basis points from the third quarter of last year, due to recognition of R&D tax credit.

In terms of returning capital, we continue to pay our dividend, and paid out $11.9 million in the quarter. Average diluted shares were relatively flat over the year ago period at $37.3 million shares outstanding.

Turning to cash flow, $37.1 million of cash was generated from operations in the third quarter, a 20% increase from the prior year, and our investment in capital expenditures was $2.8 million. We ended the quarter with $84.6 million of cash and short-term available for sale investments. Our long-term debt obligations at the end of Q3 stood at $157.8 million, a decrease of $5.5 million at the end of Q2. Going forward our capital deployment priorities retained opportunistic M&A, our dividend, and debt pay down.

Now I will discuss the performance of our three business segments, starting with the biotechnology segment. Q3 reported sales were $81.4 million, with organic growth of 6%. Foreign exchange negatively impacted reported sales growth by approximately 2%. By geography, the US grew approximately 10% organically, with mid-teens biopharma sales growth, and low single digit academic results.

Europe was flat organically with biopharma sales in this region increasing low single digits, offsetting a low single digit decline in academia. As Chuck mentioned in his comments, the timing of the Easter holiday impacted our European results, representing an unfavorable 3% impact to our growth in this geography. However this timing impact should reverse in Q4. China experienced strong organic growth in the mid-20s, while the Pacific Rim declined upper single digits year-over-year. Excluding Japan however, the Pacific Rim grew in the low teens. Japan remains challenged by government funding reductions and delays. Adjusted operating income for the biotech segment increases 1% in Q3, compared to the prior year. Adjusted operating margin was 55.5%, a decrease of 130 basis points year-over-year, due to the timing of certain commercial investments, partially offset by the impact of productivity initiatives and volume leverage.

Turning now to clinical controls segment sales in Q3 were $29.9 million, with reported growth of 50% over last year. The acquisition of Cliniqa contributed 51% to growth, while organic revenue decreased 1%As with prior quarters, the timing of OEM shipment orders introduced variability to the Cliniqa control segment, with customer ordering patterns weighing on our Q3 segment results. Given the quarterly variabilitity introduced by the OEM ordering patterns from our chemistry based controls and now Cliniqa, we believe a trailing 12-month organic growth rate is more indicative of our clinical control segment performance. On a pro forma basis, assuming Cliniqa was included in our results last year as well as this year, the trailing 12-month organic growth rate for the segment was 8%.

Clinical controlled adjusted operating income increased 53% in Q3, and adjusted operating margin was 31.6%. An increase of 70 basis points from the prior year. The higher adjusted operating income and margin was primarily attributable to strong volume leverage associated with the Cliniqa acquisition.

Moving on to our protein platforms segment, net sales in Q3 were $19.7 million, an organic increase of 26% from the prior year period. Favorable currency translation impacted revenues by less than 1%. Growth for the segment was broad based with most major regions and product lines growing by solid double digits. In the quarter ended March 2016, was the first March end quarter to grow sequentially from the previous December end quarter, in the history of ProteinSimple, including the years predating the acquisition of Bio-Techne. We believe this provides further evidence that the new commercial strategy is taking hold, and a reacceleration of the protein platforms has begun.

Revenues from Simple Plex also continue to ramp, and we remain pleased with the revenue trajectory of this business. As Chuck discussed,we acquired Zephyrus Biosciences in Q3, and anticipate to commercialize the associated single cell western blot analysis instrument, Milo, during the first quarter of our fiscal 2017. Adjusted operating income in Q3 for the protein platform segment was $1.6 million, representing an operating margin of 8.1%, compared to a $1.7 million adjusted operating loss one year ago. With strong volume leverage and productivity, driving the year-over-year improvement. We continue to expect additional improvement in protein platforms profitability, as top line growth and productivity gain drive operating leverage in coming quarters.

So in summary Q3 was a record quarter for Bio-Techne on adjusted bottom line results,accomplished by solid commercial and operational execution in all of our businesses. We expect to finish the year strong as well ,with Q4 looking very similar to Q3 from a top line perspective. However, we expect the mix to change somewhat, with the biotechnology segment in particular, facing a rather tough comp from the prior year when they grew 7% organically. Thus the margin profile in Q4 may not be as strong as Q3 due to a change in mix. That concludes my prepared comments and with that, I will turn the call back over to Melanie to open the lines for some questions.

Thank you. (Operator instructions.) We'll go first to Dan Leonard with Leerink Partners.

Thank you. So I just wanted to delve into the protein platforms performance a bit more. Can you talk more about the components of the growth there?I know you said it was broad based but maybe offer some color about how much was Maurice versus Simple Western, and any color on the consumable trends as opposed to the instrument revenue trends would be helpful?

Yes, well, Maurice has a strong pick up here at the beginning of the platform, but it's still not material to the overall performance. Performance of the division is really still around Simple Western. We worked hard to get the commercial team ready and back into place, and up to speed and focusing on regenerations and productivity and cross-selling with our R&D systems commercial force. And that's all bearing fruit. We're near the 60 kind of number of instruments per quarter, and that's up from the 40s or so a year ago. So it's pretty good growth there overall.

The Simple Plex is also ramping and is close to plan. Still a small business, but not a start-up anymore. It's starting to bear fruit. Now the revenue component in Simple Plex will be stronger in consumables, the assays being a strong component because it's a closed system. We remain at about a 25% consumable rate on the rest of the biologics platform.

So really growth is across all of the platforms, with the biggest component being Simple Western. Biologics has always been a strong platform, and even the existing product platforms are still selling well, and Maurice is a new category. So almost the same size in general as Simple Western, but the acceleration for the western outpaces biologics. We could have a surprise inMaurice exceeding our expectations, but we are still banking on the fact that Simple Western will out do it. It is a much larger market opportunity.

Got it. That's all helpful. And then my follow-up question, can you give us an update on how you are looking at Japan?

The same way everybody else is, with a lot of prayers. We have been hearing, that their EMID new consortium of funding the government is starting to release funds. We are starting to see early data from that. It's as much of an issue as easy comps as anything, probably, but it's still early. We are not banking on any strong fast recovery in Japan to be honest, and I don't any anyone else is talking about it either. I don't think that we are any worse off than anybody else, it is a matter of waiting on funding. We are still growing. Actually our team just came back from protein platforms division, and they had a positive report on some uptake in Japan, but in general, it's steady as she goes, and just not enough happening. Waiting on funding.

Gotit. Thanks Chuck.

We'll go next to Jeff Elliott with Robert Baird.

Thanks for the question. Jim, can you just verify, did you have any change in selling days in the quarter?I get the Easter impact but were you same year-over-year in terms of just number of days in the quarter?

Yes, we didn't have any drastic change due to any kind of 4-4-5 calendar, because we operate on a normalized typical calendar, however, admittedly there was an extra day with leap year. Leap year was an extra day in February and provided extra revenue there. It may have had a 1% or so lift. It's hard to say exactly.

Okay. So pretty minorthough. Moving over, I guess, Jim, looking at the segment margins giving the moving pieces with Cliniqa, and some of the deals, can you just help us think about the segment margins maybe in the next couple of quarters?How should we think about modeling those?

From a segment margin perspective, I would say that with regards to our biotech and clinical control divisions, fairly steady margins from what we have seen. It's more around protein platforms that we can continue to see some expansion there with the revenue pull through. So like we saw from not only year-over-year, but quarter-over-quarter prospective in protein platforms, we saw some very nice, very nice margin expansion there with the additional revenue, and as they continue to recover on the top line, we should see some continued leverage on the cost base. So I would say steady, steady as she goes, and two of our three segments with some increasing margin pull through in protein platforms, but also keep in mind the overall mix with that reacceleration of protein platforms revenue, the overall mix will be a bit of a headwind, due to the low margin of overall PPD versus our biotech division.

You start doing the math, when you start doing your math on CCD, you will see the strong owner tradition here from Cliniqa. We had a huge quarter for them. It didn't count organically but it's there in the numbers and it's big. It is a lumpier business, and we're going to go to a TTM kind of number. It won't sustain at that run rate this quarter. It will be up and down. Just realize that. You are going to, $29.9 million is not a typical quarter.

Got it. Okay. Thanks, guys. That's helpful. Nice quarter.

We'll go next to Amanda Murphy with William Blair.

Hi, good morning. Just a couple of quick ones. So first, I don't think you mentioned the Fisher distribution agreement specifically, I guess how has that gone this quarter?I know it's kind of been a little bit back and forth in terms ofhow much contribution it's had, and wondering if it's helpful in terms and how you are thinking about it long term?

We are still low single digits in academia, which is better than it used to be. I think it is steady as she goes there. I would say the Fisher component of that was marginally better than last quarter. Still not as good it as it was in the first early quarter of our relationship. Now we are starting to get some size issue here. It's becoming a larger and larger share of our channel in the academia sector. I think if you compare it to their results overall, we studied the results and talked to them, I would say they came in under what they were at, in their own performance. So we are working through that.

All-in-all, better than last quarter. So we are optimistic. And it is still a crucial element to our channel strategy, and helping us keep our costs down in our commercial organization, and attitude is good, cross-selling is good. The teams get along. So we are hanging in there with that. It would be nice to see them break it out, and do at least as well as they talk about their entire segment as a company Thermal, but we have not yet achieved that.

Is there any specific driver of that slowdown, or is it just a function of kind of being early in the relationship, and working through, as you said just fundamental size?

I think we had some great preliminary results from for five or six quarters in a row really, and I think what changed was a couple of the dynamics within their own company as they integrated Life Tech. One you have added a lot of the portfolio. They have a much bigger bag to sell, and it opened up opportunities internally, I think, for a lot of their rock star salespeople and their technical people. So they have had more internal turnover. So people are jumping from the Fisher side to the Thermal Fisher division.

And so we're having to train and retrain, and get more of a written going with their sales force. I think that's the bigger issue. It's how much is in the bag and staying current with their technical workforce. Our portfolio, it doesn't sell itself. It's very complicated technical reagents, and we trained their entire technical sales force in the beginning, and we have got to keep the pace with that. And I think that's probably why it's been a little bit different the last couple of quarters, but it's coming back. We identified the issues there and they are very supportive, and we're working on that.

Got it.

It's a big company and they are firing on all cylinders. They should sell their reports. So that have got lots of opportunities for people, and people are moving around.

Makes sense. Just one, I guess, broader question. I think in the past, you have said that based on your current book of business, that you could see a revenue run rate closer to $750 million, if you include potential synergies that you might be able to drive, and so I guess my question is, is that still the case?And then secondly, you talked about the pipeline that you have, being fairly strong. When you are first came on board, you outlined a plan of inorganic and organic growth. So given what you have in the pipeline, do you still see those targets as being achievable?

Yes. So our plan of getting to $1 billion in five years, I think we are still within the range of that possibility. It has always been more of an ideal. It's not a forecast or anything, of course. I think we backed off of the $750 number a little over a year ago, when FX kind of went crazy on us, in Europe especially. We were talking about a steady state around $650 million or so, if we did no other deals, and then getting up into the low 40s in the margin area. I think we are on track for that. There's no issue, but we are going to do deals. Our pipeline remains very strong. We have been in some actions. One as of late, we spent a lot of time on the metrics, we wanted that, really we were outbid by a heavyweight that wanted it badly, and had a lot more synergies than we could offer.

But we're always working on many at the same time and we currently are as well. We are probably leaning a little more towards the private side, and we'll try to do a few things without attracting the big guys, but there's a lot of opportunitiesWe have a strong cash flow. We have got a great team. We have got , we are working together on some deals where the teams do get along. So it's just about making the numbers work, and making investors happy, and all of that stuff. But our pipeline remains on the order of 100 different targets from small to large so --

Got it. Very helpful. Thank you.

We'll go next to Matt Hewitt with Craig-Hallum Capital Group.

Good morning. Congratulations on the strong quarter. A couple of questions from me. First, so if I'm understanding in the clinical control segment, you had some benefit with timing on shipments in the third quarter. Just trying to calibrate what that means for Q4?Are you expecting something similar to Q2 at $25 million to $26 million, or something similar to the year ago period with maybe a few basis points of growth, so that would be closer to $21 million?

Yes, Matt, we will not give you specific guidance by segment. I think what I would share with you is that it's lumpy, and so, in fact, we had strong orders out of Cliniqa, which doesn't count organically, but timing out of our legacy chemistry-based controls business, which affected organic, and going forward it could be lumpy as well. At a high level, what we will share is that we expect our overall Company revenues to be similar in Q4 as Q3. The mix between the business units could change a little bit. I think it will change somewhat in the sense that BTDs overall revenue will be likely a lower percentage. That's a negative mix impact. That's what we will share.

And we will also --The Hematology component has been and will remain steady as she goes at 5-ish percent growth rate. Very much a run rate.

Okay. All right. Thanks. And then Chuck, maybe a question for you. When you came on board, there was a lot of heavy lifting on the investment side, there were a lot of internal investments that needed to be made. Where do you think you are in that stage?What stage do you think you are in those heavy investments?Do you see that tailing off?Obviously, investing for growth will be necessary, but from some of those initial investments where do we sit, and how does that play out over the next year or two?

That's a great question. I would say we are about in the seventh inning on that. The investments come in two categories for me. One is they are really operational, and they are really needed for productivity or they are capital, all right?And we have built out three different buildings already here on my watch, and at the most we have one more to do here, internally locally in headquarters that we are playing around with, in terms of ability to kind of rework our total work stream. I mean you have been here. This place is like a honeycomb. Changing it around and making improvements is like working a Rubik's Cube. You need to start with a big enough blank sheet of paper to try to redo everything clean enough. We are in the middle of that. We are doing a lot of lean things.

As you saw our margins improved again. We had absolutely phenomenal productivity in the biotech sector but software, around email, computers all being replaced, LMS system, we are ready to pull the trigger on phase one of our ERP system in July. That's all on track, which is fairly expensive. We've got a lot of as the team, the executive team is pretty much in place. I don't see a lot of new additions going forward. The stock and the equity-based compensation is all in place. The top 100 people. There is not a big need to further do that right now unless there's need through acquisitions of new team members that way. So I think we are in good place there.

We have capital needs going forward, I think with the Phase 2 and 3 of ERP. There's continued investment, I would say a steady state on the website development, nothing more, but nothing less. We made improvements there. So that will be a same as she goes going forward. We are putting in place another, this is pretty Hyperion for consolidation. We have gone from 6 sites to 20 sites. Poor Jim is tired of consolidating spreadsheets on napkins, and we are getting on a real system he is used to using from his days at Thermal, and most of the world uses. Things like that, we have to do, but really you said it well. The heavy lifting, I think is really behind us. We are going through my third round of roundtables. I have probably done almost 30 different meetings with groups of employees in the last three or four months and they are noticing it. They are very appreciative and they get it. They see where we are going and they see it.

Go ahead. That's great. Thank you very much. That's a really good update. Thank you.

(Operator Instructions). We will go next to William March with Janney Montgomery Scott.

It's Bill March on for Paul Knight. How are you doing?

Good.

You saw mid-double digit growth in the biopharma segment. What is driving growth from that end market?

Okay. Well, a couple of things. When we worked hard at getting our core back in place, I mean, certainly took some arrows over ProteinSimple a few quarters ago. But the harder part of this Company turning around and getting going has been getting this core going. Because it is just so fragmented as you know. We still don't have really any reagent products over $2 million, and we still have customer bases 1% or less in general.

We typically have done a lot of prioritization since I have come, around what we are going to make and why. Instead of just throwing 2,000 or more new products at the wall and see what sticks every year, we are substantially down from that, somewhere around 1500, but a lot quicker kind of revenue. A lot more focus on the marketing end of it, and why there will be quick take up. And part of that has been the trend in CRO. There's been a lot of custom in the industry, and ad cam recorders, there was a lot of custom going on as well. We are seeing it too.

So we are getting on the biotech pharma side we are getting a lot of requests, because we are a quality producer. We have great scientists. We are in some cases the only game in town for the things we make. And they are becoming more and more for special things. We try to put as much of that into the catalog as possible. It doesn't all go. If it doesn't go, it's always still a recurring revenue stream with that partner. And the thing I like, it is immediate sales. You are not waiting at all. So we have had a dramatic improvement in our Vitality index. If you remember our first year here, we reported about $2.4 million in first year sales. Last year we reported $5.8 million. This year will probably be well over $10 million we're thinking. So it's been a dramatic improvement in the core, but also from custom and everything else, and it's largely biotech pharma which has been driving this double-digit growth rate. We add the numbers up.

Great. And then --

It's much more visible through the websites helping there. I could go on and on about our trade show strategies, investments there, the booth redesigns, the comprehensive look that we have around our family of brands. We just came back from ACR, and the response was unbelievable. We had record number of leads and pretty much across the board customers are saying, yes, we know who Bio-Techne is now, and we like doing business with you. We like the path you are on with all the different segments, and you are becoming more and more of a one-stop shop for us.

Great. And secondly in terms of end markets, maybe on the academic side, what are you seeing from that end market in terms of with the new NIH budget, and maybe what you see for the rest of the calendar year?Thanks.

Yes, we're seeing kind of how everyone else is reporting on, I don't think we have seen too much of a take up yet from that extra funding and spending. Maybe a little bit, but we're not really seeing a lot of evidence. We are like everything else, it's going to be really occurring mostly in the second half of the calendar year here. And we are hopeful. It should be, we have talked about what it should give us, when you roll it all through and go through the analytics and our customers, it should be about a 1% overall improvement for us. Is it there yet or not?Well, we had a record quarter, maybe a little bit there. It's hard to start separating the stuff under 1% like that.

Understood. Thanks, guys. Have a good day.

We are going in the right direction. We are not contracting. We are in an expansion time frame for a while, we think. So that's good.

Great. Thank you.

And that will conclude our question and answer session. I would like to turn the conference back over to our speakers for any additional closing remarks.

Well, very proud of our team. It was a great quarter. We sure hope it continues. We see a very bright future here. People are having fun, and we'll talk to you again next quarter. Thank you.

That does conclude today's conference. We thank you for your participation. You may now disconnect.