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spk00: Good day, and thank you for standing by. Welcome to the Harvard Bioscience third quarter 2022 earnings 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 1 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Dave Sorois. Please go ahead.
spk01: Thank you, Shannon, and good afternoon, everyone. Thank you for joining the Harvard Bioscience Third Quarter 2022 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 Q3 2022 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 31st, 2021, our subsequent quarterly reports on Form 10-Q, 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 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, 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. Thanks, David. Good afternoon, everybody.
spk04: Let me start by saying that in spite of a rough third quarter, we continue to work through actions to dramatically improve our portfolio and resize the cost of our organization by the end of Q4. Let's go to slide four of the presentation and take a look at the highlights for the quarter. Revenue of the quarter was $26.9 million, down 9% from a strong Q3 prior year, with 6% growth in cellular and molecular more than offset by lower sales of preclinical, which was down 17%. Reported revenue includes a $1 million impact from unfavorable currency, and we experienced a very slow summer with lower sales to CROs and pharma across the regions. And we continue to see a rotation out of obsoleted low margin CMT products sold mostly through distributors. Adjusted operating margin came in at 2.6% versus 13.3% last year, impacted by lower sales of preclinical products and higher cost of goods in the quarter. Gross margins came in at 51%, down from 56% last year, impacted by inflation and lower absorption and E&O charges. We had a poor mix in the quarter as we finished manufacturing of the low margin products being obsoleted. Cost of goods was significantly impacted by lower preclinical revenue to absorb fixed overheads. Free cash from operations was $700,000 and net debt was roughly flat. Finally, as we previously announced last July, we're preparing for FY23 with portfolio and restructuring actions on plan to complete in Q4. which are designed to underpin our goal of 58 to 60% gross margins and EBITDA margins in the high teens. Let's move on to slide five. We'll look at the revenue in the quarter by product family, which shows Q3 22 revenue adjusted to reflect 2021 exchange rates. Starting with the first row of the table on a constant currency basis, our cellular molecular technology revenue was up 6% from last year. driven by the strong performance of our direct sales team. We had solid growth across geographies, driven by strength of our cellular products in particular. CMT grew despite reductions in obsolete non-strategic lower margin products sold through distributors. Looking to our preclinical products, again on a constant currency basis, revenue was down 17% from a strong prior year. European CROs and pharma sales of telemetry and inhalation systems was down significantly from a strong prior Q2. In Asia Pacific, China is recovering but had a tough comparable to a large prior year telemetry sale, and lower sales in other APAC countries impacted negatively on the very strong dollar. The U.S. was slower in Q3 on lower telemetry sales to CROs, though we see the pipeline improving here in Q4. The strong U.S. dollar compared to the Euro and British pound drove a current the impact of $1 million, which will likely continue to hurt us through the year. Let's move to slide six. I can tell you a little bit about some of the exciting new product introductions. Starting with our cellular molecular technologies, after the quarter ended, we received a large order from a top pharma company for our BTX electroporation systems for use in bile production. This order will begin shipping in Q4. Over the longer term, this opportunity is expected to ramp to over $1 million annually, primarily driven by consumption of our unique flat pack reaction chambers, augmented by expanded services. Furthering our initial inroads, we see an emerging value proposition for our BTX system in bioproduction, which is often used today in pharmaceutical research and development to create the initial strains of the therapeutics. BTX electroporation has the potential to provide an ongoing stream of flat-pack consumables revenues that benefits from the production quantities in addition to those used in research and development. Secondly, after the quarter end, we introduced the new U7500, our premium spectrophotometer building on our well-known ultra-spec line. This system replaces three existing models and is designed to penetrate pharma CRO companies and top academic labs. Lastly, continuing to drive market leadership in preclinical wireless continuous monitoring, we also introduced our exclusive continuous monitoring glucose implant. This new implant allows for continuous monitoring of glucose levels and avoids the cost, inconvenience, and variability inherent in periodic manual sampling. Glucose monitoring is expected to be an incremental growth driver in academic labs, government labs, and pharma companies, in the pursuit of solutions to the ever-growing problem of obesity and diabetes. This new line of implants is expected to add over half a million dollars annually to our business. Now let me turn the call over to Mike for a quick look at Key Financials. Mike?
spk03: Thanks, Jim, and good afternoon, everyone. As a reminder, my discussion will focus on adjusted results for P&L performance, which aligns with measurements we use to internally manage the business. I'll skip over slide eight with the data table and go right to page nine to go through the full financials. On gross margin, we reported 51% for the quarter on an adjusted basis as compared to 56% in the prior year. This decline was due to higher costs associated with inflation, including uniquely high levels of price increases and electronic components, which we see moderating on a go-forward basis. Fixed cost absorption was also a major driver given the revenue decline noted. compounded by the decline in sales coming from our preclinical products, which carry higher than average gross margins. Despite these short-term headwinds, we see go-forward traction in gross margin improvement with continued ability to increase our prices to our customers, and the mix within cellular and molecular technology sales continues to improve, with niche cellular products delivering higher growth within CMT. CMT and overall gross margins will improve meaningfully with the portfolio and restructuring actions Jim has discussed. Gross margin for the quarter on a GAAP basis was 45% due to $1.4 million of charges associated with these portfolio and restructuring actions, which relate to products manufactured in our largest CMT facility, primarily inventory write-downs for low-margin products we will exit in the coming months. Adjusted operating expenses were up approximately 3%, with higher labor costs associated with inflation and R&D investment growth, primarily related to investments in our next generation telemetry products, but also supporting the new product introductions Jim discussed. Adjusted operating expenses were down sequentially from Q2 2002 by approximately $800,000, reflecting initial benefits from the restructuring actions Jim noted, as well as lower overall discretionary spending than originally planned for 2022, given the softer revenue trends noted. While headcount grew in the second half of 2021 and early 2022, in reaction to the supply chain and labor dynamics that emerged over the last year, the restructuring plan we're finishing now will have headcount down approximately 10% from Q2 end, with a workforce we believe can support growth and operating leverage in 2023. Adjusted operating income for Q3 is down meaningfully due to the factors noted above, most notably due to the drop in revenue discussed, which we believe represents a trough quarter for revenue due to the unique end-market slowness experienced this past summer. On cash flow and debt, net debt is up $4 million over prior year due primarily to the legal sediment we've discussed previously. Cash outflows related to this matter ended in Q2, and with improvements in work and capital in Q3, particularly DSO, we were able to generate $600,000 of cash flow from operations and keep net debt essentially flat at $45 million. For the rest of 2022, we expect net debt will be at a similar level at Q3. We expect to maintain strong collection efforts and to bring down gross inventory levels in Q4. However, networking capital typically increases overall in Q4 due to higher sales seasonally. Restructuring and transformation costs for Q3 were $1.7 million, with inventory write-downs and severance costs associated with the portfolio actions and restructuring. These costs were partially offset by a reversal of accruals associated with the litigation. The line item detail of these costs are included in the GAAP and non-GAAP reconciliations included in this presentation. We anticipate up to a million dollars of additional charges in Q2, or in Q4, rather, to complete the restructuring plans noted. Importantly, with these actions, we believe the major restructuring initiatives needed to construct the growth platform we've been discussing are behind us exiting 2022, and we're planning for significantly lower transformation costs in 2023. CapEx in Q3 was 400,000, or 1.3 million year-to-date, with manufacturing and technology infrastructure investments made. CapEx will be lower near term given the focus on cash flow improvement and deleveraging. Our leverage ratio or total debt to adjusted EBITDA at Q3 end is 3.9 times, up from 2.7 at year end due to the softening earnings, particularly in Q3. As you will see in more detail in the 10Q to be filed shortly, we recently secured an amendment to our existing credit facility which increases the maximum leverage ratio coming in and provides room for the company to complete its restructuring activities launched in the second half of this year. We believe this amendment, combined with the plans we are executing to set up 2023, which includes reducing inventory levels, which spiked up over the last year due to address global supply chain dynamics, provides us the flexibility needed to continue to improve the business and deliver improved margins and cash flow, and ultimately return us to sustained leverage below three times. Jim will give initial thoughts on the 2023 margin targets in his conclusion, and we are all laser focused in accompanying this with strong positive cash flows and deleveraging in 2023. With that, I'll turn it back to Jim to discuss the full year outlook. Jim?
spk04: Thanks, Mike. I'm moving to our summary on slide 11. First, looking at the upcoming fourth quarter, we expect fourth quarter revenue in the $30 million range. We see sequentially improving revenue and an improved product mix returning our adjusted gross margin to first half range and adjusted operating margin to the 14 to 15% range. Plus, improving inventory and working capital management will further improve cash flow. For the full year, FY22, we expect revenue of approximately $115 million, gross margin in the 55 to 56% range, and adjusted operating margin in the 9 to 10% range. Despite a challenging third quarter, we continue to drive the transformation of our business to the profitable growth-oriented platform we envision. We're on target to complete obsolete and low-margin non-strategic product lines by the end of Q4, this in combination with resizing and leaning manufacturing overheads and reducing operating expense also by the end of Q4. These actions support next year's targeted gross margins in the 58% to 60% range and EBITDA margins in the high teens. New product introductions and improved portfolio with pricing power will underpin profitable organic growth for the future. Finally, our transformation costs are expected to be significantly lower with restructuring essentially complete at the end of Q4. Thank you. Now I'll turn the call back over to the operator and open the line for questions.
spk00: Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Paul Knight with eBank. Your line is now open.
spk02: Jim, how are you? What's your goal now on organic growth potential?
spk04: Well, when I think about next year, our plan organically is to, you know, we're rotating out of something like $5 to $6 million of non-strategic low-margin products that typically sell through distribution. So I'm looking next year to get back to that kind of mid to upper single digit on a reported basis, and a little better than that when I re-account and look at a pro forma view as I extract out the revenue that we're no longer selling next year. So roughly speaking, somewhere in the neighborhood of 10 to 11% on a pro forma basis, and then, again, accounting for the revenue that we're exiting, probably somewhere in that neighborhood of 6-ish percent on a pro-pharma basis, or actually, I mean, on a reported basis.
spk02: And then on this BTX electroporation configuration, you're mentioning that you had a sale to a major pharma company, Is there more pipeline behind that?
spk04: Yeah, we've been working on this for a while. We've been very well known in the initial discovery of the various new drugs coming out. Our BTX electroporation system has been used for a very large number of new drugs, including things like the COVID vaccines. But historically, we were typically only used either in the development of the initial drug, either at the research labs, academic labs, or in the pharma companies, but not necessarily in the production, bioproduction of those drugs. What we've been working on is the ability to provide a bridge from if someone's using our equipment to generate the first line, if they're gonna be using electroporation in the line itself, we're now working and offering the ability to transition from that creation of the drug to the initial levels of production. Depending on the amount of demand, we're certainly seeing the initial production up through medium and maybe low levels, or up to low to medium levels of production rates. That can change a lot based on the drug and based on how it's used and based on how much is actually specific electroporated that shows up in the vial and in the end drug. This is an area we've been working on for a while. It's an exciting time to be able to offer this. It's a new growth opportunity for us. We've been working with a number of companies. We highlighted this one in particular because it's a large order. We see this becoming a multi-year opportunity and reaching a million plus in annual consumable revenues just with this one particular order alone. And then when you add up the ability to bring others into this, it's an exciting growth area for us.
spk02: And the BTX, is that for cell and gene therapeutic applications?
spk04: It can do that, too. It was actually one of the very first electrophoration systems out there involved with the first cloning, moving on to the development of things like monoclonal antibodies. It's used in in the development of not just the drugs, but also, you know, the drugs that are, you know, some are large molecule drugs, some are, you know, small. Anything that goes through electroporation for developing the initial cell lines, we're heavily involved in this and have been for many years. And, you know, for us, just the ability to provide a transition or a bridge from the initial drug to something they can start producing in some level of volume is really important because they, especially if they've used our technology to create it, it's much, you know, we think we'll be able to show that it's much safer to just expand that volume of it and start to enter, you know, production, you know, low-level productions and then, you know, growing from there.
spk02: And then lastly, the spectrophotometry product. Spectrophotometry is, can you kind of give us a gauge of how big the overall product spectrophotometry business? Is it Harvard Bio? Is it more than 10, less than 20? Is there any metric you can give us? I know it's been large, but if that'd be helpful, thanks.
spk04: Yeah, the spectral business itself is somewhere, I would say, in that kind of 5% or 6% of revenue range. So it's meaningful. It's not too large, but it is an area, again, where we've tended to focus on selling through distributors and into academic research. This new version is also designed to be easier transition and sold into pharma companies where we have direct sales, where we have, you know, really good connections. So, you know, it's an expansion on our, you know, on our respective comedy business.
spk02: Okay, thanks.
spk00: Thank you. Our next question comes from the line of Bruce Jackson with Benchmark Company. Your line is now open.
spk05: Hi, uh, good afternoon and thank you for taking my questions. I wanted to, um, Hey, so, um, I wanted to take a little time to talk about the inhalation business. Obviously it got a big boost during COVID-19. You've got the leading, um, leading products in that space. How much of the current downturn would you say is due to just general economic conditions and how much could potentially be a shift in the market towards a more normalized level?
spk04: That's a good question. I don't think there's any doubt, at least in hindsight, that given that we had offered the product about the time that COVID was coming out, it had an immediate uptick. What we did was we worked on a transition of new capability into the product to then be able to have it more targeted toward long-term use and then compete on the specifics of being able to measure exact amounts of what was delivered through the system and inhaled by the model. So I would expect that we had some buildup of additional sales of the inhalation units just because of everything happening with COVID. And we did see a lot of those sales go to pharma companies around the world, and they adopted it fairly quickly. So we could very well be, like I say, moving toward more of a normalized level of revenue there and sales. And we'll grow off of this level then based on the new capabilities that we've added, including the ability to specifically measure the amounts inhaled.
spk05: Okay. Okay. And then you mentioned that there's going to be about $5 to $6 million of revenue impact from discontinued products in 2023. Were there any discontinued products in this quarter that had any impact on the top line number?
spk04: Yeah, certainly what we started is in this last, actually in Q3, we started identifying and telling customers that we were rotating out, that we were obsoleting certain products. So we did see a continued rotation out of, and again, if you look at what I look at what we sell through distribution around the world, again, mainly to academic research sites, some of the obsoleting products, We saw, you know, a downturn somewhat on those as we would have expected a rotation out of those. You know, I see that as a good rotation. And then, you know, with the introduction of the 7500, you know, that's a new premium unit that takes over and replaces a number of other units that were in production that were, you know, lower margin, lower capability. We think this is going to bring back and keep us in that revenue stream, you know, doing well even though it's rotating out of those lower margin products.
spk05: Okay. The last question for me, you discussed the fourth quarter CRO pipeline was starting to look a little bit better. I was wondering if you could maybe give us a little bit of color on either the types of the studies or the types of products that are catching some of this upturn in the fourth quarter. Thank you.
spk04: Yeah. You know, we've always done really well with our implantable telemetry continuous monitoring systems. You know, this summer, in the summertime, July, August, you know, things really slowed down, you know, very much in Europe. And pretty much, you know, we saw the slowdown, you know, globally. And it seemed to slow down fairly quickly in around, you know, in that kind of mid-summer or late-summer timeframe and then start recovering. So we saw, you know, the recovery is happening. And, of course, we're very happy to see it recovering in our unplannable telemetry space. You know, so that's coming back nicely. And then it's going to be augmented because, you know, the glucose, the new glucose product is brand new. It's a, you know, it's incremental business for us. It's something that academic research has really been looking for, including government labs and pharma companies. So that will augment the growth in our high margin telemetry and monitoring business. So that's the piece where, you know, again, when your highest margin products you know, hit some delays like they did in the summer there, you know, that had a real effect on us because it was, you know, you're losing some, you know, very high margin revenue in the quarter. At the same time, you know, that would have been, you know, that also forces you then to have, you know, an issue with absorption of overheads. And to really fix the long-term overhead issue, I mean, to have the real kind of cushion that we need as a company, those are the structural changes that we're making to bring down the overall cost of the business. So the two things that are happening is, you know, we see our great margin products and the introduction of the new glucose product, you know, getting us back to where we need to be and improving our margins. At the same time, the cost reduction activity and the, you know, associated with changing and improving the portfolio and taking our cost of the organization down gives us the kind of cushion and headroom in our margins so that we can absorb when we have a, you know, a one-off quarter that happens to be, you know, particularly slow for whatever reason, whether it be, something with COVID or something with the supply chain. A company our size, we tend to really get hit hard with the kind of things happening in the market when you have a very strong dollar. Countries like Japan are really struggling to buy almost anything. Countries that are buying in euros and pounds, which is a significant part of our business, that really turns into a currency translation problem. So the only way to really solve that is to just get our cost structure down. And in good quarters and good years, we'll be in really good shape. But if we have some issues that pop up for a point in time, it's not going to be quite as hard on us on a quarter basis.
spk02: Got it. Thank you. Thanks, Bruce.
spk00: Thank you. Our next question comes from the line of Christopher Sakai with Singular Research. Your line is now open.
spk06: Hi, Christopher. Hi, guys. This is a theme for Chris. I was wondering if you can provide us a little bit more details on the preclinical revenue stream in terms of what happened this quarter and how do you kind of see it going forward?
spk04: Yeah, I mean, you know, it was the preclinical revenue in the quarter where we really saw slowing. And a lot of it just seemed to be delays. And we know much of our preclinical products go to you know, pharma companies and CROs and, you know, companies that really, you know, have to pay attention to the top line and bottom, their bottom line. So, you know, we saw some of it was, you know, belt tightening, you know, in the quarter. And then some of it was just, you know, people getting back to work after COVID. And, you know, we knew that, you know, the summer was going to be a tough summer and people that, you know, Europeans who typically take, you know, four or five weeks off, you know, we saw you know, people, you know, nobody around to even call and talk to in some of the centers until, you know, summer was fully done and people would start to come back to work really in the September timeframe. So I think it was a combination of that. I have no doubt that we have some belt tightening happening, you know, in the CRO space. And I think to what Bruce had mentioned, you know, there could very well have been some additional sales prior year. We had a very strong prior year and very strong Q3 last year, you know, where, you know, some of the pharma companies, you know, made some major purchases. We had a an individual million-dollar purchase by one of the largest CROs in China, which really is great news for us, except it kind of makes for a tougher comparable when you think about a million-dollar incremental deal just in one case in the prior quarter. So we see that coming back. The mix is going to start improving here. It improves already as we look to Q4, and then with the cost changes that we're making, our revenue stream will have strong margins and strong drop-downs.
spk06: Thanks. So in this, and, you know, look, we are aware of some of the slowdown we are seeing in U.S., especially in biotech, considering we are out of the high of IPO's back market for the last two or three years. But you mentioned mostly this is OUS. So do you think that that is sort of a similar situation, OUS and U.S.? ? in terms of slowdown, or we might see slowdown in a little bit in U.S., which we haven't seen yet.
spk04: Yeah, well, we did see some slowing in the U.S. in the preclinical revenue stream. You know, you're mentioning, you know, bring up a good point with the biotech. You know, that was something, you know, we always saw and still see as a great growth opportunity, especially now that we have some of the new products with the BTX and the ability to start to to offer to smaller biotechs and pharma companies that are involved with more orphan drugs and such to help to provide them with other options for bridging to production. But the biotech, I would say that wasn't really, there wasn't a lot of revenue for us. When I think about our North American revenue, much of it is CROs and pharma companies. So with some slowing there in that quarter, and like I said, we've already seen the pipeline improving You know, even going into our expectations, our, you know, natural growth from Q3 to Q4 as we look within this year and then going forward. So, you know, augmenting it with new products, especially with, you know, the new glucose is going to continue to drive toward a very positive, you know, mix for us on implantable monitoring. And then just, you know, watching as we deal with the headwinds, you know, in Europe, China, we all believe China. We see it improving somewhat. We think it's going to do quite a bit better as we think about they have been going through these periodic shutdowns. There's a strong feeling that China is going to pick back up very strong. Europe is always a place where we always have some level of concern just because of the market there and, of course, the currency situations.
spk06: And finally, you know, apart from the three new products that you talked about, in terms of early stages in R&D, if you can talk a little bit about, give us some updates about your guys' thinking, what's, you know, cooking over there, that would be very helpful.
spk04: Well, good question. You know, you can see where we're making our investments. We're making the investments in areas where we have, you know, high barriers to entry, good pricing power, and a good ability to sell our products. So investments, we continue to invest in the cellular molecular side very much on the cellular approach. We think there's gonna be a lot more adoption of cellular testing technologies into the stream of how you get products through the preclinical and into clinical. So that's an area of continued investment. You saw that with BTX. You're gonna see that with more of our multi-electrode array type products that'll be coming in. You know, then, you know, the implantable telemetry, of course, is an area where we continue to, you know, we need to stay, you know, the market leader in there. And we'll continue to invest, and you'll see new products coming out on the software side. That's an area that, you know, we've talked about it in the past, but now, you know, we see the ability to really manage data and to provide the right kind of capabilities, not just to, you know, CROs, but also to pharmas and to have versions that sell well into academic research. So you'll see more investment on the software side of our business too.
spk06: Perfect. Thank you.
spk04: Thank you.
spk00: Thank you. This concludes the question and answer session. I would now like to hand the conference back over to Jim Green for closing remarks.
spk04: Well, thank you for joining us. This ends our presentation today. We hope you'll join us again for our Q4 results in February timeframe. So thank you very much, and we'll see you soon. Thanks.
spk00: This concludes today's conference call. Thank you for your participation. You may now disconnect.
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