Q3 2022 Azenta Inc Earnings Call
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Okay.
Greetings and welcome to the event of Q3 2022 financial results.
During the presentation, all participants will be in a listen only mode.
We will conduct a question and answer session.
At that time, if you have a question. Please press the one followed by the four on your telephone.
Any time during the conference you need to reach an operator, Please press star zero.
As a reminder, this conference is being recorded Tuesday August nine 2022, I will now turn the conference over to Sarah Silverman head of Investor Relations. Please go ahead.
Thank you operator, and good afternoon to everyone on the line today, we would like to welcome you to our earnings conference call for the third quarter of fiscal year 2022.
Our third quarter earnings press release was issued after the close of the market today and is available on our Investor Relations website located at investors thought Atlanta Dotcom. In addition to the supplementary Powerpoint slides that will be used during the prepared remarks today.
I would like to remind everyone that during the course of the call we'll be making a number of forward looking statements within the meaning of the private litigation Securities Act of 1995.
There are many factors that may cause actual financial results or other events to differ from those identified in such forward looking statements.
I would refer you to the section of our earnings release titled Safe Harbor statement, the Safe Harbor slide on the aforementioned Powerpoint presentation on our website and our various filings with the SEC, including our annual reports on Form 10-K, and our quarterly reports on Form 10-Q, we make no obligation to update these statements should future financial data or events occur that differ from the forward looking.
Statements presented today.
We may refer to a number of non-GAAP financial measures, which are used in addition to and in conjunction with results presented in accordance with GAAP. We believe the non-GAAP measures provide an additional way of viewing aspects of our operations and performance, but when considered with the GAAP financial results and reconciliation of GAAP measures. They provide an even more complete understanding of the event.
Business.
non-GAAP measures should not be relied upon to the exclusion of the GAAP measures themselves.
In addition, we may refer to certain estimates of Covid based impacts.
These figures are estimated based on our insights to customer applications, <unk> prototypes, indicating such demand or constraints on regional demand our ability to deliver.
On the call with me today is our President and Chief Executive Officer, Steve Schwartz, Our Chief operating Officer, Matt Mcmanus, and our Chief Financial Officer, Lindon Robertson, Yes.
Yesterday after the market closed we issued a separate press release announcing the signing of a definitive agreement to acquire being medical system.
Following the overview of the third quarter results, we will provide highlights of the agreement and the medical business.
Then take your questions at the end of the prepared remarks.
With that I would like to turn the call over to our CEO Steve Schwartz.
Thank you Sarah and good afternoon, everyone and thank you for joining us today.
I'd like to reiterate that this call will be longer than our usual quarterly calls as we dedicate the first half to a detailed review of third quarter results and.
And the second portion will focus on the pending acquisition of <unk> medical systems.
Our third quarter results reflected continued execution in what was for us a more challenging environment.
Q3 results came in a bit softer than expected. We believe this is a short term perturbation and we remain extremely positive about our solid positions in robust markets, which will allow us to return to the strong growth profile, we've been delivering for many years.
Despite the near term headwinds, we experienced we still delivered solid organic growth of 6% year over year, driven by continued momentum in our storage services in cold storage systems.
We continue to see customers turn to us to build out their lasting infrastructure and while we will provide more details later in our remarks suffice it to say the team is fully engaged and ready to tackle the needs of our customer base.
As you will note from our press release yesterday, we've been busy on the M&A front, when we announced the acquisition of <unk> Medical systems, a global leader in innovative vaccine cold chain temperature control transport solutions.
This business along with the addition of <unk>, which we closed on July one our meaningful additions to our portfolio of capabilities and the high value highly critical cold chain.
Both businesses advance our mission to accelerate discovery and development and both provide critical capabilities at the point of delivery of lifesaving therapies to people across the globe.
Want to welcome the marquee team do is enter and I look forward to the <unk> medical team joining us when we close the acquisition, which is expected in October 2022.
Even after these transactions, we will still have roughly $2 billion in cash available to deploy for strategic investment.
We're actively pursuing several meaningful organic expansion initiatives and we continue to work a robust pipeline of additional M&A opportunities to enhance our portfolio.
I will now turn to our results for Q3.
Revenue for the quarter was $133 million up 3% year over year at.
At a headline level this growth rate is lower than we've delivered in many years, but in terms of our ongoing business. We were up 14% when normalized for the estimated COVID-19 impact in both periods.
That said in the quarter, we experienced a complex operating environment that contain COVID-19 related headwinds as well as some changes in customer behavior that impacted our results.
Regarding the operating environment similar to past quarters, we continue to manage through logistics and supply chain issues for certain business lines as well as continued labor inflation.
Began to implement pricing increases to offset these headwinds that provided a modest benefit in Q3, but the majority of the benefit will be seen in Q4 onward.
With respect to Covid I will comment on our operations as well as on what we're seeing with demand.
On our last earnings call, we shared that in late April we experienced a two week shutdown of our facility in Suzhou China.
We estimate that this negatively impacted revenue in our genomics business by roughly $1 $5 million in the quarter.
Since then we've not experienced any additional facility shutdowns and all of our global operations are functioning normally.
That said on the demand side, the Covid situation in China continued to cause headwinds from our Chinese genomics customers, particularly the academic institutions, which were closed for an extended period of time.
We expect to see some continued demand volatility in China, So long as Covid remains present.
In addition, although we had anticipated and forecasted a meaningful decrease in our consumables and instruments revenue for Q3, we were taken by surprise at the magnitude of the sequential drop which turned out to be approximately $3 million more than the original $6 million decrease we had contemplated in our guidance.
And although we believe the genomics performances recovering in Q4 based on the order patterns to date at present, we forecast yet another drop in consumables and instruments in the fourth quarter Matt.
<unk> Lindeman will give some additional color in their remarks.
We've also received a question from investors on our customer mix as well as exposure to small and early stage biotech.
Overall, we estimate the total exposure is roughly two thirds pharma biotech one quarter academic and the remainder being hospitals distributors diagnostics companies government and others.
The trends, we saw with our customers in Q3 were fairly broad and have not been limited to small early stage customers.
Overall, we acknowledged a more difficult environment, but we remain keenly focused on performance and encouraged by the progress, we're making operationally as well as with our customers.
We're confident in our market leading capability, we built that squarely addresses the needs of a growing market and we anticipate strong growth to be the norm again in the near future.
Today I am pleased to have our chief operating officer, Matt Mcmanus with us on the call that joined US earlier in the year and it's been a great addition to the team at.
Ed will cover more detail on the quarter, and then turn it over to lindon to cover the financials.
Thank you Steve it's good to be on the call with you all today.
So I joined <unk> in January have been continuously impressed by the team and our portfolio of capabilities I've traveled to many of our sites and I'm proud of the work we are doing to enable and accelerate our customers' scientific breakthroughs to market.
I'll now provide more detail around the results from the quarter, starting with our products segment.
The products business delivered revenue of $47 million for the quarter, a 3% decline year over year.
Excluding estimated COVID-19 impacts this business grew 16%.
The growth ex Covid was driven by double digit growth in our large stores cryogenic storage and products related services.
Our large automated stores business had a record bookings quarter and while it's difficult to identify a trend. This gives us increased confidence in our outlook for the next few quarters. As these orders typically take six to nine months to fully convert into revenue in.
In terms of the types of customers, we are selling more into DXP environments with large pharma customers as well as into clinical and repository applications.
Our cryo business also remained strong growing mid teens year over year in the quarter, we placed our largest ever order in Europe at a new cell therapy production facility.
This customer is also leveraged multiple aspect of the ecosystem, including our cryo pods filling stations and qualification services separately, we completed the installation of a cryo exchange a multiunit system controlled by a central cryogenic picking chamber at one of the country's leading research hospitals. We also saw record shipments.
Cryo pause in L. N two filling stations, which are great entry points for us into what the customers.
Our products services business, which provides post warranty services spare parts and other product maintenance had a record quarter.
This is an important part of our business, which ensures continued maintenance of our equipment and more importantly continuity with their customers.
The consumables and instruments business declined 18% year over year as.
As we have discussed previously the C&I business has experienced the largest benefit from COVID-19 related demand and in the quarter. This benefit fell to $3 million, primarily from China customers.
In addition, we saw some softness from the Americas and EMEA regions, which we believe is due to several factors, including one customer stocking positions as we're hearing from customers that they took on larger supply positions of consumables that are taking longer to work down as well as to a slower approval process for investment in laboratory instrumentation.
Our services business reported revenue of $85 million up 6% year over year, driven by growth in sample repository services and more muted growth in genomics.
Genomics revenue grew low single digits, a portion of our customers reduced scope of work or delayed projects. Some citing the current market uncertainty is a factor for the more cautious spending.
Next generation sequencing grew 5% year over year, while the deceleration reflected softer ordering levels, we're seeing terrific traction with our new proteomics offerings and recent European launch of our ample con easy offering inefficient sequencing chemistry, which has been great for bringing in new customers.
The synthesis business was the most impacted by our China facility locked down in April as well as by the continued COVID-19 situation in China, the latter impacted both our customers' demand as well as added complexity to our logistics globally during the quarter we.
We have a small but growing gene synthesis production capability in the U S, which we believe will be a significant asset for us in the future.
In addition, we continue to launch new service offerings to expand our customer touch points. This quarter, we expanded our viral packaging services to Baculovirus generation, an important tool for protein expression with pharma and biotech course please.
We saw strength in preclinical and clinical services driven primarily by continued momentum in our high throughput genomics portfolio supporting clinical trials.
Sanger revenue declined 1% year over year, primarily due to the COVID-19 situation in China, where many of our customers, especially academics were not placing orders.
Assuming the Covid situation in China improves we expect to see this customer demand return in Q4.
The sample and repository solutions business grew 19% year over year, driven by a continued increase in core storage revenue and the number of samples stored.
We continue to work on securing additional large deals in the pipeline and I can say with confidence that our customers are genuinely impressed with what they see when they visit our Indianapolis facility, which now boasts a newly installed automated store.
The build out of our Indianapolis facility dedicated to manufactured product is going well and we will provide additional storage capacity as we expand this offering.
The LNG therapy research continues to be a growth engine for our business, representing approximately 10% of revenue in the quarter.
Genomics, Srs and products cell and gene therapy revenue all grew double digits year over year.
The team continues to add services targeted to our cell and gene therapy customers.
Recently, we added a DLP AAV itr service, and our preclinical and clinical business, which enables us to extend our relationship beyond the initial research and discovery stage.
The last point I'll make about our cell and gene therapy business is that the addition of <unk> provides an important new platform for growth.
<unk> is a leader in control rate sell buying with end to end applications from R&D, all the way to the patient.
They serve over 100 cell and gene therapy customers in our key product. The plasma therapy is used for controlled rate thong of cryo preserve raw materials and patient therapies.
Finally, I'm also pleased to report that in July we completed our laboratory moves in China to our new state of the art facility in Suzhou as well as our move to a larger laboratory in the Boston area in June .
Both milestones are significant for our customers our business and our employees.
These strategic investments significantly expand our capacity and provide room for future additional growth.
As we look ahead to the fourth quarter and beyond we acknowledge the challenges may continue over the near term, but the immense potential of our portfolio and critical market applications is clear.
As a standalone life Sciences company will continue to deliver the value of <unk> <unk> to our customers and what we view as the very early days of this unique opportunity.
I'll now turn the call over to Lindon.
Thank you Matt.
And now I'll refer you back to the slide deck available on our website turning to slide three to review some key points from the quarter.
Third quarter revenue grew 3% year over year that is 6% organically, which adjust for the headwinds from currency.
Three was unquestionably a challenging quarter as we faced a combination of external and internal headwinds.
External factors of currency and Covid has affected us in the past, but this quarter. They each provided for particularly severe comparison to a year earlier.
And internally, we experienced the site shutdown due to COVID-19 in the April month at our Suzhou China site.
In total the growth was impacted negatively from foreign exchange by the three points that gets you to the organic growth rate of 6% and we estimate another 11 points from the change in Covid demands when comparing to the prior year we.
We will provide additional color on these impacts as we step through the detailed results of the segments, but for now I will simply highlight that the services segment grew 6% year over year as reported and 8% organically in the products segment reported a decline of 3% year over year and was actually up 2% on.
On an organic basis.
The larger five point impact in products is due to its higher content of European based drove on it.
non-GAAP earnings per share from continuing operations was 12 flat.
Flat sequentially and up one penny year over year.
We ended the quarter with over $2 5 billion in cash on the balance sheet, yes.
The acquisition of Marchi, and the announced agreement to acquire <unk> medical systems will be funded from this cash on hand, moving on to slide four on the left side of the page the GAAP P&L carries the traditional differences in SG&A, such as amortization and M&A related expenses.
More significant this quarter, it's just the difference in the tax line.
On a GAAP basis, we had accrued to the expected full year tax rate in the first half.
When you do this on a negative pre tax income early in the year with expectations for a positive bottom line in the second half quarterly tax accrual is always highly sensitive to an adjustment to the full year projection.
As our projected full year is brought down with the current quarter topline results and expected M&A cost you see the sensitivity in the quarter.
Now, let's look into the non-GAAP P&L on the right side of the page for additional color on the performance.
Total revenue for the third quarter was $133 million up 3% year over year.
As mentioned the organic growth in the quarter was approximately 6%, which excludes the three point headwind from foreign exchange the.
The currency headwind on revenue was roughly two points more than anticipated in our initial third quarter guidance.
We estimate we had $1 million of net positive revenue in Q3 from Covid effects compared to $10 million in Q2 and $13 million in Q3 2021.
The third quarter's COVID-19 impact positive or negative is comprised of delivering a total of $4 million of COVID-19 revenue in the quarter $3 million of this COVID-19 demand was in the consumables and instruments business and approximately $1 million of services in our sample repository solutions business for managing vaccines, but we also saw an estimated four.
There's a headwind in the genomic services business, which is a lack of revenue. We believe was driven by the Covid environment. We had described approximately $3 million in our expectations, which included impacts from our operational locked down in early April and some customer demand.
The extra $1 million impact in our results was driven by the extended China Lockdowns on this customer demand situation.
Overall, our estimated Q3 COVID-19 related revenue was approximately $4 million less than we expected in our prior guidance.
<unk> margin was 46, 3%, reflecting margin pressure in each of the segments.
Operating expense declined $5 $5 million quarter to quarter, primarily reflecting lowering accruals for performance based compensation. These.
These and cruel included a year to date adjustments and are expected to come back up of approximately $2 5 million in this fourth quarter.
Adjusted EBITDA margin in the quarter was 10, 4% down 290 basis points quarter over quarter, reflecting the reduced operating leverage from the lower revenue base as well as the impact from the lower gross margin.
This leverage works both ways it accelerates the margin expansion as we grow but in these periods when we run lower it takes your margin down substantially.
I would emphasize that we are indeed, a growth business and a strong industry and we are confident the headwinds are temporary and that with the leverage in our model margin expansion comes back with our future growth.
Turning to slide five for a review of our life Science products segment results.
The products business delivered $47 million of revenue down 3% year over year.
I can refer you to the graphic on slide five I will describe the bridge.
Excluding the 2 million impacts from currency product segment grew 2% year over year.
Within C&I, we saw a $4 million decline at a constant currency or a drop of 14% year over year.
We have estimated an approximate $6 million declined from COVID-19 demands on tubes within the C&I line.
The non COVID-19 demand has seen an increase of approximately $2 million or mid single digit growth.
Not to dismiss the surprises, but I do want to highlight we continue to have strong performance in systems and services.
We had 27% growth at constant currency and systems, and 25% and related services as Matt highlighted we saw a significant bookings in the quarter, which continues to feed the backlog revenue into 2023.
So there are two key messages as we look forward.
And the highly differentiated value in the systems and services businesses, which includes the automated cryo storage for cell and gene therapy, we see high demand and expected continued growth.
The consumables and instruments business will continue to see softness and we saw a $3 million of COVID-19 demand in Q3, but we see minimal amounts of this quarter, perhaps supporting only $1 million.
The life Sciences products Q3, gross margin was 44, 9% significantly lower than our peak in Q2, and 260 basis points lower year over year.
The trend reflects the leverage of CNI dropped and less favorable mix as C&I does provide a higher than average margin.
The trend in gross margin leads us to the lower Q3 operating margin of four 7% and EBITDA margin of nine 3%.
For the fourth quarter, we expect to see 47% to $51 million of revenue.
That would be a reported decline of 4% to 12% year over year.
We anticipate we will only carry about $1 million of Covid demand and our C&I business compared to $11 million, a year ago, bringing C&I to an approximate 30% drop year over year.
However, we continue to see momentum in automation systems and related services.
Where we expect to see a positive 30% growth with approximately half of this from our organic growth and half from the addition of the Barky automated controlled rate thawing offerings are.
Our total projected growth of products carries an approximate four and a half point drag from currency year over year.
Next please turn to page six for a review of our life Science services segment results.
Our services business delivered revenue of $85 million up 6% year over year.
Excluding $2 million in foreign exchange headwinds services was up 8% year over year.
The estimated impact of Covid was a negative $2 million in this quarter compared to a positive $3 million in the third quarter of 2021 or a headwind of $5 million.
$2 million in this quarter included a $3 6 million headwind in China genomics, partially mitigated by the continued vaccine management sample repository solutions.
Genomic services generated revenue of $59 million up $2 million or approximately 4% year to year at constant currency rates.
We did not add a graphic on the page for sequential explanation, but I would be remiss, if I did not add color to the decline evident on our top line numbers on the chart.
$6 million of the $7 million drop was in genomics.
More than $1 million of the $6 million was from currency.
After that the largest contributor was next generation sequencing, which declined approximately $3 million. Most all of it in Asia, where the Covid lockdowns impacted us <unk>.
The remaining one 5 million decline is within the synthesis and other lab services revenue stream.
Sample repository solutions delivered revenue of $26 million reporting strong growth of 19% year over year, driven by our core storage services.
As you can see in the graphic on slide six this business contributed $5 million of topline growth year over year at constant currency significantly driven by the global enterprise partnerships. We have won in the biological sample storage place.
Services segment gross margin was 47% down 260 basis points from the second quarter down 450 basis points year over year.
Gross margin decline was significantly driven by the leverage had in genomics with growth in labor costs, but on lower growth of revenue.
Adjusted EBITDA margin for the services segment was 10, 3%.
As we look into the fourth quarter, we do see improved demand put upon the genomics business and sequential expansion in the sample repository solutions business.
All in we estimate revenue to be $84 million to $90 million, providing approximately flat to 8% year over year growth and is inclusive of a three point headwind from foreign exchange.
Let's turn to slide seven to review the summary of cash flows that.
That the free cash flow line, you can see that we had to use it in excess of $400 million in cash primarily driven by the taxes paid on the gain on the sale of the semiconductor automation business.
Capital expenditures in the quarter totaled $15 million.
We completed construction on the first phase of our new China headquarter in Suzhou and are now operating from that space.
Final capital expenditures on this project are expected to be made in the fourth quarter.
Let's turn to slide eight to review the balance sheet.
As of June 30th we had $2 5 billion of cash restricted cash and marketable securities with no debt outstanding.
As you move down the balance sheet, you'll see an increase in other current assets, which is primarily due to the currency translation adjustment for a net investment hedge.
The decrease in other current liabilities reflects the tax payments that I mentioned for the sale of the semi business.
Turning to slide nine for our guidance on the fourth fiscal quarter of 2022.
Revenue from continuing operations is expected to be in the range of $131 million to $141 million with a midpoint supporting a decline of approximately 1% year over year.
We expect products revenue to be in the range of $47 million to $51 million supporting a decline of approximately 8% at the midpoint and services being in the range of $84 million to $90 million supporting a growth rate of approximately 4% at the midpoint.
Foreign exchange is expected to be a headwind of approximately four percentage points and the acquisition of Marchi is expected to contribute approximately three points to year over year growth.
Overall, we are projecting approximately $2 million of Covid based revenue in the fourth quarter compared to $12 million in fourth quarter of 2021.
$2 million this quarter reflects the lower level of Ni based Covid revenue continued vaccine management and sample repository solutions and some relief in the China headwinds in genomics.
I also want to highlight that we will be making certain investments in operating expenses or strategic initiatives in light of having a significant expansion of global reach with our portfolio of cold chain capabilities.
You should expect we will spend another $3 million to $4 million in operating expense this coming quarter to accelerate these initiatives.
When combined with the change in variable compensation accruals and the addition of the <unk> structure, we expect operating expense to be approximately $7 million higher than the fourth quarter compared to this prior quarter.
With this in consideration adjusted EBITDA is anticipated to be 8% to $14 million non.
non-GAAP earnings per share is expected to be $4 12 per share.
That will be back with you in a few minutes to address the implications of our investments and our new acquisitions, but for now I will turn the call back over to Steve to talk about the acquisition of the medical system.
Thank you Lindon, everyone. Please turn to slide 11 of the presentation.
I'm very pleased to discuss with you the acquisition of <unk> Medical systems, a global leader in some of the most critical links in the vaccine cold chain and temperature control transport solutions across every part of <unk> medical systems saving lives as the purpose, which drives all that they do and they've embraced this mission for more than 40 years.
As we've discussed in past quarters, we have been actively evaluating multiple M&A opportunities and then be medical systems. We believe we have found a unique asset that fits perfectly into our goals that agenda to help our customers accelerate discovery development and delivery of life saving Therapeutics. In addition, b medical capabilities have multiple <unk>.
<unk> two is enter and provide capability that will further extend our global cold chain solutions as Youll hear in my remarks, there business is mission critical and enabling delivery of treatments to people across the globe as part of us until we see incredible opportunity for additional investments that will grow and expand this business even further.
Leica Center B medical is a company that prides itself on innovation and has a track record of a challenging what's possible. The company has focused its R&D investment to meet the demanding needs of customers to reliably deliver vaccines and some of the most challenging climates and remote regions scientific discovery and innovation is happening faster and faster.
But that's only part of the story you still need a way to effectively deliver these treatments in that last mile to the patient is would be medical makes possible.
<unk> and traceable cold chain solutions are a necessity in the markets that they serve and be medical as the market leader in its core vaccine cold chain business, enabling the delivery of lifesaving therapies anywhere any time to any one.
When I say anywhere I mean to some of the most remote and rugged areas of the globe with limited infrastructure, such as electricity cell phone service and paved roads as well as in areas, where temperatures routinely exceed 40 degrees Celsius or into the one hundreds on the Fahrenheit scale, when I say anytime im referring to situations, where electricity may be temporarily.
Unavailable and Theres, a need for continuity of cold chain such as in the natural disaster.
And rather than say to anyone I should have said to everyone. As we medical supports our global mission to make sure children received vaccines to prevent life threatening diseases for which there are known cures, but which they might not otherwise have access to accomplish this they are forged enduring relationships with aid groups, including the Bill and Melinda Gates Foundation.
The World Health organization, UNICEF, Gabby and others and established themselves as preeminent suppliers of cold chain solutions that ensure lifesaving treatments will be delivered dependably. The backing of these prestigious organizations is a testament to the superior capabilities of <unk> medical systems to be entrusted with the last mile solutions to the critical health.
Some of these institutions and 150 countries worldwide.
In addition, we've been thoroughly impressed with the support that <unk> medical receives because it's headquartered in Luxembourg, we see this as a very favorable business environment and one in which we will continue to invest for growth.
<unk> of Luxembourg offer significant benefits, including a very strong innovation ecosystem.
Access to a highly talented workforce and significant government support to promote <unk> Medical's mission of saving lives globally. This includes support from the Ministry of economy, and the Ministry of development in cooperation and humanitarian Affairs.
Turning to slide 12, let me provide a bit more detail on <unk> medical and its business lines. The medical brings to us and to more than 350 employees. They have a rich 40 year history of leadership in the vaccine cold chain market, including an installed base of more than 500000 units across all business lines. The business today is divided into three sub segments.
Vaccine cold chain, which represents about 80% of their revenue.
Medical refrigeration, which is around 13% of revenue and blood management systems, which account for roughly 7% of revenue.
The vaccine cold chain business line consists of end to end solutions for vaccine transport, including real time location and temperature monitoring these are robust and reliable product lines to protect the therapeutic until the last mile of its journey for many years be medical and serve the developing world using innovative technology to ensure reliable temperature control for long transport times.
Part of what makes be medical unique is that theyre, not only dedicated to enabling the delivery of lifesaving materials, but also to reliability.
Their product guarantees are market, leading and in certain cases, three times the industry average their transport freezers erode a molded out of durable corrosion free materials at our state of the art manufacturing facilities in Luxembourg, and India. In addition, <unk> medical is leading in its regulatory approvals and their products are already certified with met.
<unk> device approvals in the U S and EU.
As you can see on this slide <unk> medical has many recognizable customers and partners and generates revenue across the globe, but mainly in Asia and Africa.
Turning to slide 14, I want to talk about the market to be medical participates in and why we think this is such a tremendous opportunity for <unk>.
The market. They serve today has significant cold chain needs more and more medicines in development utilize novel technologies that require advanced cold chain solutions, just to give you a sense of the magnitude of the importance here more than 20% of the world Health organization's list of essential medicines prior cold storage and transport and has reported that.
Upwards of $35 billion of annual pharmaceutical industry losses are from temperature related issues of course, the COVID-19 vaccine put a spotlight on the cold chain and opened the door for mrna therapeutics and we expect to see continued investment there.
On the topic of COVID-19, I'll mention that the company did see an increase in demand for their products in 2021, as COVID-19 vaccines, requiring temperature sensitive transport solutions became more readily available to developing countries. We think that this helped to drive awareness of the need for a reliable cold chain, but our vision for their portfolio is so much more than that.
On its own be medical is a great business with a strong growth profile and a vibrant market, but just as we did when we acquired bio storage technologies to launch ourselves into the outsource sample by a repository business and when we acquired gene with in the genomics space for the interrogation of samples in BD medical we see the same type of.
Potential to drive tremendous incremental value from investments that we'll make to leverage the combined to be medical and <unk> capabilities into new market opportunities with new high value products and services.
Turning to slide 15, let me outline some of those opportunities at a high level.
Dave just three of many examples of opportunities that are currently on our roadmap.
The first is the expansion into other cold chain market opportunities using current be medical capabilities using proven technologies for highly durable highly configurable cold chain transport solutions with location and temperature reporting products can be configured in size and form factor to handle from a single sample up to very large cold systems for bolt ground.
And air cargo transportation think about this as not just the last mile but potentially all miles in the transport journey.
We're already geared up to join our engineering teams for the development of more purpose built cold chain solutions that are beyond current vaccine delivery.
Second to be medical vaccine cold chain refrigeration systems are a critical link in the opportunity to build our human health infrastructure in developing countries, where the <unk> medical last mile coal devices are used not only for the last touch for outbound vaccine distribution, but also can be utilized as the first link in a cold chain return trip for population biologic.
Sample collections that could be banked in the local bio repository and ultimately studied in local genomics laboratory for the benefit of human health in a particular country.
Products and services already in our Atlanta portfolio.
And finally, it's an advanced investment in our future as a truly global company to.
<unk> medical footprint brings an incremental 3 billion people approximately 40% of the world's population into our sphere of service.
Most of this population is located in fast growing emerging markets, which are as eager and deserving as any other part of the world to have access to the best of Human Health Research and treatments. We're looking forward to learn from our medical colleagues and the people. They serve as we accelerate the development of our offerings for these new markets.
Finally, we're particularly enthusiastic about the leadership team that has built this purpose driven business and the dedicated employee base, which has met the challenges of the demands for reliable and innovative products for global human health.
This is an exceptional team at an exceptional company and we're proud to have a chance to join with be medical on our combined purpose to bring in now deliver breakthroughs faster.
Now, let me turn the presentation back to Lindon, who will cover the transaction financials in more detail.
Thank you, Steve moving to slide 16, I want to highlight some of the transaction details in a little more on the profile of <unk> Medical systems. The acquisition comes for a cash price at approximately 410 million euros to be paid at closing an additional consideration up to 50 million euros tied to a performance based.
Earn out which will span our fiscal year 2023.
The transaction will be funded from cash deposits, which we hold in Europe , and we expect to close in October 2022, which is our first month of our fiscal 2023 year.
In terms of the company profile being medical has generated $109 million of profitable revenue over the past 12 months ended June 30.
So our last full year financial statements reflected 20% adjusted EBITDA as we measure it we do have planned investments to support the business growth, which will begin immediately these.
These will certainly continue to support the sales growth in portfolio development as well as appropriate G&A support to bring them into a public company structure.
We expect the transaction with investment to be accretive in this coming fiscal year on a non-GAAP basis and on a GAAP basis by fiscal year 2024.
As you think about updating your models I will add that the gross margins are quite comparable to our product segment and the revenue is more skewed towards the December quarter. This is due in part to the nature and timing of government spending.
We will provide some further guidance for <unk> medical expectations on our fiscal year end earnings call later this year.
With the addition of the medical we will be running at a pace with annual revenue of over $650 million with significant growth and margin expansion opportunities. This revenue comes with further reach and covers more of the cold chain challenge extending our leadership position across broad markets with an enhanced portfolio regarding our 2000.
24 target model, we will hold off on updates for now and plan to revisit to model later in fiscal 2023.
We will of course outline what we have added for our acquisitions and give you a more complete picture of the horizon.
I will wrap up with three messages from today's discussions.
While our base business is running at a lower level of revenue and EBITDA than we estimated for the exit point of 2022. This does not sway us from our conviction of the growth and margin expansion capability in the business and potentially sets us back some on a timeline for the model, but does not change the potential.
Second we are excited to be taking in both Marquis and be medical they add capabilities that fit with our strategic objectives and our existing customer needs. They extend our leadership position, but more importantly, make us more valuable to our current and expanding customer list.
Finally, we are accelerating some investments for strategic growth, we will do this within these businesses and to initiate further strategic initiatives to unlock some of the possibilities within our portfolio.
All of these points will reshape our model and we will continue to give you clarity on the organic performance as well as that of our acquisitions and investments of course, we still have another $2 billion in cash on the balance sheet for additional capital deployment opportunities and we have the right team and the platform to support more.
Abilities and customers across the globe with that I would like to thank everyone for joining us on the call today and I will turn the call back over to the operator for questions.
Thank you so everyone. If you would like to register a question. Please press. The one followed by the four on your telephone Youll hear a three <unk> prompt that acknowledges the request for your question has been answered and you would like to withdraw your registration press. The one followed by the three silicon for questions. It's one four.
Our first question is from Jacob Johnson with Stephens. Please go ahead.
Hey, good afternoon. Thanks.
Thanks for taking the questions I guess first Steve you talked about some COVID-19 benefit at the medical is there any way to kind of quantify.
How much in revenue they were doing.
From Covid related vaccines or maybe alternatively, just how that business has been growing the last couple of years, you know I think its tougher for any of us have a crystal ball around around Covid as we think ahead, but I think it would be helpful. Helpful.
Helpful Framework.
Quantify that if you could.
But it's worthwhile because I think it's an important question about COVID-19 let.
Let me start with visit company, we've known for a lot of years now we've been close to and we've been able to watch progress and how they've handled themselves just satisfying the vaccine vaccine cold chain market has done an exceptional job and it's a tremendous company and includes we knew them before COVID-19. So we watch the reaction.
In a COVID-19 world and they stepped up and did exactly the kinds of things that accompany ought to do what they were able to deliver to handle large volumes of.
Shipments and product and responded to every demand that came to them from the market. So.
Because we're not yet the owners will will give you as much information as we ought to right now, but let me put in perspective in 2021, they did approximately $28 million of Covid revenue they attribute to COVID-19.
But again in perspective here.
In 2022, the current forecast and we'll CHRISTUS up when we when we talk at the next earnings call in 2022.
Revenue for the company ought to be more than 2021, and it will incorporate very little COVID-19 in other words less than $5 million in the current forecast for Covid. So just to give you an idea really strong performance really strong growth of the company Covid. Indeed was part of significant part of 2021.
We anticipate higher revenue in 2022, and almost no COVID-19 contribution by the current forecast so.
And the reason that comes about as a couple of things one.
Just the the alert that everyone was put on from Covid really shook their markets in terms of pandemic readiness and so what we're seeing now is both a change in the number and the quality and the volume of funding that's coming.
Toward entities, who are able to help to deliver vaccines.
As a result of the Covid alert and pandemic readiness generally so.
Were we the company, we're bullish about the opportunities that exist because of the.
The need for a cold vaccines generally and we quantified a little bit of Covid vaccines, specifically, but we do see the investments coming to satisfy and do <unk>.
Pandemic preparedness across the markets that we serve so I hope that's helpful. Yes, Yes, that's super helpful. Steve and then just I guess, one follow up again on be medical Steve just can you talk about the the end customer they have it sounds like theres, some nonprofits and kind of government organizations.
Can you just talk about the customer and maybe how that overlaps with your existing customer base today.
Sure. So the customers. Obviously ultimately are the patients who are vaccinated and cared for the people who drive the purchasing of the government's if you will of these various countries and we count today about 150 countries.
Often the mechanism is that the agencies will provide funding in various forums for various countries depending on specific need as to what qualifies for an investment and often UNICEF is the agent in between to help to manage the funds and the distribution of funds the receipt of product. So there is a mechanism in place.
That's existed for many many years the company operates in that.
In that configuration, and that construct particularly well, but generally its individual countries taking care of their populations working with the aid agencies going through an intermediary.
That's our point of contact for a majority of the business.
Okay got it I'll leave it there thanks, Steve.
Okay. Thanks Jacob.
Again for questions. It's the one followed by the four on your Keypad next question is from Paul Knight with Keybanc. Please go ahead.
Steve.
The 410 million Euro is that last 12 months ending June .
$410 million Youre always the purchase price.
I'm sorry, yes.
9 million Euro is the is the trailing 12 months ending June correct.
Revenue.
And do you have any thoughts on what a normalized growth rate is there.
Paul.
Assistance to be a double digit grower for us.
And our model expectations.
We look forward to giving a lot more color around that as Steve highlighted there's a.
There has been.
Cove at ups and downs, but really strong growth in the recent times with those markets demanding a lot more.
And I think the walk away from the June quarter on continuing business is kind of like your slideshow says 11.
Percent negative impact from Covid, I guess is kind of the way to think about it right relative to plus 6%.
Ex currency.
Does that mean, 17% type growth ex COVID-19 impact and FX.
Yes.
That's right I think you captured adjust rates, 3% reported.
Out the currency.
6% organic and in our estimation as we had if you remove the COVID-19 impact from a year ago, we moved vehicle that impact.
This year the underlying business then on a constant currency basis grew approximately 17%.
Okay got it alright, thank you.
Perfect.
Next question is from Vijay Kumar with Evercore ISI. Your line is open.
Hey, guys. Thanks for taking my question.
Sun on the Q4 guidance here.
And then perhaps to you.
So at the midpoint of your revenue guidance implies.
Flattish revenues and I'm assuming.
Acquisitions, and FX kind of offset each other in Q4.
How are we seeing like zero percent organic in Q4, I mean I understand that.
There's a $10 million COVID-19 headwind in Q4.
X that I think you're guiding to perhaps 7% organic.
Does it seem right.
<unk> was for high teens revenue growth you, China Lockdowns my understanding this.
That's that's.
That's that market has opened up demand is normalizing. So why are you looking at.
Almost zero organic here.
Sure.
So youre right. There is still implications from a year ago comparison on the Covid and we also do have.
The FX.
Baked into that so.
When you when you back out FX that gives you the organic but we don't back out the COVID-19 on that organic number.
Locations are there, but it doesn't take away.
That our revenue is on.
On a lower trend than what our expectations had been coming into the second half what I would highlight is we continue to see.
Strong growth in the systems.
First on products systems and.
Services, but the.
The biggest detriment in the Covid compares going to beat the C&I. So so products, that's where you get.
To the down 8% midpoint of range, there and Thats the biggest detriment on the services side, we're still we're not satisfied with the numbers, we're putting on the table here. It continues to have some expansion sequentially.
On Srs and it will show.
Solid growth, but on the genomics side.
While we're seeing some expansion sequentially there potential it's still lower growth than what we expect let me add a little color what we're seeing in the genomics space because we.
We have we have really.
Through this as you can imagine.
With our teammates with.
Looking at our customer set one.
And I'm going to reflect a bit on Q3 data and then reflect what we see a bit in Q4.
And then in the Q3, what we noted we continued to see unique customer accounts expand that's very encouraging for us because the marketing the rebranding all of that we started to re look at say heavily impacted something ourselves, we're not concluding that we haven't.
Softens the brand recognition by transitioning from gene was to a center or from fluid X to a center, but we think our team has really ramped up well and we're.
We're providing latitude and investment dollars to make sure the marketing efforts are there.
Whether that has adult Dolby effect of these into growth curve.
We'd be second guessing ourselves a bit but the fact that we're expanding customer unique customer counts, we're pretty solid on the we look underneath the unique customer accounts.
And we also see strong stability in most places expansion of the Pis and the buying behavior in other words, the buyers unique buyers underneath, especially genomics, where they carry many pies or buyers underneath the authorized account purchase order.
And that indicates to us then.
What we've seen is really a slower spend level not a withdrawal of our.
<unk> representation and presence.
Now in terms of.
Geographics I'll give you a little more color.
We had high single digits in the 7% to 9% range.
On a constant currency basis in the Europe space and as well obviously in U S. At an organic rate in genomics and I'm sticking to genomics here, so the 7%, 9% there in that space.
Wasn't that strong double digit that we've seen in the past, but it wasn't it's not reflective of the 1% that youre seeing thats the bottom line right on the total so.
Where we were pulled down was the China impact in Q3, what do we expect in Q4, we think that we continue to see we do see a bit relief and recovery in China, we've seen some strengthening there we've seen.
Actually we've seen order load.
On a weekly basis show some momentum through the month of June and July .
Clearly in the NGL space.
And we don't have a reason to think that thats going to.
Pulled back so we've provided a range here with a little bit of expansion.
At the midpoint more expansion at the upper end, but we also recognize the line of sight here has it.
Isn't it isn't as clear to us so we put a range around that level, so vijay you've called out exactly.
We were disappointed in our pre announcement we.
While we're putting on the table here, but we'll always be as clear as we can with as transparent as we can we're seeing strength across the base and participation of the customer base.
A little bit of pullback in spending thus far and we'll keep we'll keep seeing this market.
And expanding forward.
And just sorry, just to clarify that.
A number of Reits Covid COVID-19 is going to be a $10 million headwind in Q4, FX, probably three to four points of headwinds and then you have incremental M&A revenues of C. Three.
Three to 4 million mesh are there any other moving parts here and for Q4.
In the 131% to 141 months.
Not moving parts other than.
What I would highlight is differentiated as on a sequential basis, we we think that.
The products, which you've captured in your dynamics products will be just a touch softer excluding archie.
<unk> services will be.
Slightly expanding and then barkey.
It gives you the net.
Upward.
Understood and then one if I may on the.
The EPS guidance here for Q4 at the midpoint, it's about <unk>.
So that would imply annual EPS of 43 cents, that's a year on year decline in your revenues on a reported basis I think it's going to be up high singles, maybe even perhaps low doubles.
How do we I guess, we had an analyst day.
We had the margin targets L P.
And the guidance here implies.
And the margin degradation year on year. So can you just walk walk us through what changed in the last three to six months Linda on the margin front.
Yes, so definitely topline has.
Brings leverage with volume, but it also.
Pulls you down when you slip sequentially like we just did.
And so I'm less on the year over year, but on a sequential basis.
The labor inflation, and which we've described in the recent months.
With the sequential drop.
In the one <unk> here in the revenue range that leverage by <unk> on the way down.
We'll continue to.
I think see the margin level about at this level at these.
These revenue levels, it will be in <unk> and a similar situation.
There are puts and takes to that but.
It'll be approximately similar gross margin are our efforts are into two fronts, obviously growth topline secondly, we do have some pricing.
We continued to exercise here and then in the cost areas.
This is no stranger to us in terms of cost in the manufacturing space and the services side I will tell you that the battle for talent continues.
And we pay for that because that's what we delivered to our customers. So that will help them through the price. We think obviously we are.
Geared for efficiencies in our operations, there as well, but not to avoid your question the gross margin.
Is the big pull down here in.
In the second half of this year.
Operating expenses under tight control at the same time, we've highlighted investments here.
Here we.
All right.
I will say, we take second looks at it but we have strong conviction as we ever have that we are in the right space for the investment for the growth.
And we'll move forward on the operating expense investments, but but the gross margin and revenue is what we're looking.
To see a little bit.
I'll say this.
Steve stable performance in the coming quarter and then we'll update you at the end of this fiscal year on what we see going into 2023.
Understood. Thanks, guys.
Vijay Thanks Jay.
So again, everyone for questions. It's the one followed by the four on your keypad.
Next question is from David Saxon with Needham Your line is open.
Yeah. Good afternoon, Stephen Lindon, Thanks for taking the questions maybe one on the base business went on the deals so.
So first one just on Srs.
Called out increasing samples under management. So just curious why it was down sequentially in the third there are any factors you'd call out.
And then also can you just give an update on kind of the strength of the customer pipeline there.
So first in the Srs business.
The business showing 19% growth year over year on a sequential basis, we saw expansion in the pure storage, we did see a little softness in hitting in logistics informatics.
These are.
We don't take any of this slightly obviously, but these are not.
Not representative of the enterprise partnerships as of yet that we've gathered in collecting managing samples the data services that we provide today as our parcel to the storage services and people are subscribing to a storage services because the value we add there. So that continues to expand we've seen.
<unk>.
You just can't get away from the $5 million climate of this business has had over the past year.
So we continue to see the sequential momentum and will continue to see that in the fourth quarter, we expect.
But but.
The flatness that you're calling out there it's more around the other offerings that we capture and so that business.
Let me, let me pause on that one and then come back to the rest of your question remind me the rest of your question.
Yeah, just around the pipeline.
I guess over the last year or so you you announced some larger contracts. So just wondering.
You know if if we could expect anything in the near future on that front.
So.
One we have signed significant contracts already and.
It has contributed to what's come into storage we've continued to see.
Strong.
Pipeline coming through the second half and we do expect so the answer the net of is yes, absolutely yes.
Again, we're not deterred at all by the.
Quarter to quarter <unk>.
Results on the Srs business, where.
I would just say I think this is a good point just to underscore.
When you look at the business in the services business Srs as a standout performer.
It's a foundation for partnership relationships across the business that where we hold their assets they send us their assets or communication with those customers on a daily basis in terms of what we have what we can do for them to advance the research by bringing all the pieces of their asset database.
On the genomics.
I referred to in our pre announcements highly transaction its high transaction volume short.
Order in lead time and turnaround and so.
<unk> represents long lasting relationships as I've highlighted expanded customer counts, but the foundation there is for Malibu in terms of the customer needs at the time period as I said I think that the spending behavior change right now is based on our assessments on the product side again.
We have a very strong differentiated.
Ultra cold store systems, including the cryo products.
Just kidding.
<unk>, 25% to 27% growth rates year over year and showed it.
On a sequential expansion, we continue to see that pipeline.
<unk> proved to be very strong going into 2023 as well as we highlighted we just had the first quarter.
And our folks so bookings.
But but that's C&I side had grown to be about two thirds of our revenue at this point last year.
This brings us down to being less I mean, when I say two thirds two thirds of our products revenue now we just went back down to it being half of our revenue a little less so.
We continue to tune that portfolio, but we're take Covid I'm, sorry, we'll take C&I as it is and will continue to market. So it's a differentiated product set where we put all of our investment in our steam when I say all of it of course, we invest in marketing behind C&I, but our true differentiated IP, what our customers are.
Our enterprise customers count on us for both large and small customers is really differentiated cryo capability reliability and frankly this is where we think that the medical systems. Embarking is just continues to solidify and extend the leadership there.
So.
I really appreciate the customer or the question.
<unk>.
I'll pause there and see if I can clarify anything that I rambled zone.
No that was that was super helpful. Thanks Lindon next one is probably for you again Linda just on.
B medical is there any are there any revenue or cost synergies assumed in kind of your thinking.
You know.
Around the combined entity and then Barky I know, it's a smaller deal but.
Any color you can give us on revenue growth profile and the margin profile. Thanks, so much.
Yes. Those are good questions one thing I'm happy to say is that both fit the profile and the criteria that we've described to our investor base both of them.
We went under thorough review in both obviously and they both clear.
Our five year ROIC models.
We use as a filter and.
Your question on synergies, neither neither rely on cost synergies.
Neither of them were banked on revenue synergies, what we do see in the <unk> medical systems opportunity as Steve highlighted as options to expand and innovate there with them and so the revenue piece that we have certainly takes their base of capabilities today combined with ours, So I wouldn't call it synergies.
It's not something that we think.
Our customers are technology adds immediately but it is an opportunity for investment to solidify and advance the cold chain.
Great. Thank you.
Yes, Thanks for your question.
Next question is from Juan <unk> with B Riley Securities Andrew Your line is open.
Hi, Thanks for taking our question.
We have a couple first in terms of the genomic services just wander here you saw.
It is.
As the impact from the weakening demand in general or.
It's from the competitor taking market share.
This isn't all that great in this category.
Sure. So this is Matt Mcmanus.
It's a great question I think lindon outlined a lot of analytics that we've done and looking at it.
And.
As he pointed out the customer count has remained largely stable for us at the ordering pie level.
So what we're seeing is the continued engagement with the customer base in that.
Those same customers have continued to order and we've added new customers as well and so from a.
From a market dynamic standpoint nearer.
Near as we can tell it's more that our customers are ordering less from us and not actually switching services, which is encouraging.
But also points to some.
Market effect, just in the slowness of the orders from customers either reducing.
And we hear this from our customers that they're actually doing somewhat less work or.
<unk> delayed some of their projects.
So while the market environment isn't the.
We certainly hope for and last quarter, we think that our relationship and the.
Really our interactions with our customers remains strong we're not losing them to the competition.
Yes got it and then maybe Lyndon can you comment on.
We divide the revenue in different geographic areas.
As you in China.
Is it.
Only that China has a slowdown in terms of overall revenue and I'll either area maintain strong growth.
So.
In China.
As a reminder, in the third quarter, we had a lockdown ourselves for a couple of weeks a little less than two weeks.
In the month of April now, we talked about that inside our guidance, we'd already comprehended, how that impacted us on deliveries and that was.
A portion of what we had factored into our guidance, but it contributes to the sequential and the year to year drop that we saw in China.
In the.
And when I say that just addressing genomics overall, we expanded some in China with some product revenue, but my.
But what I would highlight is that the overall larger impact in China was demand driven in areas with.
It's a little bit analogous to rolling blackouts for its rolling Lockdowns throughout the quarter here I think your the implication is that.
From an earlier question is correct, we're seeing that market is more open now and even in the month of June we saw.
Pick up and as we saw a pickup we saw nice growth in the number of customers in China as well. So we're encouraged by that.
And like I said in my guidance.
Picked up some relief in our numbers from genomics from China.
When you think about.
Europe and U S again high single digit revenue growth on an organic basis.
We're looking at that is less than what we would like to see performance wise again will be we will be continuing to drive in the marketing side.
But at this point, the order load, which suggests to us that <unk>.
Ability to slight expansion overall.
And while there is some upside there we think at the upper end of the range, we have to acknowledge the lower end of the range is realistic as well so Jan.
Don't want to.
I don't want to say anything other than really the range that we see.
Based on our line of sight today, an admittedly in the genomics space, it's a little less than what we would we would like to carry a little bit of backlog in Ngls, even less and gene synthesis and almost no backlog in Sanger right. So it's just a reality that we deal with.
Yes got it.
Very helpful.
And then maybe one last question from me, just curious, which part how we are kind of a business has.
Overlap with the medical system or you see potential to see overlap there.
We think there's very little overlap John this is Rob.
Really a tremendous opportunity, we think to add capable technical capabilities that will enhance the offerings that we have.
And as we talked about the opportunities going forward just from human health standpoint to utilize that link in the cold chain couple to other offerings that we have is a sense that we think are just tremendous long term.
Value opportunities for us So we're really pleased by the capability.
Certainly refrigeration technologies are interesting, but you know what.
And B medical they use solar direct drive from a power source things that we can utilize they are tracking devices and a long history of data collection. So we think those are those are offerings that will really enhance the things that we do already in the in the company. So we're really enthusiastic about adding that technical capability as they are.
Our about combining with <unk>, we think it's just a great match with very little overlap and a lot of complementary capabilities.
Got it I think you have on the household counter.
No further questions I'll turn it back to Linda for closing remarks.
Alright, thank you.
Look everybody, we we always come with you with a lot of excitement a lot of enthusiasm about our business and it's no less today is just with a lot of angst in the results.
But its no less enthusiasm in terms of where we're headed and in fact.
It is underscored by the investments, we're making with <unk> medical and have made with marquee.
We're excited about the path forward with these individual businesses and we continue.
Two to invest in every aspect of our business to build out organically and we will continue on that path.
As I mentioned earlier, our intention is to.
Look forward, whether it's at the end of the year or a few months with experienced would be medical would be updating our long term model. So I won't refer to that now obviously, we're coming out of the year at a lower EBITDA traction than what we expected, but again not.
With any less.
Enthusiasm for where this model takes us.
And as a reminder, we still have another $2 billion available on our balance sheet to continue to add to this business.
Enthusiastic about that as well so we thank everybody for their time with us and we look forward to the call backs. We know we have some busy schedules ahead of US we are.
At a conference this week so what you are.
Press releases that we put out recently, we've got more conferences coming up for the next couple of weeks as well, we look forward to doing those and meeting you out on the street so to speak so thank you very much.
And that does conclude our call for today, we thank everyone for participating and you can now disconnect.
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