Harvard Bioscience, Inc.

Good day, and thank you for standing by, and welcome to the Q1 2021 Harvard Bioscience, Inc. Earnings Call. At this time, all participant lines are in 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 1 on your telephone keypad. If you require further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Dave Schwarz. Please go ahead.

Thank you, Amanda, and good morning, everyone. Thank you for joining the Harvard Bioscience First Quarter 2021 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 Q1 2021 HBio Quarterly Earnings Presentation and is 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, 2020, our subsequently filed reports on Form 10Q, 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 business, reflects how we set and measure our incentive compensation plans and how we manage the business internally. The difference between our GAAP and non-GAAP results are outlined in the earnings release and today's presentation. These two documents, as well as a replay of this call, 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. I will now turn the call over to Jim. Jim, please go ahead.

Thank you, Dave. Good morning, everybody. Why don't we go ahead and move to slide four of the presentation, take a quick look at the highlights of the quarter. Revenue was up 14% year over year on strong order growth. Adjusted operating margin improved to 12% versus 2% in Q1 of last year. That's up 10 full percentage points, and our best Q1 in years. Our preclinical product revenue was up 24%, driven by North America and Asia. Cellular and molecular revenue increased 3%, with strong order growth. However, revenue was impacted by global supply chain issues. And net debt was reduced by $2 million, and our leverage ratio is now below 2.5 times. As we look forward, we're increasing our revenue outlook, now expecting 10% to 14% growth over 2020. up from our last quarter outlook of 8% to 12%. And remember, this includes about $5 million worth of low-margin products pruned from the portfolio over the last couple years. We still expect adjusted operating margin improvements to get to the mid to upper teens. And going forward this year, our business high-value organic growth, improved marketing, and exciting new product introductions. We move to slide five of the presentation. We'll look at some of the details. As expected, we continue to see revenue improvement with Q1 coming in at $27 million, up 13.5% over last year. Gross margin came in at 57.2%. That's an improvement of 260 basis points. This quarter had a gap operating loss of minus $200,000, or 0.9% of revenue. Our adjusted operating income was $3.2 million, so our adjusted operating margin improved to 12%. Gap earnings per share was negative two cents, up from negative 12 cents last year. Our adjusted earnings per share was five cents, that's up from a negative one cent last year. Our cash flow from operations was $1 million, and we've paid down our debt by $2 million in the quarter. Move on to slide six, look at the revenue. in the quarter 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 up 2.6% from last year, with revenue shipment delays caused by global supply chain disruptions in a number of our materials. However, we expect continuing improvement as academic labs reopen with strong quarter growth and improving revenue shipments as the global supply chain resolves. Looking at the second row of the table, Our preclinical product revenue was up 24%, again driven by strong order growth in our core customer segments of CRO, pharma, and academic labs in North America and in Asia. And we're seeing very strong growth in academic labs in this area, especially with our new inhalation systems going out. Reported revenue grew 13.5%, and on a constant currency basis, our revenue grew 10%. Moving to slide seven, take a look at the major activities in the quarter, starting with some of the items that drive growth. Our North American sales realignment is complete with expanded territories and improved coverage, and momentum is growing in incremental product cross-selling, especially with our historical cellular and molecular products now selling to our preclinical customer segments. We introduced nine new or improved products in January. Our backlog increased significantly, and we're managing our global supply chain risk to maintain strong growth. On the cost and cash flow side, we have communicated our final restructuring actions in Europe to complete our lean initiatives and expect to finish this in the first half of this year. I'm happy to say that we've reduced our debt leverage to under 2.5 times, driven by significant improvement in adjusted earnings, ongoing positive cash flow, and continued pay down of our debt. Now I'll turn the call over to Mike for a quick look at some of the key financials. Mike?

Thanks, Jim, and good morning, everyone. We are very pleased with our start to 2021 with the payback from staying focused on executing our original 2019 Strategic Action Plan coming through in our results and our outlook for 2021. As a reminder, we report adjusted results for P&L performance, which aligns with the measurements we use to run the business and reconciliations of adjusted results to GAAP are included in the appendix of this presentation. On the P&L, while our year-over-year results are favorable in part due to the rapid volume loss in March 2020 with the onset of the pandemic, the P&L reflects a fundamentally stronger business with adjusted operating margins, outperforming NP1 in recent company history despite our CMT product revenues still recovering to pre-COVID levels as academic labs remain below normal productivity. This improvement is a trend we expect to continue for the full year of 2021, as reflected in the outlook. Gross margin improved year-over-year on volume, and with improved product mix associated with strong sales of our higher-end solutions and a number of low-margin products removed from the portfolio at the beginning of the year. We will continue to see improved gross margin due to product mix trend theme Q1, as well as new products released in January and overall sales growth. All told, we are on track to the 60% plus gross margin target we've been executing towards since 2019. Adjusted operating income increased due to the strong revenue recovery and product mix noted, as well as cost reductions implemented over 2020. Operating expenses were down modestly versus prior year as we removed inefficiencies and waste with our lean focus while reinvesting in commercial and marketing capabilities to support strong, sustained revenue growth. Additionally, variable compensation increased with higher sales incentive and bonus accruals. Our incentive plans in place for 2021 are well aligned with our top line and margin expansion goals reflected in our outlook. As noted previously, we have communicated final actions associated with our turnaround and restructuring program, generating approximately $7 million in annualized cost savings from original run rates. Implementation of these final actions consolidate engineering, from small European sites into larger centralized design teams, is on track for completion in Q2. With these activities complete, our full attention is on optimizing and growing the business. On cash flow and debt, we are very pleased to report our leverage ratio, our debt to adjusted EBITDA, is now less than 2.5 times. Net debt came down an additional $2 million in Q1. and a soft Q1 2020 bottom line is now annualized, leading to a significant improvement versus roughly three-and-a-half times leverage one year ago. Cash flow from operations is lower than prior year due primarily to higher working capital in line with higher revenue and a strong outlook. Customer collections remain strong and stable, and given the dynamics of the global supply chain, our inventory focus is to keep supply available to fulfill our growing order volumes. With that, I'll turn it back to Jim to discuss our full year outlook. Jim? Thanks, Mike.

Okay, let's move to slide 11. Looking forward, with most of the structural improvements behind us, this year our primary goal is sales growth driven by improved sales effectiveness, marketing, and new product introductions. We expect revenue growth on a reported basis to improve to approximately 10% to 14% versus 2020. We see preclinical tailwinds. and overall sales execution providing a sustainable growth foundation. Academic labs are expected to continue recovering throughout the year. Portfolio rationalization pruned low-quality revenue of approximately $1 million against our FY19 baseline and another $4 million against FY20. Risks do remain on the potential impact of global supply for certain materials, which we are managing very closely. We still expect strong adjusted operating margin improvements to reach the mid to upper teens range. We expect gross margin expansion on increased volume and improved margin mix. And finally, we will continue investing in sales and marketing and R&D that support our long-term profitable growth plans. Thank you. Now I'll turn it over, turn the call over to the operator and open the line for Q&A. Thank you.

As a reminder, if you'd like to ask a question, please press star followed by the number one on your telephone keypad. That is star one to ask an audio question. Your first question comes from Paul Knight with KeyBank.

Hi, Jim. On the CMT growth of 3%, what kind of supply chain issues is it? Is it getting stuff somewhere, polymer shortages? Could you give a little granularity on that?

Sure, sure. It's really pretty much in line with some of the things you read about with the automobile manufacturers. You know, we use the same kinds of electronics and chips. There's certain types of plastics that have been a problem. A lot of it's just taking a longer time. What we're doing is I've told the team, you know, we're not cash starved anymore. I don't mind running a little heavier on working capital. We're buying more in advance, and we want to make sure, and again, We always look to make sure that if we're going to buy in advance and take more risk on something that may not have orders in hand for it, that they're things that we're confident are not going to obsolete. So I expect that it will take a little while. You know, we're working on them. We have times, you know, established for the products or for the technologies and materials that are running a little low. But, you know, again, we don't see lost revenue. We see delays. That's why we saw, you know, a pretty big increase in our backlogs. this quarter. And you know, some often people say, well, big backlogs, not a problem you want, but you don't want it for too long. Because you don't, you aren't shipping fast enough, sometimes you could start to lose customers. So we definitely definitely have a handle on it. But it is an issue. But it is more on the raw material supply side.

Right. And then you had mentioned, you know, professional marketing new products. Are you there is the program in place for continuing high growth or maybe faster? Could you talk to what you've done, and then what do you think, or are you willing to say what you think your normalized growth rate? Is it 14% like this year? Is it double digits? Is it high and single? Could you touch on that two-parter for me? Thanks.

Sure. Certainly on the improvements that you're seeing and we'll see on the marketing side, Ed, That's an evolving effort. We started with getting one of the big holes was effective product line management, having a good understanding of the product lines and the market and pricing and needs of the customer. That's come along very well. We have a substantial improvement in our product literature. We're now working with a company that's going to take our – we're going to end up here soon with what I would call a very professional website that ties the brands properly. You know, we don't want to lose – you know, this was – this company was – and I've described it as a basket of brands in the past. You know, it's now – you'll start to see it come together, you know, under the guidelines of Harvard Bioscience being the – you know, being the technology driver behind these brands. We're not going to lose the brands, but you'll start to see that – you'll see that evolve to where it's much easier to understand. And then, you know, which also then supports our cross-selling activities. So that's coming along. You know, it's probably going to take a year for that to really be, I would say, in a more final state. But it is, you know, every quarter there's an improvement. You know, as far as the – you know where the tailwinds are in this business. We have tailwinds certainly in the entire DSI portfolio. You know, the inhalation products, since we introduced that new system, I mean, that's just taken off like crazy. perfect timing and a new area of growth. And what's funny, not funny, we originally thought that much of that growth would be CRO and pharma. We're seeing a lot of expansion of that portfolio into academic labs, even though the academic labs aren't really back yet. So the products that we see expanding, we have anything associated with electroporation, gene splicing, the CRISPR-related products, certainly that's got a ton of tailwind for us. You know, the The telemetry and the systems that we sell through our preclinical space, those are doing really well, and the cross-selling activity is really picking up. We're finding that the account management structure that we had for the CROs and pharma is really an effective way to distribute some of our larger, higher-priced products that were historically only sold through the CMT side. So, you know, there's certainly things that make a lot of sense, and you can see that we're adding products. We're back in the product development world, so that has to be a part of this. You know, your question about what can we underpin as far as long-term sustained growth, I mean, certainly you have to know that I would be disappointed if I can't deliver double-digit growth, especially where we are in this business. You know, but for this year, as everything recovers, You know, I think it's fair to say we've been a little conservative on it until we have real evidence and we see the sustained numbers coming in and we can model them. You know, the way I like to model it is by, you know, the simplest way is your number of reps times their quota and then, you know, organize it around how well you're performing. So there's a number of ways to do this. So in general, you know, I feel like, you know, we're going to have a good solid growth platform here. I started off saying, look, if I can get this to somewhere in the 6% to 8% range, that was good. I think the market felt that was good. But I think given the space we're in, we're going to work to do better than that. That's probably about all I can say about it right now, but we're certainly going to work to do better.

Then lastly for me is when I look at electroporation, gene splicing, and other products related to cellular-level research, what's the portion of your company exposed to those type of markets, and what do you think those products are growing at if you can smash them together like that?

Yeah, it's hard. The thing that's affected us in that area, like everything, is we have had some supply chain issues with certain components. But, again, we're working to solve that. There's definite growth. We see nice order intake growth in that space. You know, we're still fairly limited in the gene slicing and CRISPR area in that we primarily sell just to the academics in that space. Now, clearly there's a lot more research coming that way, so it's still a great place to have exposure. But you're going to see us working to have a newer generation come out of that product, you know, one that will be even more compelling into the academic space. We're also eyeing at what point we want to maybe need to get to a higher volume product type of technology that we would use, you know, based on this technology, be able to move this into slightly higher volume areas to expand other types of customers that will want to use this on a larger basis. But, you know, again, the immediate growth and the demand is in the academic side with all the new things happening. You know, this is a perfect product that's involved with – heavily involved with anything to do with, you know, vaccines and, you know, some of the new drugs coming out. So it's a great place to be. It's an area that we have a lot of interest in. I think you know it hadn't been invested in, I guess, for a while, which I guess I have to look at that as an opportunity because now that we are going after this, it's a nice opportunity for this company. Okay. Thank you. Thanks a lot, Paul.

Your next question comes from Tim Chang with Northland Securities.

Hi, Jim. Good quarter. Hi. Why don't we get your thoughts on just academic labs? You know, are you starting to see some hints that the labs are going to start to reopen? And, you know, when do you think that will happen? Will it be this summer or more likely this fall?

Yeah, you know, our feeling is it's a little bit of a mixed bag depending on where you are. You know, we see the lab business already moving up fast in Asia and China. North America a little slower because, you know, it's just a time of bringing people back with, Some states, like Manchester, where you have a ton of labs, it's just taking a while to get people back in. And then also you don't have students back in yet in many places. And you do need the students, too. The researchers, they've been struggling to get them in on a rotating basis. So I think to answer your question, in the U.S., we think that if we get here to the fall semester, that we're going to see that really pick up. Europe is a little different there. I mean, Germany and the U.K. have had some hard shutdowns. And, you know, even if the researcher can come in, they often haven't been, and they've been told not to come in often. And even if they do come in, you may not have the people in there that you need to process orders and, you know, pick up shipment and so on. So our thought there is that Europe is going to trail by probably a couple quarters. We're probably looking at best at the end of the year for most of Europe to really be back to the kind of capacity that we would expect. The really... great news that we've seen is so much of our growth on the preclinical side is in expanded use of our telemetry products and the inhalation products in academic lab settings. So, you know, I think we were so concentrated on seros and pharmas there that, you know, we kind of lost sight of probably one of the bigger prizes is needing those same types of products in the lab that are trying to create any spin-offs where a lab starts to build these cores and they spin off what's what starts to really look like a proxy for a small pharma company or a small CRO that's spinning out. They get funding. They need to build their own lab. We help establish the full suite to get their lab up and running based on what they're trying to do. And if they're trying to get to the point where they're getting through the full preclinical phases, they need products like ours. And that's, again, even without all the labs being back. So there's clearly going to be some nice pent-up demand that's going to develop as they all come online.

Let me just one follow-up, Jim. I guess, you know, obviously you have some supply chain disruptions. I mean, how long – how do you sort of quantify, you know, how big that disruption is at this point? And, you know, how much time do you think it will take to sort of offset that?

I mean, is this going to be a quarter or two where you think things – Yeah, I think you're – we're thinking it's going to be a couple quarters for it to really clean up. So, which means that, you know, we'll, you know, certainly our backlog, again, lots of nice growth on the order side and, you know, good growth on revenue, but, you know, it's been constrained. It will clear up. You know, we know how to do this. I've got pros in here now doing this with me. But it's going to take some time because a lot of this is electronics and things, you know, where they're spinning up and bringing a boundary back online. You know, we compete with, you know, Tesla and everybody else for some of these, the kind of chips we use, ASICs. So, you know, we... It's a lot of work to work around these supply chain things when they happen. But it will resolve. I mean, again, we're believing for probably a couple quarters before we're at, you know, like real run rates on the shipment side. Okay, great. Thanks, Jim. Thanks, Jim.

And your next question comes from Lisa Springer with Singular Research.

Hi, Lisa.

Thank you. Hi. Congratulations on another good quarter.

Thank you. Thank you.

Tim, could you give us – you mentioned you've introduced nine improved or refreshed products since January. Could you give us one or two examples of how they were improved and how meaningful that was in terms of, you know, marketing the product?

Yeah, you know, when you introduce the product, it's usually, as you expect, takes a little while to get the adoption, but the first thing it does is it gets excitement, generates a lot of excitement with your sales team and with the customers that now see things, you know, really refreshing and some new technologies. You know, the first – The biggest one, of course, we've talked a lot about is, you know, which was the inhalation technology, which just took off. That was a great product for us. Now we introduced that last year. You know, with the other products coming out, there's a series of improvements and new technologies in the cellular testing area, also in some of the Biochrome products, the things that use where you're measuring – looking at specific molecular weights of certain molecules and so on. So it's kind of a lot of base instruments that are used. I don't have the list of all of them, but that was clearly, I mean, you start to roll through those. And we've got, I think, something like six new products teed up that will be coming out here with our sales organization and our sales meeting that goes happens in June. So usually the heartbeat is about every six months. You'll see a handful of new products that come out. You know, some of it's refreshing, some of it's new. But that is something you have to have as a technology company. You can't just sit with old products, you know, getting along in the tube. You have to be refreshing the product line and introducing new technology. So it's part of the driver for the company.

Okay. And my next question I want to ask you about, do you have a target for leverage by the end of the year? What's your comfort level with your current leverage?

Well, you know, we've been, you know, we aren't right now in the market to be using the balance sheet for anything other than really making this a great growth business right now. I said from the beginning, you know, if we got to the second half of this year, you know, we're going to have a much better balance sheet. At this point, certainly we feel like we'll be under two times on leverage at the end of the year. You know, we don't, the company doesn't consume much capital, so, you know, EBITDA drops to cash mostly. And as we get into the year, but the thing we're looking at now is, you know, some of these adjacency that might make some sense, you know, to bring in some inorganic technologies to fit this out with portfolio. I'm not working hard on that right now. Right now, we're just looking at making sure we really understand it because so much opportunity just to get the sales force correct, to get the coverage right and the depth of coverage and the product portfolio right. That's when you start to know, you really look at, well, what are the right kind of maybe additional products? And then we have a choice. Do we invest? Do we make them? Do we make them you know, organically? Do we make capital investment for, you know, adding some of these new products, you know, or do we do, or some of these, you know, might be acquired things? But, yeah, either way, I mean, you'll see the debt continue to come down, a lot more opportunities for us on how we use the cash.

Great. Thank you, Joe.

Thanks, Lisa.

And we have time for one last question, and that question is from Bruce Jackson with Benchmark.

Hi, Bruce. Hi, good morning. So the springboard off the last question, looks like R&D kicked up a bit this quarter. Do you have an R&D spending target? Prior to the downturn, you were spending like maybe about $11 million annually. So what are your R&D spending plans right now?

We were somewhere around 8% of revenue. So, yeah, somewhere around that 11-ish. I don't see it needing to jump up high right now. I mean, you know, we're still – loading up and getting, you know, getting the rest of it together, getting it right. But certainly there are some areas that we have to make some investments. And I expect as we grow, as revenue grows, we will certainly be – and, of course, you know, operating leverage and profit, we will be applying more on an absolute basis in R&D. And there will be some, you know, much of it's, you know, op-ex, but they'll probably also be looking at some capital spend to – you know, as some of these new products ramp up and new technologies and, you know, as you get into tooling and such. So there'll be some increase there. Again, I kind of like saying at a, you know, kind of that 8% to 9% of revenue is kind of a safe place. You know, I think we have – it forces us to be efficient in the use of R&D. But I'll tell you, you know, we're flexible enough if something really became compelling and we needed to throw a little more at something, you know, we have the ability to do that.

Okay, great. Okay. And then I know September of 2019 was a long time ago, but you laid out a 60% gross margin target at that point. Do you think you could still get to 60% gross margins by the end of the year?

We do. We do. We expect that we'll be at 60-plus as we get into Q4. So, yeah, exactly. I think that was a good target, and it still makes sense. And a lot of it is natural. because much of the cost structure is already taking place now, and as we get to more efficiencies, a little better scale, and with the product mix improving, it naturally happens for us.

Yeah, because all the pruning done and the focus on the sales channel and hiring products, that's really improving the mix a lot. So I'd say, Bruce, we have a very clean path as volume comes back to – So that's 60% plus. It's probably not this year. The full year is at that, but we'll be at that run rate in the second half of the year. You know, we'll have confidence on that.

All right, great. Thank you very much for taking my questions, and congratulations on all the progress.

Thank you, Bruce. Thank you.

And now I'd like to turn it back over to our speakers for any closing remarks.

Okay, thank you. And thanks for joining us in this in-state presentation. We hope you'll join us in, I guess it's in August, that we'll show you adults for our second work. So thanks again, and we'll see you soon. Bye-bye.

That does conclude today's call. Thank you for your participation. You may now disconnect.