Hamilton Thorne Ltd.

Welcome to the Hamilton Thorne Limited first quarter 2023 earnings conference call. Before turning the call over to your host today, please be reminded of our standard public company policy on forward-looking information and use of non-IFRS measures. Certain information presented or otherwise discussed on this call may contain forward-looking statements. These statements may involve but are not limited to comments relating to strategies, expectations, planned operations, product announcements, scientific advances, or future actions. This information is based on current expectations that are subject to significant risks and uncertainties that are difficult to predict. Should one or more risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance, or achievements could vary materially from those expressed or implied by these forward-looking statements. These factors should be considered carefully and prospective investors and other parties should not place undue reliance on these forward-looking statements. The company assumes no obligation to update such forward-looking statements or to update the reasons why actual results could differ from those reflected in the forward-looking statements unless and until required by securities laws applicable to the company. Additional information identifying risks and uncertainties is contained in filings by the company with the Canadian securities regulators, including, without limitation to the company's management, discussion and analysis for the quarter ended March 31, 2023, which filings are available under the company's profile at www.cidair.com. During this call, the company may reference adjusted EBITDA, constant currency and organic growth as non-IFRS measures which are used by management as measures of financial performance. Please see the sections entitled Use of Non-IFRS Measures and Results of Operations in the Company's Management, Discussion, and Analysis for the Periods Covered for Further Information and Reconciliation of Adjusted EBITDA to Net Income. Now, let me introduce, excuse me, now let me turn the call over to Hamilton Thorne's CEO, David Wolf.

Thank you very much. Good morning and welcome to the Hamilton Thorne Limited First Quarter. 2023 earnings conference call. I'd like to introduce myself, David Wolfe, President and CEO of Hamilton Thorne. On the call with me today is our CFO, Francesco Fragasso. This morning's call will have the following format. First, I'll present a summary of operational and financial results for the quarter ended in March with a focus on our sales, markets, and operational performance. Francesco will follow with a more detailed discussion of our financial results for the periods, as well as a review of our financial position and liquidity. I will then return for a few minutes to provide some information on our outlook for the balance of 2023, and we will then open up the line for questions. Since we had our year-end conference call just 45 days ago, we'll keep our remarks relatively brief. I'd also like to remind participants that we do not provide financial guidance, so I'd ask you to limit your questions to either historical periods or general trends in the business. I'll begin with our sales results. I am delighted to report that our 2023 has gone off to an exceptionally strong start. We had a record first quarter posting sales of $16.7 million and adjusted EBITDA of $2.8 million versus $14.1 million and adjusted EBITDA of $2.5 million in the prior year. This represents 19% sales growth on a reported basis and 24% sales growth on a constant currency basis. Our organic growth, which eliminates the effects of both acquisitions and exchange rates, was up 15% for the quarter, reflecting continued market share gains. As we have discussed in our prior calls, currency fluctuations and translating financial statements into our presentation currency of U.S. dollars continues to have a substantial, though somewhat lessened, impact this quarter, reducing reported results by approximately 5%. Fortunately, these headwinds are easing, and I'll discuss this a little bit more in our outlook section. I'm also happy to report that while supply chain issues do continue from time to time, they are more normalized, leading to fewer delays in production and shipping. Let me again give you some of the highlights from our performance. First quarter sales increased 19% to 16.7%, 24% on a constant currency basis. EBITDA increased 13% to $2.8 million. 18% on a constant currency basis. Organic sales up 15% for the quarter. Gross profit margin was 15.6%, which is up 185 basis points versus the prior year. Net income did decrease to $77,000 for the quarter, which Francesco will address in his remarks. In Q1, we had strong demand across all of our product categories with equipment sales up 20% and consumable software and services up 18%. As I mentioned, I was particularly pleased to see our gross profit margins continue to improve up over 180 basis points versus the prior year. This improvement is largely due to economies of scale, product mix, increased direct sales of our own products, as well as the addition of the higher margin across the whole quarter. I'll now turn the call over to Francesco to provide a more detailed discussion on the numbers.

Thank you, David. Good morning, everyone. I'm Francesco Fragasso, CFO at Amiton Corp. I will briefly highlight the first quarter 2023 financial results. David has already provided an update on sales and gross profit, so I will focus on the other elements of the income statement, as well as the cash flow and liquidity of the company. Operating expenses increased 36% to $8 million for the quarter. Expenses increased were mainly due to the addition of micro-optic expenses for the full quarter, expenses related to M&A, increased costs associated with investment in sales and other personal support to support growth, and increased share-based compensation. The return to the pre-COVID level for sales and marketing activities is also a factor for expenses increasing Q1 2023 compared to the same period of last year. Overall increases in operating expenses were in line with our expectations. Net interest expenses in Q1 2023 increased by $140,000 to $258,000 due to additional term debt incurred to finance macro-optic acquisition in November 2022 and higher use of a bank line of credit to fund working capital. partially offset by the repayment of the outstanding principle on term loans. In the quarter, income tax expense decreased to 104,000 from 296,000 in Q1, 2022, due primarily to the reductions in income before taxes and to the deferred income tax recovery of 122,000 in Q1, 2023, compared to a deferred income tax expense of $44,000 in the same period of 2022. The change relates to the temporary differences between income tax value and the carrying value of assets and liabilities. Net income for the quarter was $77,000 compared to $556,000 in the prior year quarter. This is primarily due to the increased operating and interest expenses I previously mentioned about that. partially offset by a decrease in income taxes. Adjusted EBITDA increased by 13% to 2.8 million for the quarter, primarily due to revenue and gross profit growth, offset by a planned increase in operating expenses. In Q1, it has continued the negative impact of foreign currency exchange headwinds, although to a lesser degree than in prior quarters. As a reminder, Adjusted EBITDA is a non-IFRS measure. Please see the reconciliation of adjusted EBITDA to net income for the quarter in our MD&A report we filed today on both SEDAR and on our website. Turning now to company cash flow and balance sheet. The company's cash balance at the end of March 2023 was $15.9 million compared to $16.7 million at the end of 2022. a decrease of about $800,000. The decrease in cash balance was primarily due to investment in working capital to support expected growth, investment in product development, and large payments to third parties related to the micro-optic acquisition. Those payments were accrued at the time of the acquisition and reflected in the acquisition price. The company used approximately 140,000 cash from operation for the quarter, primarily related to timing of increased account receivable and reduced account payable at the quarter end. Inventories were slightly up as they began to unwind the significant investment we made during 2022, while continuing to support our growth. In the first three months of 2023, Cash used in investing activity was $800,000, which included the purchase of equipment and the normal expenditure of ongoing investment in capitalizing tangible or product development activities. Cash generated in financing activities in Q123 was $120,000. One million proceeds were related to the use of working capital line of credit, net of payment on term loans and lease obligations. Note tables and term loans outstanding total 14.6 million at the end of March 2023, equal to about 1.4x the 12 trailing months adjusted at the beginning. At the end of 2022, the company continues to have a strong liquidity position of 26.4 million, including $15.9 million in available cash and $10.5 million in unused borrowing capacity, which includes $8 million line of credit for M&A approved in May and disclosed in the subsequent event section of the financials. This liquidity availability makes us well-positioned to support our acquisition program and finance the expected growth. I will now turn the call back over to David to comment on the Hamilton Torn Outlook. David?

Yes, thank you, Francesco. Looking forward into the balance of 2023, we feel that our company is in a great position. We continue to expect solid sales performance based on the positive trends in our field and as demand and growth have returned to pre-pandemic levels in nearly every market that we serve. This will drive continued growth in the more recurring revenue parts of our business, including the sales, consumables, software, and services. While we may see capital equipment sales growth moderate, as several of our distributors who built up inventories during periods of supply shortage work through these positions, we note that underlying demand remains very strong. As previously reported or mentioned, exchange rate headwinds had a 4% to 5% impact on reported results in Q1, a significant improvement over the fourth quarter. We expect foreign exchange to be relatively neutral in Q2, and if this trend continues, it should provide some tailwinds in the second half of the year. Regarding our M&A activities, we have an extensive pipeline and continue to actively work on multiple acquisition opportunities. As Francesco mentioned, with significant cash on hand in our unused lines of credit, as well as further debt capacity, we are well-positioned to continue to execute on our acquisition program. In summary, despite various day-to-day issues that we face, we feel extremely positive about our market position, confident in our team's ability to execute on our strategy, and, as I said, very optimistic about the future. We'll now open the lines for questions.

Operator, please present the first call from the queue. We will now begin the question-and-answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Justin Keywood from Stiefel. Please go ahead.

Hi, good morning. Thanks for taking my call. In the release, I mentioned a robust M&A pipeline, and obviously there was the transaction that was completed just recently. What's your view on M&A in the near term? Any update on the multiples being asked? And then also, the type of current assets that you're pursuing, if it's similar to Hamilton's business or perhaps in adjacent areas? Thank you.

Sure, so I think there's a few questions. Maybe I'll answer them in reverse order. We are clearly focused today on continuing our, as we have done in the past, to do complete acquisitions that are in our current target markets, which, again, is providing assisted reproductive technologies and related products. We look at and would be open to doing things in adjacencies, or I would say show me possibly even outside that, but we certainly are putting proactive efforts into those. We feel, given where we are in relatively early innings of the consolidation of a highly, highly fragmented supplier market, that there's still ample opportunity for us to stay within our market. I will note that the transactions tend to be relatively small given the nature of the available targets, and we've been, I would say, reasonably successful in both identifying, acquiring, and integrating these, you know, on the smaller end, potentially sub $5 million and maybe up to $10 million and a little bit higher revenue companies. So I would say, generally speaking, that's what you should continue to expect to see from us. In terms of the actual pipeline, as you know, we're very cautious on getting ahead of ourselves and maybe accidentally signaling something to the market. So I'll just repeat, you know, our formulaic comments. that our pipeline is robust and we are actively working on a number of opportunities. So hopefully that was at least reasonably responsive.

Yes, thank you. And then on the outlook, there's commentary of continued strong underlying demand and obviously quite a good organic growth number in the current quarter. But I was just hoping to square that with – Just in your opening remarks, there was a comment on moderation of equipment sales. If that's going to be impacting any of the organic growth in the near term?

Yeah, I think in the near term we might see some modest impact on the organic growth in the capital equipment side of our business. As I tried to indicate perhaps in shorthand in our remarks, as people following us know, Our consumables and recurring revenue parts of our business, which are consumable software and services parts, tend to be more or less linearly aligned to increased activity at the clinical level increases demand. So we expect those to continue to grow strongly for the short, mid, and long term. Consumed capital equipment by nature tends to be a little bit lumpy, both in terms of the you know, the cost of it at the ultimate demand level. And then it's become clear to us as we've been surveying some of our distributors that distributors, I guess, as rational actors built their inventories a little bit during times when we had periods of supply shortage. So I think in some cases that's not an issue at all. And they're buying as they always have in other cases, working through some inventories. Again, I think that'd be a relatively short term kind of transitory effect, the kind of thing you often see when you're dealing with a large-scale capital equipment.

Thanks. Maybe just in a summary of you, would there be any material difference? Because it seems like there's a lot of moving parts there. Just with the Q1 organic growth or the general range that Hamilton typically achieves, which I believe is 10% to 15%, would that be impacted at all?

So the Q1 organic growth was 15%, including 20% – well, it wasn't pure organic, but 20% growth in capital equipment. We would expect to see, as I said, potentially capital equipment moderate growth a little bit, but we still would certainly view, again, in any particular quarter anything can happen, but we feel very confident that we can continue to be over 10% organic growth at least on a continual basis for a solid period of time.

Thank you. Very helpful.

The next question comes from David Martin from Bloomberg. Please go ahead.

Good morning. Thanks for taking my questions. The first one is you said that supply chains are near normalized at this point. Does that mean that they have further to go to get back to normal, and could your cost of goods get lower as you get back to a full normal?

Yeah, thank you for the question. So when I think about supply chain issues, in those remarks, generally it was talking more about product scarcity or occasional inability to obtain, whether it's finished goods that are processed um, resold or components that are built into products that, that we have. And that, that is pretty much, uh, normalized. I will note that they're all in our field. Uh, there are, seem to be, and historically have always been some level of supply chain issues, uh, you know, where, where we, we sell relatively, um, uh, you know, differentiated products with a lot of components that, um, You know, it's insulated us in some ways from supply chain issues because they're so different. But on the other hand, you know, relatively small volumes tend to have big impacts. On pricing, I would say pricing is, you know, has a little bit of a yin-yang. You know, we might see some pricing improvements on certain commodities. But on the other hand, though, we're not overly stressed about it. There's obviously a general inflationary – environment that we're in. So we're certainly not expecting any significant pricing improvements over the next, you know, over the balance of this year. Or I should say cost improvements over the balance of this year, prices to us.

Okay. Okay. Second question relates to Justin's last question. You said you expect to continue 10% plus organic growth. Is that at the end user level or is that at the level of Hamilton Thorne?

So we measure it at the level of Hamilton Thorn. That's very clearly a measure of our, and it's spelled out in our MD&A in terms of definitions, but I'll paraphrase. We look at our sales on a constant currency basis, pro forma, as if we've done an acquisition, as if we'd owned that business for the entire prior period. So it's at the Hamilton Thorn level. Okay, thanks.

That's it for me.

Thank you. Again, if you have a question, please press star, then 1. Our next question comes from Tanya Armstrong-Whitworth from Canada Corps Genuity. Please go ahead.

Good morning. Just one more for me in terms of the geographical split. I think it looks like your mix of EMEA revenue has increased. America seems to decrease. Can you talk about what you're seeing in different geographies that you sell into and why this mix shift has occurred?

Yeah, so at a very high level, our geographic mix is not, I would say, changing dramatically. The introduction or acquisition of Microptic did increase our European revenues somewhat, and we saw a little bit of that in Q4. But in general, I think we're... seeing strong growth across Europe, where we're very, very strongly positioned in consumables, strong growth in Asia and the U.S., where we focus more on capital equipment. So I'm not sure I'm seeing the kind of significant geographic split or differences from year to year.

Okay, that's fair. And then actually one more, if I may. You did mention that the decline in net income was partially due to significant M&A-related expenses. Could you talk to what these M&A expenses were?

Yeah, so I'll just give you kind of a high level, and maybe I'll ask Francesca to drill a little bit deeper to the extent. We don't want to get into this huge detail. But we spent about $500,000 in M&A expense in the quarter. Some of that is related to continuing M&A activities that we're doing, so we can't really comment on those very much. And then, as Francesco mentioned, there was a significant level of payment related to the microptic acquisition that was dealt with in the purchase price but occurred in Q1. So I don't know if you have anything you want to add, Francesco.

Yes, you can see the difference between Q1 2022, $20,000 and Q1 2023, $508,000. So Q1 2022 was particularly low. What do we include in that category? Are all the activities related to building the pipeline of opportunity, do preliminary analysis, sometimes even due diligence or preliminary due diligence, tax planning type of service. Not necessarily they translate in an actual acquisition. As I said, they are mainly or often related to building the pipeline. But one clarification is that when we actually consume an acquisition, we don't capitalize any money. related expenses to the acquisition that the frs will allow us to do we didn't do it so far so that describes a little bit the nature of those type of costs okay excellent that's all for me the next question comes from michael freeman from raymond james please go ahead hey good morning david and francesco congratulations on the court and thanks for taking our questions i wonder

I wonder if you could shed some light on seasonality in this industry. And I recognize that working across so many geographies, this might be a challenging question to ask given the different payer types. But I wonder if you could give a brief overview on seasonality, particularly relating to the first quarter.

Yeah, so that's actually a great question. Perhaps I should have touched upon in our remarks. So generally speaking, There's not enormous seasonality except Q4 tends to be higher in part because people, particularly for capital equipment, the normal things people are spending through their budgets, people tend to get focused on calendar years to accomplish certain kinds of activities. So historically, we've seen Q4 as being our highest quarter season. And then Q1, I believe, in every quarter I've ever looked at, tends to be lower than Q4 in the prior quarter. This year is an exception to that. This year is the first quarter that, at least in the past five or six years or seven years, where we had a Q1 that was over our Q4. So I'm clear whether there's going to be some big change in our seasonality or, you know, other events that led to that. But that's an interesting thing. As you can imagine, summers tend to be a little bit lighter, particularly in Europe. And then, you know, there's some seasonal effect of holidays, but primarily in Q4, but that tends to get overwhelmed by the customer part of it. So long story short, I think the, you know, historically Q4 has been much higher. And then, you know, the other quarters, you know, showed normal consistent growth. Maybe we're entering a new chapter. Who knows?

We'll know better in a year. That's right. All right. Thanks, David. That's helpful. And now I wonder if you could describe the size of your direct sales team today and some geographies in which Hamilton Thorne seeks to grow its direct sales team during the next year.

So we have direct sales teams across most of the major markets in Europe. across the U.S. and we support Canada out of the U.S. And we're starting to make some investments and continuing to make some investments in Asia, Asia-Pac, where we have a location in Australia and Singapore. I would say in general, we're in a period of incremental growth rather than substantial new territories. And say one comment, which I'll add at the end, uh, where we are adding people, you know, um, to address market opportunities, either because the market is growing over underrepresented in those markets. I think you'll see more investment in Asia pack, uh, where we've just added people in, uh, in, in Australia, uh, and Singapore, as I mentioned, uh, we did just begin to sell into Spain on a direct basis. Uh, and that's by virtue of the microtic acquisition. Right now, we have a solid team there. We may add there as we generate additional success. And then in other markets, I think you'll see somewhat incremental additions. I should add, maybe I should have started with this, that in general, we tend to prefer to enter new markets by acquisition of ideally a solid product-based company that also has a direct sales team in that market so that we start with a solid team experienced with a level of revenues and profitability kind of baked in versus the alternative, which we have done, but it's along the road, the alternative being to just start in Greensfield's higher level the several people that you need to have reasonable critical mass in any given country, and then work hard to grow a business, get those people ultimately to break even, and then as you start to show significant profitability and people get at the level of their capacity, start to add people.

Okay. Well, thanks very much. Good luck second quarter.

Thank you. Again, if you have a question, please press star and one. The next question comes from Antonia Borovina from Bloombergton. Please go ahead.

Apologies. I tried to remove my question from the queue.

All right. There are no more questions in the queue. This concludes our question and answer session. I'd like to turn the conference back over to David Wolfe for any closing remarks. All right. Well, thank you very much.

I'd like to reiterate my thanks to all of our employees for the great work they're doing and the dedication they show to our business and to our customers and to our business partners and shareholders for the support they show our company. I will be back for a conference call ideally in the second week, first or second week of August. and look forward to having continued discussions then. In the meantime, we encourage you to go to our website. Again, our investor-oriented website is www.HamiltonThorne.ltd for more information on our company, products, initiatives, and further investor information. With that, I'll sign off, and thank you very much.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.