Q3 2020 Harvard Bioscience Inc Earnings Call

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Thank you Melissa good morning, everyone. Thank you for joining us for Harvard Bioscience third quarter 2020 earnings Conference call.

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

File is entitled to 320, 28, bio quarterly earnings presentation and is 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 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 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 in our annual report on form 10-K for.

The period ended December 31st 2019, our quarterly reports on form 10-Q filed in 2020 and our other public filings.

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

Also much of today's call will focus on our non-GAAP quarterly results, which we believe better represent 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 GAAP and our non-GAAP results are outlined in the earnings release and today's presentation.

These two 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 and available in the Investor Relations section of our website.

A replay of this call will also be available at the same location on our website.

I will now turn the call over to Jim Jim. Please go ahead. Thank you David Good morning, everybody.

Let's go ahead and move to slide four of the presentation take a look at the highlights for the quarter.

Despite revenue being down 12% from Q3 last year, our gross margin was up 80 basis points and adjusted operating margin was up nearly three full percentage points.

Academic labs sales continued to recover as labs reopened.

And our combined CRL and pharma revenue continue stable at 2019 levels, our pretax pre pandemic levels.

We're happy to see expanding growth in our new inhalation product line.

As we look forward revenue and profitability growth will support adding back certain organizational costs as our employees return.

We will continue our disciplined cost and cash management approach with leverage around three times and we expect to refinance our debt. So.

Finally, we expect to deliver second half operating margin in the mid to upper teens, beating last year.

Move to slide five of the presentation, we'll look at the details of Q3.

As expected we continue to see improvement with our Q3 revenue coming in at 24 million, that's down 3.4 million or 12% down from Q3 last year remember, though Q2 was down 21% from prior year all impacted by the COVID-19 situation.

Our gross margin on a GAAP basis measured 56.1%, that's an improvement of 150 basis points from last year.

Our non-GAAP adjusted gross margin was 56.4% an improvement of 80 basis points from last year.

This quarter, our GAAP operating income was $200000 or <unk>, 0.8% of revenue and it's up from a negative 1.4 million in the prior year.

Our adjusted operating income was 3.6 million so our adjusted operating margin improved to 14.8% up over two and a half percentage points from the same period last year.

GAAP earnings per share it was negative three cents.

Our adjusted earnings per share was four cents flat to last year.

Our cash flow from operations was $1.6 million and we paid down our net debt by half a million dollars.

Move on to slide six like acute our Q3 revenue by product family.

Starting with the first row of the table, our cellular molecular product revenue, which is primarily from academic research labs was down 21% worldwide.

It's an improvement, though from Q2, which was down 33%.

We see continuing improvement as labs, reopen and restart their research and development for new therapies and vaccines.

Looking at the second row of the table, our preclinical product revenue is maintaining the recovery at pre COVID-19 pandemic levels.

And within that our preclinical academic level academic revenue, it's still down, but improving again as labs reopen.

Moving to slide seven well look at restructuring activities and major actions in Q3.

Finishing up on the restructuring plan that was announced back in Q4 of 2019.

The Connecticut manufacturing consolidation and the UK downsizing are now complete.

That's for actions in Q3, the COVID-19 related actions taken in Q2, and Q3 support getting us to a sustainable lower overall cost of organization.

And also on the bright side, we're seeing expanding demand of our new insulation products.

Now I will turn the call over to Mike for a quick look at our key financials Mike.

Thanks, Jim and good morning, everyone.

I'll speak to our full PML and our liquidity and as is our practice I'll focus on our adjusted or non-GAAP operating results, which we used to run the business.

We know what our GAAP results and related reconciliations to adjusted results are included in the appendix of this presentation.

As noted we continue to improve our margin profile. Despite the unique environment created by COVID-19.

Gross margin improved versus prior year on product mix and the positive impact of our restructuring plan, which includes a modest benefit from eliminating certain low margin products in the second half of 2019.

We continue to accelerate our efforts on both sales effectiveness and product line improvements recently to ensure we're balancing cost management and driving profitable top line growth.

These efforts along with continued academic lab recoveries should provide us a path to the 60% gross margin targets set forth in 2019.

I do note that were down sequentially, our gross margin due to the uniquely strong mix in Q2 as well as seasonality.

Adjusted operating income increased versus prior year, despite lower revenue.

Due to the gross margin improvements noted.

Cds execution of our restructuring plan.

Plan announced in December 2019 is substantially compete with.

Connecticut, and UK site activities fully executed and other permanent cost structure changes implemented post COVID-19 provide an additional 1 billion of additional annualized cost savings.

As communicated last quarter. The combined effect of these activities is total annualized cost savings of $5 million to $6 million.

Opex for the quarter was $10 million or 20% down over prior year and essentially flat to Q2.

However, we know we relied more on permanent cost reductions in Q3.

As a reminder, last quarter, we leverage temporary work and pay reductions and in Q3 much for workforce returned to work full time.

Finally on cash flow, we can continue to reduce net debt with dsos and inventory reductions contributing to a $1.6 million cash flow from operations for the quarter.

We reduced net debt by over 5 million, thus far in 2020, and nearly $10 million in the past year at the new management team.

Our leverage ratio or total debt over adjusted EBITDA.

It's stable, it's slightly below three times, we're compliant with all debt covenants based on all the actions we have taken to improve the business and the underlying solid cash flow profile, we believe market conditions exist to refinance our debt to lower cost facility in the near term.

With that I'll turn it back to Jim for perspective on the rest of 2020, Jim Thanks like to see.

Slide 11.

Taking a look forward and we expect combined our combined CRL and pharma revenues to continue to grow.

We expect the sequential growth is academic labs reopen over the upcoming quarters.

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

We'll manage our cash flows and continue to pay down debt.

And work to finance to a much less costly bank debt in all we expect continued sequential quarterly revenue improvement and we expect to deliver second half operating margins at the mid to upper teens level.

Thank you now I'll turn over the call to the operator and open the line for <unk>. Thank you.

Thank you, ladies and gentlemen, as a reminder to ask a question you will need to press star one and you told us only to be doing a question press the pound or hash key please standby, we compile the DNA roster.

Your first question comes from Lisa Springer with singular research.

Go ahead.

Thank you.

Good morning, and congratulations on a pulling out a pretty decent quarter.

Thank you Lisa.

Regarding the product mix what was the price.

Product mix impact on gross margin and with the products mix similar to the product mix in Q2.

I think versus Q2, Q2 had a very strong product mix heavily heavily leaning toward other telemetry products, which are one of our highest margin products as we got into Q3 and Q3 as a.

From a organs are not normally Q3 is one of our lighter quarters. There was a little lighter our mix was a little heavier toward some of the newer or some of the.

DMT products starting to come back in the lab, so that had a bit of a negative mix on us yet. So you noticed that the gross margin is down a little bit from the prior quarter, but again as as we get into Q4 are.

Our overall mix shifts back to where we think it's naturally would be asked so we're a little heavier on a little bit of a negative mix also had some a number of things that couldn't revenue recognized in the quarter.

So that has a slight negative effect on the mix piece, but overall.

That's fairly lumpy business moves up and down and the gross margin will shift a little up and down with that but overall, we are our targets for the second half is to get the up there close to that 50, 758% net on the second half and and you know our targets for 2021 are I've been very clear about that and we're pretty.

We're where we feel real strong about all the things that we're doing here. This year and then the second half to physician 2020 wanted to be on target for what what we want this company to be.

Okay and could you provide me with a little more color around the.

Demand for the insulation products, where is the demand coming from and how did it can appear to demand in Q2.

Yeah. That's that's a great question, that's a real exciting growth area for US you know we introduced the inhalation product because it's a it's a first of its kind that allows you to to measure what you're putting into a subject in terms of what their breathing and then at the same time in real time measure what of that is getting through the longs and into the blood system.

Same thing goes for medications or things that you're trying to treat a particular disease, whether it be colgate or our other other the initial big demand. We saw develop was in the CRL and and the pharma side and again it started in China, where you would expect where they came back to work very quickly working on vaccines and so.

We also as expected saw that demand moving around the world again, primarily and initially in pharma and see our Roes. However, our our feeling is that the a much a very large driver for demand for this is going to be the academics as they come back you know the work they're doing it's going to be heavily targeted.

Toward airborne type diseases, and this is a perfect kind of product perfectly timed to left these large academic sites research in this area and developing therapies in this area to adopt us. So we think this demand is really just starting overall, starting with CRL in pharma and then expanding and.

Standing as the all the academic start to come back.

Other areas. We had we do have a number of other products that are in a similar situation was cellular testing type of products like with the electrophysiology that are also very much involved with testing at the cellular level that will be an area that we also expect to see demand growing and specifically at the academics really start to come back.

Okay and my last question is about the refinancing of the debt is this something that you anticipate might happen still this year.

And what kind of rates are you indifferent and you might be able to get but kind of reduction.

Well the pressure that's a that we have on ourselves to get to a lower cost of debt certainly we're targeting we'd like to get it done this year.

There's always some things that can happen with the marketplace and such but certainly we're targeting to get it done here in the very near future.

Certainly I'd like to see have done this year in certain so what Mike when you look at the kind of savings that that'll generate I think Mike do you want to comment on what were thinking as far as what bank level interest rates look like it's certainly on the kind of couple of million dollars a year in interest savings that we would project on that Mike.

Right, Jim and market conditions have improved there and that people like the credit profile and that we're paying close to.

Over 9% right now will be it should be less than 5% all in.

The opportunity out in the marketplace right now.

Okay, great that's huge thanks very much.

Q.

Next question is from Bruce Jackson as the Benchmark company. Please go ahead.

Hi, Thank you for taking my questions.

First off good yeah.

Operating expense control during the quarter do you have any additional special charges coming in the fourth quarter.

Mike Youre roughly were what do you expect that yeah, there's still some things.

There were finishing off and so I think in total way to think of it Bruce is.

With the five to 6 million of savings that we've talked about over between Q4 last year and this year, they will be about $5 million to $6 million in total so that's there'll be some left to go but should be around what we are in Q3, which.

Which is a little less than a million bucks.

Okay.

And then if we could just talk a little bit more about the academic market. So how fast is that coming back and.

And the installation in particular, but are there any other areas of demand coming from that market.

Sure sure. If you look you know.

I think that's a good proxy for as the lab. Our labs are coming back is looking at the the CMT level revenue that we report on a you know initially we thought that that the last would be down somewhere in the neighborhood of 50% and then recovering.

Sequentially at something like maybe moving from 50 to 30 to 10 or 15 or so what we've seen in our numbers is are we were down around 33 to.

34%.

In Q in Q.

Two and that improved this quarter to I think 21% down. So we're seeing about a 10 10 slightly over 10 point improvement per quarter as it as it moves back to the norm.

I think the good news like and then like you mentioned, but new products coming out is we expect to see that the recovery is it looks like a general growth improvement for us, but then with these new products coming in that's going to be additional underlying organic growth that we expect will continue to move our natural growth vector forward.

As we get into next quarter and then certainly in next year I'll be able to show you.

Kind of a pro forma restated view and also be able to show you what the products and you know we've we've decided on certain product lines that they're not really strategic they might be low margins. They might there. They may not be a part of what we think is a real strategic growth driver for the business. So we're working to remove those.

Some of those from the portfolio I'll also at that point be able to show you what it looks like on a pro forma basis, and then what we what we would be expecting to see as far as natural organic growth as we get as we go into 2021, maybe even in Q4 I'll be able to give a better view of that and give you a better ability to.

Forecast, what the underlying natural growth rate of the businesses and of course, you'll see it on a much more valuable product mix because it's more strategic these are products with more natural tailwinds and Oh by the way products that are going to have better pricing power and will be that the future of this business.

Speaking of the the product portfolios, there's the the product line rationalization, that's going on and then you also have in the past discussed how some of the products or maybe you can get a refresh.

Maybe some new products coming out.

Anything that saw coming up near term that we can look out for.

Oh, absolutely certainly you already know about the insulation products, you'll see extensions in that area.

There's going to be expansion and new technology on the implantable telemetry side, that's our fastest growing our it's our our fundamental business is what we do with the with the Implantables for what's used in all of the you know the file preclinical testing.

And then in addition to that we see expansion and we're going to continue to invest in the cellular level testing activities are more.

More and more of what happens in the preclinical phases is is being able to test you know things like safety toxicology at the cellular level. So that is going to be expanding some of our multichannel type products that that's again an area that we continue to invest in we think that that the AAA area.

Has been I mean to me. It's it was it was really kind of.

Kind of left alone for a long time, the product hadn't been updated or refreshed or improve on and I want to say 10 years. So that's an area that we see real opportunity in the marketplace. We were the leader in the original.

The analysis technologies.

And it's it's it's been doing okay in clinical and research, but that's an area that we're investing in we expect to introduce some new technologies. There are some faster technologies and also you know we've kind of that seems like the company just kind of let go of the clinical applications of that even though it's a it's a leading product.

In the clinical space and it's a it's a product that's used heavily AAA is something that's used for every new and just about every newborn baby. So there's well it's got a great installed base has a great consumable stream and shame on us for not having really driven that and having that become a a growth part of this business. So that just to name a.

A few and then there are others with somebody advanced development, that's taken place in past platform. That's that's a natural area also that with expanding research.

And you also see that we have tended to do I kind of thought of that business. When I first really got into it as looking too much like a basket of brands and some of these brands might be very strong in a particular region like our MPS products were very strong in Germany, but you don't see it you don't it doesn't make any sense why they are not heavily demanded in the u.

Yeah, So you'll see those things start to move over also so as we get to the end of the year, you know I'll be going through and showing more of what we are doing not only with products, but give you a better view of how we're putting the sales organization together in a way that really expand sales efficiency. So we're pretty excited about all the stuff coming out and it's.

And it's natural it's right in line with where the market's going both and in the research space and in the commercialization in pharma and CRL.

All right that's it from me thank you very much.

Thank you Bruce.

There are no further questions at this time I would like to have become friends that tell me speakers.

Okay, well. Thank you very much I appreciate you joining us for Harvard Bioscience, and look to see you lifting in our on our Q4 for call. It. The comes up next quarter. Thank you very much and have a great day. This is the end of the presentation.

Ladies and gentlemen, this conclude today's conference call. Thank you for participating you may now disconnect.

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