Q4 2019 Earnings Call
Participants. Please continue standby Yakovlev weekend momentarily once again, please stand by and thank you for your patience.
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Welcome to the fourth quarter 2019, Hartford Life Science incorporated earnings Conference call. My name is call. It wont be your operator for today's call. At this time all participants are in listen only mode later, well conduct the question answer session.
The question answer session. If you'd have a question. Please press Star then one on your Touchtone phone. Please note that this conference is being recorded I will now turn the call over to Dave that surprised you may begin.
Thank you poet and good morning, everyone.
40 began 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 a file the file was entitled H.B. I O Q4 quarterly earnings presentation and it can be located in the Investor overview section of our website.
Leading the call today will be Jim Green, President and Chief Executive Officer, and Mike Rossi, Our Chief Financial Officer.
Let me, let me remind you that on todays call. The company may make various remarks about future expectations plans and prospects for Harvard Bioscience ink that caused us to constitute forward looking statements for purposes of the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by these forward looking statements as a result of various factors, including those discussed in our annual report on form 10-K for our fiscal year ended December 31st 2018, and its subsequent filings made by the company with the FCC.
To the extent the company utilizes non-GAAP measures reconciliations will be provided in various press releases and on the company's website.
Further I would like to inform you that the company, it's directors and certain of its executive officers are participants in the solicitation of proxies from the company shareholders in connection with the Companys 2020 annual meeting of shareholders.
The company will file a proxy statement and proxy card with the FCC in connection with its Felicia solicitation of proxies for the 2020 annual meeting.
Shareholders I strongly encouraged to read the proxy statement the accompanying proxy card and all other documents filed with the FCC carefully and in their entirety as they contain important information.
Information regarding the entity of companies participants and their direct or indirect interest by security holders or otherwise, we'll be set forth in the proxy statement and other materials filed by the company with the FCC, which can be found porphyry through the investor overview section of the company's website at Harvard Bioscience Dot com or through.
The Fccs web site at FCC Dot Gov.
We will not comment on engine capital or the director nominations on this call.
I will now turn the call over to Jim.
Please go ahead, Jeff Thank David Good morning, everybody.
Let's start by moving to slide four take a quick look at the highlight.
We drove significant year over year, adjusted operating margin expansion going from 14% to 18%.
Strong cash flow with year over year leverage reduction from 3.7 times to 3.3 times.
We initiated a major restructuring, giving greater than 4 million in annualized savings.
This year, we expect a return to organic growth.
Delivered significant operating adjusted operating margin expansion well into the mid teens.
And strong cash flow to reduce our debt and our leverage ratio to below 2.5 times by the end of year.
Move on slide five.
Patient pick a take a look at Q4 Q4 revenue came in at $31 million down 2.9 million or 8.6% from Q4 last year and included impacts of a negative point 2 million in FX and negative 1.3 million from low margin portfolio rationalization.
Our gross margin on a GAAP basis measure, 55.6% up 30 basis points non-GAAP adjusted gross margin was 55.6% down 30 basis points.
This quarter had GAAP operating income of 1.6 million or 5.3% revenue.
Our adjusted operating income was 5.6 million.
That means our adjusted operating margin came in at 18.1% and that's up four percentage points from last year.
GAAP earnings per share was once that.
Our adjusted diluted earnings per share measured eight cents up once that from the prior year, though it was impacted and include the impact of FX and some taxes and Michael talked to you about that little bit later on.
Finally, our cash flow from operations was $2 million.
Let's move on to slide six and look at the full year.
Revenue for 2019 was 116.2 million down 3.8%.
GAAP gross margin was 55.4%.
Non-GAAP adjusted gross margin came in at 55.8% up 10 basis points from prior year.
GAAP operating income was <unk> point $4 million or 0.3% as a percent of revenue.
Our non-GAAP adjusted operating income was 14.9 million or 12.8% of revenue up 70 basis points.
GAAP earnings per share was a negative 12 cents.
Non-GAAP adjusted diluted earnings per share was 18 cents down two cents from prior year.
Cash flow from operations measured $8 million.
Let's move to slide seven.
Harvard Biosciences, historically shown the businesses various basket of product brands, which we believe do not do justice to describing the business.
You will see us transitioning to a more straight forward view of the business by showing the company's products and applications, but also showing them sold to various customer segments, well known customer segments. If customer segments will typically include academic research pharma clinical research labs, and distribution, which will often include OEM sales.
We'll talk about that.
So starting with the first of all the table our cellular molecular product revenue, which is predominantly to academic customers was down in Europe for the first three quarters and recovered in Q4.
We had a negative 1.3 million Q4 impact from product portfolio rationalization.
We also had negative 2.1 full year impact for a few large OEM and distributors, which we're now actively addressing these relationships.
Looking at the second roll the table, our preclinical product revenue was down throughout the year, primarily impacted by the consolidation of our our largest for CRL customers combining into to.
Academic sales in Europe, and two large onetime purchases in Q4 last year.
The CRL consolidation impact our impact our run rate in the first half started recovering in Q3 and recovered to normalized levels in Q4.
Pharma had two large unique customer purchases in Q4 of 18 and revenue came to normalized levels exiting 2019.
Any academic space Europe trended down through the year exacerbated by gaps and sales coverage, which I can say now we are addressing.
Mike will give you color little later on in the presentation to the items in the lower section of the slide.
So let's move on to slide eight and take a look at the restructuring related actions that took place in Q4.
We completed the Tvs I consolidation into the Minneapolis operation.
We initiated the Connecticut manufacturing consolidation to halted math.
We initiated downsizing of our UK operation.
And we started a global reduction in force over 10% across all businesses.
We expect annualized savings of over 4 million phasing and primarily in the first half of 2020.
And we expect onetime cost of 45 million spread across this Q4 through Q4 2020.
So with that I'll turn it over to Mike for the financials.
Thanks, Jim So on slide 10 up the presentation folks.
The full PML for the quarter as noted revenue was down 8.6% year over year.
Argument Jim's commentary Biomarkers were were down due to planned product rationalization and large form of farmer orders in prior year and the rest of world, where we have reported headwinds through Q3, one nine.
Both Europe and China finished the year strong a positive sign entering 2020.
Turning to profitability, we grew adjusted operating income and expanded margins 400 basis points through continued focus on reducing our cost base by both manufacturing efficiencies and opex discipline.
Gross margin was essentially flat as cost reductions offset the impact of lower volume.
Adjusted EPS increased one penny on the operating income improvement noted with higher effective tax rate, partially offsetting these gains.
The reported tax rate is higher for the quarter and year due to certain tax credits in Europe, which lap since the prior year.
Overall cash taxes remain low for the business.
Turning to the balance sheet, we reduced debt by over $7 million over the course of 2019, which included the benefit of a $3 million reduction in inventory year over year.
We're pleased to exit 2019, having deleverage the business and with the operating flexibility to execute the planned restructuring noted.
Turning to full year financials on page 11.
Youre gaining revenue declined for the year with due primarily to the CRL consolidation impact Europe headwinds and product rationalization efforts noted.
The full year results in 2019 include a net increase of approximately 2.4 million.
From the January 2018 acquisition of Dxi and divestiture of the Denville distribution business essentially one extra month of the OSI sale from 2019, which is overall improve the profitability of the business.
Adjusted operating income with modestly up with 70 basis point margin improvement based on the cost reduction focus we've noted.
Gross margin was essentially flat as these cost savings and improved product mix offset the impact of lower volume.
Full year adjusted diluted EPS declined on a higher tax rate noted.
As well to a lesser extent FX and the share count.
With that I'll turn it back to Jim to share our 2020 outlook Jim Thanks, Mike.
Okay, let's move to slide 13.
And review the 2020 cost reductions that are designed to expand both our gross margins and our operating margins.
We expect 4 million in annualized savings from global restructuring announced in Q4 19.
Savings beginning in this Q1.
These actions included consolidation of the Connecticut manufacturing into our core manufacturing operation. This action is expected it didnt progress down expected to complete by mid year.
Restructuring the Cambridge UK operation is also in progress and also should complete by midyear.
Our global head count reduction or approximately 10% across the functions.
Essentially complete here in Q1, and we'll pay back throughout the year.
Move on to.
Slide 14.
Talk a little bit about 2020 growth drivers.
The impact of the CRL consolidations has annualized now and we see a return to growth in the first half.
Our COO in pharma customers expect increased growth on demand of our next generation implantable telemetry devices and these start shipping here in Q1.
We expect incremental pull through sales of our cellular based products on expanding use of cell based testing in both Crs gross and pharma customers.
Our academic sales are expected to remain stable and we expanded opportunity in our CRISPR related products and cellular level testing.
Our challenge is with certain distributors and OEM partners, where we expect a modest decline it has our attention and we're addressing better management of these channels.
I will say the Corona virus situation could be a mixed bag at this point likely a headwind early in the year, though could be more demand for certain kinds of our products. When we looked at what's happening in the use of cellular and preclinical type testing products.
So let's move to finally, we'll look at like 15.
Let me just take a minute to say that the board and I believe the current share price does not reflect the true value of Harvard Bioscience.
We have taken strong actions to address this such as establishing a new management team restructuring actions focusing on growth and.
And setting public targets against we are measured.
So as I look the outlook for 2020, we're on track with the public targets that we set last September we.
We see revenue returning to organic growth in the low single digits for the year, primarily coming in the second half.
We expect gross margin expansion of approximately two percentage points.
We expect operating margin expansion of approximately three percentage points, reaching the 15% to 16% level for the full year.
We continue to focus on debt reduction and expect our leverage ratio to be below three by the end of the first half.
Thank you now I'll turn the call back over to the operator and open the line for you and I. Thank you.
Thank you.
We will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone.
I wish to the we'll know from the Q. Please ask the Pathfinder hash key if you are you may speaker phone you may need to pick up the handset first speak for question and numbers. Once again, if you have a question. Please press Star then one on the attach town south.
First question comes from Paul Knight Janney Montgomery. Please go ahead.
Hi, Jim and.
It really good.
Have you guys on the phone as well bike and the first question I had is.
The product rationalization, what product line was that in the fourth quarter, Jim and.
What kind of the level of revenue would you say are you looking at is is there any is there. Another 4 million 5 million worth of an additional rationalization you think about or you don't know yet, but starting with what was in that 1.3.
Yes.
Thanks, and good to hear good to hear your voice Paul.
The first thing would be the TV ESI products. Those are the jacketed type products that that go typically actually sell through our dxi business with those products.
The preclinical that was an operation down in North Carolina. It was subscale, losing money the revenue associated with it was on the order of annualized maybe a million or so last year. So in moving that and just just keeping the jacketed products, which have a have a life those move forward, but I would say with.
That shut down there probably affected on annual basis somewhere maybe a little around $1 million of revenue now again that was why would typically call bad revenue. It was older products low margin, we have newer types of products that would that would transition to until it over time anyway. So it just made sense to take that out of it.
Portfolio.
But the little that the small amount of of continued revenue that we will get from these current jacketed products built contributed they'll contribute but at a much lower revenue level.
The other thing is there was the kind of there was there where the company had been selling large system that had very small company factored content in it so which meant they were they might look like a big revenue number, but they're very low margin and very little contribution and something like that to strategically doesn't make sense for this business. You know my focus is to.
To drive growth with profitable business that means gross margins that are accretive to our gross margin not things that are that can be significantly dilutive and in that space. I think identify that particular, one particular product line that that was a little over a million, maybe 1 million and a half optimism and a half of that kind of a product offering that we are no longer offering didnt.
Offer it this year. It will there was some of that and last year. So that comes out.
Other than that I also said that Theres been a cup. There's a couple of products of large customers that had been eroding and had been eroding over a few years and and it's almost out of our business. At this point so that was coming down at about 1 million to 1 million and a half year part of why we were seeing kind of just the overall erosion with that.
It's going to it annualizes this year anyway, what we're deciding it does it make sense for us to try to kick it back into the business and that's on the order of about 1 million 2 million a half. So that's kind of the total numbers some of its already come out there'll be a little bit more this year, maybe it's another couple of million a headwind, but with driving growth across the rest of.
The business, you'll see that crossover as we get into the year as we certainly as we get to the second half Thats, where we had predicted the negatives are gone. If there are some that a couple that we want to keep that will if they are good and profitable will at least with those to flat and you'll see the overall growth kicking and from the underlying growing products that are strategic.
So I hope that answers your questions that gets of yesterday, you think about.
And then you're mentioning under several things on slide seven like.
Changing the large OEM distribution arrangement or impact and also gaps in European sales coverage do you expect these things you're changing and distribution in the sales group does that take a first half or does that take the year to to get the distribution network. The way that you want.
It.
Some of it starts right away the sales the gaps that we had in the sales area, where we had gaps of could coverage we have already filled those spots over the last couple of months.
But as you know these are quota based type opportunity they take they might take a year for an individual up to really get up to speed on average, but certainly they start contributing even in the first half as far as the one OEM customer that a couple of one main one that we're dealing with that that's not going to really that's still going to be a bit of a headwind through the first half so thats why.
Again, when I look at the business kind of pad predicted that we've kind of roughly flat in the first half there.
We're kind of hard to predict the Corona virus thing, but that's that's going to have that certainly can have a bit of impact early on in the first second quarter, but we see other other things that are growing, especially when you have a CR rose now coming back to growth.
And telling us that I mean actually indicating growth in demand. The pharma also same thing some of the exciting product that you're aware of like the CRISPR related products. Those are the those are those have some nice tailwinds. There also again with the situation in China you start to see some of these a number of these products everything from cellular based test.
Getting through preclinical.
To some of the gene splicing things that are used for the for creating some of the potential solutions. These these are getting a lot more attention now and everybody is working on it and these all the most all these customers working at our customers of ours. So again, it's a mixed bag, we hate to see what's happening there.
But it does highlight that we're going to replace that can really help.
So.
Yes, I think Thats, where we are a little bit it'll take a little while the first half, but again the other things are offsetting a lot of some of these downward movement in the first half, but as those are done and we address we address them. We are we're we're full speed ahead at the second half comes in.
And then the do you expect for a tax rate on 2020.
Well, Mike on tax rate.
The low Twentys is probably right right to think about Paul.
Okay and then last question is the cellular and molecular product lines I know that you know obviously the cell and gene therapy market is the most rapidly growing part of the marketplace what level revenue you add the directly related to.
Studies involved in cell and gene therapy, and CRISPR related work et cetera.
Is that part of what part of cellular and molecular is it.
It it's it's a fairly large component of our of our academic sales and cellular molecular so you look at.
I'd like to Mcf or the the FX related products were individual sell testing and the CRISPR related products, where theres, where you see a lot of the.
The the.
The fusion type technologies for.
For adjusting and loading different things into the cells. So those are the two second I would say CRISPR related and the seller base testing, which between the two of them I would say, it's certainly on the range of around half of our CMT business I would say roughly speaking that addressed those type areas and what's what's also very.
Starting to us is that our relationships with the CRL us and pharma companies. We we've sold those technologies reasonably well into those markets in Europe, but never really.
Did much in the U.S.. So we're now talking with the big our big.
Yes, I customers Farman, Crs and starting to offer those products, there and that's where we see it that's where the additional incremental type pull through starts to come through so they're they're interested in it we are talking with them about it and again it specifically those areas that you mentioned cellular testing.
And things that are associated with the biologics.
Okay. Thank you.
Thanks, Paul.
Our next question comes from Lisa Springer from singular research. Please go ahead.
Thank you.
Good morning, I Wonder if you can comment on how the CRL landscape has changed over the past year and how that might create future opportunities for you.
Yes, well you know we had our we have our four largest CRL customers.
Consolidated into two so now that we have trials River Covance. There are two I guess, our two largest customers now.
Yes, there was as you might expect a little bit chaos during those acquisitions, where they were sorting out who was going to which tools. They were going to using the good news is all four were using our tools.
But the delays at the end they add they had told US point blank that they knew they were going to be some delays in purchasing tilting sorted out like which which labs were going to be concentrating on what and who's who's going to be in charge.
Thats behind us now and they they both large customers have indicated they see both of them increasing demand on our products and thats starting now so we're pretty happy to see that that not only as a stabilized but they are moving back toward.
At least to where they were and they look forward to growth. If you look at there. If you look at what they project publicly there on them on of nice deep growth curve, and we were able to draft that nicely with the Crs and the pharma business is still moving more and more to the CRL is and that's part of growing it. So we can play both sides of that.
It fits with pharma thats, great if it moves zero Thats fine too and we are becoming the standard.
The standard actual systems that are used by by these folks so that that puts us at a great position.
Okay and could you comment on.
Expectations for R&D spending in 2020, and where that R&D is gonna be concentrated.
I don't know that we that we say what the numbers are on R&D budget, but certainly I will tell you. This we're putting it into the areas, where we see expansion and growth a lot of it really is targeted toward.
The commercial sites of pharma CRL.
It said the platforms that really are used by these folks that better I would say very sticky and those than if they use our since our platforms that are and our data analytics systems.
Then they use arch consumables that our telemetry devices.
The other area I would say is when you look at the areas that we see that we that we know are being used and expanding in academia, but also being pulled into the CRL pharma world comes down to the the cellular seller based testing products that those we see that's where that's where we're investing there and we're investing in the gene splicing are.
Hi, Chris for related products to builds are natural tailwinds, and Thats, where were making more investment to be able to offer a wider spectrum and be able to go more cross the full line from the academic sites that may be doing small numbers attests to more high volume things that are happening in the Crs and pharma.
Okay. Thank you.
Thank you Lisa.
Our next question comes from Bruce Jackson from the Benchmark Company. Please go ahead.
Hi, Good morning, and thank you for taking my questions follow up question on the Corona virus situation and the CRL shows.
Have you heard anything from your Shiro accounts about how the crude men and trial work is going and then does that have any impact on your product flow and.
How do you see that playing out over the course for the next couple of quarters.
Yes, well make as we see the initial demand is primarily in the academic side.
But add that as that starts to work and as we start to see vaccine starting to be come out to the where they're starting to move toward clinical testing.
We see that as certainly that that demands our products.
And in particular.
We think that and we're starting to see a lot more interest and tick up in the inhalation type products. So when you look at how you're going to how youre going to test these situations like this.
Relation is really critical so that that's something we're preparing for we think that that's going to be something thats going to be some upside for us on the other handle in China. We know a lot of a lot of the academic Institute's they've been told stay home for another couple of months. So we know we've got some there will be there'll be some impact to the China revenues and the good.
As for US I think good news or not.
We don't have a lot of China revenue I have never made a big deal out of it. So it's not it's not a massive exposure to us at all it's more minor, but but it is something that you know as that correct that will start to be opportunity for growth.
But the neat, but again the need for our products are right in line with the kind of things that are needed to help solve problems like this.
Okay. That's something that's helpful. And then in terms of the Chris for related product line I assume you're referring primarily to the BTX electroporation and Thats right extra fusion product lines right is there.
Was there anything else in the product line that some debts gene therapy related.
Chris for related.
Thats, probably the most on the upfront side and we've tended to have one product that was kind of one size fits all and.
We knew we know if we really want to draft that with the growth opportunity that there is for us to have a couple more configurations, one that will get us higher volume and then also.
For places where they don't have.
Budget to have a more value based offerings. So we're expanding that capability and electroporation as big Big part of Gulf CRISPR.
Then when you look to the the as type products individual sell testing areas that would be its related but typically we expect we see those both those are the two that'll applied to that space, but again BTX as a big one and we see a lot of opportunity for us.
Okay, Great and then last question for me and the product line rationalization I think the general idea as to migrate customers over too.
Another product in the product line how's that.
Process going into you have enough like sales and marketing people right now to to manage that process.
I think we do I mean, it was a smaller it wasn't a large revenue stream, but it was a fairly older technology moving away from these external jacketed type of ways of.
Measuring signals to more implantable devices, which is right in our wheel house with Implantables and telemetry, but also with headsets and things that are used for neuro that come out of our enthusiasts and German German facility. So that that's more of a natural.
Change, but but I get again, I think of a longer on the them Implantables, that's where it's all going to go.
All right. That's it for me. Thank you very much. Thank you Bruce.
This is all the time allotted for questions I'll now turn the call over to Mr. Green for final remarks.
Well, thank you everyone for joining us.
Look forward to.
Spending more time with our investors really I again want to say I think we've got the right board and the right management team, we're making the changes to turn this into a real profitable growth platform of the business.
I came here to do this I get I appreciate your support and I look forward to.
Joining us on our next call for Q. Thank you very much and have a good day.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.
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