Q1 2020 Earnings Call

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Ladies and gentlemen, please continue to hold your conference call will begin momentarily.

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Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020, Harvard Bio's Science Inc. earnings Conference call.

At this time, all participants ARNA listen only mode. After the speaker presentation, there will be a question and answer session to ask a question. During the session you would need to press star one on your telephone if you require any fighter assistance. Please press star zero.

I like the hand, the conference over to Speaker today dates are always thank you. Please go ahead Sir.

Thank you Dylan and good morning, everyone. Thank you for joining us for the Harvard Bio's side first quarter 2020 earnings conference call before.

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

While is entitled to 128, <unk> quarterly earnings presentation, and can be 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 Rafi Chief Financial Officer.

Before I turn the call over to Jim I'll read our Safe Harbor statement.

And 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 at our annual report on form 10-K for the period ended December 31st 2019 at our other public filing.

Any forward looking statements, including those related to the company's future result in 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 plan and how we manage the business internally.

The differences between our GAAP and non-GAAP results are outlined in the earnings release and the slide presentation.

These documents 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 available in the Investor Relations section of our website.

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

I'll turn the call over to Jim Jim. Please go ahead.

Thank you, Dave let me start by saying that we're really proud to see our product playing their part in the fight against Cobot 19.

Many of our cellular molecular technology, such as our BTX Electroporation gene splicing products are helping develop new treatments.

Multiwell plates are helping detect antibodies.

Our preclinical products play a major role also in any new treatment or vaccine before use in humans.

And our recent advances in inhalation or just are just in time for research and development for fight against any airborne virus.

So let's go ahead move to slide three of the presentation take a look at the highlights.

Revenue from the combination of Crs and pharma was up modestly in the quarter.

Academic labs were down significantly as lab shutdown due to the coated 19 pandemic.

Our strict cash and cost control in the first quarter help maintain strong cash flow and also help pay down our debt principal by approximately $5 million.

As we look forward.

We're expecting further revenue declined in Q2 recovering as the academic labs reopen in the second half.

We rapidly implemented significant expense reductions to support margins and cash flow for Q2 and beyond.

We continue to move to a leaner organization and operation.

And we will continue to maintain strict cash and cost discipline as we continue to meet our debt obligations.

Let's move to slide four presentation take a look at the detailed Q1.

We were significantly impacted by Cobot 19 pandemic Q1 revenue came in at 23.8 million down 4.4 million or 15.7% from Q1 last year.

Gross margin on a GAAP basis measured 54.6% that's 2.7%.

Worse than last year.

Non-GAAP adjusted gross margin was 54.6% down 2.9%.

This quarter had GAAP operating income of negative $3.3 million.

Our adjusted operating income was a positive $500000. So our adjusted operating margin was 2%.

GAAP earnings per share was negative 12 cents.

Our adjusted earnings per share was negative one cents.

Our cash flow from operations with two plus 2.9 million.

And we paid down our debt principle, but $4.8 million.

Moving to slide five.

Take a look at Q1 revenue by product family and customer segments.

Starting with the first of all of the table, our cellular molecular product revenue, which is primarily for academic research labs was down 15.7% worldwide as lab shutdown and personnel began working from home.

Which impacted order processing and receipt of equipment.

Reductions include 300000 dollar an exit from a non strategic product line.

Looking at the second roll the table. Our overall preclinical revenue was also down primarily due to the cobot 19 impact on academic research lab shutdowns.

Good news RCR rose saw year over year growth in the quarter, driven by North America, and China recovering.

Also pharma remain steady to last year, and we see a lot of excitement around our new inhalation products.

As I said academics and distributors were down with the lab shutdowns.

And one of our large government lab customers was down $700000 on issues from of internal funding delays.

We move to slide six.

Well look at the restructuring related.

To the restructuring that we announced late last year.

We initiated the Connecticut manufacturing consolidation into holliston and expect to complete in our third quarter.

We initiated downsizing of our UK operation also expected to complete in the third quarter.

The global reduction in force or approximately 10% across overall over across our entire business is almost complete.

We expect annualized savings over $4 million phasing in primarily in the first half of 2020.

And we expect onetime costs of approximately $4 billion to $5 billion associated with it.

We move on to page seven.

And I look at our reaction to the oncoming pandemic at the time.

In mid Q1, we began to see the initial effect of cobot 19 on our China customers and began to plan contingencies for what to do should its spread to other countries.

During the first few weeks of Q1, we build an action plan.

To dramatically actually it was late late in Q1.

We build an action plan to dramatically reduce the overall cost of the business and rapidly implemented it early enough to protect the second quarter and potentially beyond.

The action consisted of worldwide reductions in work hours and compensation reductions in force.

Reductions in management compensation.

And all said, we expect to save approximately $3 million in the second quarter from these actions.

At the same time, considering continuity of the business and employee safety, we rapidly implemented mess measures to for safe factory operation and work from home for non factory employees.

As a result, we have stable effective manufacturing operations up and running.

Now I'll turn it over to Mike for financials.

Thanks, Jim.

On the full PML for the quarter as noted revenue was down 16% due to the impact of Cobot 19.

This impact itself equally across geographies in Q1 with Asia impacted through February followed by a significant impact of business in Europe, and North America in March with the onset of the virus.

The main driver of our growth in original 2020 expectations will strengthen our CRM customer base and while these customers were impacted we are seeing strength with this customer base a month into Q2.

Turning to profitability.

The volume impact noted had a significant drop through effect on gross and operating margins given the speed and severity of the change in revenue trends.

However, our continued focus on leaning out our cost base is reflected in the 1.2 million dollar reduction in Opex reported.

And the impact of our previously announced restructuring actions will sequentially increase from Q1, given most employee notifications were within the quarter.

On top of these committed actions by the additional roughly 3 million of savings in response to covert 19, Jim noted.

We reported a one cents loss per diluted share due to the volume impact noted with cash interest expense declining approximately $200000 on the continued reduction in debt.

The reported tax benefit on a non-GAAP basis, 32.6%, while cash taxes remain very low in 2020.

The GAAP loss.

Our share of one cents included Doug.

The GAAP loss for the quarter included a 1.5 million dollar onetime cost to affect the ongoing restructuring that we announced in December.

Turning to the balance sheet as noted we paid down $4.8 million of debt in Q1 contributing to a $12 million reductions in debt since the end of 2018.

Cash flow from operations improved to 2.9 million from 2 million in the prior year.

We've enhanced our processes around working capital and overall cash management practices, which is benefiting us now and will support our ability to manage through the trough in revenue we expect in Q2.

And we continue to make payments needed to execute our ongoing restructuring and get the cost structure right.

With that I will turn it back to Jim to review the outlook for 2020, Jim.

Thanks, Mike.

Let me just also first quickly say over the last few weeks, we took a hard look at our liquidity.

And in looking at what we had to run with we felt like we had we were in good enough shape with with our current cash reserves and the way the business is running in the actions that were taken that we really didnt need the additional 6 million as part of the PPP loan.

So we've already return that to the bank Im glad to say that.

In returning that we think we're doing our duty in helping other companies that really do need access to that capital now.

So I'll be glad now and we'll move to slide 11, and take a look forward for the business.

We expect the combined Crs and pharma revenues to continue to grow.

With the Coca 19 impact, we're expecting second quarter revenue decreased 20% to 30% year over year and to begin recovering as academic labs reopen in the second half.

I'm very glad that we took immediate action to offset Q2 margin impacts and continue to move to a leaner organization in operation.

We expect improving gross margins and operating margins is academic revenues recover.

Finally, we will maintain cash flows and meet our debt obligations, while we build a leaner and more profitable business platform.

Thank you and I'll turn it over to the operator for questions and answers. Thank you.

Thank you Sir as a reminder to ask your question you in nature Press Star one on your telephone to withdraw your question press the pound key.

Please standby, while we compiled accumulate roster.

I show our first question comes from Paul Knight from Janney. Please go ahead.

Jim can you talk to the businesses again as you were moving into.

Kind of missed the first part of the full due to.

As the operators I guess.

And.

This is equally zeros as they left.

Q2 pharma and academic.

Okay sorry.

So I guess the real good news in all of this is that the CR rose.

Our started growing actually in Q1 in spite of in spite of covert.

Situation, we did see some initial delays while I think everybody was taking stock of what was happening.

But the combination of.

Yeah roads and pharmaceuticals have continued to do well they are up and running.

That business and I think starting and it actually in China as we all saw China starting to.

Erode on the academic side, but and again on the farm on the pharmaceutical Taro side. There was some initial hesitancy, but it very quickly. They very quickly returned returned to work and really got up caught up to business and started repurchasing and purchasing or adding demand for our products.

So overall pharmaceutical and see our roads, we see our have done well through this and continue to do well and indications.

From them as they are going to continue to to require more equipment for us, it's expanding into and we see it's a port the U.S. was there.

Very strong in Q1, we see it growing even further throughout the year China recovered in Q1 in that area and continues as expected to continue to grow strongly.

Europe.

A little bit slower to get started on the for on the CRL pharmaceutical side, but we are seeing of them starting to pick up somewhat too so.

All said that those customer segments of pharma and see our ROE, we see as being in very good shape throughout this and I.

Yes, I think many would say probably a tailwind for that business, given what theyre working on and the need to get back to the all the existing products that they were working on.

On the on the academic side as I said, you know started in China with order activity dramatically dropped off there we saw and we had it with our sales reps and had contracted customers academic customers in China. They were told sometime mid to late Q1 that things were going to be slowing down that they might actually be working from home.

Since then of course, we all know that day.

Shut down almost all of their academic operations.

So in China, we saw that happened very quickly. That's why we took immediate action to to plan for any event this where to rotate around the world.

In China, though we do see just as just to kind of fast forward a little China is picking up not only they've been picking up on their own pharmaceutical side. They are starting to come back to work on the academic side. We are seeing more order activity. There, we expect that to recover fairly quickly now.

The us as you know again, the CRL of pharmaceuticals have done quite well through this for US have continued demand more equipment and you know that everything that they are doing whether its era b or vaccines heska is required to go through this safety and toxicology testing and the formal preclinical testing that needs to be done.

For for release of any of those products, so that along with their existing backlog of projects I would think it's going to provide a solid outlook going forward.

In the us in that segment.

Europe has been a bit slower.

As we also know that a number of the drugs that were originally being done in Europe. Some of those were transferred to US operation. So thats part of Europe being kind of sluggish on the CRL pharmaceutical side on the academic side Europe, it like that the other groups.

Has pretty much shutdown I will tell you, though that in over the last few weeks, we have started to see some initial.

Order activity starting to develop I know, we're in close contact with them.

We know by site, we we have a rough idea what their expectations are as to when Theyre labs reopened.

So I think I'm, sorry, I didn't know exactly what units, but I hope that gives you some flavor feel free to if there's some things like.

I missed that let me know Paul anything else. Okay, and then so basically you think you'll be academia, maybe bottoming now, but not necessarily recovery I think I think at this point, we saw academia, we sell the order order intake drop precipitously.

And as you got in the mid and late Q1, we expect it hits.

I would I believe it's pretty much at that low level now that run rate is what we see going into Q2.

We think we'll see sequential improvement off of that at pretty much lock step as the let's come back to work when when the when the folks went home the lab shutdown order intake.

Really dropped off you know even shipments had to drop off because there was nobody there potentially to unpack equipment and I will say that one of the things that practice actions that we took right away even by mid Q1 later into Q1 is I'd ask that each of our before anything shift to an academic labs that we make phone calls and make sure that there were people there too.

Receive the price.

Product because the last thing you want is shipping something to somebody who is not receiving and then at whips right back on your freight by your freight forwarder or later on.

And you've got a problem and regardless of whether you're fob on Rev. Rec.

It's a bad if the bad situation, if you're shipping and they're not receiving it. It just it just goes bad so what we did is made sure that especially.

On the when we knew it was both an academic customer we wanted to make sure that they were there I'd rather take the hit in slow slowdown on the shipments now than they had a bit back in Q2.

So we're pretty confident that that's that's where it is that he and I think to your base question. This lower run rate coming out of Q1 is what we're modeling into Q2.

We do we have we believe it's going to get bet. We believe it's going to start to recover here, we have but we had were saying we're assuming we're probably into Q3 for that recovery because we know it's going to take time people to get back restart the order.

Process.

In the meantime, we have we took a we took advantage of a lot of digital marketing we've held we're hoping.

Webcast with large groups of customers about the newer technologies getting even though they're sitting at home maybe a board.

They're looking for something to do so being able to to work with us and looked at the new products and product coming out so that when they get back to the office.

We'll have already done a lot of the prospecting and they're ready to start the order process again. So it really just comes down to that calling the time coming on the recovery of the.

Academic labs coming back and turning back on.

And.

Can you talk about debt payments that are do this.

Quarter, I think is 2.8 for the year.

And then were turned negative associated with the government.

Programs as well like restrictions et cetera.

Well I guess first on the debt we have our ongoing interest rate payments, which we certainly have not had expect no problem at all there will be some additional required payments as part of the covenants, which we will of course, we're going to meet.

And typically there is excess cash requirements, but that will the main thing as we're going to make sure we meet our debt obligations.

And we'll work we will work like Hell to avoid any kind of covenant issues.

As the government loan stuff I would say that the government loans that we were able to take advantage of in Europe. There was some really nice programs where.

There they'll work to help you offset opex per.

For someone who is maybe working part time.

That's very helpful in the U.S.

We just we looked at it certainly originally when it became available we looked at because while we just there was there was a lack of visibility with things happening. So quickly we thought it made sense to go ahead get the application and had no idea if we get the loan we didn't get the long we applied and good faith and certainly we feel like we had every reason to use it as it was designed.

But as it became clear that they were running out of money.

It just makes sense for us that if just to build and then I believe that if we can do it without.

Taking money from yes tax payer that could be used elsewhere that some somebody who needs and maybe more than we do if we can get by without it by really managing the business. That's what we're going to do so we went ahead and returned it I think late last week I think that came out in a in an 8-K just recently, but certainly it was are we just the main reason that we decided we just did.

Need it we can get by without it we know how to run the business.

Okay. Thanks, Jim.

Thank you Paul.

Thank you I'm next question comes from Lisa Springer from singular. Please go ahead.

Good morning, given like.

Morning.

Comments, you mentioned that you mentioned that you're seeing some interest in your ambulation type products could you give us some more color around that like what are the insulation type products and from what customer segments are you seeing that demand.

Sure sure. It so we were working on this for a while in its kind of.

Opportunistic that we were able to launch the product just before this was starting this before cobot comes out in the past year, there's the way you measure.

Inhalation load is there's there's essentially a way you try to get attracted you try to understand how much you've delivered to somebody but you can't really tell.

Hi. This is what you do as you if they're designed to to inject.

Aerosols into the longs of the test subjects and in the past all you.

Could do as measure how much you thought you put in well did the new design product is able to not only very clearly measure exactly what was delivered at all so we can also measure the response to it so when you think about.

Our disease that works its way into the lungs, knowing at what point, how much of a viral load is going to actually in fact, and then how the along is going to respond after that in terms of the lungs efficiency and then how that viral load works its way into the into the subject. So this the time.

Moving on this was there really wasn't any way to do anything like this in the past asked to in real time.

I understand and quantify viral load or we call it.

Because at the time, we don't know for sure what they're going to be using but whatever that aerosol as will be at we're measuring their saw were met when we can respond and correlate that with whatever measurements are taking.

Associated with it with that subject so perfect timing for that the company immediately we started seeing interest from China, we're selling them now they're up and running.

And their interest interest is across the board since we don't have that many of the academic labs are still shutdown of the interest there has been more telephones and emails and variable.

But when it comes to this pharmaceuticals and see our rose you know there, they're up and buying and somebody.

Early early academic labs that are running are also buying now and we think this is going to be.

We've already seen quite a bit growth in those shipments that we expect that to continue to grow.

Okay, great and.

Part of the Q4 story was the impact from.

Good margin portfolio rationalization is that process essentially complete.

It pretty much as its its close.

Where much of these.

Yeah, I think yes, it's it's pretty well through I mean, we're asset portfolio that we we believe it's going to be successful going forward.

We're putting more investment in a certain areas that we know are going to have.

Tailwinds things like our anything Christopher related with the BTX line, we're adding a new line to that to be able to go after.

Multiples.

Well uses of it will be look into more higher volume versions.

The cellular side some of the things that we're doing on on how use a multi well placed I mean thats highly.

In antibody detection, so we see that growing we're going to be making more investments. There and then of course, just a general preclinical side I mean, just everything has to go through the preclinical testing phases.

That means utilization of of our implantable telemetry devices and systems and an expansion of that space. So.

In many ways. This is going to it forces us to really look at where the tailwinds are invest there.

Look at where the maybe that maybe where there's not a lot of strategic value going forward and look to look to create savings there.

Okay, great Yeah actually that leads to another question. The implantable preliminary devices you were going to start shipping in Q1 does that actually happened and did that impact Q1 revenues.

Yes. It did we did start shipping in Q1.

We were held up with took a while to get production lines up to full rate I know at this point I think we're we're running along at rate I don't know that were.

I think we're beating all the demand, but anyway, there is theres no real problems with it it did launch and it's a great new exciting product.

Yes, sure, Okay, and one last question, which might be more for Mike. If we don't want the assumption that second quarter revenues are going to be down between 20, and 30% and given the expense reductions you talked about how should we think it.

Gross margins in the second quarter will they be similar to Q1.

The there'll be a little bit of downward pressure there a lot of the savings that we're we're taking its going to go through the Opex line. So just with that type of volume decline there will be a little bit a negative pressure on gross margin, but but net net you'll see our operating margins and just operating profit.

Get back to kind of normal run run rate levels that we've been at recently because we've taken such.

Aggressive cost actions.

Okay, great. Thanks, very much at least this lease that we tried to size. We don't we looked hard at what we thought the potential operating profit impact might be.

On a revenue reduction if that were to occur and we were at all in we were to see some further erosion and so thats. How we so we have target of what kind of expected savings, we felt we really needed to generate to maintain.

Our ability to have good gross margin.

Vincent operating margins and to continue to cash flow properly and keep the business running well and you know as we come out of the quarter as the come out of Q2, we're going to know if things are how fast things are coming back and it will figure out and certainly we can if there's one thing we not to do is to manage their cost structure.

Quickly the no.

Good.

Yes.

Okay, great. Thank you.

Open up again in the fall can you tell us little bit about your customer base and.

Do they use research.

There is have projects that are fully funded do you think that they're likely to start up again.

With their projects in the fall can you just kind of sensors.

How stable that revenue stream might be and how fast it might come back.

Sure Yeah, I can tell you that you'll certainly has as as we all as you all know the budgets had already been set so you know the researchers in the labs had pretty good budgets coming in we also know that NIH has has expanded.

The amount of budget Fenton spend spend level, but I'd. These academic research lab. So we're excited to see them get back to work.

As far as did the school year in such the bigger the bigger impact for US is that the researchers come back that's not so much there helpers and students, but the actual academic researchers.

As soon as they we believe and indications we getting them as soon as the as soon as the let them they wouldn't be back in their labs, and then they'll be able to then we'll start to see the you know in each of these areas a ramp up of order activity again, we've already seen it start in China, we're seeing some shoots in Europe U.S., we think starts to come back here.

We're fairly quickly to and you know, it's going to come back by state, but as long as the research actual researchers are our are back in the lab. That's the main gating item for US and then it'll just be a matter of of time and sequence as they come online.

Okay. That's great that's very helpful and then.

Just a quick question on the on the income statement.

Where do you think you can get.

The DNA expense down to over the remainder of the year.

Thats a good question I think if you it's kind of hard to answered at this point specifically I can tell you that if you look at the cost reductions that we've loaded in and we will we expect to see throughout Q2, because that will be it. It's the combination of.

Combination of the riff actions. The you know the restructuring actions that started last year much of that now will be in our run rate spend for Q2, along with these additional $3 million of actions will be in so as we come out of this we're going to we're going to be careful to make sure that that we don't AD spend unless there is.

Adding unless there is additional revenue that demands the added added spend.

There are some things where you know we'll look to do as people start to come back full time that'll also be timed with growth in revenue. So we'll be matching that to make sure that we keep our our dropdown and our ability to run the business our ability to generate.

You know solid operating profits and operating operating margins.

So.

And specifically in Gionee you now as we there are you know.

I always saw as we can say continue to turn this into a more leaner business certainly gionee as a piece that that improves there too. When you have as you have less site. You have you know you end up with more of cost centers to some of these smaller sites, where you really are just have your engineering and maybe some product.

Product marketing cost folks you don't really need a lot of DNA overhead associated with that at that point. So we're going to cut you're going to continue to see the CFC to move those numbers down as we can.

I think maybe because we're managing the costs along with the revenue we know it's coming in and make sure that we were building a much leaner platform as a business.

Okay.

Thank you for that and then last question for me do you have any any other new products that are set to launch later this year.

Actually we did as a a series of new ones that have that have been working and we'll be launching we're adding a win with with the advent of the what's happening with any we no need to a search for antibodies, we think thats going to be moving forward and that's going to be a long term need not just for for this particular disease, but for a lot more.

Some of our product there associated with that with the plate readers and and multi well product that you use that for isolating and measuring.

Yeah actual load of of antibodies that we see as a growth area. That's an area that we're putting a lot of effort and thought into now.

Re reinvigorating the Biochrom side of the products you know there we think even on the clinical side, there's a real room for that to grow.

Everything associated with Electroporation and Christopher.

We'll be expanding that product line to be able to to do more outside of just typically we tended to be very heavily penetrated in academic research labs and not quite so not quite so much in the CR rose and pharmaceuticals, but now that we have.

Really strong relationship strategic relationships with the largest CR rose and pharmaceuticals, you're going to start to see some of those products also be tailored tune for our expansion into higher volume.

And be able to be more applicable into those spaces.

I think those are probably the main areas, where you'll you'll see more moat more movement.

Okay, great. Thank you very much thank you Bruce.

Thank you I show no further questions in the queue at this time I like to turn the call back to Mr. Jane Green CEO for closing remarks.

Okay, well. Thank you again for joining us it's been a tough tough few weeks a couple of months.

But I hope you know that.

This team we have the right team in place here to manage this business of the turnaround continues I think as we as we get as we see our customer last come back online.

That will continue to drive sequential growth in revenue as we manage our our spend rate as the core of the cost of the business is that as we keep that down and we get that additional and revenue starts to grow you'll see better operating leverage.

We're excited about this I think you know the future. We know we were excited to be in a position to play a part and what's happening here and to be able to help.

And I know our book.

Sleep is as we exit this year, we're going to be right back on track to make this the kind of a highly profitable platform. You know that's run well that Oh, that's highly that's right in this space of where that business should be so we're excited about taken us business to the next level and again getting through this year and into 2021. So thank you.

Very much for your time.

Have a good evening and everybody please be safe.

Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.

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