Q3 2021 Harvard Bioscience Inc Earnings Call
Good day and thank you for standing by welcome to the QC 2021 Harvard Bioscience, Inc. Earnings Conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there's a little bit a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Your work or any further assistance. Please press star zero I don't like to have your conference is ready to your speaker today.
Please go ahead.
Thank you Melissa and good morning, everyone. Thank.
Thank you for joining the Harvard Bioscience third quarter 2021 earnings Conference call.
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.
File is entitled Q3, 2021, H by a 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 are subsequently subsequent quarter.
<unk> reports on Form 10-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 today.
Sure.
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 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.
I will now turn the call over to Jim Jim. Please go ahead.
Thanks, Dave and good morning, everybody.
Go ahead and move to slide four of the presentation look at the highlights for the quarter.
Revenue was up 23% over Q3 dollars 20, and up 8% over pre Covid Q3 19.
Our preclinical revenue was up 28% on strong global demand and across all key product lines.
Cellular and molecular technology revenue was up 19% continuing its recovery as labs reopen.
Again this quarter, we saw strong order growth and backlog growth. However, we continued to have fulfillment delays and global supply chain disruption issues associated with it.
Adjusted operating margin came in at 13%.
That's versus 15% in Q3, 'twenty versus 12% in Q3 and 19.
Adjusted gross margins came in at 56% impacted by over three percentage points from higher Cogs.
And higher Cogs continued from Q2 on global freight costs material inflation, plus direct labor inefficiencies.
Q3, 'twenty with a difficult comparison due to the dramatic onetime cost reductions, we took last year to handle the Culver COVID-19 headwinds.
Move on to slide five.
Look at the details of the quarter.
As expected we continued to see strong revenue growth Q3 coming in at $29 7 million Thats up 23% over last year.
Gross margin on a GAAP basis came in at 55% down 110 basis points from last year on higher cost in the global supply chain.
This quarter had GAAP operating income of $5 million, that's one 8% of revenue.
On adjusted basis, our adjusted operating income of $3 9 million. So our adjusted operating margin measured 13, 3% of revenue.
GAAP earnings per share was zero up from a negative <unk> <unk> last year.
Our adjusted earnings per share was <unk> <unk> up from <unk> last year.
Our cash flow from operations was negative $700000.
And our debt increased by $2 7 million as we prepare for a strong Q4 and our debt ratio measured two five times EBITDA.
Moving onto slide six.
Starting with the first of all of the table, our cellular and molecular technology revenue, which is primarily from academic research labs is up 19% from last year with orders and backlog up significantly.
Experienced significant revenue shipment delays caused by global supply chain disruptions in a number of our materials.
We're seeing fulfillment improving with added hiring although this does drive direct labor inefficiencies until new staff get trained and staffing levels get optimized.
Planned to pruning or removal of lower value product revenues impacted reported revenue by approximately $1 million in the quarter.
European Labs are still slow, though we do see demand improving as we go forward this year and the remainder of this year.
Yeah.
Looking to the second row of the table, our preclinical product revenue was up 28% driven by strong order growth across our product lines for our core customer segments of <unk> pharma and academic labs and that's globally.
Asia Pacific saw very strong growth in EMEA was also up double digits sales.
Sales growth in the Americas was also positive with strong pharma demand the U S government continues to trend lower.
Overall preclinical is now well above pre COVID-19 levels up 27% from Q3 to 19.
Overall reported revenue grew 23% over last year and 8% over the same quarter pre Covid 2019.
Moving to slide seven we'll look at major activities in the quarter.
Starting with the post Covid operating environment global supply chain labor sourcing and retention challenges continue similar to what we saw in Q2.
Operations are stabilizing and improving as we continue hiring that we are running high use of labor in order to fill in the gaps.
Pricing actions have been initiated to help combat material inflation over the upcoming quarters.
Our European sales organization, we've completed the designs.
And align the structure similar to what we've done in North America.
Alignment of territory similar to North America will add territories and expand the reach and preclinical sales team will also now start to be to wrap the behavior products. The same as we did last year in North America, and it was a very successful and helping drive growth.
Now I'll turn the call over to Mike for a quick look at the key financials Mike.
Thanks, Jim and good morning, everyone.
We're very pleased that the leadership team to see continued momentum in top line growth and on track to achieve our stated 2021 goal to drive long term profitable growth.
As we usually do 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 Pete on P&L performance, which aligns with measurements used to internally manage the business.
Reconciliations are available in the appendix of this presentation.
GAAP results.
Consistent with Q2 reporting and we will make certain references against 2019 due to the unique comparability issues with 2020 due to COVID-19 on that note. Our performance continues to reflect a fundamentally better business with adjusted operating margins of 13% exceeding Q3, 2019, a 12%.
Despite the roughly 300 basis point negative impact of supply chain or labor costs noted.
Looking back to Q3 'twenty the decline in margin from 15% includes the Cogs impact as well as unique onetime cost measures Jim noted to preserve cash flow during the height of COVID-19.
Our operating expenses in Q3 21 include investments to return sales marketing and R&D spend to pre COVID-19 levels with a vastly improved set of capabilities to leverage as well as higher variable compensation accruals.
In terms of bottom line performance as well as long term value creation delivering superior gross margin levels remains in focus despite the impact of supply chain trends noted.
Adjusted gross margin was 56% were in line with historical performance as headwinds in Cogs were largely offset by improved product mix within the Cogs increases the majority of the impact is due to vendor cost increases starting in the first half of this year.
Also experienced higher manufacturing labor costs due to both market forces on wages, but also inefficiencies in certain facilities, where head count reductions were made during the downturn in 2020, requiring rehiring retraining in 2021.
We've seen stabilization in these operations, which will position us for efficiency gains and leverage in 2022.
An improved product mix as we've discussed our growth initiatives are focused on selling high end niche products through more efficient direct sales channels as well as the pruning of low margin low growth Skus all of those actions have led to better mix improving our gross margin overall to keep us neutral against where we were with the Cogs headwind.
<unk>.
On cash flow and debt, our leverage ratio or total debt to adjusted EBITDA is two five times relatively consistent from the prior quarter, but down from three two times leverage at the end of 2020 due to higher adjusted earnings net debt of $49 million is essentially flat to the end of 2020 due to inventory grew.
We have increased inventory levels in response to strong order growth and to ensure stable order fulfillment. During this period of supply chain volatility.
The increases in inventory levels have helped stabilize operations as noted.
As we exit Q3 interest expense is down significantly over prior year due to the December 2020 refinancing and.
In terms of other uses of cash capital expenditures in Q3 were $500000, which included manufacturing.
Manufacturing site investments to support growth and scalability in our core manufacturing centers.
Additionally, we incurred approximately 900000 of transformation costs, which are excluded from adjusted earnings given these are non rate run rate investments.
Q3 costs included final expenses from Europe site consolidations completed in mid 2021 costs associated with organizational upgrades as well as project costs related to improvements in our core business systems and operations.
I noted on our Q2 call that we would invest roughly $1 million in the second half 2021 to accelerate improvements in our core operations.
A portion of Q3 spend is related to these efforts. The primary output of these efforts short term will include global data warehouse and data visualization tool sets, which is already enabling our sales effectiveness efforts has recently been extended to benefit our operations and supply chain analytics.
These analytical capabilities capabilities in place are fundamentally different today and another source of momentum as we enter 2022 supporting growth and margin expansion.
With that I'll turn it back to Jim to discuss the full year outlook Jim.
Thanks, Thanks, Mike So looking forward, if we got to move to slide 11.
Our primary goal is sales growth driven by improved sales effectiveness marketing and new product introductions.
Over the next few quarters, we will be addressing cogs issues, resulting from the global supply chain disruptions, specifically honing in on freight optimization material costs, and labor inefficiencies and tuning our overhead costs.
In various places such as Europe.
As for our outlook for the year were taken up our revenue outlook to maintaining our operating margin targets. Despite the extended supply chain related cost increases. We now expect revenue growth on a reported basis to improve to approximately 15% to 17% growth versus last year.
We see strong order growth and a strong backlog driving sustained growth in our preclinical product revenue.
Academic labs are expected to continue recovering with strong order growth and a strong backlog.
Portfolio rationalization pruned low quality revenue of approximately $1 million from our FY 19, baseline and another $4 million from FY 'twenty.
Risks do remain.
The impact of the global supply chain for certain materials that we are managing it closely and brute, forcing manufacturing and supply to best meet our demand.
As for adjusted operating margin, we are maintaining expected improvement to the mid teens range.
In spite of these global supply chain issues. We expect continued gross margin expansion on increased volume and improved margin mix somewhat offset by higher supply chain costs.
With that I want to thank you and now I'll turn over the call to the operator and open the line for Q&A.
Thank you as a reminder to ask a question you will need to press Star One and you had told us selling can be doing your question press the pound key.
Yeah.
Your first question comes from the line of Lisa Springer from singular research. Please go ahead.
Good morning, guys.
Hi, Lisa.
I wanted to ask you. So you've mentioned that the supply chain issues have been a factor in terms of cost per labor and freight materials have you encountered any issues in terms of sourcing components for some of your higher tech products.
Or are there things you are generally available just at a higher price.
This is this happens often on especially in high Tech development, but yes, we've seen.
A mix of items being very hard to get.
A number of suppliers either shut down their operation and had to restart and a number of cases, we've had to go out to the to the to the market and try and find.
Parts that maybe you have to get through areas instead of directly from the original manufacturer you have to sometimes go out and pay a fairly high price for something that's available, but somebody has to somebody has to go out and put it together. So in those cases the prices. So on an individual component basis can go up dramatically.
But in time that all settles out sometimes we have to do things like redesign part of the circuit to be able to move on with a different a different product move on with it with a different a different set of chips.
But definitely that's that's.
Probably the largest problem we have in terms of supply chain disruption as with the supply we need from our suppliers and we've done things like reached out and.
The team has evaluated basically the full suite of electronic chips that we use across the portfolio.
And I've asked them to make sure that we have where we can make sure. We've got a year supply available and that means that's why you're seeing things like inventory going up.
And then also if there's things that are just.
So hard to find we end up having to pay a higher purchase price for it but.
But that's where the disruption is really hitting us is with the supply of parts to our to our manufacturing sites.
Okay.
Jim could you comment.
Comment on the revenue contribution from newer products say products introduced in the past 12 months and how the gross margins compared to the average product.
Yes, that's a great question Lisa and.
An example would be the inhalation product that was virtually a new product.
Like a year and a half ago.
It's become a significant contributor to revenue growth in the business.
That's just one dimension. We've introduced this just in this last year of 17, new products, our enhanced products of what we're already offering.
Those are driving new growth in the business incremental growth and in some kind of in some cases, it's replacing existing growth with a product that's a better product.
It's going to be more sustained.
But certainly new product development is a key portion of our growth plan and will continue to be.
Okay and just my final question I wanted to ask you about your comment is that U S government contract reductions where factor impacting preclinical could you provide a little more color on that and what you see happening with that in the fourth quarter.
Sure sure.
Covid hit we saw the government redirect a lot of their investment from things that they historically would have invested in for instance for US we were pretty heavily.
Thats exposed to what they were doing with.
Trying to test for Biohazards. So some of our products that were used for that.
There was a pretty good pretty significant I mean, there was a measurable part of our revenue.
But the government basically those labs had either slowed down or shut down and redirected their their focus from biohazards.
And areas like that to things that were more associated with with Covid. So in that particular segment. There we saw.
Pretty good drop off of the revenue.
It's in the numbers.
But that's probably going to take a while for that to all come back in I think a lot of it just as the governments focus has shifted from worrying about biohazards to worrying about how are we going to make sure we accelerate things like <unk>.
And we do think that that will come back in time, but at this point, we've been able to replace any of that loss revenue plus some with areas that corridor core to our business.
Sure. Thank you very much.
Thanks Lisa.
Yeah.
Your next question comes from the line, it's Paul Knight from Keybanc. Please go ahead.
Hey, Paul.
Paul you might be muted I don't know if youre speaking.
Okay.
<unk> on Covid.
Could you go over your CRO.
No exposure your academic exposure level and the growth you're seeing in those two markets Jim.
Yeah.
Sure and in in the quarter.
The CRM business for Us is very big and it's a very lumpy. So in this quarter timing caused us to have a little bit a little bit lower than what we would typically see on the CRO side, but.
But at the same time pharma grew very strong. So that's why we saw global substantial growth on the pharma side with with our preclinical products.
So definitely that.
Academic revenue academic research sites Theres still coming back.
Solid and it's growing across our lines. So both the CMT lines and a lot of our growth that we always that we've been seeing in the.
Preclinical side, it's also going to academic research site, especially sites, where theyre doing more animal model work.
And working on startups of new pharma <unk> biotech tech companies.
And Jim you've I think in the presentation hid has shown growth year over year compared to 2019 pre COVID-19 of about.
8%.
Is that kind of the normalized growth rate of Harvard Bioscience or are you guiding to what your your long term goal really is.
Yes.
Our goal is to certainly get into that or close to that 10% region thats the target for us as you know 10 plus.
Looking at its kind of hard to take an extract all of the puts and takes from 18 or 19% to 20 to 21.
If you think one of the things that we took out revenue of something like a $5 million in.
21 that it would've been in 19, so when you when you do the puts and takes and adjust for all that the underlying growth. We see is in the double digits.
And that's kind of what we look at for how we're going to sustain that kind of growth I think.
Our global targets.
Targets were more in that six to eight originally well certainly we see that.
Very achievable and our targets at this point is to get up to.
More like 8% to 12% region, that's where we're shooting for but certainly getting to tenants.
A real important milestone for us on a sustained basis.
And then I know.
The earlier question was around products as well, but.
Specifically electroporation.
Other.
Or were there any product highlights besides the emulation product line.
Yes, good question.
Certainly we are investing there is natural tailwind.
With the electroporation technology and were introducing some new technologies and products along that phase, we expect that to be one of the fastest growing parts of our of our business and also in our net revenue growth. There are some areas that aren't really growing that fast and we are looking at those now as to whether some of these other products.
We are not right in that.
In the in the tailwind of where we're really focusing whether or not those make a lot of sense to make the investment to turn those into good growth additional drivers or whether there's something else that we should be thinking about doing with them, but there is no question that there is still.
Another somewhere in the neighborhood of $4 million to $6 million that we think will likely need to be pruned out over the upcoming years. So.
But then there's also a couple of areas that we want to look at that we just have to make a decision can we turn those into something that contributes on an accretive basis to the kind of growth vector that we want and that's really that fits the sales the sales rep's bag, that's going to take a little bit longer thats, probably another but so you'll see some evolution of those but I.
I would like to get to where I had again, a good sustained double digit growth.
And part of that will be positive through extracting some negatives and thats just part of the natural thing and as we do that we'll let you know what those numbers look like like the last $5 million that we took out from the night the 19 timeframe.
Yeah, Okay. Thanks.
Yeah.
Your next question comes from the line is.
Sorry, Tim Chiang.
Capital. Please go ahead.
Thanks, Tim.
You talked a little bit about how European labs are improving sequentially and we think that's still about one third of your total revenues could you talk a little bit about how you.
See Europe coming back in the fourth quarter and into 'twenty two.
Yes.
There is a clear strength that we see with a lot more order activity a lot more quoting a lot more things taken place on the European labs, because they've really been slow for us.
Certainly.
As we look to Q4 and Q1 next year in the next couple of quarters, we do expect the euro.
<unk> labs to get back where they were.
That's going to be a piece of improving our overall business.
Yes.
The good news for US is our fundamental businesses outside of there have been more than taken up the slack. There. So that's going to help that's going to help us as they get back to where they really should be.
At the same time, we're tuning what our product offerings are going to be so we want to stay in those areas that really make sense that have a good natural tailwind for them.
Okay, Good and maybe just one follow up which is how how.
<unk> much.
Sure.
Ability do you have to take up price on.
CMT in preclinical product line. Obviously this costs are increasing but are you able to pick up costs, especially our prices, especially let's say in the fourth quarter and into mix.
Yes.
Something that is always challenging but what we've seen is it depends on the it depends on the customer segment depends on.
The product if the things that we sell direct we have quite a bit of pricing power. So if our reps are out there at the highly technical sale. It's a sticky sale areas like that we have we have really good pricing power. Some of the things that we sell through distribution may take a little longer and may or may not have the kind of pricing power that wed like to see we are implementing.
<unk> had some some new pricing that's rolling out here now it will really start to stick as we get late into Q4, and then more into Q1.
New orders will be at a better pricing point for us and it's a mix in some cases, we modified pricing very slightly and other areas others theres things that really needed to go up pretty much. So you might see things move up from certain things might go up as much as 15% to 20%.
Net average.
We dial in three years to 4% price increase net we would expect to get to 3% ASP average. So that's kind of what I, if I can get 2% to 3% improvement on Asps.
That really helps us offset the inflation, that's part of our cost structure that's come in.
The other parts of the Cogs that are bothering us. So those are the things that we have a handle on what will get to the efficiencies on labor. It. There's no question about that.
We'll get to what it takes to get Cogs, where they need to be.
But some of the inflation on some of these parts and what it's likely to be with us.
But if thats.
Arnold two two points or so.
Gross margin that we hope to be able to make up on its own with pricing and then get further improvements as we do the natural improvements of Cogs.
Okay.
Okay, great. Thanks, Tim.
Thanks, Tim.
Your next question comes from the line of Jack.
<unk> from benchmark company. Please go ahead.
Hi, Bruce Hi, Thank you hi, Thank you for taking my question. So.
Launched 17 products new products this year.
I already discussed some of the stuff that youre working on.
In terms of inhalation.
Products are you still working on.
Solid both cellular and molecular testing products for CRISPR.
Is the supply chain.
Situation at all impacting your new product cadence for 2022.
Yeah.
We're working on a series of products across the portfolio.
There's new things coming out in the cellular side with individual cell testing and backfill testing.
That's a natural growth area for us, where we have great technology not a lot of players there high barriers good pricing youre going to see further improvements there.
And with new products.
A lot of what we've also been focusing on is things that really fit the preclinical bag.
And we have also mentioned that the behavioral type products that in the past typically sold and on their own as individual products into academic research, we're not working to bundle those more with the technologies that we already sell into the pharma CRM markets.
<unk>, that's a nice fit for us and Thats why youre going to see.
The team that the team said that that rep, the products for preclinical or having a broader integrated cell sale that there'll be able to sell and you put that together with our overall systems that are.
That are qualified for preclinical formal testing I mean, that's a very nice barrier for us and it's a.
And it just it just makes sense. It is a piece of cross selling but it's more than that it's actually realigning the portfolio best for driving growth to our all of our primary.
Primary segments, but theres, new products coming out and we'll be announcing new sets as we get to our new our global sales meeting in January.
This is a technology company, we we have to keep innovating and a lot of companies aren't doing it. These days. So that's a real advantage for us and the fact that we're a little more nimble we can put a lot of effort in one or two key places where the bigger companies tend to peanut butter, everything and everything kind of moves along slower. So that's an advantage for us.
That's the only question I've got for today, congratulations on the quarter. Thanks for taking my question.
Thanks, Bruce Thank you.
Your next question comes from Ireland Gushing from Nano cap gross please go ahead.
Hi, guys I have more of a comment because they're doing a great job.
Turning the company around growing again.
Making money everything looks good but I feel like from us.
Stock perspective that you're failing theres no investor Relations Theres No press, we press releases intra quarter I feel like there's so much more you can do and if I saw this company for the first time and it was brought public the thing would be worth $800 million to $1 billion in this market. So I feel like.
You have to do more on the Investor Relations front.
And that's really my comment I know you guys were supposed to try and start doing something and I haven't seen anything yet.
Yeah, well thanks for your thoughts on that first of all.
I Hope you know certainly I think.
The more we.
The more our messages out there that will certainly help the business.
We are planning some roadshows were planning with our sell side folks to get out there in front of more customers. No question that we are we have some opportunities there and certainly thank you. Thank you for your thoughts.
But also with like 17, new product introductions. This year did you put out some press releases.
<unk>.
Just keep the name alive intra quarter, while nothing is going on just so we know you are alive and something's happening.
Great Okay.
I appreciate your thoughts.
Yeah.
There are no further questions at this time I would like to hand against that dealt with speakers. Thank you.
Great. Thank you for joining us and look forward to lifting in at our Q4 call.
In February Thanks take care everybody.
This concludes today's conference call. Thank you for participating you may now disconnect.
[music].
Yes.
Sure.
Yes.
Okay.
Yes.
Yes.
[music].
[music].
[music].
[music].