Thank you for standing by. My name is Dee and I will be your conference operator today. At this time, I would like to welcome everyone to the Rapid Micro Biosystems Second Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Michael Beaulieu with Investor Relations. Please go ahead.

Good morning, and thank you for joining the Rapid Micro Biosystems Second Quarter 2024 Earnings Call. Joining me on the call are Rob Spignesi, President and Chief Executive Officer; and Sean Wirtjes, Chief Financial Officer. Earlier today, we issued a press release announcing our second quarter 2024 financial results. A copy of the release is available on the company's website at rapidmicrobio.com under Investors in the News & Events section. Before we begin, I'd like to remind you that many statements made during this call may be considered forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements, including, but not limited to, statements relating to Rapid Micro's financial condition, assumptions regarding future financial performance, anticipated future cash usage and cash runway, guidance for 2024, including revenue, expenses, gross margins, system placements and validation activities, [indiscernible] impact of our operational efficiency program, our efforts to reduce our use of cash for operating activities with the goal of enabling the company to achieve positive cash flow without additional financing, expectations for and planned activities related to the company's business development and growth, customer interest and adoption of the growth direct system, statements regarding rapid sterility and the potential impact of macroeconomic uncertainty on Rapid Micro's business. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. For a list and description of the risks and uncertainties associated with Rapid Micro's business, please refer to the Risk Factors section of our most recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission as updated from time to time in our subsequent filings with the SEC. We urge you to consider these factors and you should be aware that these statements should be considered estimates only and are not a guarantee of future performance. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 2, 2024. The Rapid Micro disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I'll turn the call over to Rob.

Thank you, Mike. Good morning, everyone, and thank you for joining us. As Mike mentioned, we issued a press release announcing our second quarter financial results this morning. These results exceeded our guidance and included a statement that reaffirmed our full year 2024 revenue outlook. As part of today's earnings release, we also announced an operational efficiency program. I will begin my discussion this morning with a review of our second quarter performance and highlights, followed by an update on the progress we are making against our 2024 priorities. I will then discuss the operational efficiency program announced this morning and the key drivers we believe will meaningfully increase long-term shareholder value. I will then turn the call over to Sean who will provide a more detailed review of our Q2 financial results as well as our financial outlook. Starting with our second quarter performance. Total revenue increased to $6.6 million representing growth of 32% compared to the second quarter of 2023. Total revenue exceeded the guidance we provided in May and was a record quarter for the company. We placed 5 growth direct systems in the second quarter with placements in North America, Europe and Asia Pacific. In June, we held our first [indiscernible], hosting potential customers at our Lexington Innovation Center and demonstration lab. Additionally, we are excited to announce that we placed our first growth direct Rapid Sterility system with one of our existing customers during the second quarter. With respect to gross margins, we continue to increase manufacturing efficiencies and reduced product costs. These initiatives resulted in near breakeven margins in the second quarter, which represented a significant sequential improvement from Q1. We remain on track for further margin improvement in Q3 and Q4. Now I would like to discuss the progress we have made against…

Thanks, Rob, and good morning, everyone. I'll start my comments today with a review of our second quarter results. I'll then review our third quarter and full year 2024 outlook, followed by additional color on the operational efficiency program we announced this morning. Q2 revenue increased 32% to $6.6 million compared to $5 million in Q2 2023. During the second quarter, we placed 5 Growth Direct systems, including our first Rapid Sterility System compared to two in the second quarter last year. We also completed five validations in the quarter compared to 3 in the second quarter last year. Product revenue, which is comprised of systems and consumables increased 43% to $4.5 million in the quarter compared to $3.2 million in Q2 last year. The growth in product revenue was primarily driven by the higher number of Growth Direct systems placed in the quarter. The Q2 consumables revenue growth rate was in the single digits compared to what was at the time, record revenue in Q2 last year. Service revenue increased approximately 14% to $2.1 million in the second quarter compared to $1.8 million in Q2 last year. This growth was driven by higher validation and service contract revenue. Second quarter recurring revenue, which consists of consumables and service contracts, increased 7% to $3.8 million compared to $3.6 million in Q2 last year. Nonrecurring revenue, which is comprised mainly of systems and validation revenue, increased 97% to $2.8 million compared to $1.4 million in the prior year quarter. Turning to gross margins. Product margins were negative $0.4 million or negative 8% in Q2 compared to negative $1.5 million or negative 48% in the second quarter last year. This 40 percentage point improvement demonstrates the meaningful progress we are making on our initiatives to reduce product costs and increase manufacturing efficiency.…

[Operator Instructions] Our first question comes from the line of Tejas Savant from Morgan Stanley.

This is Yuko on the call for Tejas. With the announcement of new targets along with the operational efficiency program, could you comment on working capital initiatives to improve cash uses. You previously called out inventory as one of the key levers, so you touched on this quarter? And how are you balancing inventory reduction and stocking to get customers comfortable that there will be consumables readily available?

It's Sean. So I think we are very focused on inventory as we look forward in terms of managing working capital, say that for the first half of the year, we're actually up a little bit. It involves a couple of different things that are, I'd say, are kind of rebalancing, which will set us up well, we believe, for the second half of the year to be a period where we see meaningful reduction in inventory. We have always maintained safety stock levels to make sure that we have inventory across the product offerings that we have to ensure that we have no disruptions. I think if you look back to the COVID period, a lot of people did have a supply chain and inventory management issues, we did not, and we would attribute that to the practices we have around making sure we maintain those safety stock levels and expect to continue to do that going forward.

Yuko, it's Rob. We also have what we call customer business reviews with customers. And part of that review is our inventory performance, and we continually receive extremely strong feedback about the quality and timeliness of our supply chain globally from our customers.

Great. And then also, could you elaborate more on the customer who placed the sterility system and underlying factors that drove them to place that system, given sterility is a low-volume application, although it comes with higher pricing, is the benefit of automated system potentially less attractive in that city versus environmental? Could you elaborate on any key differences in the workflow that may make the incentive to adopt Growth Direct, perhaps a slightly different value prop in the [indiscernible] versus other applications?

Sure, sure. I think it's a good question, Yuko. So yes, as you touched on in the EM is a higher volume type of tests where automation plays a role in automating a high-volume kind of repetitive task. Although the value proposition of Growth Direct, I'll remind folks listening is clearly, full automation, but also strong data integrity, data management, data security. In automation, even in a lower volume environment is very important for a reduction in errors. So while it automation plays a different role, I would say, in a high-volume setting versus a low volume. I think the data integrity the lower amount of hands on time and just the improved quality is incredibly important, again, in low volume or high volume. However, the additional extremely strong value proposition that has is Rapid Sterility has on our Growth Direct system is time to result. If you recall, as little as one day, we can give time to detection to a contamination and as little as 3 days final time to results. And this compares generally to about 2 weeks if things go well to the legacy method. So customers are getting not only all the benefits of a fully automated platform technology, which more and more of the planet of the universe of customers is getting used to, but they have the incremental benefit with regard to sterility of the very fast time to detection and [indiscernible], which in some cases, is gating for release to patients and business implications, too, with regard to revenue recognition and things of that nature. So the value proposition of sterility is very strong. And this is under the -- again, just another reminder. Our strategy here is to build the next-generation infrastructure for quality control across pharma. So we are automating and sterility is the -- is a key part of this. The full -- essentially the full suite of daily routine use tests across environmental monitoring, testing, water testing, bioburden or product testing and now sterility testing, all under the ages, if you will, the value proposition of the Growth Direct platform.

Our next question comes from the line of Dan Arias from Stifel.

Rob, maybe just following up on sterility, now that you've gotten some customers together on it, how are you feeling about uptake there in general? What do you think will be the difference between those that adopt that system or that capability versus those that don't -- within the existing user base of those that you've connected with and you've convinced that Growth Direct is something that they need to have?

Yes. So again, I wouldn't rule anyone out of -- of using it at this point. So the -- it's early days in the commercial availability of the product, the -- we're excited about what we're seeing from the feedback. You heard in the remarks about our Sterility Day, we're having webinars and significant global customer connections. And the feedback is strong. The funnel build is very strong. So within the existing customer base, I would say, universally strong feedback. We did place a system in the quarter to a large existing customer and we would expect that trend to continue. It is a capital equipment sales process. So it will have some of those features with regard to the sales cycle timing. That being said, we also expect new customers, new customer segments, which we touched on in previous calls, right? So some of the -- we're very, very strong, as you know, in biologics and cell and gene therapy. This drilling application does address quite strongly segments such as sterile injectables, for example, and vaccine category. So it's also excitingly opening up conversations, I would say, with incremental and new very large customer segments for us. And there's a recent example where we're having a sterility conversation with a customer in one of these new categories, and it's triggered a sales process around environmental monitoring. So a bit back to the comments I made at the end of Yuko's question is the our strategy here is to bring a platform technology that automates the -- effectively the majority of the microbial quality control requirements of companies. So our sales team now globally is equipped to have conversations up and down that workflow and help the customer solve their microbial QC problems. And we're starting to see the benefit of that already with the launch of Sterility.

Okay. I just need to dig in that a little bit more. I understand that hypothetically, everybody could be or should be interested, but that's probably unlikely to be the case for a while. So what I'm kind of trying to understand is when you talk to your sales team or you look at those that you gathered together, what are the characteristics of those that feel like they're most likely adopters versus either less likely or adopters down the road? I know everybody should use it, but that's probably not going to happen anytime soon.

Yes. Okay. So fair enough. So the most likely customers to adopt earlier in the cycle will be largely the larger companies that know us well. I don't think it's a hard and universal rule because the funnel does have -- I was new customers in new segments. But -- if you think about it, again, consistent with our approach, we have a number of customers globally out there in the biologics and cell and gene that have higher value applications that know the Growth Direct, know the benefit of the Growth Direct, implemented the Growth Direct, have managed the data around Growth Direct. And this is an extension of the menu around it. . So that would be, if I could kind of point out what I would expect to be the earlier adopters and consistent with the placement we had, it is an existing large customer. It would be our existing customer base. I do want to highlight, though, the funnel is has got a nontrivial amount of, I would say, new customer and new customer segments in it.

Okay. All right. That's helpful. And then, Sean, on the gross margin trajectory, you sound pretty confident there. It's not hard to see how you flip to positive for the back half. But in order to get positive for the full year, I do need to be in like the mid- to high single-digit range in 3Q and then actually like the high teens range in 4Q on total gross margin. So is that the right level of increase, if not help me out? And if so, I just need to understand a little better how the incremental improvement materializes from here?

Yes. Dan, I think about it as the second half probably a little less specific to Q3 and Q4 and that high single digit to low teens number range makes sense based on where we see things right now.

Okay. And then just if I could sort of extend the thought. So -- and I know we'll talk to 2025 at a later date, but how do you feel about 4Q? Because you have some nice things working for you on the gross margin line very clearly. I mean you'll be up -- if that cadence hold, you'll be up a good 20-plus percent from 2Q to 4Q. So is there anything you can say about 4Q as a jumping off point for gross margins next year?

Yes. I mean I think one thing to point out is our typical seasonality is just volume still matters. I mean we're obviously making a lot of progress on the internal initiatives we have across our revenue areas to get margins up if we follow our typical seasonality, there will be some pressure on margins sequentially from Q4 to Q1. But we would still expect to be positive in Q1 and then build even more from there. I think I'm not going to give guidance at this point, but we did talk today about what we expect over the next several years across the business and gross margin was part of that. And we've given a kind of end point by the end of '27 to get to mid-double-digit margins. I think that gives you some feel for think '25, '26, '27 will be on average. So I think if you think about where we could exit Q4, maybe a step down in Q1, but then we're building up positively throughout 2025 to get to a point where that overall full year number for '25 is a meaningful step-up from the overall '24 number.

Yes. That makes sense. I can work with that. Okay. Last one, if I could, just to slip in a question on the operational efficiency. How does that impact anything might do when it comes to just expansion of the commercial team. You've got some important new products here. I think you still have ambitions of growing the sales coverage outside the U.S. So can you maybe just talk about the cash conservation that sounds like it's important in the context of still growing out the franchise still touching more customers?

Yes, Dan, it's Rob. So we -- our commercial team is in place. So we're not -- we don't see meaningful growth to the team. We've answered on previous calls. We do have a sterility specialist, but we really view our sales team. We train them to be consultative sales professionals. So they're able to position and work with customers on the full range of applications. Again, all of environmental monitoring water bioburden and sterility applications. So we view our team in place globally, fully constituted teams in North America, Europe and Asia. So we don't see meaningful growth in the near term and are comfortable with the coverage we have and the ability to drive to not only the near-term guide, but also the longer-term outlook that Sean walked through in the prepared remarks. Some questions? Okay. I think that's the end of the question. So thank you, everyone, for the questions today. I appreciate the continued interest in our business. Listen, we're just kind of wrap things up. We're very excited about the business and what we see in both the shorter term and over the horizon here with regard to some elements of our outlook, long-term outlook that you heard today from a commercial standpoint increasing customer discussions with senior level customers about multisystem orders. I think you heard some of that in the prepared remarks. So we're quite encouraged with what we're seeing there. And with regard to the funnel builds and conversations globally and specifically negotiations with customers currently on multisystem orders. Margin improvement is clearly one of our additional top priorities. And I think you can see clear and demonstrable progress there. Our third pillar of focused new products, very excited about Rapid Sterility and certainly, great early returns and more to follow. And then consistent with our fourth pillar of prudent cash management, excited about the operational efficiency program and what that means for the business with regard to achieving positive cash flow without additional financing. So again, thank you for your time. We'll wrap the call up now, and we look forward to speaking with many of you shortly.

Ladies and gentlemen, this concludes today's call. Thank you all for joining. You may now disconnect.