Q4 2020 Harvard Bioscience Inc Earnings Call

Good day.

Good morning, ladies and gentlemen, and welcome to the Q4, 2020 Harvard Bioscience earnings Conference call.

At the time, all participants are in a listen only mode.

Later, we will conduct a question and answer session and instructions will follow at that time, Inc.

Require assistance during the conference. Please press Star then zero on your Touchtone telephone.

I would now like to turn the conference over to Mr. Davis of voice. Please go ahead Sir.

Thank you Tiffany and good morning, everyone.

Thank you for joining the Harvard Bioscience fourth quarter, 2020 earnings Conference call.

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 the <unk>.

File is entitled Q4, 2020, H final 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.

And our discussion today, we may make estimates the 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 31, 2019, our subsequent quarterly reports on form 10.

And Q 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 day.

And 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 of 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 as well as a replay of this call 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.

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

Thanks, David.

Good morning, everyone. Thanks for joining us today what.

What do we go right to the slide deck and move to slide four of the presentation take a look at the highlights for the quarter.

Net revenue recovered to pre COVID-19 levels.

Adjusted operating margin improved both year over year and sequentially to 19%.

Our preclinical product revenue was up 19% showing strength across all markets and product lines.

Cellular and molecular revenue is still down the recovering sequentially as academic labs continue to recover and come back to work.

We finished refinancing from high cost debt, the commercial bank debt saving about $3 million annually.

As we look forward, we expect reported revenue growth of approximately 8% to 12% over last year.

We expect adjusted operating margin improvement to the mid to upper teens.

And going forward this year youre going to see our focus is on high value organic growth.

Marketing and new product introductions.

Let's move on to slide five and we'll take a closer look at some of the details.

As expected we continue to see improvement with Q4 revenue coming in at $31 million flat to last year.

Gross margin came in at 57, 2%, that's an improvement of 150 basis points from last year.

This quarter had GAAP operating income of $2 8 million or eight 9% of revenue.

Our adjusted operating income was $5 8 million so our adjusted operating margin measured at 18, 7%.

GAAP earnings per share was negative two cents.

On an adjusted earnings basis, our EPS was <unk> <unk> flat to last year.

Our cash flow from operations was two and a half million dollars and we paid down our net debt by half a million dollars in the quarter.

Let's move on to slide six.

Starting with the first of all of the table, we'll take a quick look at our sales to cellular and molecular product revenues.

Which is primarily sold to academic research labs and.

And it was down 15%.

But with continued sequential improvement from Q3, which was down 21% of.

Also continue improvement from Q1, which was down 33%. So we're seeing a steady growth back as a as the law. As these are academic labs continue to reopen and start to move back towards normal operations. We expect continued improvement as these labs reopen and as they restart the research and development of new exciting therapy.

And vaccines.

Looking to the second of all of the table, our preclinical product revenue was up 19% driven by.

Strength in all of our core customer segments contract research organizations and pharma and academic labs, there was somewhat offset by a modest decline and government and distribution business.

Moving on to move on to slide seven and look at.

Some of our major activities and the quarter.

Looking at the growth drivers, we realigned sales territories and expanded coverage and we aligned along our direct sales lines and a separate distribution type structure.

Looking at some of the products, we saw preclinical telemetry and insulation product line is growing fast and especially and pharma CRO and academic labs.

On the cost and cash site and the of the cost and cash flow side.

The cost out from turnaround and lean at lean initiatives delivered up to $7 million to $8 million from prior run rates.

We completed our debt refinancing with about $3 million of annual cash savings and it also gives us added flexibility to support our growth plans.

Finally, these cost actions and increased margin from growth on our business will enable additional investments and new product development, new product introductions that youll see coming out this year.

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

Thanks, Jim and good morning, everyone.

And I'll focus my discussion on the full P&L and our liquidity.

And Q4, we saw gross and operating margins improved as the result of continued focus on business fundamentals.

Margin improved year over year on strong sales from our higher margin products and the positive impact of cost reductions.

<unk> gross margin also benefited from the normal seasonal uptick Q3 to Q4 and revenue.

You've proven and we are seeing from focused sales execution and product portfolio management, including the elimination of a number of low margin skus at the beginning of 2021 has us on track to the 60% gross margin target we set forth in 2019 as economic lab productivity returns pre COVID-19.

Evil's later in 2021.

Adjusted operating income increased as revenue returned to prior year levels, and Q4 and product mix improved and.

And Q4, we continued to manage costs with discipline, maintaining our focus on the lean structure. We've recently communicated internally our plans to consolidate certain engineering operations and eliminate two small facilities in Europe.

The incremental actions are expected to generate additional annualized cost savings of approximately $2 million and will be complete and the first half of 2021.

All told total cost reductions versus run rate prior to the July 2019 management changes or over $7 million annually with global head count down over 15%, creating a more operationally efficient business.

These savings have enabled reinvestment and a much stronger sales and marketing organization and Jim will speak to our expected growth and other investments and the discussion of our 2021 outlook.

Finally, operating expenses increased sequentially in Q4 due to variable compensation with higher sales incentives plus bonuses accrued based on achieving our original 2022nd half goals of over 17% adjusted operating margins and refinancing our debt all happening despite COVID-19.

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The ability to fund these incentives while also delivering improved sales and financials absolutely creates of momentum for 2021.

Finally on debt and cash flow, we continue to reduce net debt and Q4 with improved earnings for significant improvements in DSO as accounts receivable were down $3 million year over year on the same revenue.

The collection focus improved significantly.

Our leverage ratio of our total debt to adjusted EBITDA remained and the low threes with the new credit facility closed in December as Jim noted the.

Cash interest costs of current debt levels will be down about $3 million and overall that will continue to come down in 2021 with the earnings growth and the underlying strong cash flow profile of the business.

And as importantly, with this new facility, we have substantial operating flexibility to execute our growth initiatives.

With that I'll turn it back to Jim to discuss our outlook for 2021, Jim.

Thanks, Mike.

Moving to slide 11.

Take a look at the summary.

And looking forward.

I guess I just want the first day when we see that most of the structural improvements are really behind us at this point there'll be more work this year for really for our final alignment for some items that will be.

And you know really lining up nicely for Europe, but most of the most of the big works already been done this year. Our primary goal is sales growth moving the business to growth and.

And driving it the proper way through sales effectiveness, having the right coverage with the right kind of organization and direct sales the combination with distribution sales.

Professional marketing.

Youre going to see a significant change in the caliber of what we use to help us.

Send our message to our customers.

And also new product introductions. This is a technology company that introduces incredible technologies that that make a difference in people's lives. So that's going to be the focus this year, but it really what you will see a real move the sales growth and this year.

We expect revenue growth on a reported basis and the range of 8% to 12% versus 2020.

We see the preclinical tailwind and overall sales execution on track to providing a sustainable growth Foundation.

And the academic labs will continue to come back and recover as they come back to work.

Portfolio of rationalization pruned low quality product revenues.

From the business and the tune of around $2 million off of our <unk> thousand 19 baseline and then an additional $3 million from our FY 'twenty baseline.

Adjusted operating margins are expected to range and the mid to upper teens.

We expect gross margin expansion to approximately 60% on volume and higher and higher margin mix.

Reinvestment in our sales marketing product development R&D will support our long term profitable growth plans going forward.

Thank you and now I'll turn the call over the operator to open the line for questions and answers. Thank you.

Ladies and gentlemen at this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad again to the star one.

Apart from moment to compile the Q&A roster.

Your first question comes from the line of Paul Knight with Keybanc.

Hi, guys compressed in the quarter.

Hi, Paul.

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Sales goal of 8% to 12%.

What's your thinking on normalized growth rate I mean, you've got a lot of noise and 2000.

And then COVID-19.

Barry and 21 to 20 and a lot of noise obviously.

The level of revenue growth goal after 2021.

Yes, that's a great great question, Paul just to give you a little.

View as to how we think of it I I like to look back to 2019 before COVID-19 before all the noise.

And as you know we've been working to <unk>.

Prune out of the portfolio the non strategic type products, the things that really didn't make sense or need or werent really strategic for growth and werent really part of driving the business. So those with those coming out I look at the I kind of my underlying view as I look at 19, and I look at the growth and I look at and I adjusted for.

Or what what I'm no longer selling and then I'd move fast forward into 2020 and do the same thing.

So by re when I look when I look at and <unk>.

<unk> for what we're no longer selling.

It looks like we can we add somewhere in the neighborhood of of three to four maybe five points of growth.

To what it would be what it would look like had we restated it based on what we're actually selling going forward. So when I look at what we expect on a normalized basis and again and you're right. This year is going to be.

It's going to be still a little bit noisy because the the labs.

Arent all back yet there could be another another downturn or another and other shut down the we're not expecting that but net net I would.

And we believe.

Fundamentally that we've got of business here that should be growing and we expect to see growing and the high single digits. So you know I originally had a target of 6% to 8% I certainly wouldn't come off of that I think theres room to even improve on that when I look at the breakout of the two classes of businesses the.

And the preclinical products.

And they were pretty confident that we're going to see somewhere around double digit growth in that space and.

And then as we get the the laboratory equipment working as we as that really starts to come back the diagnose the research work.

That's going to come back to a normalized growth rate somewhere in the neighborhood of 5% to 6%, but I think it's fair to say that we also are going to see some significant improvements and our sales efficiency as we get coverage right and we run our direct sales like the professional direct sales team needs to so again net net if I'm in that six to eight and maybe.

B up to up to close to 10% growth on an underlying basis I think that's a good a good basis to build on and to assume this business should be generating.

And what products and the quarter stood out to you as kind of highlights on the growth rates.

Right, well being and certainly you saw what happened with the preclinical products and 19% growth much of this we believe is strong sustainable continuous growth in those areas are big part of that was I have to say of the new introduction of the installation technology.

It's a fast growing component, but also the fundamental business of the telemetry of the Implantables and the base software systems. The the phonemic software system, that's what we'd call. It if the if that based analytics system that's used.

Two.

Called the data and to come up with your come up with what it is you're going to be.

Buying at the outcomes of the of the testing. So those were three of the big areas. Other areas that we see growth as the single cellular type tests areas areas, where we're seeing more and more activities go into single single cell testing and.

And then of course, you know the expansion of the the newer technologies that are CRISPR related so you get into the Bts and electroporation technologies, we see Thats also going to be continue to see nice demand pretty much across the spectrum of our customers, but and so that's why it all comes together very nicely and as we get into as we get into time to get out there.

And talk with with our.

Of our investors and such and now we're gonna have a much better deck that we'll be working through to show the.

Show more detail on these products and what's really growing and where the technology, where the puck is going to.

So look forward to getting out with your people.

And do you expect any further shrinkage of non growth businesses and 21 Jim.

I don't think so I think it was important to try and get to figure out what really didn't make sense and the portfolio net net it's probably somewhere around five points.

That just the they were a drag of the business. They were not you know not really things that were they werent and and areas that we're going to be growing they were routing and they weren't they didn't really.

And it makes it just didn't make strategic sense.

But I don't I don't really see anything specific going forward that because I think we did a pretty good job of evaluating the full portfolio our call points. The sales teams our marketing capabilities. So I think we're in pretty good shape, there always could be something that depending on what happens and the market might make more of less sense for us to do and you know we are we do have limitations as to how much work.

And be able to spend on R&D and that means you have to make calls we will make the calls for the most.

Of the longest running tailwind, where we see the long the best future for these technologies.

But that said I don't I don't see anything in particular that I expect to have to come out of the portfolio at this point.

And then lastly, the.

CRO industry is adding another merger do you see those.

The two customers as.

A significant part of your sales exposure and your thoughts on that.

Well I mean, I think it's always historically, it's an issue for a short time, because there's always some chaotic period, where nobody's quite sure who's going to who's going to run the show and which processes will be fall will be used the good news is we have great exposure.

The cross those companies. So it's not it's not like there's the risk. We don't believe there is the risk that we will lose it and we think there could be some little bit of noise during the process, while they switchover.

But sometimes it goes the other way and.

The the acquirer and needs to expand more and we end up with more business there.

I think the key thing is we've got the team in place now with professional strategic account management and place we have a we had a great sales leader in this area, who knows how to work these relationships and.

And those how to build.

The strategic relationships with these types of large customers, but the CRM business is a big part of our expected growth going forward and we see that continuing to come.

Seeing it in the U S, whereas Asia is really picking up and <unk> and pharma.

And just overall just looks like we've got we've got a really nice share coming our way and.

Okay. Thank you.

Thank you Paul.

Operator, I think we have another question coming in.

Yeah.

Yeah.

And part of me up net.

We have Bruce Jackson.

And with benchmark company.

Your line is open.

Right.

Good morning, and thank you for taking my question.

So you talked about it.

Launching some new products here in 2021 I wanted to know if you would be willing to go and some more details about it.

Which areas you can be launching and that's and if there's anything that you're particularly excited about.

Sure.

I will tell you that as we get to our new bra roadshows that will be coming up we're going to go into a lot more detail, but just in general I think it's fair to say that youre going to see investments in our BT ex line.

The line, which is electroporation and that's part of the whole CRISPR world and Youre going to see expansions there.

Youre going to see further improvements and some new product lines coming out and the individual cell areas and that would be the <unk>.

Multi cell system of the MTS systems.

We're always we're always coming up with new areas of expanding and and expanding.

Expanding our infusion products.

And then I'd say across the board of for the products for free for preclinical telemetry there'll be there'll be some new telemetry technologies that we're working on for Implantables will continue to push the inhalation product and there'll be a lot more effort on really making our best in class of software platform.

This is the this is a product if you know as the.

This goes into a large site.

It really it really is sticky and it makes it it's something that our customers get really good at using it and it's areas, where we can add new features fairly quickly to meet their needs. So that's a big part of adding the number of sockets that we have and the business.

Okay, Great and then.

Just generally on capital deployment do you have.

The target that the capital ratio that you are going for you've been doing a really good job of paying down debt and I'm just wondering.

What do you think is the optimal mix for you.

And I think as we get down somewhere around two ex that's going to be a pretty a pretty good number for us and now we have a much better facility now as.

As we get the late in the year.

And it's likely that we may see some real opportunities to bolt on.

Some of some products or technologies that would help us to build out the portfolio of nicely so that.

And that was the whole idea with the get get our balance sheet clean.

It will be clean this share you can see how we're cash flowing very well.

Much of that cash is is to pay down the debt the light.

There likely will be some level of capital expense our capital expenditures this year.

Just as we as we really tune the system and move the volumes up and and work on improving our yields but those would be the two main things nothing nothing big on the on the horizon right now though.

Yeah.

Yeah.

Okay great.

Nice quarter. Thank you very much for taking my questions.

Thank you Bruce.

Yeah.

Okay.

Yeah.

Okay.

Okay.

And your next question comes from the line of Tim Chiang with Northland Securities. Please go ahead Sir.

Hi, Jim.

I kind of quarter.

Could you talk a little bit of just about your geographic segmentation and it looks like what about half of your business is coming from the North American and the rest comes from outside.

North America, you know, how do you sort of the year.

The growth rate ex.

The U S or ex North America versus North America for this year.

Well a good good question Tim.

I mean, certainly North America is the the bulk of our business but.

And it's been coming on very quickly and and surprisingly fast.

A tremendous amount of strength in Asia.

Europe's a little slower it's been slow.

And for last year and fact.

And hasnt been running Super well for us for a while we are working on getting our structure in place and our ability to sell better there.

We think and time, so I guess, if I were to say the.

Main driver with the U S. Our fastest growth area of probably is going to the Asia. Because we do see continued all indications are this is going to be a grower. We see our orders are coming in very solid backlogs building.

Europe will probably be able the last one to really come up part of it is Europe still has a lot of countries that are shut down pretty hard.

But by the time they are all back to work and labs are open we will I expect Europe to turn back into a knife.

Growth.

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Great and and Jim maybe just one follow up I mean, how do you sort of the research labs reopening of the year progresses, and theyre going to be more.

Tied to the the.

2021 school year or do you see the research labs opening up more of this summer.

Yeah, I would I would say, it's going to be a slightly different probably depending on the region.

Asia seems to be all.

Pretty much running full speed there I would say they are up and running and we see that and we see the outlook there very strong.

America is coming along very nicely, we still have a few areas like the northeast, which typically are the probably the strongest their areas. They are still running slow they will start the clip and we believe as we get into summer time.

So I would I would expect that.

As we get into the.

Fall school year, that's when things really start to kick in and that's when the the.

The budget, so I'll be re snap, but they still got budget for this year that we expect to see.

And to build here, but it's the people get back that that's kind of of the way, we see it and are Europe's going to take a little longer.

So again I would expect you know China is pretty much there now.

North America is coming back very fast.

Europe, a little slower I think its going to take Europe, we're probably looking into the third or fourth quarter to really be back to where they should be running at its probably more like the fourth quarter for them.

On the research labs and that is the Crows and farm out there, we don't really see a problem there they're up and running you can see it by the growth we're seeing I mean.

<unk> sustained solid growth on CRM and farm of work and.

Also seeing more and more of what would typically happen and small pharma and these but these cores that are coming out of large universities theyre starting to move more and more toward what looks like.

A small pharma company and that's for US that's of great target and we think that's going to be a big part of academic growth and the preclinical space.

Okay great.

That's great that's great commentary.

Thanks, Tim.

Your next question comes from the line of Lisa Springer with singular research.

Good morning, and congratulations on a great quarter.

Thanks Lisa.

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How much of the bump and preclinical revenues and the fourth quarter would you estimate is COVID-19 related.

You know that.

The probably the only way, we can really say would be.

And it wouldn't necessarily be specifically COVID-19 because these products are used for all of vaccines and all.

All therapies and drugs drug development of the one though that we would.

Two that seems to have more of a COVID-19 connection to it as the inhalation products.

And what's really nice about that is of course, the COVID-19, we introduced the product right at the perfect time.

And it is seeing a lot of uptake and across the board and I think as the academic and come back I mean, the academics have of real taste for installation and the concept and we believe that as this happens we're going to see more and more drugs and vaccines, taking advantage of of what you can do and what <unk>.

Need to do with the with inhalation the ability to measure.

And the amount of whats.

And what's going into the lungs, and how much and how fast that's getting across into the bloodstream and.

And then also it also is used for the effectiveness of the drugs that are going to be used against it.

So again I would say that.

The general portfolio supports COVID-19, but it's not really of specific like a one off thing it's really more generalized.

But the emulation and does have a specific growth vector associated with it thats incremental because of Covid and the move toward these vaccines.

Okay excellent and.

In terms of products that were introduced this year and once you're planning to introduce next year or in 2020 one.

How important are they to your revenue growth or are they going to be a big contributor of it.

Yeah, well I think that typically with these kinds of technologies. Some we'll have some immediate growth impact but generally.

You the things you build today are things that are being used.

A year from now two years from now.

I see of the Orange the the product development activities. They are a little more aligned with the long term growth because you know this business hasnt seen long term growth for a long time.

So for us to have a significant expected underlying organic growth factor and again.

And I said and the beginning.

If we're not and the eight six to eight 9% range.

To be there to be helping you got to be in that range or better and that makes you better be shooting for more of like double digits and much higher numbers, because there's always some things that are going to be going the other way of times.

But the likelihood is what we're doing and sales that gives an immediate and much more immediate kick to the to getting to the capacity and volume capacity of sales that you should have getting the right level of marketing materials that help solidifying the distribution arrangements and those should all the growth drivers and there are more <unk>.

Media, but the again the NPI new product introduction, they tend to be a little more medium term and long term, though I will say.

He's been a believer and teaming with some with key strategic customers and and taking risk together with them on introducing new.

Innovative products that may be and nobody's using yet so youll start to see some of that happening too here.

More work that will the things that we'll be doing that will be newer technologies that they may not be used.

Immediately, but as they come out youll start to see them and.

More of the more leading institutes and then eventually work their way into more general use.

Mhm, Okay. Thanks, Jim and my last question concerns of gross margin improvement.

How much of that prudent came from product mix and is there still room to even make the product better.

I don't know that we've broke it down specifically, but clearly there is a natural mix improvement because as I said, there were some products and the portfolio of that honestly just didn't make sense.

And there wasn't they werent part of a portfolio that would pull through higher margin consumables or anything so those that made sense of just.

Removed from the portfolio of whether they be sold off or are just.

You don't move move to other areas.

So part of it is the product offerings and part of it is the mix. There is we do have good pricing power, though and you always have to be careful with that.

But in general it's still also comes down the volume so a better mix and more volume gives us natural improvement and gross margin target from the of getting was to get the 60% of clearly I fully felt like that was well within reach we feel like we're going to be there of this year.

And then we'll have to we'll have to see how that goes because based on the theres always of a tradeoff on on price and volume and where you are and where you are and if you're interested in introducing and new spaces and not so there are white spaces that we'll be looking at two for this portfolio.

Okay, great well, thank you very much Jeff.

Thank you Lisa.

At this time I'm currently showing no further questions in queue I will now hand, the conference back over to Mr. Jim Green.

Alright, well, thank you everyone for joining us.

And it's in today's presentations.

And I'll ask that you.

Join us and May for our first quarter.

The fiscal 2021 and have a great day and thank you so much for your support and thinking.

Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.

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