Harvard Bioscience, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Harvard Bioscience, Inc. Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Dave Sorois. Thank you. Please go ahead, sir.

Thank you, Dylan, and good morning, everyone. Thank you for joining us for the Harvard Bioscience First Quarter 2020 Earnings Conference Call. Before we begin, I would like to suggest that you take a moment and download a copy of a presentation that will be referred to during this call. The file is entitled Q120, HBIO Quarterly Earnings Presentation, and can be located in the Investor Overview, Events, and Presentation section of our website. Leading the call today will be Jim Green, Chairman of the Board, President and Chief Executive Officer, and Mike Rossi, Chief Financial Officer. Before I turn the call over to Jim, I will read our Safe Harbor Statement. In our discussion today, we may make statements that constitute forward-looking statements. Our actual results and performance may differ materially from what we have projected due to risks and uncertainties, including those described in our annual report on Form 10-K for the period ended December 31, 2019, and our other public filings. Any forward-looking statements, including those related to the company's future results and activities, represent our estimates as of today and should not be relied upon as representing our estimates as of any subsequent day. Also, much of today's call will focus on our non-GAAP quarterly results, which we believe better represents the ongoing economics of the business, reflects how we set and measure our incentive competition plans, and how we manage the business internally. The differences between our GAAP and non-GAAP results are outlined in the earnings release and the slide presentation. These documents can be found on our website under Investor Overview, Events, and Presentations. Additionally, any material, financial, or other statistical information presented on the call, which is not included in our press release and presentation, will be archived and available in the Investor Relations section of our website. A replay of this call will also be available for one week at the same location on our website at harvardbioscience.com. I will now turn the call over to Jim. Jim, please go ahead.

Thank you, Dave. Let me start by saying that we are really proud to see our products playing their part in the fight against COVID-19. Many of our cellular and molecular technologies, such as our BTX electroporation gene splicing products, are helping develop new treatments. And our multi-well plates are helping detect antibodies. Our preclinical products play a major role also in any new treatment or vaccine before use in humans. And our recent advances in inhalation are just in time for research and development for fights against any airborne virus. So let's go ahead and move to slide three of the presentation and take a look at the highlights. Revenue from the combination of CROs and pharma was up modestly in the quarter. Academic labs were down significantly as labs shut down due to the COVID-19 pandemic. Our strict cash and cost control in the first quarter helped maintain strong cash flow and also helped pay down our debt principle by approximately $5 million. As we look forward, we're expecting further revenue decline in Q2, recovering as the academic labs reopen in the second half. We rapidly implemented significant expense reductions to support margins and cash flow for Q2 and beyond. We continue to move to a leaner organization and operation, and we will continue to maintain strict cash and cost discipline as we continue to meet our debt obligations. Let's move to slide four of the presentation and take a look at the details of Q1. We were significantly impacted by the COVID-19 pandemic. Q1 revenue came in at 23.8 million, down 4.4 million, or 15.7 percent from Q1 last year. Gross margin on GAAP basis measured 54.6 percent. That's 2.7 percent worse than last year. Non-GAAP adjusted gross margin was 54.6 percent, down 2.9 percent. This quarter had GAAP operating income of negative $3.3 million. Our adjusted operating income was a positive $500,000, so our adjusted operating margin was 2 percent. Gap earnings per share was negative 12 cents. Our adjusted earnings per share was negative 1 cent. Our cash flow from operations was 2.9 million, and we paid down our debt principal by $4.8 million. Moving to slide five. take a look at Q1 revenue by product family and customer segments. Starting with the first row of the table, our cellular and molecular product revenue, which is primarily for academic research labs, was down 15.7 percent worldwide as labs shut down and personnel began working from home, which impacted order processing and receipt of equipment. Reductions include $300,000 of an exit from a non-strategic product line. Looking at the second row of the table, our overall preclinical revenue was also down primarily due to the COVID-19 impact on academic research lab shutdowns. Good news, our CROs saw year-over-year growth in the quarter driven by North America and China recovering. Also, pharma remained steady to last year, and we see a lot of excitement around our new inhalation products. As I said, academics and distributors were down with the lab shutdowns. And one of our large government lab customers was down $700,000 on issues of internal funding delays. We move to slide six. We'll look at the restructuring related to the restructuring that we announced late last year. We initiated the Connecticut manufacturing consolidation into Holliston and expect to complete in our third quarter. We initiated downsizing of our UK operation, also expected to complete in the third quarter. The global reduction in force for approximately 10 percent across our entire business is almost complete. We expect annualized savings over $4 million, phasing in primarily in the first half of 2020, and we expect one-time costs of approximately $4 to $5 million associated with it. We move on to page seven and a look at our reaction to the oncoming pandemic at the time. In mid-Q1, we began to see the initial effect of COVID-19 on our China customers and began to plan contingencies for what to do should it spread to other countries. During the first few weeks of Q1, we built an action plan to dramatically – actually, it was late in Q1. We built an action plan to dramatically reduce the overall cost of the business and rapidly implemented it early enough to protect the second quarter and potentially beyond. The action consisted of worldwide reductions in work hours and compensation, reductions in force, reductions in management compensation, and all said, we expect to save approximately $3 million in the second quarter from these actions. At the same time, considering continuity of the business and employee safety, we rapidly implemented measures for safe factory operation and work from home for non-factory employees. As a result, We have stable, effective manufacturing operations up and running. Now I'll turn it over to Mike for financials.

Thanks, Jim. On the full P&L for the quarter, as noted, revenue was down 16% due to the impact of COVID-19. This impact was felt equally across geographies in Q1, with Asia impacted through February, followed by a significant impact to business in Europe and North America in March with the onset of the virus. The main driver of our growth in our original 2020 expectations was via strength in our CRO customer base, and while these customers were impacted, we are seeing strength with this customer base a month into Q2. Turning to profitability, the volume impact noted had a significant drop-through effect on gross and operating margins given the speed and severity of the change in revenue trends. However, our continued focus on leaning out our cost base is reflected in the $1.2 million reduction in OPEX reported, and the impact of our previously announced restructuring actions will sequentially increase from Q1, given most employee notifications were within the quarter. On top of these committed actions are the additional roughly $3 million of savings in response to COVID-19, Jim noted. We reported a one-cent loss per diluted share due to the volume impact noted, with cash interest expense declining approximately $200,000 on the continued reduction in debt. The reported tax benefit on a non-GAAP basis is 32.6%, while cash taxes remain very low in 2020. The GAAP loss per share of one cent included a The gap loss for the quarter included a $1.5 million one-time cost to affect the ongoing restructuring that we announced in December. Turning to the balance sheet, as noted, we paid down $4.8 million of debt in Q1, contributing to a $12 million reduction in debt since the end of 2018. Cash flow from operations improved to $2.9 million from $2 million in the prior year. We've enhanced our processes around working capital and overall cash management practices, which is benefiting us now and will support our ability to manage through the trough in revenue we expect in Q2. And we continue to make payments needed to execute our ongoing restructuring and get the cost structure right. With that, I will turn it back to Jim to review the outlook for 2020. Jim?

Okay, thanks, Mike. Let me just also first quickly say, over the last few weeks, we took a hard look at our liquidity. And in looking at what we had to run with, we felt like we were in good enough shape with our current cash reserves and the way the business is running and the actions that were taken that we really didn't need the additional $6 million as part of the PPP loan. So we've already returned that to the bank. I'm glad to say that in returning that, we think we're doing our duty in helping other companies that really do need access to that capital now. So why don't we go ahead now and we'll move to slide 11 and take a look forward for the business. We expect the combined CROs and formal revenues to continue to grow. With the COVID-19 impact, we're expecting second quarter revenue to decrease 20 to 30 percent year over year and to begin recovering as academic labs reopen in the second half. I'm very glad that we took immediate action to offset Q2 margin impacts and continue to move to a leaner organization and operation. We expect improving gross margins and operating margins as academic revenues recover. Finally, we will maintain cash flows and meet our debt obligations while we build a leaner, more profitable business platform. Thank you, and I'll turn it over to the operator for questions and answers. Thank you.

Thank you, sir. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. I show our first question comes from Paul Knight from Janney. Please go ahead.

Jim, can you talk to the businesses again as you were moving into Q2? I kind of missed the first part of the call due to busy operators, I guess. specifically CROs as they left Q2, pharma, and academic?

Okay, yeah, sorry. So, you know, I guess the real good news in all of this is that the CROs are, you know, started growing actually in Q1 in spite of the COVID situation. You know, we did see some initial delays while I think everybody was taking stock of what was happening. But the combination of CROs and pharmaceuticals have continued to do well. They're up and running, you know, that business. And, you know, I think starting initially in China, as we all saw, China starting to erode on the academic side. And, again, on the pharmaceutical and CRO side, there was some initial hesitancy, but it very quickly, they very quickly returned, returned to work, and really got up to business and started, you know, repurchasing and purchasing or adding demand for our products. Overall, pharmaceutical and CROs have done well through this and continue to do well. Indications from them is they're going to continue to require more equipment from us. It's expanding. Of course, the U.S. was very strong in Q1. We see it growing even further throughout the year. China recovered in Q1 in that area and is expected to continue to grow strongly. Europe, a little bit slower to get started on the CRO pharmaceutical side, but we are seeing them starting to pick up somewhat, too. So all said, those customer segments of pharma and CRO we see as being in very good shape throughout this, and I think many would say probably a tailwind for that business, given what they're working on and the need to get back to all the existing products that they were working on. On the On the academic side, as I said, you know, it started in China with, you know, order activity, you know, dramatically dropped off there. We saw, and we had, with our sales reps and had contacted customers, academic customers in China, they were told sometime mid to late Q1 that things were going to be slowing down, that they might actually be working from home. Since then, of course, we all know that they shut down almost all of their academic operations. So in China, we saw that happen very quickly. That's why we took immediate action to plan for in the event this were to rotate around the world. In China, though, we do see, just to kind of fast forward a little, China is picking up. Not only they've been picking up on the CRO and pharmaceutical side, they are starting to come back to work on the academic side. We are seeing more order activity there. We expect that to recover fairly quickly now. The U.S., as you know, again, the CROs and pharmaceuticals have done quite well through this for us. have continued to demand more equipment. And you know that everything that they're doing, whether it's therapy or vaccines, is required to go through the safety and toxicology testing and the formal preclinical testing that needs to be done for release of any of those products. So that, along with their existing backlog of projects, we think is going to provide a solid outlook going forward in the U.S. in that segment. You know, Europe has been a bit slower, and as we also know that a number of the drugs that were originally being done in Europe, some of those were transferred to U.S. operations, so that's part of Europe being kind of sluggish on the CRO pharmaceutical side. On the academic side, Europe, like the other groups, has pretty much shut down. I will tell you, though, that over the last few weeks, we have started to see some initial order activity starting to develop. I know we're in close contact with them We know by sight. We have a rough idea of what their expectations are as to when their labs reopen. Sorry, I don't know exactly what you missed, but I hope that gives you some flavor. Feel free to, if there's something you think I missed, let me know, Paul. Anything else?

Okay, so basically you think academia may be bottoming now, but not necessarily recovering.

I think at this point, you know, we saw academia. We saw the order intake drop precipitously. As you got into mid and late Q1, I believe it's pretty much at that low level now, and that run rate is what we see going into Q2. We think we'll see sequential improvement off of that pretty much lockstep as the labs come back to work. When the folks went home, the labs shut down, order intake really dropped off. Even shipments had to drop off because there was nobody there potentially to unpack the equipment. And I will say that one of the things that proactive actions that we took right away, even by mid-Q1 and later into Q1, is I'd ask that each of our, before anything shipped to an academic lab, that we make phone calls and make sure that there were people there to receive the product because the last thing you want is shipping something to somebody who's not receiving it and then it whips right back by your freight forwarder or later on and you've got a problem. And regardless of whether you're FOB on RevRec It's a bad situation if you're shipping and they're not receiving it. It just goes bad. So what we did is make sure that, especially when we knew it was going to an academic customer, we wanted to make sure that they were there. I'd rather take the hit and slow down on the shipments now than to have it whip back in Q2. So we're pretty confident that that's where it is. And again, I think to your base question, this lower run rate coming out of Q1 is what we're modeling into Q2. We believe it's going to start to recover here, but we're assuming we're probably into Q3 for that recovery because we know it's going to take time, people to get back, restart the order process. In the meantime, we took advantage of a lot of digital marketing. We're holding webcasts with large groups of customers about the newer technologies and getting, even though they're sitting at home, maybe bored, they're looking for something to do. So being able to work with us and look at the new products and products coming out so that when they get back to the office, you know, we will have already, you know, done a lot of the prospecting and they're ready to start the order process again. So it really just comes down to the calling the timing on the recovery of the academic labs, you know, coming back and turning back on.

Can you talk about debt payments that are due this quarter? I think it's 2.8 for the year. And then weren't there negatives associated with these government programs as well, like restrictions, et cetera?

Well, I guess first on the debt, you know, we have our ongoing interest rate payments, which we certainly expect no problem at all. There will be some additional required payments as part of the covenants, which, of course, we're going to meet. And typically there's excess cash requirements, but the main thing is we're going to make sure we meet our debt obligations, and we'll work like hell to avoid any kind of covenant issues. As far as the government loan stuff, I would say the government loans that we were able to take advantage of in Europe, there are some really nice programs where they'll work to help you offset OPEX, for someone who's maybe working part-time. That's very helpful. In the U.S., we looked at it, and certainly originally when it became available, we looked at it because there was a lack of visibility with things happening so quickly. We thought it made sense to go ahead and get the application in. Had no idea if we'd get the loan. We did get the loan. We applied in good faith, and certainly we feel like we had every reason to use it as it was designed. But as it became clear that they were running out of money, it just made sense for us to – and I believe that if we could do it without, you know, taking money from U.S. taxpayer that could be used elsewhere from somebody who needs it maybe more than we do, if we can get by, you know, without it by really managing the business, that's what we're going to do. So we went ahead and returned it, I think, late last week. I think that came out in an AK just recently. But, you know, certainly, you know, it was our – the main reason that we decided we just didn't need it, we could get by without it. We know how to run the business.

Thanks, Jim.

Thank you, Paul. Thank you. Our next question comes from Lisa Springer from Singular. Please go ahead.

Good morning, Jim and Mike.

Good morning.

During your comments, you mentioned that you're seeing some interest in your insulation-type products. Could you give us some more color around that? Like, what are the insulation-type products, and from what customer segments are you seeing that demand?

Sure, sure. We were working on this for a while, and it's kind of – opportunistic that we were able to launch the product just before this was starting, just before COVID comes out. In the past, the way you measure inhalation load, there's essentially a way you try to get a track. You understand how much you've delivered to somebody, but you can't really tell. By the way, what you do is they're designed to inject aerosols into the lungs of the test subjects And in the past, all you could do is measure how much you thought you put in. Well, the new design product is able to not only very clearly measure exactly what was delivered, but we can also measure the response to it. So when you think about a disease that works its way into the lungs, knowing at what point how much of a viral load is going to actually infect and then how the lung is going to respond after that in terms of the lung's efficiency and then how that viral load works its way into the subject. So the timing on this was, there really wasn't any way to do anything like this in the past. In real time, understand and quantify viral load, or we call it, because at the time we don't know for sure what they're gonna be using, but whatever that aerosol is, we're measuring the aerosol, and we can respond and correlate that with whatever measurements they're taking associated with that subject. So, you know, perfect timing for that. You know, the companies, you know, immediately we started seeing interest from China. We're selling them now. They're up and running. You know, and their interest is across the board. Since we don't have, you know, since many of the academic labs are still shut down, the interest there has been more, you know, telephones and emails and verbal. But when it comes to the pharmaceuticals and CROs, you know, they're up and buying. And some of the early academic labs that are running are also buying now. And we think this is going to be We've already seen quite a bit of growth in those shipments, and we expect that to continue to grow.

Okay, great. And a big part of the Q4 story was the impact from low-margin portfolio rationalization. Is that process essentially complete?

It pretty much is. It's close. You know, we're much of these – I think, yes, it's pretty well through. I mean, we're at the portfolio that we believe is going to be successful going forward. We're putting more investment into certain areas that we know are going to have tailwinds, things like anything CRISPR-related with the BTX line. We're adding a new line to that to be able to go after multiple uses of it. We'll be looking to more higher-volume versions on the cellular side. some of the things that we're doing on how to use the multi-well plates. I mean, that's highly used in antibody detection, so we see that growing. We're going to be making more investments there. And then, of course, just the general preclinical side. I mean, just everything has to go through the preclinical testing phases. You know, that means utilization of our implantable telemetry devices and systems and expansion of that space. So, In many ways, it forces us to really look at where the tailwinds are, invest there, look at maybe where there's not a lot of strategic value going forward, and look to create savings there.

Okay, great. And actually, that leads to another question. The implantable telemetry devices, you were going to start shipping in Q1. Did that actually happen, and did that impact Q1 revenues?

Yeah, it did. We did start shipping in Q1. We were held up with – it took a while to get production lines up to full rate. At this point, I think we're running along at rate. I don't know that we're – I think we're meeting all the demand. But anyway, there's no real problems with it. It did launch, and it's a great new exciting product.

Yeah, for sure. Okay. And one last question, which might be more for Mike. If we go with the assumption that second quarter revenues are going to be down between 20% and 30%, And given the expense reductions you talked about, how should we think about gross margins in the second quarter? Will they be similar to Q1?

You know, there'll be a little bit of downward, you know, pressure there. You know, a lot of the savings that we're taking is going to go through the OPEX line. So just with that type of volume decline, there'll be a little bit of negative pressure on gross margin. But net-net, you'll see our operating margins and just operating profit, you know, get back to kind of normal run rate levels that we've been at recently because we've taken such, you know, aggressive cost actions.

Okay, great. Thank you very much. Lisa, we tried to size, you know, we looked hard at what we thought the potential operating profit impact might be on a revenue reduction if that were to occur and we were to see some further erosion. And so that's how we, so we had a target of what kind of expected savings we felt we really needed to generate to maintain the our ability to have, you know, good gross margins and operating margins and to continue to cash flow properly and, you know, keep the business running well. And, you know, as we come out of the quarter, as we come out of Q2, we're going to know if things are – how fast things are coming back, and we'll figure out – and certainly we can – if there's one thing we know how to do is to manage our cost structure and to manage it well within the revenue we have. And, you know, with Q1 happening so quickly, there's not a whole lot you could do in a you know, even with a few weeks' notice, we were able to put things in place to make sure that we, you know, preserve Q2 and are in a position to improve and lean the business going forward.

Okay, great. Thank you for all the color.

Thank you, Lisa. Thanks. Thank you. Our next question comes from Bruce Jackson from Benchmark. Please go ahead.

Hi. Thanks for taking my question. Hi, Bruce. Hey, I wanted to talk about the academic market here briefly. So, A lot of schools sent their students home for the rest of the year. There's still some debate as to whether things are going to open up again in the fall. Can you tell us a little bit about your customer base, and do these researchers have projects that are fully funded? Do you think that they're likely to start up again with their projects in the fall? Can you give us kind of a sense of how stable that revenue stream might be and how fast it might come back?

Sure. Yeah, I can tell you that certainly, as you all know, the budgets had already been set. So the researchers and the labs had pretty good budgets coming in. We also know that NIH has expanded the amount of budget sent and spendable by these academic research labs. So we're excited to see them get back to work. As far as the school year and such, the bigger impact for us is that the researchers come back That's not so much their helpers and students, but the actual academic researchers. We believe, and the indications we get from them is as soon as they'll let them, they want to be back in their labs, and then we'll start to see in each of these areas a ramp-up of border activity. Again, we've already seen it start in China. We're seeing some shoots in Europe. U.S., we think, starts to come back here fairly quickly, too, and you know it's going to come back by state, but as long as the actual researchers are back in the lab, that's the main gating item for us, and then it'll just be a matter of time and sequence as they come online.

Okay, that's great. That's very helpful. And then just a quick question on the income statement. Where do you think you can get the G&A expense down to over the remainder of the year?

You know, that's a good question. I think if you – it's kind of hard to answer it at this point specifically. I can tell you that if you look at the cost reductions that we've loaded in, and we will – we expect to see throughout Q2, because that will be – it's the culmination of – combination of the RIF actions, the restructuring actions that started last year. You know, much of that now will be in our run rate spend for Q2, along with these additional $3 million of actions we'll be in. As we come out of this, we're going to be careful to make sure that we don't add spend unless there's additional revenue that demands the added spend. There are some things we'll look to do as people start to come back full-time. That will also be timed with growth in revenue. So, you know, we'll be matching that to make sure that we keep our drop-down and our ability to, you know, run the business, our ability to generate, you know, solid operating profits and operating margins. So, you know, and specifically in G&A, you know, as we, there are, you know, I always saw as we continue to turn this into a more leaner business, you know, certainly G&A is a piece that improves there too when you have, as you have less sites, you have, you know, do you end up with more of cost centers at some of these smaller sites where you really just have your engineering and maybe some product marketing kind of folks? You don't really need a lot of GNA overhead associated with that at that point. So you're going to continue to see us, you know, move those numbers down as we can. So I think the main thing is, you know, we're managing the costs along with, you know, the revenue we know is coming in and make sure that we, you know, we're building a much leaner platform as a business.

Okay. Thank you for that. And then last question for me, do you have any other new products that are set to launch later this year?

Actually, there's a series of new ones that have been in work and will be launching. We're adding, with the advent of what's happening and the known need to search for antibodies, we think that's going to be moving forward and that's going to be a long-term need, not just for this particular disease, but for a lot more. Some of our products are associated with that, with the plate readers and the multi-well products that you use for isolating and measuring the actual load of antibodies. That we see as a growth area. That's an area that we're putting a lot of effort and thought into now, reinvigorating the biochrome side of the products. There we think even on the clinical side, there's a real room for that to grow. Everything associated with electroporation and CRISPR is We'll be expanding that product line to be able to do more outside of just, typically we tend to be very heavily penetrated in academic research labs and not quite so much in the CROs and pharmaceuticals. But now that we have a really strong relationship, strategic relationships with the largest CROs and pharmaceuticals, you're going to start to see some of those products also be tailored and tuned for expansion into higher volume and be able to be more applicable into those spaces. So I think those are probably the main areas where you'll see more movement.

Okay, great. Thank you very much.

Thank you, Bruce. Thank you. I show no further questions in the queue. At this time, I'd like to turn the call back to Mr. Jim Green, CEO, for closing remarks. Okay, well, thank you again for joining us.

It's been a tough few weeks, a couple of months, But I hope you know that this team, we have the right team in place here to manage this business. The turnaround continues. I think as we see our customer labs come back online, that will continue to drive sequential growth in revenue as we manage our spend rate of the cost of the business. As we keep that down and we get that additional and revenue starts to grow, you'll see better operating leverage. We're excited about this. I think You know, the future, you know, we're excited to be in a position to play a part in what's happening here and to be able to help. And, you know, our belief is as we exit this year, we're going to be right back on track to make this the kind of highly profitable platform, you know, that's run well, that's, you know, highly, you know, that's right in the space of, you know, where this business should be. So we're excited about taking this business to the next level. and again, getting through this year and into 2021. So thank you very much for your time. Have a good evening, and everybody, please be safe. Ladies and gentlemen, this concludes today's conference call.

Thank you for participating. You may now disconnect.