Q1 2022 Harvard Bioscience Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by and welcome to the Harvard Bioscience, Inc. First quarter 2022 earnings conference call.
At this time all participants are in a listen.
After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need your breakfast Gordon the one key on your touch upon telephone.
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I'd now like to hand, the conference over to your host today deep their eyes.
Thank you Olivia and good morning, everyone. Thank you for joining the Harvard Bioscience first quarter 2022 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.
Kyle is entitled Q1, 2022, H bio 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, 2021, our subsequently filed 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 day.
Also much of today's call will focus on our non-GAAP quarterly results, which we believe better represents the ongoing economics of the business reflects how we set and measure 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 overviews 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.
Dave.
Let's go to slide four of the presentation and take a look at the highlights for the quarter.
Revenue was up 7% over last year, with preclinical up 7% and cellular and molecular up 10%.
We saw significant order delays from China from the Lockdown, there, though we do already see China recovering later this quarter and expect a strong second half.
Cost of goods continue to run high from global supply chain disruptions inefficient labor and higher freight costs.
Adjusted operating margin came in at 8% versus 12% last year impacted by shipment revenue delays inflation and investments that we made for growth.
Gross margins came in at 57% flat to prior year with mix improvements offset by an increase in Cogs.
Higher Cogs continue from global freight costs material inflation, plus direct labor inefficiencies.
Opex was temporarily up on timing of sales and marketing activities versus a COVID-19 driven low prior year.
Research and development investments increased as planned to support our long term growth.
Finally, the 8-K announced litigation settlement puts the legal distractions behind us.
If we move to slide five the presentation, we'll look at the details in the quarter.
In spite of global supply chain headwinds and delays in shipments to China, We had solid revenue growth with Q1 coming in at $28 8 million up 7% over last year.
Gross margin on a GAAP basis came in at 56, 2%.
100 basis points from last year, despite the higher cost of goods.
This quarter had GAAP operating income of negative $6 7 million, which included a $5 million charge related to the litigation settlement.
Our adjusted operating income was $2 4 million so our adjusted operating margin measured eight 2% of revenue.
GAAP earnings per share in the quarter was a loss of <unk> 17.
Our adjusted earnings per share was <unk> <unk> down a penny from prior year.
We consumed about $2 million in cash.
And our net debt increased by $3 million in the quarter.
Our leverage ratio measured at two nine times EBITDA.
Now, let's move to slide six.
Look at the revenue in the quarter by product family.
Starting with the first row of the table, our cellular and molecular technology revenue was up 7% from last year impacted by shipment delays to China on their lockdown and global supply chain disruptions continue to hamper our revenue shipments.
Order intake from North America remains strong across the portfolio, we saw delays from the China Lockdown Recut.
Recovering late in this quarter and also we see a real strong second half.
European orders were delayed on Covid Lockdowns in January and February .
But have started recovering slowly.
Looking at the second row of the table, our preclinical product revenue was up 10% over a strong prior year. However, we did experience revenue shipment delays in China and continue to be hampered by these disruptions in the global supply chain.
Order intake was very strong in North America.
We saw delays, though in China from the Lockdown, but as we said on CMT, we do see.
<unk> recovering here later in this quarter and we see a very strong second half.
This quarter currency impacted revenue by about half a million dollars.
Our overall reported revenue was 7% over last year.
I will turn it over to Mike for a quick look at the key financials Mike.
Thanks, Jim and good morning, everyone Needless to say the global environment has experienced historic level of volatility and change over the last two years.
But as we have throughout this period, we stand with conviction on our ability to manage through bumps in the road like we're seeing in the order delays associated with China.
Our core products and diverse customer base combined with actions we've already taken provide a foundation for the.
Profitable double digit growth, we've been speaking to and Jim will speak more in our outlook about how we see the full year shaping up in the context of some uncertainty on how the China market recovers from recent status.
As we usually do I'll walk through my fault, the full P&L and cash flow in more detail. As a reminder, my discussion will focus on adjusted results for P&L performance, which aligns with measurements.
He used to internally manage the business.
Before I walk through margins cost and cash flow I wanted to share an update on our investor reporting.
Since 2019, we've reported our revenues as a split between our preclinical and CMT product families through 2021, our preclinical revenues as reported have been are telling metairie and inhalation products that became part of the Harvard Bioscience portfolio with the 2018 acquisition of data Sciences International or DSI.
As we've discussed the top focus for us since day, one has been to integrate the brands and products in a logical way that addresses the needs of the market as part of this we have evolved our go to market model and product line management to include our behavior isolated the Oregon and surgical products as preclinical solutions with common call points in applications towards the tsi.
<unk> Accordingly, Accordingly, these products, formerly reported in our CMP product family are now reported in our preclinical revenues as reflected in our actual historical revenues. We look forward to sharing more examples in 2022 with our investor community on how we're evolving and investing in our core products and markets to drive growth.
Now turning to our results on gross margin, we reported 57% for Q1 2022 similar to prior year, but was substantially different underlying factors delivering this result, which remains favorable industry benchmarks, Jim as discussed in detail the negative impacts of supply chain inflation in labor dynamics, which first showed meaningful.
Increases in Cogs in Q2 of 2021.
These costs are now are over $1 million per quarter as previously reported but we now have much more prescriptive targeted areas to mitigate these costs and we expect Cogs to begin improvement in the second half of 2022 as programs get implemented.
Despite these cost increases we have maintained stable gross margins and margins due to continuous improvements in product mix and pricing.
Our higher margin preclinical products and niche products within our CMT portfolio grew as a percentage of overall sales relative to prior year once again and pricing actions implemented also benefited gross margin.
Clearly the supply chain will continue to evolve the factors, we can control around product and channel management will continue to positively impact margin improvement.
Adjusting operating income for Q1 is down as Jim discussed due to planned investments in sales marketing and R&D to underpin our double digit revenue object growth objectives as well as inflation impacts also Q1 revenue was lower than internal plans due to the factors. Jim has discussed while we are investing responsibly for growth we.
To see mid teens operating margins and solid recurring positive cash flows is important financial objective in Q1 is simply software and operating margins than we'd like given how rapidly the order flow declined in the second half of Q1.
Finally costs, such as travel and trade show expenses were very low in the beginning of 2021 due to remote work for sales and others at that time.
On cash flow and debt, our leverage ratio or total debt to adjusted EBITDA is two nine times up from $2 seven at year end due to softer earnings in Q1 as discussed.
Also net working capital typically drops down Q4 to Q1, but remains higher than typical Q1 levels for us due to AR collection delays in China due to the Lockdowns, which are timing issues versus bad debt exposures, plus higher inventory levels to deal with supply chain uncertainties as well as lower than expected shipments in the first quarter.
In terms of other uses of cash I first wanted to speak to the litigation settlement referenced we recorded charges totaling approximately $5 million based on the settlement reported via 8-K in April .
<unk> related to this event will largely be in Q2 2022 as disclosed in the 8-K bio stages, keeping new capital sustained its own efforts as a clinical stage entity, which may provide recovery for these outweighs, but this is an uncertain outcome and we are planning with our new recoveries.
And our own.
No recoveries from this on our own 2022 cash outlook, we secured an amendment in our credit facility recently to accommodate these payments and increase our maximum level of leverage allowable leverage ratio for the rest of 2022.
We provide we expect this provides ample room to get any litigation payments behind us and execute our growth and improvement plans set for this year.
Capex for Q1 was $500000, we expect capital expenditures for 2022 to be approximately $2 million from growth with growth from our past annual run rates, primarily associated with capitalized development costs associated with <unk> product investments referenced.
Additionally, we incurred $1 4 million in transformation costs in Q1, which are excluded from adjusted earnings consistent with best practice. Given these are non run rate investments in our business infrastructure designed to ensure solid long term growth platform.
Our cost in Q1 related primarily to a detailed review of our operations in Massachusetts, and Minnesota, which manufacturer and support the substantial majority of our global revenues from this process. We have identified specific programs to increase productivity supporting items, such as planned Cogs reductions as well as to unify the processes and system.
Of these core operations to efficiently deliver long term profitable growth, we expect roughly $1 million per quarter rest of the year and cash investments to support these improvement plans.
Consistent with our message from our Q4 call. We expect 2022 cash flow from operations to improve versus 2021 based on earnings growth and we do not expect the level of working capital growth experienced in 2021 in response to the supply chain dynamics discussed with that I'll turn it back to Jim to discuss the full year.
Outlook, Jim Thanks, Mike just real quick.
Operating statements I misstated that.
<unk> was up 10 in preclinical is up seven it's actually the reverse preclinical is up 10% and CMT is up 7%.
And Youll see Thats correct, the numbers and in the presentation.
So now let's move to the summary, slide on slide 10, and taking a look forward. We continue to see strong growth and improved margins that we are broadening our range.
To account or a range of the outlook to account for volatility potential volatility in China.
We expect year over year revenue growth in the range of 8% to 13% versus last year.
We expect solid growth in North America, and EMEA, and we see China recovering late in this quarter, followed by a strong second half.
Reported revenue will be net of further portfolio rationalization activities with.
With the expected to prune, where we expect to prune somewhere between two and $4 million of low quality non strategic product sales to really improve our mix and help us make this business a much more leverages bowl platform business.
As for adjusted operating margin, we expect continued improvement to range from and to keep the range from 14% to 16% of revenue gross margins to improve to 58% to 59%.
Driven by operating leverage on growth and continued cost of goods sold reductions.
We see the global supply chain stable, but remaining at some of these at these higher cost levels.
Operating margin improvement will include continued higher level of research and development for new products.
Long.
And cost of sales and marketing.
Thank you and now I'll turn the call over to the operator, and we'll open the line for questions and answers. Thank you.
Thank you ladies and gentlemen.
At this time please press the star.
Our agenda, one key on your Touchtone telephone.
Please standby, while we compile the Q&A roster.
First question coming from the line of Paul Knight with Keith.
Your line is open.
Hey, Jim can you talk to China is what percent of company revenue.
It's.
Somewhere around 20% ish, yes, Asia overall is about 20% of <unk> revenue and most of that is China.
And if China recovers you would expect to want to get to the upper end of revenue guide.
I think yes, that's true.
I mean, what what we the reason we broadened the range is.
<unk>.
We did see a downtick in orders and one of the things that we've won that we validated is it's not it's not a loss if they're delayed.
<unk>.
Our people are in China in Shanghai, that's where our main operating offices are a lot of them. They have actually all been forced to work from home and their customers also have been forced to work from home so companies their academic research sites there.
We have really had to delay.
<unk> orders with us in a number of cases, if they're recurring orders those seem to come in just fine.
But people are going back into the office and they are setting up their tools to be able to start picking up the orders. We don't see we don't have any evidence of anything loss at all it seems to be delayed. So that's why we think not only will we get back to our strong second half.
There's a good chance that a lot of what was delayed in the first first quarter and some of the second quarter. We will build we will wind up and we may see some extra in the second half of that because theres no. The actual demand is there. It's just been the inability to process the orders and early on in the quarter, we had issues with shipping into China now that seems to be resolved.
We are seeing shipments working much faster now.
And we're also getting people are getting back on the phone and we that's why we see just looking even even late in this quarter, we're starting to see indications that this is coming back.
So again, we expect that to continue to get better the latest news we hear in China is that they know they've got to get things back up and running and again, but we were on the ground. There. So we see it actually it really happening and talk to the folks and there's no we feel real good about the second half and in fact, the fact that we can see early indications that even in this quarter.
Order intake pick it back up that's helped set us a nice positive sign.
And the pricing, meaning your columns evolved easily gone up.
And other.
Art.
Can you pass on pricing ultimately.
Yes, we've been pretty good at passing that pricing on now it takes a while for that to start to fit in and sometimes there is longer term contracts, where it takes a while to.
To actually implement the new pricing, we've had very little pushback in the areas, where we've just rolled out the new pricing at the beginning of the year, we're seeing that now in the in the order intake and then in and then they will follow into the revenue side, So we're pretty well able to pass on that in some areas.
The less strategic areas the things that we've worked with your distribution, it's a little harder there. There we have we sometimes compete compete with multiple customers. There so thats a little bit harder, but across the board. We're seeing that we're seeing pretty much everybody take those prices up to account for this.
Where we sell direct and our high technology products with high barriers, we have very very strong pricing there and.
And pricing power so.
We will pass and we have been working to pass more of that along but because we think it's the inflation piece. The purchase price variance piece is going to stay high we don't see a reason why that will come down.
With the changes in the business here and what we're doing on the operating side, we definitely are going to see significant improvements in our in our labor cost.
So we will see efficiencies there and with the work that we're going through to.
To use the tool set from Minneapolis and move towards the one tool set and one platform that's going to give us an opportunity to start to really address some of the overheads across all of all of the company. So again, the freights, probably going to stay high for a while we get it's hard to predict that we're kind of assuming that that may just stay like that.
Price is going to stay high, but our big our big driving component of labor and labor inefficiencies that that's going to be resolved here and youll see that resolve throughout the year and as we exit the year, we're going to be much much better on the Cogs side and of course, if there's pricing opportunities. We are definitely we'll be pulling that lever too.
Okay. Thank you.
Thanks.
Yes.
And our next question coming from the line of Tim Chiang from Northland Capital. Your line is open.
Hi, Thanks.
Jim Mike.
I think previously you had a target for about 60%.
The gross profit margin.
Do you think that's still achievable this year, just given some of the supply constraints.
Yes.
Yes, great question.
We think as Youll see it continue to get better through the year on volume so as we get to the end of the year. We're confident we'll be it will be at 60% maybe right around that region.
Some of the larger quarters, we'll start to hit that anyway, but and even for the year, we would think will be <unk>.
The $8 59 for the year that will include a lower Q1 here with all the impacts that we're still working through here, but yes, as we get to the end of the year, we should be at a run rate of right at around 60%.
And let me just one follow up how quickly can you pruned some of these low quality.
Products are they already coming out of.
The top line.
There.
We set this up.
Like whenever you take something out of the portfolio. It takes a little bit of time and you have to build up.
You didn't have to go through from the sales organization back to the company and modify the process and with that typically what we do is we look at how many we'll sell off to customers as a last time buy and will often have to put a little higher price than it. If we can't if we can't really it's inefficient for us to deliver it but I would I'm.
<unk> the second half of this year.
The revenue products that are that are coming out will really start clipping out so it'll it will kind of build out through through the second half of the year as we get to the end of the year I would expect that number around $4 million ish to be out.
And again, that's net of us delivering our top line reported revenue because that's.
A lot of what comes out it won't just go away. Some of it will be we were able to replace with better products simply by offering the more strategic future product in place of it.
But something that just doesn't really have a future.
Last year as a negative a negative or positive and if it if it doesn't really fit our portfolio for the future we have to be moving it out and put our effort into what really matters for growing the business profitably.
Okay got it thanks.
Alright.
Yes.
And our next question coming from the line of Bruce Jackson with Benchmark. Your line is now open.
Hi, Thanks for taking the questions.
We launched an upgrade to your respiratory products do you have anything else in the new product pipeline that we can look forward to during the year.
Sure.
This last couple of years, we've been clipping along at around 15, or so new products being introduced combination of new and refreshed.
Publicly announced in press release, the new improvement and the launch of the.
The smart study on for installation.
That we believe is a very easy because it's so unique and we see it as a nice drive incremental driver for our business. That's why I want to start doing more speaking about these technologies as they come out but there are some areas that we're really focusing on areas that will allow us to take a product that might be have historically been sold into academic research and been used in.
More smaller batch level testing things like products that are going to be used in cell testing and things that are going to be used I think they are used for.
If things like the CRISPR related products those like things like that we're looking now at what we have to do because now we have such great exposure to the larger pharma companies farmers that cross a number of our products fit well into that stream to and I've never really had access to it that's partly why Mike said that we're starting to readjust, where we report the numbers in <unk>.
Really good example is our behavior products, which has always really only sold into academic research.
When you think about that along with telemetry, it's exactly along the lines of what the Crows and the pharma companies need they have to do the same thing. So it's there and we have great exposure in great and Mac and where the top share holder enter into let telemetry side for safety pharmacology and toxicology.
Behavior is a piece of that whole the whole puzzle. So when you integrate behavior, along with that and you might integrate it with telemetry. So youre able to cover a broader range of that cycle that preclinical cycle of it has to.
You have to go through in order to go to move into clinical.
And also because our products are our DLP compliant that means they are usable the data's collectible unusable with your filings to the FDA, So youre going to see that as something like that that rolls out we're already seeing an uptick in behavioral products and that's where you see some of this uptick you see happening in on our.
Our preclinical side is happening because we're expanding some of the portfolio with things that we're already doing but had been limited in the past academics, so youll see more and more of these products start to tip over there and as we start to get measurable improvements in growth there will.
We will be announcing that youll see youll see that happen. We will continue to sell the academic research if it's a large site and they and they need our our cellular products, but on the other hand.
Also there's a lot of animal work, taking place at very large academic sites, where.
Our products that are in preclinical. They are also can be configured at the size for the for the research side. So we're actually seeing both sides have the ability to drive growth along their lines, but we do want to be able to show a lot report along the portfolio.
Annual report along the customer segment for you.
Alright, that's it for me thank you.
Thanks Bruce.
And I'm showing no further questions at this time I would now like to turn the call back over to Mr. Green for any closing remarks.
Well. Thank you. Thank you for joining us today today in our presentation, we hope you'll join us in three months further for our Q2 results. Thanks, again and have a great week. Thank you.
Ladies and gentlemen that does conclude.
Conference for today. Thank you for your participation you may now disconnect.
Essentially typically if theres very few questions.
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