Q1 2021 Harvard Bioscience Inc Earnings Call
Good day, and thank you for standing by and welcome to the Q1 2021, Harvard Bioscience, Inc earnings call.
At this time all participant lines are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need the press star one on your telephone keypad. If you require further assistance. Please press star zero.
I'd now like the hand, the conference over to your Speaker today, David Joyce. Please go ahead.
Thank you Amanda and good morning, everyone. Thank you for joining the Harvard Bioscience first quarter 2021 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 file is entitled Q1 2021, each by a quarterly earnings presentation 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 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 31, 2020, our subsequently filed reports on form 10.
Q and our other public filings.
The 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.
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.
Difference 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.
Okay.
I will now turn the call over to Jim Jim. Please go ahead. Thank.
Thank you Dave good morning, everybody.
Let me go ahead and move to slide four of the presentation.
Quick look at the highlights for the quarter.
Revenue was up 14% year over year on strong order growth.
Adjusted operating margin improved to 12% versus 2% in Q1 of last year, that's up 10 full percentage points and our best Q1 in years.
Our preclinical product revenue was up 24% driven by North America and Asia.
Cellular and molecular revenue increased 3% with strong order growth. However, revenue was impacted by global supply chain issues.
And net debt was reduced by $2 million and our leverage ratio is now below two five times.
As we look forward, we're increasing our revenue outlook now expecting 10% to 14% growth over 2020 up from our last quarter outlook of 8% to 12% I. Remember this includes about $5 million worth of low margin products pruned from the portfolio over the last couple of years.
We still expect adjusted operating margin improvement to get to the mid to upper teens and.
And going forward. This year, our focus is high value of organic growth improved marketing and exciting new product introductions.
Moving to slide five of the presentation I will look at some of the detail.
As expected we continue to see revenue improvement with Q1 coming into $27 million of 13, 5% over last year.
Gross margin came in at 57, 2%, that's an improvement of 260 basis points.
This quarter had a GAAP operating loss of minus of minus.
$200000 of 9% of revenue.
Our adjusted operating income was $3 2 million so our adjusted operating margin improved to 12%.
GAAP earnings per share was negative <unk> up from negative <unk> 12 last year.
Our adjusted earnings per share was <unk> <unk> up from a negative <unk> <unk> last year.
Cash flow from operations was $1 million and we paid down our debt of $2 million in the quarter.
We want to slide six and look at the revenue in the quarter by product family.
Starting with the first row of the table, our cellular and molecular product revenue, which is primarily from academic research labs was up two 6% from last year with revenue shipment delays caused by global supply chain disruptions in a number of our materials.
However, we expect continuing improvement as the academic labs reopen with strong order growth and improving revenue shipments of the global supply chain results.
Looking at the second row of the table.
Our preclinical product revenue was up 24% again, driven by strong order growth in our core customer segments of CRO of pharma and academic labs in North America and in Asia.
And we're seeing very strong growth in academic labs in this area, especially.
Our new insulation systems going out.
Reported revenue grew 13, 5% of constant currency basis, our revenue grew 10%.
Moving to slide seven and take a look at the major activities in the quarter, starting with some of the items that drive growth our North American sales realignment is complete with expanded territories and improved coverage and momentum is growing and incremental product cross selling, especially with our historical cellular and molecular products now.
Selling to our preclinical customer segments.
We introduced nine new or improved products in January.
Our backlog in cruise increased significantly and we're managing our global supply chain risks to maintain strong growth.
On the cost and cash flow side.
We have communicated our final restructuring actions in Europe to complete our lean initiatives and expect the finish this in the first half of this year.
I'm happy to say that we've reduced our debt leverage to under two five times driven by significant improvement in adjusted earnings ongoing positive cash flow and continued paydown of our debt.
Now I'll turn the call over to Mike for a quick look at some of the key financials Mike.
Jim and good morning, everyone. We are very pleased with our start to 2021 with the payback from the state focused on executing our original 2019 strategic action plan coming through in our results and our outlook for 2021.
As a reminder, we report adjusted results for P&L performance, which aligns with the measurements, we use to run the business and reconciliations of adjusted results. The GAAP are included in the appendix of this presentation.
On the P&L, while our year over year results are favorable in part due to the rapid volume loss in March 2020, with the onset of the pandemic. The P&L reflects a fundamentally stronger business with adjusted operating margins are performing any Q1 in recent company history. Despite our CMT product revenue is still recovering to pre call.
The levels as the academic labs from being below normal productivity.
This improvement is the trend we expect to continue for the full year 2021 as reflected in the outlook.
Gross margin improved year over year on volume and improved product mix associated with strong sales of our higher end solutions and the number of low margin products removed from the portfolio of at the beginning of the year.
We'll continue to see improved gross margin due to product mix trends seen in Q1 as well as new products released in January and overall sales growth. All told we are on track for the 60% plus gross margin target we've been executing towards since 2019.
Adjusted operating income increased due to the strong revenue recovery and product mix noted as well as cost reductions implemented over 2020.
Operating expenses were down modestly versus prior year, as we removed inefficiencies and waste with our lean focus while reinvesting in commercial and marketing capabilities to support strong sustained revenue growth.
Additionally, variable compensation increased with higher sales incentives and bonus accruals.
Arent set the plans in place for 2021 are well aligned with our topline and margin expansion goals reflected in our outlook.
As noted previously we have communicated final actions associated with our turnaround restructuring program generating approximately $7 million of annualized cost savings from original run rates.
Implementation of these final actions consolidated engineering from small European sites into larger centralized design teams is on track for completion in Q2.
With these activities complete our full attention is on optimizing and growing the business on.
On cash flow of debt, we're very pleased to report our leverage ratio or debt to adjusted EBITDA is now less than two five times net debt came down in the additional $2 million in Q1 and of soft Q1, 2020 bottom line has now annualized leading to a significant improvement versus roughly three five times leverage.
One year ago.
Cash flow from operations is lower than prior year, due primarily to higher working capital in line with higher revenue and a strong outlook.
Customer collections remained strong and stable from given the dynamics of the global supply chain of our inventory focus is to keep supply available to fulfill our growing order volume.
With that I'll turn it back to Jim to discuss our full year outlook Jim.
Thanks, Mike.
Let's move to slide 11.
Looking forward.
With most of the structural improvements behind us this year, our primary goal the sales growth driven by improved sales effectiveness marketing and new product introductions.
We expect revenue growth on a reported basis to improve to approximately 10% to 14% versus 2020.
We see preclinical tailwind and overall sales execution, providing a sustainable growth foundation.
Academic labs are expected to continue recovering throughout the year.
Portfolio rationalization pruned low quality revenue of approximately $1 million against our FY 19, baseline and another $4 million against the FY 'twenty.
Risks do remain on the impact potential impact of global supply for certain materials, which we are managing very closely.
We still expect strong adjusted operating margin improvements to reach the mid to upper teens range. We expect gross margin expansion on increased volume and improved margin mix.
Finally, we will continue investing in sales and marketing and R&D and support our long term profitable growth plans. Thank you.
Now I'll turn it over turn the call over to the operator and open the lines for Q&A. Thank you.
As a reminder, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad.
Sorry, I was asking the audio question.
First question comes from Paul Knight with Keybanc.
Hey, Jim on the CMT growth of 3%.
What kind of supply chain issues is it getting stuff from where polymer shortages.
Give a little granularity on that sure it's really pretty much in line with some of the things you've read about with the automobile manufacturers. We use the same kind of electronics and chips. There are certain types of plastics that are that have been a problem.
A lot of it is just taking a longer time, what we're doing as I've told the team we're not we're net cash starved anymore.
I don't mind have running a little heavier on working capital we're buying more in advance and we want to make sure I mean, the again, we always look to make sure that if we're going to buy in advance and take more risks on something that may not have orders in hand for it.
The things that we're confident are not going to obsolete. So we will I expect that will will it'll take a little while.
We're working on them, we have times established for the for the products our offer of the technologies and materials that are running a little low.
But again, we don't we don't see lost revenue, we see we see delays that's why we saw a pretty big increase in our backlog this quarter and some often people say well big backlog.
The problem you want but you don't want it for too long because the aren't shipping fast enough, sometimes you could start to lose customers. So that we definitely have a handle on it but it is an issue but it is more on the raw material supply side right and then you had mentioned professional marketing new products.
Are you there is the program in place for a continuing high growth.
The faster could.
Could you talk to what you've done and then.
What do you think or are you willing to say what you think your normalized growth rate is it.
14% like this year in the double digits high single.
Could you.
Touch on that to partner for me. Thanks sure of certainly on on the improvements that youre that youre seeing and will see on the marketing side debt Thats.
That's been evolving effort, we started with getting one of the big holes was effective product line management, having a good understanding of the of the product lines in the market and of.
Pricing and needs of the customer that's been that's come along very well.
We have some debt.
A substantial improvement in our product literature.
We're now working with the company that's going to take the are you were going to end up here soon with the what I would call of very professional website that ties the brands properly. We don't want to lose this was because of the company was I've described it as a basket of brands in the past.
It is now Youll youll start to see it come together under under the guidelines of the heart.
<unk> bioscience being the being the technology driver behind these brands and I kind of lose the brands, but youll start to see that youll see youll see that evolve to where it's much easier to understand and then which also then supports our cross selling activities. So that's coming along it's probably going to take a year for that to really be I would say more final state, but it is every.
Quarter, there is an improvement.
As far as the.
You don't really know where the tail winds are in this business, we of tailwind and certainly in the entire DSI portfolio. The inhalation products sales since we introduced the debt new system.
Just taken off like Crazy.
Perfect timing in a new area of growth and what's funny is one of we originally thought that much of that growth would be zero and pharma, we're seeing a lot of expansion of that portfolio in the academic labs, even though the academic labs aren't really back yet so.
Still of the products that we see expanding we have anything associated with electroporation gene splicing the.
The CRISPR related products, certainly that's that's kind of a ton of tailwind for us the.
The telemetry and the systems debt that we sell through our debt through our preclinical base those are doing really well on the cross selling activity is really picking up.
We're finding that the account management structure that we had for the Crows and in pharma is really an effective weighted to district.
Distribute some of our larger higher price products that were historically only sold through the CMP side. So there are certainly things that make a lot of sense right in Red you can see that we're adding products were back in the product development world. So that has to be of part of this your question about what do we what do we what can we underpinned as far as long term sustained growth.
I mean, certainly you have to know that we would have we'd be disappointed if we if I can't deliver double digit growth, especially where we are.
In this business, but for this year is everything recovers.
I think it's fair to say, we've been a little conservative on it until we until we have real evidence and we see the sustained numbers coming in and we can model of them now the way I like the model. It is by most of the simplest way as is.
Number of reps times their quota.
And then organize it around how well each of them of performing so theres a number of ways to do this but so in general I feel like we're going to have a good solid growth platform here I started off saying look if I can get this to eight somewhere in the 6% to 8% range that was good.
I think the market we felt that was good but I think given the space we're in.
We're going to work to do better than that that's probably about all I can say about it right now, but we're certainly going to work to do better.
And then lastly from me is when.
When I look at Electroporation gene splicing and other products related to cellular level of research.
What's the proportion of your company exposed to those type of markets and what do you think those products.
We're growing at.
Can smash them together like that yes, it's hard the ones of the thing that affected us in that area like everything as we have had some supply chain issues with certain components.
But again, we're working to solve that where there is definite growth we see.
Nice the nice order intake growth in net space.
We're still fairly limited in the gene splicing and Christopher area in that.
<unk> of cell.
Just to the academics in that space now clearly theres a lot more research coming that way. So it's still a great place to have exposure, but youre going to see us working to have a newer generation come out of that product one debt, but we will be even more compelling into the academic space were also <unk> what point, we want to maybe you need to get to a higher <unk>.
Volume type of technology that we would use based on this technology to be able to move this into slightly higher volume areas to expand other types of customers that will want to use this.
A larger basis, but again the immediate growth and the demand is in the academic side with all of the new things happening. This is the perfect product thats involved with heavily involved with anything to do with.
Vaccines and <unk>.
Some of the new drugs coming out so it's a great place to be it's an area that we have a lot of interest in it I think.
It hadn't been invested in I guess for a while.
Which I guess I have to look at that as an opportunity because now that we are going after this.
It's a nice it's a real opportunity for this company.
Okay. Thank you.
Thanks, Paul.
Your next question comes from Tim Chiang with Northland Securities.
Hi, Jim good.
Good quarter.
Wanted to get your thoughts on just the academic labs are you starting to see some hints that the labs are going to start to reopen.
When do you think that will happen will be the summer or more of locally this fall.
Our feeling is it's a little bit of a mixed bag, depending on where you are we see the lab business drive already moving up fast in Asia and China.
North America, a little slower because just the time of bringing people back with some states like Massachusetts, where you.
You have a ton of labs.
It's just it's taking a while to get to get people back in.
Then also you don't have the students back in yet in many places and you do need the students to of the researchers they've been trying to they've been struggling to get them in on a bit on a rotating basis, but I think the answer your question in the U S. We think of as we get the year to the fall semester that we're going to see that really clip, we're going to see that really pick up.
It's a little different there I mean, you look at Germany, and the UK of had some hard shutdown and even if the researcher of can come in the Austin haven't been and they've been told not to come in often so and even if they do come in you may not have the people in there that you need to process orders and.
The pickup shipments and so on so.
Thought there is that Europe's going to kind.
The trail back probably a couple of quarter from probably looking at best at the end of the year for most of Europe to really be back to the kind of capacity that we would expect.
The really great news that we've seen as so much of our growth on the preclinical side is.
The expanded use of our telemetry products in the inhalation products in academic lab settings. So I think we were so concentrated on zero and the farmers there that we've kind of lost sight of probably the one of the bigger prizes as needing those same types of products in the lab that are trying to.
The spinoffs where of lab starts to build these cores in the spin off whats well it starts to really look like a proxy for a small.
The small pharma company of small CRO at spinning out.
They are they get funding they need to build their own lab. We can help we help establish the or the full suite to get their lab up and running based on what they are trying to do and if they are trying to get to the point, where they're getting through the full preclinical phases, they need products like ours.
Net net again, even without all of the labs being back so there's clearly going to be some nice pent up demand that's going to develop as they all come on line.
Let me just wanted to follow up Jim.
I guess obviously.
You have some supply chain disruptions I mean, how long how do you sort of quantify.
How big that disruption is at this point and how.
How much time do you think it will take to sort of.
Offset that I mean is this.
Let me a quarter or two where you think things.
Yes, I think we're thinking it's going to be a couple of quarters for us of really clean up so.
It means that we will certainly our backlog again.
Lots of nice growth on the order side and good growth on revenue, but it's been constrained it will clear up we know how to do this they've got frozen and here now doing this with me.
But it's going to take some time because of lot of this is electronics and things where they are spinning up on bringing a boundary back online we compete with Tesla and everybody else for for some of the the kind of chips, we use of <unk>. So.
It's a lot of work to work around the supply chain things that when they happen but.
But it will.
It will resolve the again.
We're believing we're probably a couple of quarters before we're at like real run rates on the shipment side.
Okay, great. Thanks, Tim.
Thanks, Tim.
And you guys question comes from Lisa Springer with singular research.
At least the thank you alright.
Hi, congratulations on another good quarter. Thank you. Thank you.
Jim could you give us you mentioned the <unk>.
Introduced nine improved of refresh products since January could you give us one of two examples of how they were improved and how meaningful that was in terms of.
Marketing the product.
Yes, when you introduced the product.
Usually as you expect takes a little while for to get the adoption, but the first thing it does it get the excitement that generate a lot of excitement with your sales team and with the customers that announced the act.
The things.
Really refreshing and some new technologies. The first biggest one of course, we've talked a lot about it.
Which was the installation technology, which just took off that was a great product for US now we introduced that last last year with the other products coming out of <unk>.
Series of improvements and new technologies in the in the cellular testing area.
In the also in some of the bioprocess products, the things that use where you're measuring.
Looking at specific molecular weight of certain molecules and so on so.
A lot of the base.
The instruments that are used.
I don't have the list of all of them, but that was clearly.
You start to roll through those and we've got I think something like six new products teed up that'll be coming out here.
With our sales organization and our sales many of the codes happened in June so usually of the heartbeats of about every six months, you'll see a handful of new products that come out some of its refreshing some of it's new.
But that that is the that's something you have to have as a technology company you can't just sit with all the old products getting along in the two of the have to be refreshing the product line and introducing new technologies.
So it's part of the driver for the company.
Okay.
My next question I wanted to ask you about do you have a target for leverage by the end of the year.
What's your comfort level with your current leverage.
Well, we've been we are right now in the market to be using the balance sheet for anything other than really making this a great growth business right now.
<unk> said from the beginning is we got to the second half of this year, we're going to have a much better.
Balance sheet at this point certainly we feel like will be under two times on leverage at the end of the year.
We don't this company doesn't consume much capital so EBITDA drops the cash mostly.
And as we get to the end of the year, but the other thing. We're looking at now is what are some of these adjacencies.
Adjacencies that might make some sense to bring in some inorganic technologies.
The fit this out with the portfolio I'm.
I am not working hard on that right now right now we're just looking at making sure we really understand it because theres. So much opportunity just to get the sales force correct to get the coverage right from the depth of coverage in the product portfolio right. That's when you start to know you really look at what are what are the right kind of maybe additional products and then we have of choice do we invest it would make the do we make them.
Organically do we make capital investment for adding some of these new products or do we do our of some of these might be acquired things.
But yes, the way I mean in the U.
You'll see the debt continue to come down a lot more opportunities for us on how we use the cash.
Great. Thank you Tim.
Thanks Lisa.
And we have time for one last question. The question is from Bruce Jackson with benchmark.
Hi, Bruce Hi, good morning.
So the springboard off the last question it looks like R&D ticked up a bit this quarter.
Do you have the R&D spending target prior to the downturn you were spending like neither out of $11 million.
Annually. So what are your plans.
Plans right now.
We were we were somewhere around 8% of revenue so, yes somewhere around that 11 ish.
I don't see it needing the jump up high right now I mean, we're still loading up and getting getting it getting the rest of the other.
It together and getting it right, but certainly there are some areas that we have to make some investments and I expect as we grow as revenue grows we will certainly be and of course of.
Operating leverage and profit we will be applying.
More on an absolute basis, and R&D and there'll be some.
Much of it.
Opex, but there will probably also be looking at some of some capital spend too.
Some of these new products ramp up of new technologies, and you know as you get into the tooling and such so they'll but there'll be some increase there.
I kind of like staying at a kind of the 8% to 9% of revenue, it's kind of a safe place I think we have it forces us to be efficient in the use of of.
R&D, but I'll tell you we're flexible enough is something really became compelling and we needed to throw a little more so than the have the ability to do that.
Okay great.
And then I know of September of 2019 months of long time ago, but you laid out a 60% gross margin target at that point do you think you could still get to 60% gross margins by the end of the year.
Do we do we expect we expect that will be it will be at the 60, plus as we get into Q4.
Yes, exactly I think that was a good target and it still makes sense in a lot of it's natural because much of the cost structures already taken place now and as we get the more efficiencies a little better scale and with the and what the product mix improving it naturally happens for US, yes, I think thats true.
All of the pruning we've done in the.
Yes.
Focus on the sales channel and higher end products, that's really improving the mix of lot. So I would say Bruce we have a very clean path as volume comes back to.
So that 60% plus it's probably not this year, but the full years at that but it will.
We'll be at that run rate in the second half of the year high confidence on that.
Alright, great. Thank you very much for taking my questions and congratulations on all of the progress. Thanks.
Thank you Bruce Thank you.
And I would now like to turn it back over to our speakers for any closing remarks, okay. Thank you.
Thanks for joining us.
In today's presentation, we hope you'll join US again, I guess, it's in August that will flow.
All of the results for our second second quarter. So thanks again and.
We'll see you soon.
That does conclude today's call. Thank you for your participation you may now disconnect.