Q3 2019 Earnings Call

I mean, Harvard Bioscience incorporated earnings Conference call. My name is apparent when I'll be your operator for today's call. At this time all participants are listen only mode. Later, we'll conduct a question and answer session. During the question and answer session. If your question. Please press Star then one on your Touchtone phone. Please note. This conference is being.

Recorded I will now turn the call over to David Choice, David You May begin.

Thank you Daniel good afternoon, everyone.

Thank you for joining us for the Harvard Bio's side third quarter 2019 earnings call.

Before we begin or would like to suggest that you take a moment and download a copy of a presentation that will be referred to during this call.

Well file was entitled each bio Q3 quarterly earnings presentation and is located in the Investor overview section of our website.

Before I turn the call over to Jim I will read our safe Harbor statement.

And our discussion today, we may make statements that constitute forward looking statements are actually results and performance may differ materially from what we have projected due to risks and uncertainties, including those in our annual report on Form 10-K for the period ended December 30, Onest 2018, and other public filings.

Any forward looking statements, including those related to the company's future results in activities represent our estimate as of today it should not be relied upon as representing our estimates as of any subsequent day.

Oh, so 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 earning release and the slide presentation.

These documents can be found on our website under investor overview.

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 that available in the Investor Relations section of our web site.

Right.

A replay of this call will also be available for one week at the same location on our web site at Harvard Bioscience Dot com.

I will now turn the call over to Jim Jim. Please go ahead.

Thank you Dave good afternoon, everybody.

Let's go right to slide four of the presentation.

Our chose our Q3 revenue came in at 27.4 million, that's down 4.3% from Q3 last year.

Our gross margin on a GAAP basis was measured at 54.6%.

On a non-GAAP basis, adjusted gross margin was 55.6%.

This quarter had an operating loss of 1.4 million on a GAAP basis.

Our adjusted operating income was positive at 3.3 million. So our adjusted operating margin was 12.1%.

GAAP earnings per share was negative seven cents and our adjusted diluted earnings per share was four cents.

Finally, our cash flow from operations on a year to date basis was $5.8 million.

We have on slide five we'll take a look at our revenue by product family.

As you know we've combined our legacy PCM I and he says teams into one combined group called cellular and molecular technologies.

This group engineers manufacturers self and services, leading edge equipment in support of discovery and research for new drug development.

In the quarter cellular molecular technology saw growth and North America, and Asia Pacific driven by CRISPR related products and precision infusion pumps.

Europe declined on large equipment ordered shipment timing.

Our preclinical systems team also known as Dxi is an industry leader in the engineering manufacturer sale in service of telemetry and monitoring technologies for the preclinical safety testing with animals required by regulatory bodies prior to human clinical trials.

In the quarter North America was up driven by growth in pharma sales.

We saw clinical research organizations returned to historic run rates. However, Q3 prior year was an all time high giving us a tough comparison.

Europe declined modestly.

In Asia Asia Pacific was down on continued trade uncertainty. However, we do see signs of improvement coming.

So then move to slide six so I'll give you an update on our 2019 action plan that position us to deliver on the 2020 financial targets that we published just this last September .

First I'm happy to say, we've completed the leadership team with the addition of Mike Rafi, Our CFO Kennedy Wilson, our leader of the preclinical or Dxi team in Minnesota at the Ash thing, who leads our cellular and molecular team.

In the quarter, we completed the consolidation of our North Carolina, TBS I operation into the Minnesota operation.

We are closely managing our operating expenses.

Run the process of consolidating our cellular molecular sales team into one well run team with improved physical and technical support coverage.

We're finalizing consolidation plans for a leaner global footprint.

And we continue to reduce our debt while at the same time, securing flexibility that we need to cover the cost of restructuring.

So now I'll turn it over to Mike for further financial review of Mike.

Thank you Jim and good afternoon, everyone.

As a reminder, I will be referring to certain non-GAAP measurements with aligned with our internal reporting and management processes and any references to adjusted results represent the non-GAAP measure we have reconciled to GAAP figures within today's release and presentation.

I will walk through financial highlights for Q3, including our cash flow in debt before covering the full PML.

On revenue in our largest market North America, we sold we showed solid growth across multiple product lines, including growth from our higher margin products such as infusion pumps.

As Jim noted CRL revenue improved the Q3 after low volume over the first half 2019, but were down year over year on peak sales in Q3, one eight.

Outside of North America, we did see declines in EMEA, and APAC, which drove an overall, 3% reduction in constant currency sales.

We believe these declines are primarily driven by timing of large equipment or system orders.

And expect to see improved sales in Q4 in these markets.

Adjusted operating income increased 3.6% or 90 basis points as cost reduction and improved product mix more than offset lower revenue.

On the balance sheet, we continue to reduce debt with 6 million in year to date cash from operations driving a $7 million reduction in net debt since December 2018.

Improving cash flow and reducing debt is a top priority as reflected in the leverage targets we communicated in September .

As articulated in our 2019 action plan.

We were recently able to amend the terms of existing debt to provide operating flexibility required to driver business improvement.

This includes a higher maximum leverage ratio and an increase in permitted restructuring related cost.

While reducing interest expense remains as a priority.

The short term this amendment will allow us to invest and transformation activities over the next six to nine month to deliver our second half 2020 targets.

Turning back to the PML on the next slide.

Adjusted gross margin was down 20 basis points were nearly flat to prior year at 55.6%.

This result was delivered despite lower sales volume and an inventory charge of approximately $300000 due to the improvement in product mix discussed.

We believe our action plan is addressing the primary margin headwinds experienced in Q3 with new operating leadership actively addressing in inventory management and footprint consolidation.

Adjusted operating expenses were lower with ongoing focus on cost reduction with both head count and not head count spend declining year over year.

Adjusted net income improved over prior year with the margin improvement noted and lower interest expense.

This translated into flat adjusted diluted EPS due to a higher share count.

So ceded with a methodology change we found best for our Investor Communications in prior periods. The company had a practice of using diluted shares per GAAP, which essentially resulted.

Using the basic share count and periods with the GAAP loss.

We are implementing this change prospectively, starting with these Q3 results and have not altered prior results as not significant to those periods.

Finally, I note that our GAAP loss for the quarter of $2.6 million or seven cents per share includes approximately 2.2 million of cost associated with the CEO transition in July and a consolidation of our North Carolina facility.

With that I'll turn it back to Jim to provide our 2019 outlook in summary, Jim. Thanks Bye.

Moving to slide 10 of our summary and outlook.

We continue our strategic actions to underpin next year's profitability and growth targets.

Consolidations and operating efficiencies will drive gross margin and operating margin prove improvements for 2020 with significant improvement in the second half 2020.

We expect the current headwinds to annualize in the first half of 2020 and sales optimization with improved products to drive topline growth throughout the year and significantly in the second half.

Now for our 2019 outlook, we see revenue stabilizing at this lower run rate into Q4. So we expect for the year a range of 116 million to $118 million.

We remain on target for adjusted gross margin at approximately 56% for the year.

Adjusted Q4 operating margin should improve to 17% to 18% that's up three to four full points from 14% last year, bringing the full year to a range of 12% to 13% versus 12% last year.

And finally, we expect to deliver adjusted diluted earnings per share of 19 cents for the year.

Thank you and I will turn the call back over to the operator to open the line for questions and answers. Thank you.

If anyone has a question you can press Star then one on your Touchtone phone. Once again, if you have a question you can press Star then one on your Touchtone phone and I'm standing by for questions. There will be a delay before the first question is announced.

And our first question comes from.

Bruce Jackson go ahead with your question Bruce.

Hi, Thank you for taking my question with regard to China Omni you've had some continued weakness here some of the other life science companies that have reported have been doing all right I'm just kind of curious to know why you think.

You might be having some slower growth relative to the other companies and then if you could remind us what is your exposure to China directly and and then I'll do you have a sense of like how much exposure you have got via your distributors.

Okay, well actually been out to make sure that understand your question.

So starting with China.

We have good exposure to China, but.

As we've seen.

If you look as we look at our sales into China, we've seen things if it slowed down for a little while and as we look particularly of the discovery type products.

That's where the product that sell it to research institutes that for much of the funding comes from the Chinese government and many of these institutions have been instructed to try and buy other than us goods. So in that particular space suite of that's where we've seen a slowdown for probably at least last few quarters.

Now in the with our Dxi and our preclinical work that business has tended to do pretty well, though it was it was down for a bit and at this point, we do see things starting to pick up.

As we look forward into the net index into the next quarter forward, we see things actually picking up nicely in that area.

So again I would ask it asking who bristow maybe re up if I didnt answer much. Your question. We are kind of have had distracted for a second there were looking at something but.

Yes, no worries subdebt spine.

My other question is just with regard to some of the restructuring that Youve discussed with your new strategic plan have you looked at.

Closing down.

Any sites and what are some of the restructuring activities. We can look forward to over the next quarter or too.

Yes, great question, what we've already we've already shutdown, our TV ASI site, which is a north Carolina, we've slipped the product of the design, we set the manufacturing of those products into our Minnesota operation.

That operations been completely shut down at this point again, the products will continue to sell though I'll through our cuts. It was offered through our dfive product lineup that will continue.

So thats been completed we have a number of other smaller operations that were looking at that are essentially part of the plan.

And we're looking at him on the larger operations in Europe are looking to see how we're going to better share those opportunities and view.

View Europe as more of one logical operating site as opposed to a number of smaller ones. So I would again, we'll have more detail for you on the call next time and actually we'll be announcing a little more detail on what exactly it will be made up of the restructuring because we have to establish what the charges will have to look like.

We'd like to take much of these actions here I'd like to get much of it either started or at least defined here and this year. So that we understand what kind of charges were looking at and have that done in time. So that we see a held the improvement in the overall business.

As we see it clicking in starting in the first half, but really going full steam in the second half of next year and I do expect that much of these these.

Consolidations are going to result in improvement in both gross margin and that's where we're at where I would expect to see much of the improvement so.

Lower cost of goods, improving our gross margins lower overall cost of organization of Opex and you'll see us investing much in the savings into areas that we can expand sales that we can improve on some of the products to help.

Drive the topline so expanding the coverage of the topline expanding sales organization and coverage and technical support along with refreshing certain other products, it's going to help drive the top line of the business at the same time, but again all that kicking and we think about the same time as weve annualize the the lower run rate we've been sitting after the last few quarters.

As we expect that to annualize in the first half of next year and then when you combine that with the improvements in the top line and the changes, we're making an optimized growth.

Thats why we see a night look to a nice organic growth vector as we kind of the second half of next year.

Alright Thats it for me thank you very much.

Alright, Thanks Bruce.

And once again if anyone has a question you can press Star then one on your Touchtone phone.

And our next question comes from Paul Knight You can go ahead with your question Paul.

Okay.

Yes can you hear me Jim.

Yes, Hi, Paul how are you.

Can you talk about the reorganization.

The cellular and the molecular technologies.

Got it interrupting sales what do you have to do how many people is it and how long does that take.

Yes, it's actually one of our top priority is it's really consolidating those two teams, it's not really necessarily lowering costs, it's really getting better coverage you look at the to the two teams essentially the PCM I in the fits legacy team they called on the same call point they called on primarily.

Academic research areas selling the discovery and research products.

So it just up it didnt seem to make much sense to have them split where you had coverage split where you have a small number of people covering a large group like the United States by combining them. They both they both groups carry the same the same product lines and were able to have better physical coverage to the customers. In addition, we can.

We'll be able to put more.

Technical support in place.

Always as you make certain changes that's one area I'm always very careful about when when you start making improvements or changes in your and your commercial channel.

We don't we don't see any any issues in doing that certainly we've secured our salesforce. They understand what's going on the sales leadership in the sales team are involved in much of the much of the design changes here for the organization. So again this is something that by getting by expanding our coverage.

We see that as being a primary driver to helping us get back to an organic growth vector for this business.

India side can you talk about what you're seeing about where we passed the CRL mergers.

Where are you seeing.

You know were and we're making a lot we're actually in pretty close contact with the CR owes at this point.

We do see first with with the two primary customers there with Covance and Charles River.

We do see them stabilizing in fact as the settlement call. We see the CRL revenues actually coming back to about to the historic numbers. The more annual average type numbers. So we're happy to see that happening and we when we think that will now start to see.

With that with those combined groups there will be incremental.

Revenue would be incremental volume of drugs going through those groups.

So were again, we're paying close attention to it certainly.

Much of the the kind of.

Impacts of the changes we think are behind us.

We do think that this is going to start improving here now going forward certainly it's stabilized and we're back at at run rate that at least in the U.S.. We're back on a growth side to make it taking maybe a little bit longer outside the us, but the majority of our CRM business is really here in the U.S.

And then Jim could you talk on you had mentioned on your corporate hand to hand out here for Threeq you.

CRISPR related products, how one off.

Much.

Of that.

Chris Bruce what affecting what percent of the cellular and molecular technology segment and what is the growth rate there is a double digit.

To flush out crisper and her.

Sure with with with much of the new drug development. These days and moving to the biologics. So we're seeing a lot more.

A lot more happening on that in things like genes lighting, and such where our BTX product is a well known product.

It is one of the fastest growing parts of our business than it and I believe it is and it's growing at double digits. It's an area that we're putting a lot of attention to you're going to see us investing more in that area.

We'll also see us investing to make that to make those products.

Even more attractive into the pharma and CRM both base typically we've we really havent taken met much of our discovery product into the CRL, some farmers, where we have a very strong.

Connection we have.

It's a place where our name as well known and very well connected in through our Dxi business. So as at the CRM shows and the farmer group start to do more and more testing even down to the cellular level, where typically it was almost all that in the past and required but much of this has been the animal testing or which is really.

Really great for our our preclinical business, but at that starts to expand into getting more and more cellular level products like.

Like our BTX type product and things that are involved with crisper and electrophysiology. These are products that we think are going to start to being the we'll be able to pull more into those spaces.

And lastly, I know that you were trying to sort out.

The.

Good morning out your interest costs.

Where are you in that process.

Yes, I'll, let Mike responded that short pulse as Mike So what Youd, we talked about as I think our first priority was to get the business improved from an operating margin perspective, when we got the operating flexibility with our debt Amendment I think is we.

Start to deliver margin improvements and get the leverage down that there will be opportunities in in 2020 to get to what a lower interest rate.

Yes, we made that as being a bit strategic decision was first picture, we have the flexibility with the balance sheet to take the charges to get the business Rightsized.

Certainly we're we're also very interested as you know and in getting that debt to the to the point, where the interest rate is more in line with what we would expect to get as we get the next early part of next year.

But again priority was to be able to make the changes we need to do.

And you do see we are cash flowing nicely, we're paying down the debt.

We are going to be working on next Friday would make sure we get the interest rate and right place at the right time.

Okay. Thank you.

Thanks, Paul.

And once again, if you have a question can press Star then one on your Touchtone phone.

And our next question comes from.

Lisa Springer go head Lisa.

Thank you for taking my question you are guiding for a pretty nice sequential improvement in operating margin for the fourth quarter I was wondering if you could.

To summarize what are going to be the growth drivers for that big surge in operating margin.

Sure Hi, again, thanks, Thanks, Lisa Thank you your voice.

We.

Typically Q4, as a stronger quarter for us so certainly that's going to be there'll be growth sequentially over Q3.

That in and when you combine that with the fact that were really managing.

The run rate cost of the business. So we'll see that we'll see revenue growth. We also expect to see a stronger mix as we get into Q4.

With the business is focusing on the higher margin products and we're expanding and some of these areas like like we talked about with.

The BTX product and such.

So we think Q4, we see that coming nicely and what these costs with the cost improvements that we're doing that only does that lead into Q4. It also.

Moves into next year with a lower cost basis, when you combine that with with the actions that we're taking.

We expect to see gross margin improving we expect to see opex.

Continuing to drop and we expect to start seeing more organic growth rolling into the business.

Okay. Thank you.

Thanks.

And that is all the time, we have for allotted for questions I will now turn the call over to Mr. Green for final remarks.

Thanks for joining us to saving that in today's presentation, and we look forward to you dialing into our Q4 call.

As we get into the beginning of next year. Thank you very much to have a good night.

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.

Okay.