Harvard Bioscience, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Harvard Biosciences Incorporated Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star then 1 on your telephone keypad. I would now like to turn the conference over to your host, Mr. David Soroy. Sir, please begin.

Thank you, Howard, and good morning, everyone. Thank you for joining us for the Harvard Bioscience Second 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 Q2 2020 HBio Quarterly Earnings Presentation and can be located in the Investor Overview Events and Presentations 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, our quarterly report on Form 10-Q for the three months ended March 31, 2020, 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 represent the ongoing economics of the business, reflects how we set and measure our incentive compensation plans, and how we manage the business internally. The differences between our GAAP and non-GAAP results are outlined in the earnings release and today's presentation. These two documents can be found on our website under Investors, 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 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. Good morning, everyone. Let's move to slide four of the presentation and take a quick look at the highlights for Q2. Academic labs were down significantly as anticipated due to lab closures around the globe. I'm glad to say that our combined CRO and pharma revenue remains strong and growing. and that strict cost controls combined with product mix drove strong margins, and we continued to pay down our debt. As we look forward, we are carefully aligning our costs with revenue levels during this expected recovery. We will closely manage cash and expect to further pay down debt. Overall, we expect to be on track to our original September 2019 margin targets. Move to slide five. Quick look at the details. As expected, we were significantly impacted by the COVID-19 pandemic. Q2 revenue came in at $23.3 million, down $6.3 million, or 21.3% from Q2 last year. Gross margin on a gap basis measured 59.4%. That's an improvement of 550 basis points from prior year. Non-gap adjusted gross margin was 59.8%. Again, improving 550 basis points. This quarter had GAAP operating income of $600,000, or 2.4% of revenue. Our adjusted operating income was 4.1 million, so our adjusted operating margin improved to 17.7%. GAAP earnings per share was negative 4 cents, and our adjusted earnings per share was 5 cents, up 1 cent from Q2 last year. Our cash flow from operations was $2.4 million, and we paid down debt by $2.2 million in Q2. Move on to slide six. Take a quick look at our revenue by product family. Starting with the first row of the table, our cellular and molecular product revenue, which is primarily from academic research labs, was down 33%. worldwide as labs shut down and personnel working from home were largely unable to process orders or receive equipment. Looking at the second row of the table, our overall preclinical product revenues were up from last year. This in spite of business from academic customers being down. Growth came primarily from North America and China on expanded demand for our telemetry and system software. As I said, academic revenue in this segment was down due to lab shutdowns. Move to slide seven, and we'll look at restructuring activities and major actions that happened during Q2. Related to the restructuring plan that was announced in Q4 of fiscal 2019, the Connecticut Manufacturing Consolidation and UK Downsizing is on track to complete in Q3. The reduction in force of approximately 10 percent across overall business is substantially complete. As for actions in Q2, We took actions to incrementally save $3 million in Q2 through a combination of temporary and permanent cost reductions. And we see our cost basis for the second half supporting continued strong gross margins and operating margins. Now, I'll turn it over to Mike for a quick look at the key financials. Mike?

Thanks, Jim, and good morning, everyone. On the full P&L, I'll be focused on our adjusted or non-GAAP operating results, which we use to operate the business, and note our GAAP results and related reconciliations to the adjusted results are included in the appendix of this presentation. As Jim noted, despite the impact of COVID-19 on Q2 revenue, we are very pleased to report meaningful improvements in gross and operating margins, and we are on track to the margin targets set out in September 2019. Growth margin performance exceeded any quarter in recent Harvard Bioscience experience at nearly 60% on an adjusted basis due to strong sales of higher margin technologies in addition to our ongoing efforts to lean down our manufacturing cost base. We will continue to push hard in these levers to drive growth margin to greater than 60% on a sustained basis. Adjusted operating income increased versus Q1 2020 and versus prior year despite the revenue decline as a result of our disciplined focus on cost reduction. Q2 operating expenses were $9.8 million or 20% lower than Q1 or prior year due to our restructuring activities as well as temporary measures put in place with the onset of COVID-19. Within Q3, we expect to have substantially completed the restructuring announced in December 2019 as site rationalization activities in the UK and Connecticut complete. Also, we have continued to review our cost structure to ensure we are a lean company on a permanent basis, and actions implemented to date will generate over $1 million of incremental cost reductions on top of the $4 to $5 million anticipated with our 2019 restructuring. All these actions inform our outlook for the rest of 2020, which Jim will speak to in a moment. Finally, on cash flow, we were again able to reduce net debt based on continued positive cash flows due to the cost actions taken to de-risk Q2 in this unique environment. We have reduced net debt by $4.6 million thus far in 2020 and by over $9 million in the past year as a new management team. Our leverage ratio came in in the low threes in Q2, and we are compliant with all debt covenants. We believe we are taking all steps necessary to ensure liquidity is available to service our obligations and to continue to transform Harvard Bioscience. With that, I'll turn back to Jim for perspective on the rest of 2020. Jim? Thanks, Mike. Let's move to slide 11.

Just taking a look forward, we expect combined CRO and former revenues to continue to grow. We expect sequential growth in academic labs as they reopen over the coming few quarters. We will maintain a leaner organization while continuing investment in targeted product lines. and we'll manage our cash flows and continue to pay down debt. In all, we expect the second half of 2020 to be on track to our original September 2019 gross margin and operating margin targets. Thank you, and I'll turn the call back over to the operator to open the line for Q&A. Thank you.

Ladies and gentlemen, as a reminder, if you have a question or comment at this time, please press star then 1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press the pound key. Again, if you have a question or comment at this time, please press star then 1 on your telephone keypad. Our first question or comment comes from the line of Bruce Jackson from The Benchmark Company. Your line is open.

Hi, good morning, and thank you for taking my questions. Hi, Bruce. Yeah, hi. So looking at the academic market in particular, how do you see that unfolding for the rest of the year? Is this something where, you know, so the third quarter, you've got really September. Are academic labs going to start going back in action like now, or could it be fourth quarter before we start to see some growth in that particular market?

Well, we see, you know, all the activities happening now with labs starting to come back. You know, in some areas, the labs are coming back pretty fast. In other areas, it's a little slower. You know, with the continued, you know, situations in the northeast with shutdowns and such, it's a little slower than we would like. But, you know, we assumed it was going to take two to three quarters to get back to, you know, normal type revenue demand. Again, it's kind of a mixed bag. China's come back very fast and very hard, which is excellent. When you look at the U.S., we see it kind of spread out by state. Some states, like in Texas, it's picking up pretty quick. A number of the large academic research sites in the south and in Texas have come back, and we see a lot of order activity there. The northeast is coming, but not as fast as we would like, but They are coming back. The researchers are coming back. They tend to be coming back in cohorts where maybe they're grouping into different groups and then one group will come back maybe a third in a particular week and then a couple weeks later another third will come back. So they're sequencing their way back into the labs and mainly to get their populations reestablished for preclinical testing to get the equipment in place and get ready for not only the things that have come up recently with COVID but you know, all the backlog of work and research that they've already budgeted for. So, again, that's why we're thinking, you know, it would be a, you know, two to three-quarter time frame to really get back up to speed. But the way I'm running the business, we're running it sequentially now. We've taken a tremendous amount of cost out of the business. We're managing our cost structure based on revenue, what comes in. making sure that we stay at the level of profitability we need to be at and that we're able to make investments in targeted products as things come back. But, no, overall, you know, it looks, even though it's, you know, with the big downturn, you know, by managing on a sequential basis, you know, we can gauge this coming back, manage the cost as the revenue comes back, and make sure that we're targeted as to where we think there's going to be strategic new business growth by customer segments. this actually in many ways gives us a chance to tune what is actually easier to do it now in a growing environment like this than it would have been in the past. So in many ways, you know, it kind of helps us organize our way as to what business makes sense to really expand and drive while it comes back and what business might not really be that strategic and should we, you know, not put a lot of effort into it.

Okay, good. Then a quick question for Mike on the debt pay down. The debt pay down was a little bit ahead of our expectations this quarter. So I was wondering just philosophically how you view this. Are you trying to hit a certain cash balance in terms of determining how much you pay down per quarter, or are you trying to hit a certain amount?

I mean, really, Bruce, the way we're looking at it is to – One is make sure we're managing to the covenant expectations. And within that, because there was a, you know, the covenant did step down from Q1 to Q2, but we're all kind of managed well within that. And then the other side of that is I'm looking at just excess liquidity I have with, you You know, so that's – we've got about $7 or $8 million at the quarter end of untapped revolver there to deal with. So I really look at kind of total excess liquidity. So call that, you know, $9 to $10 million going into the second half, which we look at as, you know, very – you know, any kind of downside scenario, we can withstand that easily.

Okay. And, Bruce, I would also add that by showing that we can drive our leverage ratio down below three, it makes it easier for us to look at the commercial refinancing activities, which, of course, now we're looking at. We think as the banks are coming back, we're going to find a nice opportunity there.

All right. Great. That's it for me.

Thank you.

Thank you, Bruce.

Thank you. Our next question or comment comes from the line of Lisa Springer from Singular Research. Your line is open.

Thank you. Good morning. You mentioned during the presentation that product mix was a factor in driving the gross margin improvement. Could you provide a little more color around that in terms of the product mix?

Sure, sure. We're seeing strong growth on the preclinical side. our implanted telemetry products that are used in conjunction with our overall systems. You know, we are the leader with pharma and CRO companies and with very large academic sites that do the kind of final preclinical testing prior to going into human clinical testing. So that's what's been ramping up, and, you know, a number of things have been driving it, just the general overall demand for capacity, because now all of a sudden there's going to be all these – you know, vaccines and treatments for COVID on top of what is, you know, planned just for the standard aging population of drug development. So there's just a generalized, you know, demand there. Those products are among our highest gross margin products. So growth in that space is really positive for our mix. And then, again, when you look at the academics as they come back, a lot of our focus is on the largest academics that in many ways look a lot to us like a pharma or CRO company. They're doing the same kind of testing. They're also picking up demand in those areas. And then that, along with our inhalation product, though it's not a very large number to start because it's fairly recent, it's right in target for what's needed here now as we get into testing for you know, for, you know, COVID and other type of communicable diseases. So, you know, again, it's the right things are growing, and we're putting investment into that area because that's got the greatest tailwinds right now. And, of course, you know, in looking at the portfolio for the rest of the academic side, you know, this gives us an opportunity to be selective as to where we think there's real strategic tailwinds, and that's what we're focusing on now is making sure that those products are ready as that demand develops.

Okay, great. And could you comment on restructuring costs in the second half of the year and how it may break down September versus December quarter?

Mike, do you have a number on that roughly? Yeah, I mean, so Lisa, what I'd say is, you know, I talked about the additional cost savings we've gotten. We had the $4 to $5 million initially from December. I'd say there'll be another, you know, million or so that comes to that additional savings, but But net, it's probably about a million and a quarter of cash out that we'll see on the restructuring costs in each quarter, Q3 and Q4.

Okay, great. And could you comment on new product launches in the second half of the year? Do you have anything lined up to go?

Yeah, we do. We had introduced the new inhalation product, and immediately upon introducing it, we saw a lot of order activity. It's building backlog very quickly. that's going to result in a nice additional vector of growth for the business. Also, on the cellular-based testing side, that's an area that we see expanding more into places where they had typically only used non-human tests. So that's going to help. And then, you know, we're looking at, you know, there's just a standard demand for the telemetry and being, as we build on getting, becoming the, you know, the standard for the systems, you know, then that puts us in a situation where, you know, the consumables and the implantables, you know, all have to come from us. So that helps us out a ton. But no, we're also looking at a few of our products, as many people know, you know, really haven't been invested in well for a while. And, you know, we are in process with a number of them that are going through, you know, rejuvenation with adding new technology, making them more network compatible that will provide more opportunity for expansion. But, you know, at the same time, we're looking at what are some of the things that maybe really don't make sense and really aren't strategic and really probably shouldn't be a part of our portfolio. So we'll be looking at those as far as Some of them we've already worked to take out of the market, either price them up and out or potentially sell them off. So we're going through that rationalization process. And as we get to the end of the year and into 2021, we're going to have the right portfolio for our customer segments. That means what pharma and CROs need. That means what large academics need. And then overall, based on needs and growth for the future.

Excellent. And final question for those of us that have short memories. Can you remind us what the September 2019 gross and operating margin targets were?

Sure, sure. You know, you remember when I came on board and took over as the operating CEO, about three months into it, I put public targets out and said, here's what we expect to do. Basically, 2019 was stabilize the business, start to build a team, make sure we hit the numbers for 19th. 2020, what I said publicly was I felt the second half of 2020, the first half I knew would go through some changes and restructure things and we get the right people in place. I didn't really at the time know that we were going to have a pandemic thrown at us at the same time. But as you can see, we took pretty aggressive actions to deal with that right away. And our targets for the second half of this year were to show gross margins around 58% and operating margins around 17, 17 or so. Is that right, Mike?

That's exactly right. Yeah, stepping up from 56% in like 12 to 13. So it's 58% in 17 is the gross and operating margin target.

I felt by making these changes, and again, with the COVID thing, it really gave us an opportunity to make the changes quickly. It kind of forced us to, which is good. and put us in a position where we look pretty good for coming into 2021. The targets I set there were pretty aggressive, 60% gross margins, operating margins at 20%, and start to see an organic growth vector based on adjusting the portfolio and having the right portfolio and having a professional quota-based sales team who calls on these large accounts. So 2021 looks really good, but right now we're in 2020. We're going to close out the second half strong. We're positioned to do it. And, again, glad to get back on the original track in spite of the whole COVID thing.

Okay. Well, that's it for me. Thank you very much.

Thank you, Lisa.

Thank you. Again, ladies and gentlemen, if you have a question or comment at this time, please press star then 1 on your telephone keypad. I'm sure no additional questions in the queue at this time. I would like to turn the call back over to management for any closing remarks.

Sure. Thank you. Again, this is Jim Green. Thank you very much for joining us. This ends our presentation for today, and thanks for being an investor with Harvard Bioscience. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everybody have a great day.