Q2 2020 Harvard Bioscience Inc Earnings Call

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I would now like to turn the conference over to your host Mr. Davis.

Please begin.

Thank you Howard and good morning, everyone. Thank you for joining us for the Harvard Bioscience second quarter 2020 earnings conference call before.

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

If I wasn't titled Q2, 2020, each bio quarterly earnings presentation. It can be located in the investor overview events and presentations section of our website.

We didn't call today will be Jim Green Chairman of the Board, President and Chief Executive Officer, and Mike Rossi Chief Financial Officer.

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

In 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.

Putting those described in our annual report on form 10-K for the period ended December 31st 2019, our quarterly report on form 10-Q for the three months ended March 31, 2020, and our other public filings.

Any forward looking statements, including those related to the company's future results 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 out 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 earnings release and today's presentation. These two documents can be found on our website under investors 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 and available in the Investor Relations section about website.

A replay of this call will also be available at the same location on our website at Harvard Bio's fights Dot com.

I'll now turn the call over to Jim Jim. Please go ahead. Thank you Dave Good morning, everyone.

Let's move to slide for the presentation and take a quick look at the highlights for Q2.

Academic labs were down significantly as anticipated due to lack closures around the globe.

I'm glad to say that our combined CRL in pharma revenue remained strong and growing.

And that strict cost controls combined with product mix drove strong margin and we continued to pay down our debt.

As we look forward.

We're carefully aligning our cost with revenue level during this expected recovery.

We will closely manage cash and expect to further pay down debt.

Overall, we expect to be on track to our original September 2019 margin targets.

Moving to slide five.

Quick look at the detail.

As expected we were significantly impacted by the Cobot 19 pandemic Q2 revenue came in at 23.3 million down 6.3 million or 21.3% from Q2 last year.

Gross margin on a GAAP basis measured 59.4%, that's an improvement of 550 basis points from prior year.

Non-GAAP adjusted gross margin was 59.8% again, improving 550 basis points.

This quarter had GAAP operating income of $600000 or 2.4% of revenue.

Our adjusted operating income was 4.1 million so our adjusted operating margin improved to 17.7%.

GAAP earnings per share was negative four cents.

Our adjusted earnings per share was five cents up one cents from Q2 last year.

Our cash flow from operations was $2.4 million.

We paid down debt like 2.2 million in Q2.

We want to slide six figure a quick look at a revenue by product family.

Starting with the first of all the table, our cellular and molecular product revenue, which is primarily from academic research labs was down 33% worldwide as labs shutdown and personnel working from home were largely unable to process orders or receive equipment.

Looking at the second row, the table, our overall preclinical product revenues were up from last year. This in spite of business from academic customers being down growth came primarily from North America in China on expanded demand for our telemetry and system software.

As I said academic revenue in this segment was down due to laugh shutdowns.

Let's move to slide seven and we'll look at restructuring activities and major actions in that happened during Q2.

Relating to the restructuring plan that was announced in Q4 fiscal 2019.

Connecticut manufacturing consolidation and UK downsizing is on track to complete in Q3.

The reduction in force of approximately 10% across overall business is substantially complete.

As for actions in Q2.

We took action to incrementally save $3 million in Q2 through a combination of temporary and permanent cost reductions and.

We see our cost bases for the second half supporting continued strong gross margins and operating margins.

Now I'll turn it over to Mike for a quick look at the key financials Mike.

Thanks, Jim and good morning, everyone.

On the full pinedale, so I'll be focused on our adjusted or non-GAAP operating results, which we used to operate the business and note our GAAP results and related to reconciliations to the adjusted results are included in the appendix of this presentation.

As Jim noted despite the impact of Cobot 19.

On Q2 revenue, we're very pleased to report meaningful improvements in gross and operating margins and we're on track to the margin targets set out in September 2019.

Gross margin performance exceeded any quarter and recent Harvard Bioscience experience at nearly 60% on an adjusted basis due to strong sales of higher margin technologies. In addition to our ongoing efforts to lean down or manufacturing cost base.

We will continue to push hard and these levers to drive gross margin to greater than 60% on a sustained basis.

Adjusted operating income increased versus Q1, 2020 and versus prior year. Despite the revenue decline as results of our disciplined focus on cost reduction.

Q2, operating expenses were 9.8 million or 20% lower than Q1 or prior year due to our restructuring activities as well as temporary measures put in place with the onset of covert 19.

Within Q3, we expect to have substantially completed the restructuring announced in December 2019, it's like rationalization activities in the UK, Connecticut complete.

Also we have continued to review our cost structure to ensure we are lean company on a permanent basis, an action implement to date will generate over.

Over $1 million of incremental cost reductions on top of the four to 5 million anticipated with our 2019 restructuring.

All these actions and form our outlook for the rest of 2020, which Jim will speak to in a moment.

Finally on cash flow, we were again able to reduce net debt.

Based on continued positive cash flows through to the cost actions taken to de risk Q2 in this unique environment.

We have reduced net debt by 4.6 million, thus far in 2020 and by over 9 million in the past year as a new management team.

Our leverage ratio came in at a low threes in Q2, and we are compliant with all debt covenants. We believe we're picking all steps necessary to ensure liquidity is available to service our obligations and to continue to transform Harvard Bioscience.

With that I'll turn back to Jim for perspective on the rest of 2020 Jim.

Thanks, Mike.

Moving to slide slide seven on slide 11, I'm sorry.

And just taking a look forward and we expect combined CRL in pharma revenues continue to grow.

We expect sequential growth in academic labs as they reopen over the coming few quarters.

We will maintain a leaner organization, while continuing investment in targeted product lines.

I will manage our cash flows and continue to pay down debt.

In all we expect the second half 2020 to be on track to our original September 2019, gross margin an operating margin targets.

Thank you and I will turn the call back over to the operator to open the line for Q1 night. Thank you.

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Our first question or comment comes from a lot of Bruce Jackson from the benchmark Company. Your line is open.

Hi, good morning, and thank you for taking my questions.

Hi, Andrew looking yeah, hi, so looking at the the academic market in particular, how do you see that unfolding for the rest of the years or something where you know since third quarter, you've got really September.

Our academic labs can I start going back in action like now or could it be fourth quarter before we start to see some groups in that particular market.

Well, we see all the activities happening now with a lab starting to come back you know in some areas. The labs are coming back pretty fast in other areas. It's a little slower you know with the continued you know situations in the northeast with shutdowns and such it's a little slower than than we would like but you know we assumed it was going to take.

Two to three quarters to get back to normal type revenue demand.

So it's going to kind of a mixed bag China's come back very fast and very hard which is excellent.

Yeah. When you look at the U.S. it seems to be we see it kind of spread out by state. Some states like Texas is picking up pretty quick and number of a large academic research sites.

In the south and in this and in Texas or have come back and we see a lot of back order activity. There are the northeast is coming but not as fast as you might as we would like but they are could do they are coming back or the researchers are coming back they tend to be coming back and cohorts, where maybe of the built their grouping into different groups and then one small one group will come back maybe a third.

In a particular weak and then a couple of weeks later another third we'll come back so they're sequencing other way back into the labs and mainly Tina to get there to get their populations re established for a preclinical testing to get the equipment in place and get ready for not only the things that have come up recently with cobot, but all the all the back.

Log of working and research that they've already budgeted for so again, that's why we're thinking it would be a you know to threeq two to three quarter timeframe to things to really get back up to speed.

But the way where the way I'm running the business, we're running at sequentially now we've taken tremendous amount of cost out of the business. We're managing our cost structure based on on revenue what comes in making sure that we stay at the level of profitability, we need to be at and that we're able to make investments in targeted products as things come back.

But overall it looks even though it's you know what the big downturn by managing on a sequential basis.

We can we can gauge this coming back manage the cost ethic as the revenue comes back and make sure that were targeted as to where we think there's going to be strategic new business growth by customer segment. This actually in many ways gives us a chance to tune what would have what is actually it's easier to do it now in a growing environment like this and it would've been in the path.

Yes, so in many ways you kind of helped us organize our way as to what business makes sense to really expand and drive while it comes back and what what business might not really be that strategic and should we not put a lot of effort into.

Okay. Good then hey, a quick question for Mike on the debt pay down the debt pay down a little bit ahead of our expectations. This quarter. So I was wondering.

Philosophically, how you view the sorry are you trying to hit a certain cash balance in terms of determining how much you pay down per quarter or are you trying to.

Hit a certain amount.

I mean really for is the way we're looking at it as to.

What is make sure we're managing to the to the covenant expectations.

And within that because there was a the covenants did step down from Q1, Q2, but where we're all kind of managed well within that and then the other side to that as I'm looking at just excess liquidity I have with my revolver available as well and.

So that's we've got about $7 million of at quarter end of untapped revolver there to deal with so I really look at kind of total excess liquidity, so call that 90 $10 million going into the second half, which we look at is very any kind of downside scenario, we can withstand that easily.

So.

And Bruce I would also add that by like by showing that we can drive our leverage ratio down below three it makes it easier for us to look at the at the commercial refinancing activities, which of course now we're looking at what we think as the banks are coming back we're going to we're going to find a nice opportunity there.

Alright, great.

Great. That's it for me thank you.

Thank you Bruce.

Thank you. Our next question or comment comes from the line of Lisa Springer from singular research. Your line is open.

Okay, Oh good morning.

You mentioned.

I'm good thank you.

Mentioned during the presentation that product mix was a factor in driving the gross margin improvement could you provide a little more color around that in terms of the product mix.

Sure sure we're seeing strong growth on the preclinical side, our implant telemetry products that are that are used in conjunction with our overall system.

We are the leader in with pharma and CRL companies and with very large academic sites that debt do the kind of a final preclinical testing prior to going into human clinical testing.

So that's that's what's been ramping up and couple of a number of things have been driving at just the general overall demand for capacity is now the sudden there's going to be all these.

Vaccine and treatments for coal bid on top of what what is planned just for the standard aging population of drug development. So there's just a generalized demand there.

Those products are among our highest gross margin products. So growth in that space is really positive for our mix.

So then you had the and then again when you look at the academics as they come back a lot of our focus is on the largest academics that in many ways looked a lot to up like a farm RCR up company doing the same kind of testing there also picking up demand in those areas and then that along with our new inhalation product, though it's not a very.

A large number to start because it's fairly recent it's right in target for for what what's kind of what's needed here now if you get into testing for you know for <unk> and other type of communicable diseases. So again, it's the right things are growing and we're putting investment into that area because that that's got the group the greatest Tailwinds right now.

And of course and looking at the portfolio for the rest the academic side. We're this gives us opportunity be selective as to where we think there's real strategic tailwinds and that's what we're focusing on that was making sure that those products already at that demand develops.

Okay, Great and could you comment on restructuring costs in the second half of the year and how it may breakdown September versus the December quarter.

Mike you.

You have a number on that roughly yeah I mean so.

Lisa what I'd say is what the I've talked about the additional.

Cost savings, we've gotten the four to 5 million initially that we for the December I'd say there'll be another <unk> million or so that comes out additional savings, but but net net it's probably about a million a quarter of up kind of cash out that we'll see on the restructuring costs and the each quarter Q3 in Q4.

Okay great.

And could you comment on new product launches in the second half of the year do you have anything lined up to go.

Yes, we do you know we had introduced the new inhalation product and immediately upon introducing it we saw a lot of order activity.

Building backlog very quickly that's going to result in a nice.

Additional vector of growth for the for the business.

Also on the on the cellular based testing side, that's an area that that we see expanding more into places where they had typically only use.

Non human tests.

So that's going to help and then we're looking at it but just the standard demand for the telemetry and being as we build on getting becoming date the.

Standard for the systems, you know than that puts us in a situation, where the consumables and the implantable.

All I have have come from us so that that helped us out a ton, but now we're also looking at.

A few of our product as many people know really haven't been invested in well for awhile and you know were look we are in process with a number of them that are going through rejuvenation with adding new technology, making them more network compatible that'll that'll provide more opportunity for expansion, but we're in.

Same time, we're looking at what are some of the things that maybe really don't make sense and and really our strategic four inch really probably shouldn't be a part of our portfolio. So we'll be looking at those as far as some of them we've already worked too.

Take out of the market either price them up and out or potentially sell them off. So it's kind of a we're going through that that rationalization process and as we get to the ended the year on into 2021, we're going to happen right portfolio for our customer segments that means wasn't what pharma NCR owes need that means what large academics need.

And then overall.

Based on you know needs and growth for the future.

Excellent and final question for those of US that have short memories can you remind us what the September 2019, gross and operating margin targets where.

Sure sure you know I remember when it came on board as and took over as operating CEO.

About three months into it I put public targets out and said here's what we expect to do basically 2019 was stabilized the business start to build the team make sure. We hit the numbers for 19 or 20 point, what I. What I said publicly was I felt second half of 2020, the first half I knew and go through you know some.

Changes and you know as restructure things and we get the right people in place I Didnt really at the time no that we were going to have a pandemic thrown at us at the same time.

But as you can see we took pretty aggressive actions to deal with that right away and our targets for the second half of this year, where he worked to show a gross margins around 58% and operating margins around 17 17 or so.

Exactly right Yep stepping up from 56% and like 12, 13, so its 58% and and 17 is how to growth in operating margin Guard I felt bye bye bye, making these changes and again with the cobot thing it really gave us an opportunity to make the changes quickly kind of forced forced us to which is good.

And put us in a position where we'd look pretty good for coming into 2021. The other targets I said, there were pretty pretty aggressive 60% gross margins operating margins 20%.

Start to see an organic growth vector based on adjusting the portfolio and having the right portfolio and having a professional quite a big sales team who calls on these large account. So 2021 look really good but right now we're in 2020, we're going to close out second half strong.

We're positioned to do it and again happy to glad to get back on the original track in spite of so called thing.

Okay, well that's it for me thank you very much.

Thank you Lisa.

Thank you again, ladies and gentlemen, if you have a question or comment at this time. Please press Star then one on your telephone keypad.

I'm showing no additional questions in the queue at this time I would like to turn the call back over to management for any closing remarks.

Sure. Thank you again this is Jim Green. Thank you very much for joining us. This ends our presentation for today and thanks for being Investor with Harvard Bioscience. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program you may now disconnect everybody have a road.

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