Q4 2021 Harvard Bioscience Inc Earnings Call
Yeah.
Good morning, and thank you for standing by and welcome to the fourth quarter 2021, Harvard Bioscience Earnings 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 the session you will need to press star one on your telephone please be advised that <unk>.
This conference is being recorded I would now like to hand, the conference over to your speaker today, Mr. Dave. So Royce. Please go ahead.
Thank you Catherine and good morning, everyone. Thank you for joining the Harvard Bioscience fourth 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.
Phil is entitled Q4, 2021, H final quarterly earnings presentation and is located in the Investor overview events and presentations section of our website.
Leading the call today will be Jim Green Chairman of the Board, President and Chief Executive Officer, and Mike Rossi, Chief Financial Officer, before I turn the call over to Jim I will read our safe Harbor statement.
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 .
And our other public filings.
Any forward looking statements, including those related to the company's future results and activities represent our estimates as of today and should not be relied upon as representing our estimates as of any subsequent date.
Also much of today's call will focus on our non-GAAP quarterly results, which we believe better represent the ongoing economics of the business reflects how we set and measure our incentive compensation plans and how we manage the business internally.
The differences between 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. Thank you David Good morning, everybody.
Slide four of the presentation to look at the highlights for the quarter.
Revenue was up 7% over a strong Q4 of 'twenty and up 7% over pre COVID-19 in Q4 of 2019.
Global supply chain continued to delay shipments driving backlog up to approximately two times, our pre COVID-19 levels.
Preclinical revenue was up 6% over our record strong prior quarter year.
Cellular and molecular technology revenue was up 9% with continuing recovery in spite of the European headwinds.
Adjusted operating margin came in at 16% impacted by increased Cogs and increased variable compensation and new investments in R&D.
Adjusted gross margins came in at 60% in spite of higher Cogs.
Higher cost of goods were due to global freight costs and material inflation plus direct labor inefficiencies.
Opex was up year on year, primarily on variable compensation and growth in research and development investments.
Move to slide five of the presentation and looked at the details of the quarter.
In spite of global supply headwinds, we had solid revenue growth with Q4 coming in at $33 1 million, that's up 7% over the same quarter last year.
Gross margin on a GAAP basis came in at 59% that's up 200 basis points from last year, despite higher cost of goods.
This quarter had GAAP operating income of $1 7 million or five 1% of revenue.
Our adjusted operating income was $5 3 million so our adjusted operating margin measured 16% of revenue.
GAAP earnings per share in the quarter was a positive <unk> <unk> up from a negative to last year.
Our adjusted earnings per share was <unk> <unk> flat to a strong prior year.
Our leverage ratio measured at two seven times EBITDA.
We can move to slide six.
Take a quick look at the revenue in the quarter by product family.
Starting with the first row of the table, our cellular and molecular technology revenue, which is primarily from academic research labs was up 9% from last year with orders and backlog up significantly from last year.
Direct sales in Europe was impacted by academic lab closures from the Omicron variant.
Backlog is up from last year, however, improving operations kept a stable sequentially over Q3 of this year.
CMT product revenue was down about 5% from last year due to shipment headwinds and approximately $1 million and pruning of low value add products and from the portfolio.
Looking at the second row of the table, our preclinical product revenue was up 6% over our record strong prior year that puts us up 18% for the year 2021.
We saw strong growth across product lines for our core customer segments, a CRO pharma and academic labs globally.
European performance was very strong across customer segments.
Asia Pacific and Americas were impacted by large CRO order timing in Q4, though we see strong growth trends looking forward in 2022.
Overall preclinical is now well above pre COVID-19 levels up 28% from Q4 of 2019.
Overall reported revenue grew 7% over last year in spite of global supply chain issues and our backlog is up substantially over pre COVID-19 levels.
Moving to slide seven we'll look at major activities in the quarter.
Looking first at the operating environment, our productivity stabilized after the 2021 external supply chain and labor impacts.
We announced retirement of our Chief operating officer in January and we're moving to a flatter organization structure with new focused leadership in research and development and in global manufacturing operations and supply chain.
Pricing actions have been initiated to help combat material inflation over the upcoming quarters.
Now looking at new product development.
Our new Vice President of Global R&D is onboard and we're seeing immediate benefits of strong professional product development leadership.
We're ramping up investments in key strategic areas, including next generation telemetry solutions and software systems to name a few.
Brand enhancement is accelerating and we already see positive responses from customers and employees.
Now I'll turn it over to turn the call over to Mike for a quick look at key financials Mike.
Thanks, Jim and good morning, everyone.
Our Q4 and full year results reflect the positive outcomes from our investments and focus on the stated 2021 goal to drive long term profitable growth.
Pleased to be starting another year setup to extend on this trend of profitable organic 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 P&L performance, which aligns with the measurements, we use to internally manage the business.
Reconciliations are available in the appendix of this presentation to GAAP results.
On gross margin despite the effects of external factors in the supply chain and inflationary environment. Our original September 2019 objective of 60% plus gross margins remains our target. Our Q4 results speak to this potential was 60% adjusted gross margin reported.
And consistent with past trends product mix remains our single.
Single biggest lever to driving margin expansion as our higher margin preclinical and cellular products grew as a percentage of overall sales relative to prior year.
This improvement is a direct reflection of our sales effectiveness and product rationalization activities, we've been discussing.
Also we have been proactive as Jim noted on the price increases in this environment, which has started to positively impact gross margins, though cost of materials and freight remained at similar inflated levels. We saw in Q2 and Q3.
Adjusted operating income for Q4 was down modestly versus prior year due to operating expense investments in critical R&D programs and higher variable compensation.
We are confident the uptick in each area aligns well with our organic growth and gross margin objectives for 2022, and also supports long term value creation via innovation and rewarding key talent.
In terms of variable compensation. This includes higher commission levels due to sales performance above our internal plans for the year and higher bonus payouts to our overall workforce.
Our bonus program is designed to reward both top and bottom line performance in the accruals noted reflect full year 'twenty one results, where we grew revenue by 16% and increased adjusted operating income by 20%.
Our operating expenses outside these areas of investment remained stable to recent run rates.
Jim will speak to 2022 investments, we anticipate to drive further sales growth and product development.
Note that we see increases in wages in line with broader market trends as well as travel and trade shows ticking back up as teams look to get back face to face to face interactions. After the COVID-19 driven environment over the last two years.
On cash flow and debt, our leverage ratio or total debt to adjusted EBITDA is two seven times down from three two times leverage at the end of 2020 due to higher adjusted earnings net debt of $41 6 million as essentially flat to the end of 2020 and up slightly from Q3, 'twenty one due to working capital growth.
We have chosen to increase inventory levels throughout 2021 in response to the strong order growth in <unk>.
Sure a stable order fulfillment during the period of supply chain volatility we've discussed.
We currently do not see inventory growth in terms of days on hand as occurred in 2021 on a go forward basement basis as fulfillment operations are stabilizing after increasing stock levels in 2021.
<unk> levels increased in 2021 due to the double digit revenue growth reported however.
However, bad debt levels remain very low and we have isolated areas to bring down dsos modestly in 2022.
Interest expense is down significantly over the prior year due to the December 2022 bank refinancing.
In terms of other uses of cash.
Capital expenditures in Q4 were $400000 and $1 2 million for the full year in line with past annual levels. Additionally, we incurred approximately $1 million of transformation cost in Q4, which are excluded from adjusted earnings consistent with past practice. Given these are non run rate investments in our business infrastructure does.
And to ensure a solid long term growth platform.
Our capex in transformation costs in the second half of 2021 included Manny.
Manufacturing site investments consistent with those noted in Q3 to support growth and scalability in our core manufacturing centers as well as analytical tools to enable sales effectiveness and overall more efficient operations in the business.
We expect 2022 cash flow from operations to improve versus 2021 based on the earnings growth noted and we do not expect the level of working capital growth experienced in 2021.
That year with the supply chain dynamics discussed.
With that I'll turn it back to Jim to discuss the full year outlook Jim.
Thanks, Mike now moving to our summary on slide 11 looking forward. Our primary goal is sales growth driven by improved sales effectiveness marketing and new product introductions.
We will continue addressing cost of goods issues, resulting from global supply chain disruptions and.
And specifically hone in on freight optimization material costs labor inefficiencies and tuning various overhead costs.
As for our outlook for the year 2022, we're expecting to sustain double digit revenue growth with further improving both gross margins and operating margins while at the same time, increasing our investment in sales coverage and new product introductions.
We now expect annual revenue growth on a reported basis to improve to approximately 10% to 13% growth versus last year and thats net of pruning reduced.
Low value add products product revenues from certain CMT products segments.
We see strong order growth and a solid backlog driving double digit growth in both our preclinical and CMT product revenue segments.
Tailwind in Americas, and Asia Pacific and steps implemented to improve EMEA sales across the portfolio underpin our growth.
Portfolio rationalization of pruning low quality revenue of approximately 2 million to $4 million as well more than offset by new growth.
<unk> do remain with the global supply situation and could be further exacerbated by the hostilities we see in Ukraine.
Now for adjusted operating margin, we expect to be in the 15% to 16% range.
We expect to improve gross margins by a full percentage point and.
And we will continue to invest in research and development for new product development and for sales coverage expansion.
Thank you now I'll turn the call over the operator to open the line for Q&A. Thank you.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Our first question comes from Paul Knight with Keybanc. Your line is open.
Sure.
Paul.
Thank you for taking the call Jim.
As you are.
As you look at academia, which I know a lot of peers in the industry <unk> been citing slow growth <unk> seem to be above that growth rate could you talk to that portion of your business exposure.
Sure sure.
One of the things, we see definitely coming back is Europe has been really held back.
All through the year and the <unk>.
<unk> really continued to extend keeping it difficult for us to talk to our customers into it.
Kept the order process slower than it naturally should events. So we see Europe as its own component continuing to grow and be incremental to our growth.
Americas just in general has a great outlook continues to grow we look at our rolling forecasts.
Three months six months, a yearly view and looking at budgets and where the areas are growing we're sitting in the right kinds of positions with our products.
And China, China got off to a bit of a had a good great year last year, we expected. Some slowness in Q1, we saw that in Q1, but we see the inspection was always expected expectation was always that Asia was going to really start to pick up in Q2, and all indications are that that's true that we will see an increase in Q2.
Again, thats, assuming we don't see some kind of a political or other external environment situation, but in general everything is pushing in the right direction. All of our outlooks are good people up the budgets look solid and.
We're confident we're going to when we put those together, we see nice growth and again these are products, which we know in some cases, there's wound up demand, but in general it's just growth in some of these technologies.
And Jim you guided to 10% to 13%.
Revenue growth in the year it looks like at least 200 million headwind due to the portfolio rationalization.
I guess.
It seems to be the highest growth you've guided to.
What's your do you have a long term thought on what growth could be.
Yes.
Our goal is to is to see a sustained double digit growth engine.
In that kind of low teens kind of range, maybe a little better, but I think I can if I can get above 10% into the low teens on a sustained basis.
And to have that content really be driven by.
There is always some pricing power expectations.
No question Youll continue to see improvements in coverage and sales efficiency, you'll see expansion, both broader and territories and deeper within customer segments and at the same time, now youre seeing or youre going to see a ramp up in our new product introductions.
Spec product introductions to be probably the largest component of growth as we go forward and that's kind of how we're modeling it and new product introductions combined with sales coverage expansion and deeper deeper product.
Deeper depth into the customer segments, and maybe some pricing along the way too we'll see how that part goes.
And then lastly are you are you complete.
Complete with your sales force reward.
Salesforce.
It's complete but we're at the point now there will definitely still be some tuning we're going to we're going to we will starting to see.
On the territory assignments, where we have opportunities to go a little deeper maybe expand territory into two territories and add a rep.
And we're also.
As the product migration that we always felt like a lot of what was developed and typically only sold into REIT into academic research had a great opportunity into CRO in pharma, but never really had the exposure to it well now we had the exposure to it with the sales organization and we've already seen one actually two of our product.
Lines have already now moved to be offered through the CRO.
The channel that really focuses on CRO and pharmaceutical companies that being the behavioral technologies, which are very consistent and the need is significant and we are a well known provider in the telemetry space, but that's a very good adjunct to add.
To add behavior.
Behavioral type products and have it be compatible with not just with our products, but the products that are used for preclinical.
Do you want to get if you've only got approval through the FDA regulatory agencies you have to have.
Kind of certification that you have to meet with your products and that's a that's a very nice for us it's a nice <unk>.
Barrier, we're already there with our systems and with our <unk>. So as we start to offer our.
Our.
Behavioral products. They will have that same kind of capability at that same kind of high barrier. We're also we've also now added.
The components that are part of individual Oregon type of testing Thats also a big opportunity for us and a real need there and the pharma and CRO side.
You'll see more of that so there will be more of a migration of these technologies will continue to sell to academic research, but youll see changes engineering changes where needed to make them compatible for higher volume and utilization and CRO and pharma customers.
Okay. Thank you.
Thanks, Paul.
Thank you. Our next question comes from Kevin.
Cheng with Northland Securities. Your line is open.
Alright, Thanks John .
Hi, Good morning could you talk a little bit just about your product mix.
That you expect.
You cited improving product mix is one of the factors for better margins this year.
How do you see the product mix evolving.
Year Rolls out sure sure we see.
So much of it is driven by the expansion.
Our our exposure now to Cros and pharma and also the biotech world that's coming out of universities, that's a new space Thats growing and building off of what we have on the preclinical space, adding products that will also apply to those customers from more of R. R.
Our development side from.
From the from the discovery side so.
We see much of the growth and a great mix for us as telemetry and systems and the systems that are used for reducing the data and collecting what it takes to to get through the FDA and regulatory agencies.
Adding to that again, expanding the behavioral in that same area behavior products.
The inhalation products have been doing absolutely Fabulous you saw what kind of tremendous growth that's been over the last year and a half since we introduced it also natural growth areas with what's happening in.
Messenger RNA those technologies are electroporation technology, our <unk> products for electroporation electric fusion, we see that having a very strong solid demand with growth in academia, we'd like to we expect that's also going to be more opportunity there as we look into small pharma and biotech.
And then at the cellular level, we've had in the past it's been a little difficult to get into to demonstrate some of the cellular products.
Now that we're able to start seeing the customers. We see that also nice pent up demand and an expectation that we will see more testing done at the cellular level early in the drug development cycle. So those are just some of the key areas and then also there is always the one of the cores of our precision infusion pumps.
Yeah.
One of the foundational products for years and years. There there were working on investing in new areas to be able to apply new applications of that so we think that's not only going to be a great continued annuity business for us, but there's nice new growth as we apply that into new areas.
That's good color Jim.
One thing you mentioned is ramping up investments in next generation telemetry.
Products.
Can you comment just on what the investment level will be and when you think you will have the next generation products available.
Sure sure whats happening in the market has given so much.
The the nonhuman primate models are or are having to be used at a younger and younger age and they're a smaller and smaller so we.
We want to stay ahead in this space, we're clearly well and as well the market leader, we want to extend that lead.
By having in the newer technology able to do much to handle much smaller animals. So very very small implants also have them designed in a way that they can that they live in an environment, where you can have multiple animals all on the same housing.
So that's going to be a nice expansion, but also just getting to the higher throughput being able to handle more animal models at the time in parallel and that also led to.
As our customers.
Be more flexible with their model populations on how they do that so telemetry is was one of the basics you know one of the foundational product technologies for us.
With that they have to use our based systems because the data reduction and how you put your how you put your your filings together with regulatory agencies.
Get used to that it becomes what you're used to it becomes an in many places.
I mean, it is the gold standard and as companies like Charles River, and Covance and others and then others start to make that the core of the basis of what they use.
Our plan now is to be able to offer to them. Some of these other products and have it be compatible and network with our base software systems that really helps tie the whole thing together it makes it very compelling and it really lets us not only provide what the customer needs, but really it becomes more of a strategic relationship with these large customers.
Hey, just one last question, Jim I mean, obviously preclinical business did benefit from a lot of the research.
Tied to Covid treatments.
Do you still see your customers doing more studies in that area or or do you think.
Ultimately, we will get reined in some.
I think certainly they anything that goes through the clinical phases and through preclinical and prior to.
The human clinical use has to go through.
Safety pharmacology toxicology type testing and behavioral testing.
So a lot of what we've seen happen is a lot of the big <unk>. They had to delay other others therapies. They are working on for things like Alzheimer's.
Obesity type therapies and such.
So what we think is going to happen is there's still going to continue to be an ongoing set of set of work on vaccines, but we're going to start to see more ability to go back and look at those therapies.
<unk> for Covid of course and then.
Things that were actually put on delay because they just couldn't do it all.
So for US we see that as <unk>.
Our long term adjunct to the demand and and then at the end of the day, it's the natural demographics and growing population, which really show, what's going to be done and the level of capacity requirements to do all these preclinical level phases.
Okay great.
Thanks for the color Jim.
Thanks, Tim.
Our next question comes from Lisa Springer with singular research your line is open.
Good morning, gentlemen.
You mentioned a backlog is it twice pre COVID-19 levels, how long is it going to take you to work through the backlog.
Well.
It remained somewhat high for a while just because were running heavy iPad or.
Our operations team to make sure that we've got material to be able to sustain our primary product lines.
For up to a year I don't want to have a situation. We're trying to be lean on supply causes me to potentially mis customer shipments so being able to ship when the customer needs. It lets me to be I don't have to be aggressive with bringing.
The backlog down, though I do have to be careful that I'd make sure I'm hitting my aging backlog in that.
Im not missing.
Expected delivery times from customers.
And we will be we are ramping up capacity. There is no question. Some of revenue incremental revenue growth will be somewhat of that will be bringing in helping to bring down the backlog.
But having a run rate backlog that is roughly consistent with where you are on orders as the ideal where you want to be.
Well, certainly we will start to youll see some of that come down this year, but.
But it's not going to come down dramatically.
Okay.
You mentioned, there's going to be $2 million to $4 million in terms of portfolio rationalization costs.
Could you what we're thinking.
Yes, as we as we look at some of the areas where there is when you really evaluate the market needs and some of the products that might really have gotten older and maybe maybe theres better technologies that we really want to migrate them to.
And often when you see that these technologies not only the older but they have a higher cost to make their lower value and price so and not to mentioned that they may drive a lot of inefficiencies across your business. So looking at the total activity based cost of products in terms of Cogs and the real value of those Cogs. If these products were.
Highly valuable I mean, you could price them, well enough and Thats fine, but if they really don't really just don't demand. It then.
We're taking them out so kind of eyeball in $2 million to $4 million it could have an opportunity to.
Make it more like six I think it'd be fine with that either way I see enough more than enough growth really good long term business.
To offset that and then when you adjust for that it's almost like in your growth rates really when you look at your core business is really another few points higher than what than what you're reporting.
Okay and.
In late February early March have you seen any impact on your European operations of Ukraine.
No. We haven't we haven't we don't have much exposure to Russia, we don't really ship there and at this point I don't think it makes sense too.
The rest of our business is just fine.
The only I guess the biggest concern I mean from a business perspective of course, the whole situation is awful but.
We don't see it affecting travel in Europe at this point.
If it starts to I guess, we would pass the <unk> resort back to more.
Work from home and not be able to maybe see all the customers, but at this point.
Everything is up and running and I've got no feedback at all that there has been any any hold back due to the hostilities there on our business at this point.
Okay and then my final question do you expect the quarterly cadence of revenues to be similar to past years somewhere back loaded.
I think we will see.
Kind of a similar level of quarter to quarter variations, we typically Q to Q4, our strongest we expect Q to Q4 to be the strongest here too.
But with with.
Having some backlog might help us additional backhaul it might help us smooth that out a little bit as we look at Q3, but in general were pretty solid with this and I think again for modeling purposes, you probably think about kind of similar levels variation, yes, I'd say that if you took the growth rates.
They are pretty even over the quarters for the year Q4 is always going to be higher in Q1, a little bit lower in the middle with the other two so I think thats. The short story is.
The historical trends are good planning assumption.
Okay, great. Thank you guys.
Thanks Lisa.
And we have a question from Bruce Jackson with benchmark. Your line is open.
Hi, Thanks for taking my question, Hey, Hey, Jim.
Getting back to the sales reorganization last quarter.
To kick off on January 1st where are we in that process at all or some of the things that you're doing in Q T.
Sure Vijay here.
Sales force yes.
Yeah, well, we've rolled out the complete structure of the sales force. The change that took place is we use the philosophy that we first tried about a year and a half ago in the U S, which worked very very well to maximize our coverage and exposure across the portfolio.
That paid off.
Handsomely in terms of organic growth for us.
That we're even tuning and expecting more growth we move that same philosophy to Europe , where we now have we have an identical type of overlap between.
The people that call on more large account calls like things that are crows farmers large very large universities and have that overlap with with the folks that are more.
Technology specific in terms of the CMT side. So it really we expect that's going to give us.
Really nice incremental growth type of opportunity as we are much better able to handle coverage and depth of showing up our products into the full segment of Europe .
Chinas.
There, we're looking at how to best handle Asia.
Had two groups that focused one more on technology the other more on on.
Customer relationships and large large accounts.
Doing some tuning there because we think that the way it was set up similar to the U S that there was opportunities on the on the CRO and academics, our CRO and pharma side, which is a very large part of our business.
We weren't really getting exposure there with some of our CMT technologies like some of the electroporation and <unk> and.
Our cellular type products. So this is going to we're going to see some changes there that are going to just allow us better offering of the products to a broader range of.
Our potential customers there.
Okay. Okay. That's helpful.
The other question I had just generally.
Respiratory.
Research products have done quite well.
The Covid environment are you seeing any change in the demand for doing the inhalation research and are there other areas of the business that are picking up you mentioned the <unk>.
<unk> research in the southern research.
Also involved in the genome research areas.
Tell us a little bit more about just what youre seeing in terms of the respiratory research and is it.
Is it being offset by the other businesses in the event that it's rich.
Yes, let me be respiratory has done done very very well and we're about to introduce some some breakthrough technologies in that space that are going to continue to make it the premier type product.
The opportunity in the past it was limited in a way that we really didn't take advantage of all that but all the customer segments. So it was kind of a mixed bag of academic research and CRO in pharma companies. What we're seeing is academic research no question substantial opportunity there with many more.
Many more things being tested early on on how.
Various diseases and such are dealt with and how they affect the regulatory how they how they affect.
Inhalation and breathing.
On the CRO and pharma side, there the opportunity for us it's exactly the same thing, but it's in higher volume, it's where they are where they are working with more animal models at a time. So both areas look very well for solid continued growth and expansion across all of the product segments and customer segments that.
We call on.
Very interesting product and it's going to have legs as we continue to make R&D investments in expanding the capabilities of that product.
Yes.
Alright, that's great. Thank you very much.
Thank you.
Thank you and there are no other questions in the queue I would like to turn the call back to Mr. Jim Green for closing comments.
Well, thank you for joining us here today.
And thank you for your interest in Harvard Bioscience.
Look forward to.
You are joining us in may to discuss the results of our fiscal first quarter results. Thank you very much have a great day.
This concludes today's conference call. Thank you for participating you may now disconnect.
Yes.
Yeah.
Yes.
[music].
Yes.
Yes.
Yes.
[music].
Yes.
[music].
[music].
[music].