Q2 2021 Harvard Bioscience Inc Earnings Call

August 5, 2021

[music].

Good day and thank you for standing by welcome to the Q2.2021Harvard Bioscience Conference call. At this time, all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press star 1 on your telephone if you require any further assistance. Please press star zero.

I would now like to hand, the conference over to your speaker today, Dave for Rice. Please go ahead.

Thank you Alicia and good morning, everyone. Thank you for joining the Harvard Bioscience second quarter 2021 earnings conference call for.

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

File is entitled Q2, 2021, <unk> 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 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 subsequent quarterly reports on form 10-Q.

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 date.

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 reflect how we set and measure our incentive compensation plans and how we manage the business internally.

Difference between our GAAP and non-GAAP results are outlined in the earnings release and today's presentation. These 2 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, Dave Good morning, everybody.

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

Starting off revenue was up 25% over Q2.2020, improving to pre COVID-19 levels.

Preclinical DSI revenues were up 20% on strong demand.

With growth across all of our key product lines.

Cellular and molecular revenue was up 22% continuing its recovery as labs reopen.

We saw very strong order growth and backlog growth. However, we had on fulfillment delays from global supply chain disruptions that all companies. These days are having to deal with.

Operating margin came in at 15%.

On net versus 18% last year and 12% in Q2 thousand 19.

Gross margins were impacted as we experienced significant cost increases in the quarter driven by material costs freight and direct labor with cost of approximately $1 million in the quarter.

With gross margin being a focus of ours you can be sure that this has our attention and we will be dealing with it.

Q2, 'twenty was a difficult comparison because of the cost actions that we took last year in response to the developing COVID-19 situation.

Moving to slide 5 for presentation and look at the details.

Yes.

As expected we continue to see strong revenue growth for Q2 coming in at $29.2 million at 25, 3% over last year.

Gross margin came in at 56% and that was down 340 basis points from last year, but on higher costs from these global supply as the global supply chain issues, which we've talked about and we will talk a little more about in the future.

This quarter had GAAP operating income of $100000 or 2% of revenue our adjusted.

Operating income was $4.3 million so our adjusted operating margin measured for 14, 6%.

GAAP earnings per share was negative <unk> 10 up from a negative for last year.

Our adjusted earnings per share was <unk> <unk> up from <unk> last year.

Our cash flow from operations was $800000 and we paid down debt by an additional $900000 on the quarter.

Moving on to slide 6 and take a look at the revenue in the quarter by product family.

Starting with the first rule of the table on our cellular and molecular product revenue, which is primarily from academic research labs was up 22% from last year with orders and backlog are up significantly.

We experienced significant revenue shipment delays caused by global supply chain disruptions in a number of materials.

Planned pruning or removal of lower value products impacted our reported revenue by approximately $1 million in the quarter.

European Labs are still slow, but we see signs of recovery looking later in this year.

Looking for the second row on the table, our preclinical products revenue grew 20% driven by strong order growth across the product lines from our core customer segment, the CRO in pharma and academic labs globally.

Sales in the Americas was up 28% on Europe was up 32% with expanding academic lab demand for our preclinical product lines.

Our new insulation product is growing at a clip of over 50%.

Our preclinical revenues are now exceeding pre COVID-19 levels of 2019.

Overall reported revenue grew 25% and on a currency adjusted basis revenue was up 21%.

Yes.

Moving to slide 7 and taking a look at the major activities in the quarter.

The post Covid dynamics continued impact on global supply chain and net really has hit us with <unk>.

Material purchase price variance issues freight and labor costs.

European restructuring actions for the 2020 plan are complete we completed the move of our UK engineering to Boston and we closed 2 smaller sites.

As for new product introductions, we introduced 9 new or refreshed products, which were announced at our June global sales meeting. So far this year, we've introduced 17, new products, which we expect to contribute meaningfully in next 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.

The first half of this year demonstrates true momentum from our stated 2021 focused on organic sales growth, while continuing to deliver improved bottom line performance and an overall more efficient business.

I'll walk through the full P&L and cash flow in more detail, but as a reminder, my discussion will focus on adjusted results for P&L performance, which aligns with the measurements we use to run the business.

Reconciliations of adjusted results for GAAP are included in the appendix for this presentation.

Including a reference to adjusted EBITDA. We've added this quarter given this is a common metric utilizing the investment community.

Clearly year over year expectations or comparison for 2020 will be influenced by the unique cycles and reactions due to the COVID-19 onset last year, which is why we will make certain references back in 2019 on that note. Our performance continues to reflect a fundamentally better business with adjusted operating margin of 15% compared to 12%.

<unk> in Q2 dollars 19 on comparable revenue levels, we reported 18% adjusted operating margins in Q2.2020 with significantly lower operating expenses in the prior year given the rapid progressive interim cost measures put in place with the onset of Covid and related revenue reductions.

Also as Jim noted this year, we experienced significant increases in cost of goods sold due to higher materials and direct labor costs, driven by the global supply chain disruptions on other macroeconomic factors, we're seeing globally in this post COVID-19 world.

I'll expand on the gross margin dialogue.

But as we continue to believe strong sustainable organic topline growth.

High gross margins.

Our important outcomes for long term shareholder value creation.

Product mix is a significant driver behind gross margin for us and today. This mix is stronger than ever. This is a direct result of our focus on driving growth in high end niche products through more efficient direct sales channels as well as the pruning of low margin low growth skus, all contributing to gross margin expansion.

As Jim will detail on the guidance section, we're expecting margins will be modestly lower than planned in 2021 based on the inflation. We are all seeing our gross margins will uptick sequentially as volume and mix continues to improve and we accelerated actions to address new realities.

On a cost base overall operating expense levels are in line with our planned expectations and also reflect the completion of our 2019 'twenty restructuring program in Q2.

As previously noted the turnaround restructuring program initiated in 2019 created $7 million of annualized cost savings.

And in terms of business optimization rest of the year, we anticipate we'll spend around $1 million in the second half to accelerate improvements on our core manufacturing operations, which were reported as transformation costs and exclude from our adjusted earnings. Given these are non running run rate investments to support scaling our operations for expected growth.

Our run rate Opex was lower than pre COVID-19 levels with a fundamentally new and improved organization in place as well as compensation plans, including variable comp accruals to ensure to reward and retain a strong workforce in place on.

On cash flow and debt, our leverage ratio or total debt to adjusted EBITDA is less than 2.5 times relatively consistent with prior year, but well below our roughly 3.5 times leverage about a year ago.

Cash flow from operations is lower than prior year due primarily to higher working capital in line with higher revenue on a strong outlook, including inventory growth.

To improve our fulfillment operations to make sure we pick the backlog down and get to achieve our revenue goals given the disruption in supply chain we've discussed.

Finally, I'd called out on the slides here.

Higher share count for adjusted EPS calculations diluted shares have increased over the last year due to the significant improvement in our share price since 2020 option exercises aligned with the price appreciation contributed to this but the majority of this was based on the dilutive effect of outstanding stock Awards for calculation of GAAP for space.

On assumed share buybacks and other stock goes up the theoretical amount of buybacks is lower but the higher share count.

That I will turn it back for agenda discuss the full year outlook Jim.

Thanks, Mike.

Let's move to slide 11, and take a look for the outlook here.

With most of the structural improvement improvements behind us. This year. Our primary goal is sales growth driven by improved sales effectiveness marketing and new product introductions. In addition, we'll be addressing cogs issues, resulting from the global supply chain issues and disruptions specifically honing in on freight optimization material.

Cost labor inefficiencies and also looking to tune our operating expenses in areas like in Europe.

As for our outlook for the year were taking up the revenue outlook and narrowing the operating margin target to account for the potential of extended sales.

Our supply chain related cost increases that we've seen.

We now expect revenue growth on a reported basis to improve approximately 12% to 15% growth versus last year.

With a strong order growth and a strong backlog driving sustained growth in our in our preclinical product revenues.

Academic labs are expected to continue recovering with strong order growth and a strong backlog there too.

Portfolio rationalization pruned low quality revenue of approximately $1 million from our F 2019, baseline and another $4 million from FY 'twenty baseline.

Rich do remain on the impact on global supply for certain materials that were managing it closely and brute force and manufacturing and supply as best we had debt we need to to meet the demand for our customers.

As for adjusted operating margin, we're narrowing our expectation on our expected improvement to the mid teens range in.

In spite of these global cost issues. We expect continued gross margin expansion on increased volume improved margin mix.

On what offset by the higher supply chain costs, which we've been dealing with more recently.

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

At this time, if you would like to ask a question. Please press Star then the number 1 on your telephone if you would like to withdraw your question press the pound key.

These standby, while we compile the Q&A roster.

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

Hi, Jim and Mike could you.

Talk about how the supply chain issues is it a is it fixable on a quarter is it taking the year on <unk>.

What's the timing on that.

Yes, it's a great question.

When you think about $1 million of incremental costs in the quarter net but that would be 3 to 4 points of operating margin.

It is pretty well split up between purchase price issues, which we think the purchase price being some of Thats going to stay we know there is some general inflation in there.

But on the other hand, as we continue to improve the way, we do our supply chain.

We'll get better improved purchase price for the actual materials.

On the on the freight side that was a big piece of it too that's going to improve and given the delays that we saw we were many times, we had to move to flight to.

To fly and materials into flight fly materials to customers that really put up put a cost extra cost on us debt now that's not going to be sustained in time level over the course in our bill.

Belief is that over the course of the next couple of quarters desk on a really smoothed out.

And we will get back to some reasonable level of freight cost and again now that we're focusing much more on it I've got the team in place that knows how to manage not just purchasing and acquisitions, but also the how.

How we freight in now and we've had to make up for these issues with labor inefficiencies having to throw more people at things.

That's inefficient net adds costs. So certainly we would see that a large majority of this is going to improve as we approach the end of the year and on the other side thats going to help us any way as you see the strong order growth, we have which is pretty amazing and the backlog that we've built.

We will get on.

Improved operating leverage on that growth so that growth for that growth alone will likely more than cover this issue.

But either way.

We've got a handle it both ways so you've got to get to the cost to get the cost out continue to improve.

The efficiencies right and you will see the natural in addition to that we will see the natural improvement of operating leverage on the revenue growth.

And Jim could you highlight any other products that were driving the 25% Q2 growth.

Yes.

It was pretty much.

First of all the DSI preclinical products were Fabulous I mean, they really drove.

On a growth there pretty much across the board the inhalation product that continues to just grow by leaps and bounds, we're making more investments in that too.

We had some issues with shipments on and supply issues constraining the shipments that we would have had on the on the <unk> line.

Now lets operation line, but thats been pretty much resolved now, but we had some impacts from that in the quarter, but debt that's going to really start speeding up now as you know that's a big.

A tailwind there in terms of needs in the market. So I mean order intake on that is.

Great again, but we were we were held back somewhat on the on being able to ship in this last quarter because of these supply chain disruptions.

But again I would say the big drivers, we saw were pretty much across the across the board on the preclinical side of the products. The <unk> on order intake is very strong revenue will pick up much faster there is in the second half of the year low.

Cellular things.

Cellular was had some issues mainly with their being so much of it being academic lab customers in there.

We're still down in some of these products are pretty complicated and you've pretty much half to half a day.

Technical sales rep for an <unk> person in lab to really closed those deals so thats still pending.

That's still been held back pretty pretty substantially.

But the outlook is it really is improving on these academic labs, there was plenty of academic labs, even though they were down overall for us in certain areas like the insulation products that those still drove a lot of demand even though there is.

Quite a bit fewer.

Labs out there operating day knew they needed they wanted that kind of technology in their lab. So bottom line is the overall academic labs are coming back Europe has been slow it is still slow but the outlook is improving there. So we're we expect the European labs to really start to March back toward somewhere near where they used to be on when they do.

<unk>, that's a big chunk of incremental demand on the business. So this is the rest of this year looks very strong on that's in spite of we've had to again brute force a number of things to be able to make shipments.

Built backlog on on the 1 hand, it's great to see a real strong backlog on the other hand, you got to be that needs to be moving into revenue growth.

But everything points towards us ending up where we really wanted to be this year and that means getting our gross margins by the end of the quarter back up to where we expect them to be.

Again dealing with the cost issues and having the natural growth revenue contribute through operating leverage.

And lastly, Jim I have based.

Based on guidance.

Your revenue growth.

We will decelerate from 25% in Q2.

Do the comps I'm assuming.

1 part of that question second part is what level of organic growth do you think the company has with the low growth product lines being paired and you entering let's say more normal environment.

When I look at just our overall our expectations.

And I've always felt like there's no reason as we get this business properly sized to get the coverage in place and the product portfolio in place and the net.

Selling now that you see for instance, with some of these a number of these preclinical products now being getting good solid penetration of academic labs.

I'd be really disappointed if I don't have a sustained double digit revenue growth business here I mean, just just on just on the fundamentals of it so and then for this year with the recovery.

It's unfortunate that we have some delays due to the supply chain with desktop on the last forever, that's been with debt will resolve.

But this is going to be a very good year, we're going to we'll end up building backlog, even through the year I need to be a little bit conservative on if it's something can happen with supply chain.

Theres something youre on ship hold list I have to.

Count for that too, but overall this is continuing to improve and I think as we get into next year I'm pretty comfortable to be able to talk about a double digit business.

Okay. Thank you.

Thanks, Paul.

Yes.

Your next question comes from the line of Tim Chiang of Northland capital.

Alright, Thanks, Jim could you talk just a little bit about.

The rollout of new products.

As the supply chain disruption also impacted.

The launch of new products in the second quarter, I mean will some of those products be delayed into the second half for the year.

I don't think Theres any doubt that we will have some delays depending on which materials, we're still struggling with but like Mike said, we've ticked up working capital to be able to overbuy, especially things that we believe are not going to obsolete.

But in general we see a pretty big portion of our sustained revenue growth being driven by new product introductions.

This is a.

Scientific and engineering organization and our long term life is based on new products exciting new products and technologies that are entering entering production based on the needs of the customer. So we will have there will certainly be some.

<unk> from supply chain, but.

<unk>.

We're going to see the primary drivers of growth via the ones that you want them to be getting the sales coverage right.

And having new and exciting products and I think examples of it or like the inhalation product.

Growing at 50, 60 plus percent a year it takes something like that it's now become a material number there are other other products like that in our portfolio.

Following that we'll follow the same kind of trajectory, we will see large growth in some areas and some things that don't make sense, you'll see us strategically we're moving them from the portfolio.

And Jim just 1 follow up.

You mentioned that academic labs or are recovering.

Do you expect.

<unk>.

An increase in demand as we get to the fall school year starting.

We do think this fall school year is part of it new budgets are often will see budget cycles based on the academic year, which kicks in.

September timeframe.

Then the rest of the academic.

At the end of the calendar year.

And I think just given that were on an order basis were really close to where we would have been pre COVID-19 anyway, and the only real slowdown has been.

On.

Construction on the supply side.

That will settle out and we.

We didn't usually you can talk a whole lot on cross selling but the other way you have the sales organization and the way it's set up.

Fact that Europe European academic labs is up substantially on our preclinical product lines that tells you that debt.

As those labs get the full speed there is a natural incremental growth happening right, there simply because of us being able to penetrate the academic labs with those products that in the past, we really didn't sell there those were primarily products that sold into.

Pharma and <unk>.

CRA type company. So there's a lot of that a lot of that natural growth is going to be happening there.

Alex like the inhalation products those are perfect fit for what you would expect to see and we always expected that the largest demand there might come from academic labs and not from the pharma companies.

So net net I mean, we feel like we've got a really we're going to end. This year very strong will be pretty much right on target and as we get into next year. This is a very good strong growth profitable growth business and youll see that all developing.

Just like we had expected and with the turnaround of the company.

Okay, great. Thanks, Tim.

Thanks, Tim.

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

Hi, Kevin Mike.

My question is regarding the backlog you mentioned there has been a pretty significant lift in the backlog for CMT products I Wonder if you expect to work through that entire backlog higher.

Backlog in the second half for this year.

Yes, I don't think so but I do think is that by the time, we get to the end of the year, we should be closer to what the normal backlog.

Sustained backlog should look like.

It's going to be it's going to be tough, it's going to be a little more costly for us because we were having to make up for.

With inefficient labor to get things through and we're having to do other things having to delay.

And then so but as we get through this.

Yes, but we will get this back to a normalized backlog. So it's kind of funny again always a bit of a 2 edged sword on the backlog growth substantially.

Burning it down on getting back to normal shows very nice growth, but but we do see sustained general order intake growth and that's what I always look at so we'll burn down some of that backlog. This year I doubt that we'll get it all back toward the levels would work, but it will be incremental to the natural order growth that we see developing.

So trajectory looks very solid.

Okay, very good and regarding new products are the vast majority of new products in the preclinical line or are there some CMT products on there too.

They're mostly of the new ones that came out this year a lot of it and a lot of investment went into the preclinical line because we're really putting the more of the investment where the tail winds are.

But also we're putting it into the cellular and molecular pieces. So some of the cellular areas those are seeing.

Then kind of held up on growth, mainly because on the on the revenue side because of <unk>.

Some of the supply constraints, but.

You look at products like <unk>.

The electrification COVID-19 related products.

Dramatic demand there and we're putting the investments in their new for new products that came out this year a lot of them on the extending our position in the.

On the clinical side and then also on the on our molecular testing side.

Okay. Thank you.

Thanks Lisa.

Your next question comes from the line of Bruce Jackson of the benchmark company.

Hi, good morning.

Thanks James.

Thank you launched 17, new products. This year can you talk a little bit about.

What areas those products we're in in that.

To the extent you can disclose once that youre working on for.

The next couple of quarters that'd be great.

Sure.

I would say in general.

For more most of most of the new introductions were in the in the preclinical side.

What went there into the software systems, what I call build.

Building up the sockets, which went on when a company a large company or are you going to large academic site when they adopt our our systems then it locks them into using our consumables are implantable.

Net debt so thats the primary driver on the investment a lot of investment going on there a lot of it is software getting the systems and getting the customers used to using our systems will be working to move more of this to the cloud a lot of it comes down to data analytics capability that large <unk>.

Pharma companies need to be able to.

Pulled together a large datasets to establish.

Build the cases for moving into clinical.

So that's 1 area, we are continuing to invest on the emulation side, we see that as a long low.

Long runway there a lot of opportunity.

Significant demand there and that's going to continue to drive and there are some new technologies, there, which we're rolling out that are going to make that product even more unique.

So that's an area on the cellular side, we're putting more effort into the.

The ability of the products that allow you to do single single multiple and then large array of cellular testing at the same time, so we see more and more testing taking place at the cellular level.

Some of it is designed for use with the genetically modified cells human cells. So that's a debt and expected area of growth.

We know that demand is going to be developing now. We also know that a lot of that is really targeted to these academic labs, so as they come on.

We will get a double effort there on the expansion of the customer.

For the labs coming online and us having these new technologies and capabilities right in line with where they want to go.

There are some new activity is happening on the fluidics molecular side too. So we're 17 products I would say, but I would say over habits on on investment level on the preclinical side.

And then also targeting exactly where the tail winds are on on the cellular side and we all know where those are anything electrification what to fusion.

Christopher related type technologies in them and then the.

The ability to the cellular based testing also.

Okay, that's great.

Just.

To follow on to.

<unk> point is.

Really this theres a lot the tailwind on preclinical work investing there its the cellular side, where the future stuff, we'll see you'll see more from US there with the word electroporation does in the marketplace, what the cellular stuff, we've already invested in and the new that's really where biotech and Biopharma is going right for where we're going on we're going to go with the market.

<unk> basically it's really those.

Preclinical and cellular assets for 1 that we're going to double down on more of an.

<unk>.

The main product that was used for much of these initial forays into some.

Some of the new vaccines that we're not dealing with that really brought those down very rapidly based on the ability to do the modifications to the cells with our equipment.

I Hope you will join us in November for the results of our third fiscal quarter. Thank you very much have a great day.

This concludes today's conference call you may now disconnect.

[music].

Good day, and thank you for standing by and welcome to the Q2.2021Harvard Bioscience Conference call. At this time, all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press star 1 on your telephone.

You require any further assistance please press star zero.

I would now like to hand, the conference over to your Speaker today, David The Rice. Please go ahead.

Thank you Alicia and good morning, everyone. Thank you for joining the Harvard Bioscience second quarter 2021 earnings conference call for.

Before we begin I would like to suggest that you take a moment and download a copy of a presentation that will be referred to during this call. The file is entitled Q2, 2021, H 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.

Putting those described in our annual report on form 10-K for the period ended December 31, 2020, our subsequent quarterly reports on form 10-Q, and our other public filings.

Any forward looking statements, including those related to the Companys 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.

The difference between our GAAP and non-GAAP results are outlined in the earnings release and today's presentation. These 2 documents as well as a replay of this call can be found on our website under investor overview events and presentations.

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

Thanks, Dave Good morning, everybody.

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

Starting off revenue was up 25% over Q2.2020, improving to pre COVID-19 levels.

Preclinical DSI revenues were up 20% on strong demand.

With growth across all of our key product lines.

Cellular and molecular revenue was up 22% continuing its recovery as labs reopen.

We saw very strong order growth and backlog growth. However, we had non fulfillment delays from global supply chain disruptions that all companies. These days are having to deal with.

Operating margin came in at 15%.

On net versus 18% last year and 12% in Q2 thousand 19.

Gross margins were impacted as we experienced significant cost increases in the quarter driven by material costs freight and direct labor with cost of approximately $1 million in the quarter.

With gross margin being a focus of ours you can be sure that this has our attention and we will be dealing with it.

Q2, 'twenty was a difficult comparison because of the cost actions that we took last year in response to the developing COVID-19 situation.

Moving to slide 5 for presentation and look at the details.

Yeah.

As expected we continue to see strong revenue growth for Q2 coming in at $29.2 million at 25, 3% over last year.

Gross margin came in at 56% and that was down 340 basis points from last year, but on higher cost from these global supply is global supply chain issues, which we've talked about and we will talk a little more about in the future.

This quarter had GAAP operating income of $100000 or 2% of revenue.

Our adjusted operating income was $4.3 million so our adjusted operating margin metric for 14, 6%.

GAAP earnings per share was negative <unk> debt.

Up from a negative for last year.

Our adjusted earnings per share was <unk> <unk> up from 5 last year.

Our cash flow from operations was $800000.

And we paid down debt by an additional $900000 on the quarter.

Moving on to slide 6 and take a look at the revenue in the quarter by product family.

Starting with the first row of the table on our cellular and molecular product revenue, which is primarily from academic research labs was up 22% from last year with orders and backlog are up significantly.

We experienced significant revenue shipment delays caused by global supply chain disruptions in a number of materials.

Planned pruning a removal of lower value products impacted our reported revenue by approximately $1 million in the quarter.

European Labs are still slow, though we see signs of recovery looking later in this year.

Looking to the second row on the table, our preclinical products revenue grew 20% driven by strong order growth across the product lines from our core customer segments on CRO in pharma and academic labs globally.

Sales in the Americas was up 28% and Europe was up 32% with expanding academic lab demand for our preclinical product lines.

Our new insulation product is growing at a clip of over 50%.

Our preclinical revenues are now exceeding the pre COVID-19 levels of 2019.

Overall reported revenue grew 25% on on a currency adjusted basis revenue was up 21%.

Yes.

Moving to slide 7 and taking a look at the major activities in the quarter.

The post Covid dynamics continue to impact on global supply chain net really has hit us with.

On material purchase price periods tissues freight and labor costs.

European restructuring actions for the 2020 plan are complete we completed the move of our UK engineering to Boston and we closed 2 smaller site.

As for new product introductions, we introduced 9 new or refreshed products, which were announced at our global sales meeting. So far this year, we've introduced 17, new products, which we expect to contribute meaningfully in next 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.

The first half of this year demonstrates true momentum from our stated 2021 focus on organic sales growth, while continuing to deliver improved bottom line performance and an overall more efficient business on.

Walk through the full P&L and cash flow in more detail, but as a reminder, my discussion will focus on adjusted results for P&L performance, which aligns with the measurements we use to run the business.

Reconciliations of adjusted results for GAAP are included in the appendix for this presentation.

Including a reference to adjusted EBITDA. We've added this quarter given this is a econometric utilizing the investment community.

Clearly year over year expectations or comparison for 2020 will be influenced by the unique cycles and reactions due to the COVID-19 onset last year, which is why we will make certain references back for 2019 on that note. Our performance continues to reflect a fundamentally better business with adjusted operating margin of 15% compared to 12%.

<unk> in Q2 dollars 19 on a comparable revenue levels, we reported 18% adjusted operating margins in Q2.2020 with significantly lower operating expenses in the prior year given the rapid aggressive interim cost measures put in place with the onset of Covid and related revenue reductions.

Also as Jim noted this year, we experienced significant increases in cost of goods sold due to higher materials freight and direct labor costs driven by the global supply chain disruptions on other macroeconomic factors. We are seeing globally on this post COVID-19 world.

I'll expand on the gross margin dialogue.

But as we continue to believe strong sustainable organic topline growth.

High gross margins.

An important outcome for long term shareholder value creation.

On a cost base overall operating expense levels are in line with our planned expectations and also reflect the completion of our 2019 'twenty restructuring program in Q2.

As previously noted the turnaround restructuring program initiated in 2019 created $7 million of annualized cost savings.

In terms of business optimization rest of the year, we anticipate we'll spend around $1 million in the second half to accelerate improvements on our core manufacturing operations, which we will record as transformation costs and exclude from our adjusted earnings. Given these are non running run rate investments to support scaling our operations for expected growth.

Our run rate Opex is lower than pre COVID-19 levels with a fundamentally new and improved organization in place as well as compensation plans, including variable comp accruals to ensure to reward and retain a strong workforce in place on.

On cash flow and debt our leverage ratio of our total debt to adjusted EBITDA is less than 2.5 times relatively consistent with prior year, but well below our roughly 3.5 times leverage is about a year ago.

Cash flow from operations is lower than prior year due primarily to higher working capital in line with higher revenue on a strong outlook, including inventory growth to.

To improve our fulfillment operations and make sure we pick the backlog down and get or achieve our revenue goals given the disruption in the supply chain we've discussed.

Finally, I'd called out on the slides here, our higher share count for adjusted EPS calculations diluted shares have increased over the last year due to the significant improvement in our share price since 2020 option exercises aligned with the price appreciation contributes to this but the majority of this is based on the dilutive effects of both.

Standing stock awards the calculation on our GAAP is based on assumed share buybacks and other stock goes up the theoretical amount of buybacks is lower but the higher share count.

With that I'll turn it back to Jim to discuss the full year outlook Jim.

Thanks, Mike, let's move to slide 11.

Take a look at the outlook here.

With most of the structural improve improvements behind us. This year. Our primary goal is sales growth driven by improved sales effectiveness marketing and new product introductions. In addition, we'll be addressing cogs issues, resulting from the global supply chain issues and disruptions specifically honing in on freight optimization.

Cost labor inefficiencies and also looking to tune our operating expenses in areas like in Europe.

As for our outlook for the year, we're taking up the revenue outlook and narrowing operating margin target to account for the potential of extended sales.

Supply chain related cost increases that we've seen.

We now expect revenue growth on a reported basis to improved approximately 12% to 15% growth versus last year.

With the strong order growth and strong backlog driving sustained growth in our in our preclinical product revenue.

<unk> are expected to continue recovering with strong order growth and a strong backlog there too.

Portfolio rationalization pruned low quality revenue approximately $1 million up from our 2019 baseline and another $4 million from FY 'twenty baseline.

Revenue remained on the impact on global supply for certain materials that were managing it closely and brute force and manufacturing and supply as best we had debt we need to to meet the demand for our customers.

As for adjusted operating margin, we're narrowing our expectation on our expected improvement to the mid teens range. In spite of these global cost issues. We expect continued gross margin expansion on increased volume improved margin mix somewhat offset by the higher supply chain costs, which we've been dealing with more recently.

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

At this time, if you would like to ask a question. Please press Star then the number 1 on your telephone if you would like to withdraw your question press the pound key please standby, while we compile the Q&A roster.

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

Hi, Jim and Mike could you.

For seeing in acquisitions, but also the how.

How are we free in now and we've had to make up for these issues with labour inefficiencies, having to throw more people at things.

That's inefficient that adds cost so I certainly we would see that on a large majority of this is going to improve as we as we approach the end of the year and then the other side that's going to help US anyways you see the strong order growth, we have which is pretty amazing and the backlog that we've built.

We will get.

Proved operating leverage on that growth, so that growth and that growth alone will likely more than cover this issue.

But either way.

Maybe we've got a handle with both ways. So we've got to get to the costs to get the cost out continue to improve.

The efficiencies right and we will see the natural in addition to that will see the natural improvement of operating leverage on the revenue growth.

And could you highlight any of the products that we're driving this 25% queue to growth.

It was pretty much.

First of all the DSI preclinical products were Fabulous and then they really drove ton of growth there pretty much across the board. The innovation product that continues to just grow by leaps and bounds, we're making more investments in that too.

We had some issues with shipments on and supply issues constraining the shipments that we would have had on the on the the Bts line the.

Let's separation line, but that is pretty much resolved now, but we had some impacts from that and the port of it that that's going to really start speeding up now as you know big.

Big lots of Tailwinds there in terms of needs in the market. So I mean ordering take on that is great again, but we were we were held back somewhat on the on being able to ship on this last quarter because of its a supply chain disruptions.

But again I would say the big drivers, we saw were pretty much across the lot across the board on the preclinical side of the products for Bts in order and taken the very strong revenue will pick up much faster there is in the second half of the year.

Cellular things.

Cellular was had have some issues, mainly with there being so much other being academic lab customers and they're still down some of these products are pretty complicated and you pretty much have to have a technical sales rep for an average person in the lab to really close those deals so thats still.

That's still been held back pretty pretty substantially.

But the outlook is it really is improving on these academic loud and what's funny is academic labs, even though they were down overall for us in certain areas like the installation products.

Those still drove a lot of demand even though.

Right a bit fewer.

Labs out there operating they knew they needed they wanted that kind of technology in their lab. So bottom line is overall academic labs are coming back Europe has been slow it's still slow but the outlook is improving there. So we expect the European labs to really start to March back toward somewhere near where they used to be and when they do.

That's a big chunk of incremental demand on the business. So this the rest of this year it looks very strong and that's in spite of we've had again brute force a number of things to be able to make shipments we built the backlog on on on 1 hand, it's great to see real strong backlog on the other hand, you gotta be that needs to be moving into.

Revenue growth.

But all the everything points towards us sending up where we really wanted to be this year and that means getting our gross margins by the end of the quarter back up to where we expect them to be.

Again dealing with the cost issues and having the natural growth of revenue contribute through operating leverage.

And lastly, Jeremiah based on guidance.

Your revenue growth.

Will the filler 8 from 25 per cent in queue to do.

Do the comps I'm assuming is.

1 part of that question. The second part is what level of organic growth do you think the company has.

With the low growth product lines being paired in you entering.

A more normal environment.

I look at our overall our expectations.

And I've always felt like there's no reason as we get this business properly sized get the coverage in place and the product portfolio in place and the current across selling now that you see for instance, with some of these a number of these preclinical products now being getting good solid penetration academic labs.

I'd be real disappointed if I don't have a sustained double digit revenue growth business here I mean, just just on just on the fundamentals of it. So and then you know for this year with the recovery and it's unfortunate that we have some delays due to the supply chain, that's not going to last forever, that's been with debt will resolve.

But this is going to be a very good year, we're going to info Melinda building backlog of them through the year I need to be a little bit conservative on something can happen with a supply chain that suddenly there's something you're on ship hold with I have to account for that too, but but overall this is continuing to improve and I think as we get into next year I'm pretty cool.

Comfortable to be able to talk about with the double digit business.

Okay. Thank you.

Thanks, Paul.

Your next question comes from the lineup, Tim Chang up North on Capitol.

Alright, Thanks, Jim could you talk with just a little bit about.

The rollout of new products has has the supply chain disruption is also impacted.

The launch of new products in the second quarter, I mean, well some of those products be delayed into the second half for the year.

I don't think there's any doubt that will have some delays depending on which materials were still struggling with but like like Mike said, we've picked up working capital to be able to overbuy, especially face that we believe or not gonna obsolete.

But in general we see a pretty big portion of our sustained revenue growth being driven by new product introductions. This is.

This is Ah.

Antefix Engineering organization and our long term life is based on new products, signing new products and technologies that are entering entering production based on the needs of the customer. So we will have there will certainly be some impact from supply chain, but overall.

We're going to see the the primary drivers of growth via the ones that you wanted to be getting the cut sales coverage right.

And and having new and exciting products and I think examples of it or like the inhalation product is for.

50, 60 plus percent a year you take something like that has now become a material number there's other other products like that in our portfolio. They're they're following who will follow the same kind of trajectory, we will see large growth in some areas and some things that don't make sense, you'll see us strategically removing them from the portfolio.

Just 1 follow up.

You mentioned that academic labs are are recovering.

Do you expect.

An increase in demand as we get to the flow of school year starting.

We do I think this fall school year as part of this new budgets, often will see budget cycles based on the academic year, which kicks in net September timeframe.

And then the rest of the academic.

At the end of the calendar year.

And I think just given that were on order basis, we're really close to where we would have been free COVID-19 anyway, and the only real slowdown has been some.

Construction on the supply side.

That will settle out and.

We didn't usually talk a whole lot of cross selling but other way of the sales organization. The way it's set up the fact that Europe European academic labs is up substantially on our preclinical product lines that tells you that.

As those let's get the full speed there is a natural incremental growth happening right, there simply because of being able to penetrate the academic labs with those products that in the past we've really didn't sell their those were primarily products that sold into for.

Pharma and and Crot's company. So there's there's a lot of that a lot of that natural growth is going to be happening there.

Products like the installation products those are perfect that for a reason for that you would expect to see we always expected that the largest demand there might come from academic lab I'm not from the former companies.

So net net.

If you'd like we got a really we're going to end. This year very strong will be pretty much right on target and as as we get into next year. This is a very good strong growth profitable growth business and you'll see that all developing.

Like we had expected with the turnaround the company.

Okay, great. Thanks for thanks.

Tim.

Your next question comes from the lineup Lisa Springer of secular research.

Hi, Kevin Mike.

My question is regarding the backlog you mentioned there has been a pretty significant lifting the backlog per CMT products I Wonder if you expect to work through that entire backlog the entire existing backlog in the second half of this year.

I don't think so but I do think is that by the time, we get to the end of the year, we should be closer to what the normal backlog sustained backlog should look like.

It's gonna be it's gonna be tough, it's going to be a little more costly for us because we are having to make up for.

Inefficient labour to get things through and we're having to other things having to delay.

And then so but as we get through this.

Yes, we will get this back to normalize backlog. So it's kind of funny again to flow is a bit of a tip sort on the backlog growth substantially.

Burning it down and getting back to normal shows very nice growth, but but we do see sustained general order intake growth and that's what I would look at so we'll burn down some of that backlog. This year I doubt that will get it all back towards the levels would work, but it will be incremental to the natural order growth that we see developing.

So trajectory looks very solid.

Okay, very good and Ah regarding new products are the vast majority of new products in the preclinical line or other some CMT products on there too.

They're mostly of the new ones that came out this year a lot of it and a lot of investment went into the free closed the line because we're really putting the more of the investment where the tailwinds are.

But also we're putting it into the cellular and molecular pieces. So some of the cellular areas. Those are seeing there's been kind of held up on growth mainly because on the on the revenue side because of.

Some of the supply constraints, but.

You look at products like.

Electric duration COVID-19 related products, there's dramatic demand there and we're putting the investments in their new some new products that came out this year a lot of them on the extending our position.

Clinical side and then also on the on a molecular on testing site.

Okay. Thank you.

Thankfully.

Your next question comes from the lineup Bruce Jackson of the benchmark company.

Alright, good morning.

<unk> mentions the launch 17 new products.

Can you tell us for a bit about.

What areas those products for in and then.

To the extent you can disclose once that you're working on for the for the next couple of quarters that'd be great.

Sure just.

I would say in general.

More most of most of the new introductions were in the in the preclinical side a lot went there into the software systems, what I call.

Building up for sockets, which went on when a company at large company or even a large academic site when they adopt our our systems than it locks them into using our consumables on implantable that death. So the primary driver on the investment a lot of investment going on there a lot of it is software getting the systems tune of getting the customers used to using our <unk>.

Systems will be working to move more of this to the cloud a lot of it comes down to data analytics capability that and a large Dr oz and pharma companies need to be able to other.

Pulled together the large datasets to establish for them.

Build cases for moving into clinical.

So that's 1 area, we are continuing to invest on innovation side, we see that as a long.

On runway there are a lot of opportunity.

Significant demand there and that's going to continue to drive and there are some some new technologies, there, which were rolling out that are going to make that product even more unique.

So that that's an area on a cellular side, we're putting more effort into.

The ability of the products that allow you to do single single multiple and then large array of cellular testing at the same time, so we see more and more testing taking place at the cellular level.

Some of it is is designed for use with that genetically modified cells human cells, so that the debt and expected area of growth.

We know that demand is going to be developing now. We also know that a lot of that is really targeted to these academic labs, so as they come on.

We'll get a double effort there on the expansion of the cost of the labs coming on line and US having these new technologies and capabilities right in line with where they want to go.

There are some new activity is happening on the fluidics in molecular side too. So was 17 products I would say with jar as day over habits on on investment level on the preclinical side and.

And then also targeting exactly where the tailwinds are on on the soda siphon nowhere those artists anything legislation electrocution program.

Christopher related technologies, and then and then the.

Deals with the ability to cellular base testing also.

Okay, that's a great day.

You could just.

To follow on.

<unk> point, it's really this does a lot the tailwind and free clinical work to investing there it's for cellular side, where the future stuff will seize you'll see more from US there with the word electroporation does in the marketplace. What the cellular stuff we've already invested in in the mirror, that's really where biotech and biopharma going right to wear.

We're going on we're going to go with the market Tailwinds basically it's really gross.

Preclinical on cellular assets, the 1 that we're going to double down on more of an.

An example of like Beachy excellent I mean that was the main product that was used for much of these initial for it into.

Some of the new vaccines that we're not dealing with it really brought those out very rapidly based on the ability to do these modifications to the cells with our equipment.

And that's now you're seeing companies like Madonna and the way they do things, that's big desk going to become more and more of the way.

Large molecule.

Rugs are going to be built so we're right in line with that that's where I really want to grab that tailwind not just to be a part of the advanced research on it but really start to move toward volume and penetrating more companies that are doing this and move toward getting more towards the higher volume.

Okay.

There was not a lot of investment Mardi of this company for awhile.

Which on the 1 hand, it says a lot that accompany could continue to move along without much new product development, but now that this is the new product introduction as the primary driver it to to get into really expanding the businesses.

That's our focus at my focus.

That's that's great and.

Obviously been a big focus for us so congratulations on the progress on them.

The results for the quarter.

Thanks Bruce.

There are no further questions at this time.

Okay, well. Thank you everyone for joining us as in today's presentation will hope you'll join US in November for the results of our third fiscal quarter. Thank you very much have a great day.

This concludes today's conference call you may now disconnect.

Q2 2021 Harvard Bioscience Inc Earnings Call

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