Hamilton Thorne Ltd.

Welcome to the Hamilton Thorne LTD third 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 the company's management discussion and analysis for the quarter and nine months ended September 30, 2023, which filings are available under the company's profile at www.cdar.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 period covered for further information and a reconciliation of adjusted EBITDA to net income. Now let me turn the call over to Hamilton Thorne's CEO, David Wolf.

Great. Thank you very much. Good morning and welcome to the Hamilton Thorne third quarter 2023 earnings conference call. I'd like to reintroduce myself, David Wolf, President and CEO of Hamilton Thorne. And also on the call with me today will be Francesco Fragasso, our CFO. Our call will have the following format. First, I'll provide a summary of operational and financial results for the quarter and nine months to end at September 30, 2023, 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. And I will return for a few minutes to provide some information on our outlook for the balance of 2023 and a few comments of 2024. We will then open our lineup for questions. I'll begin with sales results. Sales grew 16% for the quarter and 17% for the year to date. Gross profit as a percentage of sales increased to 49% for the quarter and 50.5% for the nine months ended September 30 versus 48.5% and 49% for the comparable periods of 2022. So a 50 basis point, 150 basis point increase. primarily due to increased sales of higher margin proprietary equipment and software services and branded consumables, combined with increased direct sales of products, as well as the addition of micropter. All of this was partially offset by higher material costs in the third quarter of 2023, caused by global inflationary environment. Equipment sales growth was 9% for the quarter, but was adversely affected by a somewhat higher than expected decline in equipment sales to China in the quarter, due to several factors, including continued economic slowdowns in China, the enforcement of buy-China policies combined with the emergence of some local competition, and delays in regulatory clearances. While some of this reduction is transient, with our orders in Q4 looking strong, these trends have been impacting our business for some time. We do expect we are likely reaching a bottom. Consumables, software, and services grew over 20% in the quarter, reflecting continued strong demand for these largely high-margin recurring revenue categories. Organic sales growth was 10% for the nine-month period and 5% for the quarter, with a lower growth in the quarter largely due to the impacts of a consumables product recall by a contract manufacturer and slower equipment sales in China, which I previously mentioned. Adjusted EBITDA increased 3% to $2.2 million for the quarter and increased 11% to $7.8 million for the nine-month period. EBITDA margins for the quarter declined about 180 basis points versus 2023-2022, in part due to product mix, as our China sales consist primarily of high-margin proprietary products and grower operating expenses spread over lower revenues than expected. Francesco will discuss operating expenses more fully in his remarks. On a geographic basis, sales in the Americas and EMEA regions were up significantly for the quarter and year-to-date, with sales to the Asia Pacific region down substantially in Q3, due in large part to the slowdown in China in the quarter, which I mentioned, but were essentially flat for the year-to-date. As we have discussed in prior calls, due to stabilizing exchange rate currency fluctuations and translating financial statements to the presentation of currency of U.S. dollars, had a positive impact this quarter, but a minimal impact for the year to date. Results in sales growth and constant currency were 12% for the quarter and 16% year to date. I'm also happy to report that while supply chain issues continue from time to time, they are far more normalized, leading to fewer delays in production and shipment. 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 Hamilton Thorne. I will briefly highlight the third 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, excluding expenses related to M&A activities, increased 27% for the quarter and 28% for the nine-month period to $8.1 million and $23.7 million, respectively. Expense increase was mainly due to the addition of macroptic expenses for a full quarter, increased costs associated with investment in sales and other personnel to support growth, and inflationary pressure across many cost items. The return to pre-COVID level for sales and marketing activity is also a factor for expense increase in Q3 2023 compared to the same period of 2022. Overall increase in operating expenses were in line with our expectations. In light of continued inflationary pressure on other operating expenses, we are actively looking at cost containment strategies that we expect to improve our overall financial performance. Net interest expense in Q3 2023 increased by $265,000 to $369,000 due to additional term debt incurred to finance my crop take acquisition in November 2022 and a higher use of a bank line of credit to fund working capital, partially offset by the repayment of outstanding principal on term loans. In the quarter, income tax expense increased to $317,000 tax recovery from $337,000 tax recovery in Q3 2022, primarily due to the reductions in income before taxes and to the reduction in deferred income tax recovery of $387,000 in Q3 2023 compared with deferred income tax recovery of 432,000 in the same period of 2022. The change relates to temporary differences between income tax value and the carrying value of assets and liabilities. Net loss for the quarter was 785,000 compared to net income of 99,000 in the prior year quarter. Net loss for the nine month period was 1.1 million versus a net income of $930,000 in the prior year period. This is primarily due to the increase operating and interest expenses I previously mentioned. Adjusted EBITDA, which we consider an important metric of our financial performance, increased by 3% to $2.2 million for the quarter and increased 11% to $7.8 million for the nine-month period. This was mainly due to revenue and gross profit growth offset by planned increases in operating expenses. As a reminder, adjusted EBITDA is a non-IFRS measure. Please see the reconciliation of adjusted EBITDA to net income for the quarter and the nine-month period in our MD&A report filed today on both SEDAR and on our website. Turning now to company cash flow and balance sheet. The company cash balance at the end of September 2023 was $15.3 million, compared to $16.7 million at the end of 2022, a decrease of $1.4 million. The decrease in cash balance was primarily due to investment in working capital to support expected growth, the investment in product development and in expanding our manufacturing capacity, and payment related to M&A activities. The company generated cash from operations of $1.5 million in the first nine months of 2023 after having invested $1.3 million in inventories. In the first nine months of 2023, cash used in investing activities was $2.8 million. Of this, $1.9 million related to the normal expenditures in PP&E and for ongoing investment in capitalized intangible or product development activities, and $0.9 million leads to improvement in equipment and furniture related to the expansion of manufacturing capacity in some of our operating business units. Investment in inventory and capacity growth have continued longer than we originally expected. However, cash flow is expected to improve as investment in expanding capacity has been completed and inventory is decreased in the coming months. Cash used in financing activity was 70,000 for the nine months of 2023. Those were mainly related to payment of scheduled term loan and lease obligations. Net of 2.9 million proceeds from a working capital line of credit. Note payable and term loans outstanding, total 14.9 million at the end of September 2023, equal to 1.4 X the 12th trailing month adjusted EBITDA. At the end of September 2023, the company had a strong liquidity position of 25.3 million, including 15.3 million in available cash and 10 million in unused borrowing capacity. This liquidity has been partially used to fund genetic medical product acquisition on October 10, Post-acquisition, the company's liquidity position is approximately 12 million. Outstanding loans are 22.4 million. And pro forma 12 trailing months adjusted EBITDA, including genetics, is 13.3 million, resulting in a 1.7 ratio debt to pro forma adjusted EBITDA. We are in the process of discussing a renewal of our M&A line of credit with our bank, which could provide us with additional liquidity. I will now turn the call back over to David to comment on Hamilton Thorne Outlook.