Q3 2022 Harvard Bioscience Inc Earnings Call

November 8, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

Okay.

Good day, and thank you for standby and welcome to the Harvard Bioscience third quarter 2022 earnings 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.

Ask a question during the session you will need to press star one one on your telephone.

Please be advised that today's conference is being recorded.

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

Thank you Shannon and good afternoon, everyone. Thank you for joining the Harvard Bioscience third 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. The file is entitled Q3, 2022, <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, 2021, our subsequent quarterly reports on form 10.

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 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 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.

Thanks, David and good afternoon everybody.

Let me start by saying that in spite of a rough third quarter. We continue to work through actions to dramatically improve our portfolio and resize the cost of our organization by the end of Q4.

Let's go to slide four of the presentation take a look at the highlights for the quarter.

Revenue in the quarter was $26 9 million down 9% from a strong Q3 prior year with 6%.

6% growth in cellular and molecular more than offset by lower sales of preclinical which is debt which was down 17%.

Reported revenue includes a $1 million impact from unfavorable currency and.

And we experienced a very slow summer with lower sales to crows in pharma across the regions.

And we continue to see a rotation out of obsolete at low margins CMT products sold mostly through distributors.

Adjusted operating margin came in at two 6% versus 13, 3% last year impacted by lower sales of preclinical products and higher cost of goods in the quarter.

Gross margins came in at 51% down from 56% last year impacted by inflation and lower absorption and charges.

We had a poor mix in the quarter as we finish manufacturing of the low margin products being obsolete.

Cost of goods was significantly impacted by lower preclinical revenue to absorb fixed overheads free.

Free cash from operations was $700000 and net debt was roughly flat.

Finally, as we previously announced last July were preparing for FY 'twenty, three with portfolio and restructuring actions on plan to complete in Q4, which are designed to underpin our goal of 58% to 60% gross margins and EBITDA margins in the high teens.

Move on to slide five we'll look at the revenue in the quarter by product family, which shows Q3 'twenty two revenue adjusted to reflect 2021 exchange rates.

Starting with the first of all at the table on a constant currency basis, our cellular and molecular technology revenue was up 6% from last year driven by the strong performance of our direct sales team.

We had solid growth across geographies driven by strength of our cellular products in particular CMT.

CMT grew despite reductions in obsolete non strategic lower margin products sold through distributors.

Looking to our preclinical products again on a constant currency basis revenue was down 17% from a strong prior year.

Europeans Crows in pharma sales of telemetry and insulation systems was down significantly from a strong prior Q2.

In Asia Pacific, China is recovering, but had a tough comparable to a large prior year telemetry sale and lower sales in other APAC countries negative impacted negatively on the very strong dollar.

The U S was slower in Q3 on lower telemetry sales to <unk>. So we see the pipeline improving here in Q4.

The strong U S dollar compared to the Euro and British pound drove a currency impact of $1 million, which will likely continue to hurt us through the year.

Let's move to slide six I can tell you a little bit about some of the exciting new product introductions.

Starting with our cellular and molecular technologies. After the quarter ended we received a large order from a top pharma company for our <unk> electroporation systems for use in bio production.

This order will begin shipping in Q4 over the longer term. This opportunity is expected to ramp to over $1 million annually, primarily driven by consumption of our unique flat pack reaction chambers augmented by expanded services.

Furthering our our initial inroads, we see an emerging value proposition for our <unk> system in bio production, which is often used today in pharmaceutical research and development to create the initial strains of the therapeutics.

<unk> has the potential to provide an ongoing stream of flat pack consumables revenues that benefits from the production quantities. In addition to those used in research and development.

Secondly, after the quarter end, we introduced the new used 7500, our premiums spectra photometer building on our well known ultra spec line.

This system replaces three existing models and is designed to penetrate pharma CRM companies and top academic labs.

Lastly, continuing to drive market leadership in preclinical wire wireless continuous monitoring we also introduced our exclusive continuous monitoring glucose implant.

This new implant allows for continuous monitoring of glucose levels and avoids the cost inconvenience and variability inherent in periodic manual sampling.

Glucose monitoring is expected to be an incremental growth driver in academic labs government labs, and pharma companies and the pursuit of solutions to the ever growing problem of obesity and diabetes.

This new line of implants is expected to add over half a million dollars annually to our to our business.

Now, let me turn the call over to Mike for a quick look at key financials.

Thanks, Jim and good afternoon, everyone.

As a reminder, my discussion will focus on adjusted results for P&L performance, which aligns with measurements we use.

To internally manage the business.

I'll skip over slide eight with the data table and go right to page nine to go through the full financials.

On gross margin, we reported 51% for the quarter on an adjusted basis as compared to 56% in the prior year.

This decline was due to higher costs associated with inflation, including uniquely high levels of price increases in electronic components, which we see moderating on a go forward basis fixed.

Fixed cost absorption was also a major driver given the revenue decline noted compounded by the decline in sales coming from our preclinical products, which carry higher than average gross margin.

Spite these short term headwinds.

We see go forward traction and gross margin improvement with continued ability to increase our prices to our customers and the mix within cellular and molecular technologies sales continues to improve with niche cellular products delivering higher growth within CMT.

CMT and overall gross margins will improve meaningfully for the portfolio and restructuring actions Jim has discussed.

Gross margin for the quarter on a GAAP basis.

Was 45% two to $1 4 million of charges associated with these portfolio and restructuring actions, which relate to products manufactured in our largest CMT facility, primarily inventory write downs for low margin products, we will exit in the coming months.

Adjusted operating expenses were up approximately 3% with higher labor costs associated with inflation and R&D investment growth primarily related to investments in our next generation <unk> products, but also supporting the new product introductions Jim discussed.

Adjusted operating expenses were down sequentially from Q2, 2002 by approximately $800000, reflecting initial benefits from the restructuring actions, Jim noted as well as lower overall discretionary spending that originally planned for 2022, given the softer revenue trends noted.

While head count grew in the second half of 2021 in early 2022 and reaction of the supply chain and labor dynamics that emerged over the last year. The restructuring plan, we're finishing now and we will have head count down approximately 10% from Q2 and with a workforce. We believe can support growth and operating leverage in 2023.

<unk> operating income for Q3 is down meaningfully due to the factors noted above most notably due to the drop in revenue discussed, which we believe represents a trough quarter for revenue due to the unique end market slowness experienced this past summer.

On cash flow and debt net debt is up $4 million over prior year due to primarily to the legal settlement we have discussed previously.

Cash outflows related to this matter ended in Q2 and with improvements in working capital in Q3, particularly DSO, we were able to generate 600000 of cash flow from operations and keep net debt essentially flat at $45 million.

For the rest of 2020 to expect net debt will be at a similar level to Q3.

We expect to maintain strong collection efforts and to bring down growth inventory levels. In Q4, However, net working capital typically increases overall in Q4 due to higher sales seasonally.

Restructuring transformation costs for Q3 of $1 7 million inventory write downs and severance costs associated with the portfolio actions and restructuring.

These costs were partially offset by a reversal of accruals associated with litigation.

The line item detail of these costs are included in the GAAP to non-GAAP reconciliations included in this presentation.

We anticipate up to $1 million of additional charges in Q2 or in Q4, rather.

To complete the restructuring plans noted.

Accordingly, with these actions we believe the major restructuring initiatives needed to construct the growth platform. We've been discussing are behind us exiting 2022, and we're planning for significantly lower transformation costs in 2023.

Capex in Q3 was 400000 or $1 $3 million year to date with manufacturing and technology infrastructure investments made capex will be lower near term given the focus on cash flow improvement and deleveraging.

Our leverage ratio of total debt to adjusted EBITDA Q3 end.

Is three nine times up from $2 seven at year end due to the softening earnings, particularly in Q3.

As you will see in more detail in the 10-Q to be filed shortly we recently secured an amendment to our existing credit facility, which increases the maximum leverage ratio covenant and provides room for the company to complete its restructuring activities launched in the second half of this year.

We believe this amendment combined with the plans we are executing to set up 2023, which includes reducing inventory levels look spiked up over the last year due to two.

To address the global supply chain dynamics provides us the flexibility needed to continue to improve the business and deliver improved margins and cash flow and ultimately return us to sustained leverage below three times.

Jim will give initial thoughts on the 2023 margin targets in its conclusion and we are all laser focused and accompanying this with strong positive cash flows and deleveraging in 2023.

I'll turn it back to Jim to discuss the full year outlook, Jim Thanks, Mike.

Moving to our summary on slide 11.

First looking at the upcoming fourth quarter, we expect revenue, we expect fourth quarter revenue and the $30 million range we.

We see sequentially, improving revenue and an improved product mix returning our adjusted gross margin to first half range and adjusted operating margin to the 14% to 15% range plus improving inventory and working capital management will further improve cash flow.

For the full year FY 'twenty, two we expect revenue of approximately $115 million gross margin in the 55% to 56% range and adjusted operating margin in the 9% to 10% range.

Despite a challenging third quarter, we continued to drive the transformation of our business to the profitable growth oriented platform we envisioned.

We're on target to complete Obsoleting low margin non strategic product lines by the end of Q4. This in combination with re sizing and leaning manufacturing overheads and reducing operating expense also by the end of Q4.

These actions support next year as targeted gross margins in the 58% to 60% range and EBITDA margins in the high teens.

New product introductions and improved portfolio with pricing power will underpin profitable organic growth for the future.

Finally, our transformation costs are expected to be significantly lower with restructuring essentially complete at the end of Q4.

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

Thank you.

As a reminder to ask a question you will need to press star one one on your telephone.

Please standby, we compile the Q&A roster.

Okay.

Our first question comes from the line of Paul Knight with Keybanc. Your line is now open.

Yes.

Hi, how are you what's your what's your goal now on organic growth potential.

Well when I think about next year, our plan organically is too.

We're rotating out of something like $5 million to $6 million of nonstrategic low margin products that typically sell through distribution. So im looking next year to get back to that kind of mid to upper single digits on a reported basis and a little better than that when I re account and look at a pro forma view is I extract out the.

The revenue that we're no longer selling next year, so roughly speaking somewhere in the neighborhood of.

10% to 11% on a pro forma basis, and then again accounting for the <unk>.

That we're exiting probably somewhere somewhere in that neighborhood of six ish percent on.

Pro forma basis are actually I mean.

On a reported basis.

And then on this.

BT ex electroporation configuration.

You're mentioning that you had a sale to a major pharma.

Yeah.

Is there more pipeline behind that.

Yes, we've been working on this for a while we've been very well known and in the initial discovery of.

The various new drugs coming out our Bts electrification systems have been used for a very large number of new drugs.

Including things like the Covid vaccines.

But historically, we were typically only used either in the in the development of the initial drug either at.

At the research labs academic labs or in the pharma companies, but not necessarily in the production bio production of those drugs, what we've been working on it the ability to provide a.

A bridge from if someone's using our equipment to to generate the first line, if theyre going to if they're going to be using electroporation in the line itself.

We are now working in offering the ability to transition from the creation of the drug to the initial levels of production.

Depending on the amount the amount of demand we are certainly seeing the initial production up through medium and maybe low levels.

Low to medium levels of production rates that can change a lot.

Just on the drug and based on how it's used and based on how much is actually specific electric rated.

It shows up in the vial and the end drugs. So this is an area we've been working on for a while it's an exciting time to be able to offer this it's a new growth opportunity for us.

We've been working with a number of companies.

As we highlighted this one in particular, because it's a large order.

We see this.

Becoming a multi year opportunity.

Reaching $1 billion plus in annual consumable revenues just with this one particular order alone when you add up the ability to bring others into this.

An exciting growth area for us.

The <unk> does that for Shelly or cell and gene therapy cell and gene therapeutic applications.

It can do that too it actually is.

It was actually one of the very first electrification systems out there involved with first cloning moving on to the development of things like monoclonal antibodies it's used in.

In the development of not just the drugs, but also the.

The drugs that are some of our large molecule drugs. Some are small anything that goes through electrification for developing the initial cell lines were heavily involved in this and have been for many years for us just the.

The ability to provide a.

A transition or a bridge from the initial drug to something they can start produced against some level of volume.

It's really important because it's not.

If they've used our technology to create it it's much we think we'll be able to show that it's much safer just expand that volume of it and start to enter production low level productions, and then growing from there.

And then lastly, the spectrophotometry.

Product spectrophotometry.

Can you kind of.

Give us a gauge of how big the overall.

Spectrophotometry business is at Harvard Bio.

More than 10 less than 20 is there any metric you can give us I know, it's been large but if that'd be helpful. Thanks.

Yes.

Petrol business itself is somewhere I would say in that kind of five or 6% of revenue range. So it's meaningful it's not it's not too large but it is an area again, where we've tended to focus on selling through distributors and into academic research.

This new version is also designed to be easier transition and sold into.

And the pharma companies, where we have direct sales, where we have really good connections. So it's an expansion on our.

Our spectrophotometry business.

Okay. Thanks.

Thank you.

Our next question comes from the line of Bruce Jackson with Benchmark Company. Your line is now open.

Hi, good afternoon, and thank you for taking my questions.

I agree.

Hey, So I wanted to take a little time to talk about the emulation business obviously.

<unk> got a big boost during COVID-19, you've got the leading.

Leading products in that space, how much of the current downturn would you say is due to just general economic conditions and how much could potentially be.

Shifting the market towards a more normalized level.

Yes, that's a good question I don't think Theres any doubt at least in hindsight that given that we had offered the product about the time that that.

Covid was coming out it had an immediate uptick.

What we did was we worked on amount of transition new capability into the product to then be able to have it more targeted toward long term use and then compete on.

The specifics of being able to measure exact amount of what was delivered.

Through <unk>.

Through the system and inhaled by by the model.

So I would certainly I would expect that we had some buildup of additional sales of the emulation units.

Because of everything happening with Covid and we did see a lot of those sales go to pharma companies.

Round, the world and they adopted it fairly quickly so we could very well be like you say moving toward more of a normalized.

Level of revenue there in sales and we'll grow off of this level then based on the new capabilities that we are adding including the ability to specifically measure the amounts inhaled.

Okay. Okay.

And then you mentioned that there is going to be about $5 million to $6 million of revenue impact from discontinued products.

In 2023 was there was there any discontinued products in this quarter that had any impact on the topline number.

Yes.

Certainly we start with what we started in this last actually in Q3, we started.

Identifying and telling customers that we were rotating out that we are obsoleting certain products. So.

We did see.

Our continued rotation out of and again, if you look at I guess, if I if I, what I look at what we sell through distribution around the world again, mainly to academic research sites some of the Obsoleting products.

A downturn somewhat as we would've expected a rotation out of those I see that as a good rotation.

And then with the introduction of the 7500.

A new premium unit that takes over and replaces a number of other units that were in production that were lower margin lower capability.

This is going to this is going to bring back and keep us.

In that revenue stream doing doing well, even though even though it's rotating out of those lower margin products.

Okay.

And last question from me you discussed the fourth quarter.

Aero pipeline, we're starting to look a little bit better I was wondering if you could maybe give us a little bit of color on.

The types of the studies.

The types of products that are catching some of the soft China in the fourth quarter. Thank you.

Yes.

We've always done really well with our implantable telemetry continuous monitoring systems.

In the summer in the summer time July August things really slowed down very much in Europe .

And pretty much we saw the slowdown globally and it seemed that it seemed to slow down fairly quickly in around and that kind of mid summer or late summer timeframe and then start recovering. So we saw that the recovery is happening.

Of course, we're very happy to see it recovering.

Our implantable telemetry space.

So that's coming back nicely.

And then can be augmented because the glucose the new glucose product is brand new.

It's incremental business for us.

It's something that academic research has really been been looking for including government labs and pharma companies. So that will augment the growth in our high margin <unk>.

Telemetry and monitoring business.

That's the piece, where again with it when your highest margin products.

<unk> hit some delays like they did in the summer there.

That had a real effect on us because it was youre, losing some very high margin revenue in the quarter at the same time that would've been.

That also forces you then to have it.

An issue with absorption of overheads.

And to really fix the long term overhead issue.

Is that to have a real kind of cushion that we need as a company. Those are the structural changes that we're making to bring down the overall cost of the business. So the two things that are happening as we see our great margin products and the introduction of the new glucose product getting us back to where we need to be and improving our margins at the same time.

Cost reduction activity in the.

Associated with changing and improving the portfolio and taken out cost of the organization down it gives us the kind of cushion and headroom in our margins. So that we could absorb when we have a one off quarter that happens to be particularly slow for whatever reason, whether it would be something with COVID-19 or something with the supply chain.

As a company our size, we tend to really get hit hard with the kind of things happening in the market. When you have a very strong dollar countries like Japan are really struggling to buy almost anything.

And companies countries that are buying in euros and pounds, which is a significant part of our business that really turns into a currency translation problem.

So the only way to really solve that but just to get our cost structure down and.

In good quarters in good years, we'll be we'll be in really good shape, but if we have we have some issues that pop up four point of time, it's not going to be quite as hard on us on a.

Quarter basis.

Got it thank you.

Thanks Bruce.

Thank you.

Our next question comes from the line of Christopher Sakai with singular research. Your line is now open.

Hi, Christopher.

This is the same progress.

Bob I was wondering if you can.

Can you provide us a little bit more detail.

Preclinical revenue stream in terms of.

What happened this quarter and how do you kind of see it going forward.

Yes, I mean.

It was the preclinical.

Revenue in the quarter that where we really saw a slowing and a lot of it just seem to be delays and much of our preclinical product go to pharma companies and <unk> and companies that really have to pay attention to the topline and bottom of our bottom line. So we saw some of it was.

Belt tightening in the quarter.

And then some of it was just people getting back to work after Covid, we knew that.

The summer was going to be a tough summer and people that Europeans, who typically take four to five weeks off we saw people.

Nobody around even call and talk to you in some of the some of the centers until summer was fully done and be able to start to come back to work really in the September timeframe.

I think it was a combination of that I have no doubt that we have some belt tightening happening in the CRM space.

And I think to what Bruce had mentioned.

Could very well have been some additional sales prior year, we had a very strong prior year very strong Q3 last year.

Where some of the pharma companies made some major purchases, we had a an individual million dollars purchased by <unk>.

One of the largest <unk> in China.

What's really great news for us except that makes for a tougher comparable when you think about $1 million incremental deal just in one case in the <unk>.

Prior quarter, so we see that coming back the mix is going to start improving area improves already as we look to Q4, and then with the cost changes that we're making.

Our revenue stream will have strong strong margins and strong dropdown.

Thanks.

And then we had.

The way it up.

Some of the slowdown.

Yes.

In U S, especially in biotech considering Vietnam.

Hi.

Spec market collapsed towards yes.

But you mentioned, mostly the U S. So do you think that that is sort of similar situation or U S and U S.

In terms of slowdown or.

We might see a slowdown in a little bit Ngls, which we haven't seen yet.

Well, we did see some slowing in the U S.

In the preclinical revenue stream.

You are mentioning.

Up a good point with the biotechs that was that was something we always saw and still see as a great growth opportunity, especially now that we have some of the new products with the <unk> the ability to start to to offer to smaller biotech and pharma companies that are involved with more orphan drugs and such.

To provide them.

Other options for bridging to production.

But the biotech I would say that that wasn't really there wasn't a lot of revenue for us when I think about when I think of our North American revenue much of it is <unk> and pharma companies.

So with some slowing there in that quarter and like I've said, we've already see the pipeline improving.

Even going into our expectations, our natural growth from Q3 to Q4.

As we look as we look within this year and then going forward, so augmenting it with new products, especially with the new glucose.

Continue to drive toward a very positive.

And mix for us on implantable monitoring.

And then just.

Watching ads as we deal with the headwinds in Europe , China.

We all believe China, we see is we see an improving somewhat we think it's going to we think it is.

Do quite a bit better as we think about they have been going through these periodic shutdowns.

The strong feeling that China pick back up very strong.

Europe as I've always a place where we always have some level of concern just because of.

The market there and of course the.

Currency situations.

And finally all.

Our platform the premium products that you talked about in terms of a highly stable.

If you can talk a little bit.

Can you give us some update.

Thinking black box.

Dan.

Yes.

Hello, and good good question.

You can see where we're making our investments we're making the investments in areas, where we have.

The high barriers to entry good pricing power.

And a good ability to sell our products. So investments we continue to invest in the cellular and molecular side very much on the cellular approach, we think theres going to be a lot more adoption of cellular testing technologies into the into the stream of how you get products through the preclinical and into clinical so that's an area of continued.

Investment you saw that with Etfs, youre going to see that with more of our multi.

Multi electrode array type products that'll be coming in.

Then the implantable telemetry of course is a barrier, where we continue to we need to stay the market leader in there and we will continue to invest and you'll see new products coming out on the software side.

It's an area that we've talked about it in the past, but now now we see the ability to really manage data and to provide the right kind of capabilities not just to <unk>, but also to farmers and to have versions that sell well into academic research. So you'll see more investment on the software side of our business too.

Perfect. Thank you.

Okay.

Thank you.

Thank you. This concludes the question and answer session I would now like to hand, the conference back over to Jim Green for closing remarks.

Well. Thank you for joining us this ends our presentation today, we hope you'll join us again for.

Our Q4 results.

February timeframe. So thank you very much and we'll see you soon thanks.

This concludes today's conference call. Thank you for your participation you may now disconnect.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Okay.

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Yes.

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Sure.

Yes.

Okay.

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Good day, and thank you for standby and welcome to the Harvard Bioscience third quarter 2022 earnings 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.

To ask a question during the session you will need to press star one one on your telephone.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your Speaker Dame steroids. Please go ahead.

Okay.

Thank you Shannon and good afternoon, everyone. Thank you for joining the Harvard Bioscience third quarter 2022 earnings Conference call.

Leading the call today will be Jim Green Chairman of the Board, President and Chief Executive Officer, and Mike Rossi, Chief Financial Officer for <unk>.

I turn the call over to Jim I will read our safe Harbor statement.

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.

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.

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

Thanks, David and good afternoon, everybody let.

Let me start by saying that in spite of a rough third quarter. We continue to work through actions to dramatically improve our portfolio and resize the cost of our organization by the end of Q4.

Let's go to slide four of the presentation take a look at the highlights for the quarter.

Revenue in the quarter was $26 9 million down 9% from a strong Q3 prior year with 6%.

With 6% growth in cellular and molecular more than offset by lower sales of preclinical which is debt which was down 17%.

Reported revenue includes a $1 million impact from unfavorable currency and.

And we experienced a very slow summer with lower sales to cros and pharma across the regions.

And we continue to see a rotation out of obsolete as low margin CMT products sold mostly through distributors.

Adjusted operating margin came in at two 6% versus 13, 3% last year impacted by lower sales of preclinical products and higher cost of goods in the quarter.

Gross margins came in at 51% down from 56% last year impacted by inflation and lower absorption and <unk> charges.

We had a poor mix in the quarter as we finished manufacturing of the low margin products being obsolete.

Cost of goods was significantly impacted by lower preclinical revenue to absorb fixed overheads free.

Free cash from operations was $700000 and net debt was roughly flat.

Move on to slide five we'll look at the revenue in the quarter by product family, which shows Q3 'twenty two revenue adjusted to reflect 2021 exchange rates.

We had solid growth across geographies driven by strength of our cellular products in particular.

CMT grew despite reductions in obsolete non strategic lower margin products sold through distributors.

Looking to our preclinical products again on a constant currency basis revenue was down 17% from a strong prior year.

European Crows in pharma sales of telemetry and insulation systems was down significantly from a strong prior Q2.

In Asia Pacific, China is recovering, but had a tough comparable to a large prior year telemetry sale and lower sales in other APAC countries negative impacted negatively on the very strong dollar.

The U S was slower in Q3 on lower telemetry sales to <unk>. So we see the pipeline improving here in Q4.

The strong U S dollar compared to the Euro and British pound drove a currency impact of $1 million, which will likely continue to hurt us through the year.

Let's move to slide six I can tell you a little bit about some of the exciting new product introductions.

Starting with our cellular and molecular technologies. After the quarter ended we received a large order from a top pharma company for our <unk> electroporation systems for use in bio production.

Furthering our in our initial inroads, we see an emerging value proposition for our <unk> system and bio production, which is often used today in pharmaceutical research and development to create the initial strains of the therapeutics.

<unk> has the potential to provide an ongoing stream of flat pack consumables revenues that benefits from the production quantities. In addition to those used in research and development.

Secondly, after the quarter end, we introduced the new use 7500, our premium spectrophotometer building on our well known ultra spec line.

This system replaces three existing models and is designed to penetrate pharma CRM companies and top academic labs.

Lastly, continuing to drive market leadership in preclinical wire wireless continuous monitoring we also introduced our exclusive continuous monitoring glucose implant. This new implant allows for continuous monitoring of glucose levels and avoids the cost inconvenience and variability inherent.

And periodic manual sampling.

This new line of implants is expected to add over half a million dollars annually to our to our business.

Now, let me turn the call over to Mike for a quick look at key financials Mike.

Thanks, Jim and good afternoon, everyone.

As a reminder, my discussion will focus on adjusted results for P&L performance, which aligns with measurements we use.

To internally manage the business.

I'll skip over slide eight with the data table and go right to page nine to go through the full financials.

On gross margin, we reported 51% for the quarter on an adjusted basis as compared to 56% in the prior year.

This decline was due to higher costs associated with inflation, including uniquely high levels of price increases in electronic components, which we see moderating on a go forward basis fixed.

Fixed cost absorption was also a major driver given the revenue decline noted compounded by the decline in sales coming from our preclinical products, which carry higher than average gross margins.

Spite these short term headwinds.

We see go forward traction and gross margin improvement with continued ability to increase our prices to our customers and.

And the mix within cellular and molecular technologies sales continued to improve with niche cellular products delivering higher growth within TMT.

CMT and overall gross margins will improve meaningfully for the portfolio and restructuring actions as Jim has discussed.

Gross margin for the quarter on a GAAP basis was 45% to $1 4 million of charges associated with these portfolio and restructuring actions, which relate to products manufactured in our largest CMT facility, primarily inventory write downs for low margin products, we will exit in the coming months.

But also supporting the new product introductions, Jim discussed.

Adjusted operating expenses were down sequentially from Q2, 2002 by approximately $800000, reflecting initial benefits from the restructuring actions, Jim noted as well as lower overall discretionary spending than originally planned for 2022, given the softer revenue trends noted.

While head count grew in the second half of 2021 in early 2022 and reaction of the supply chain and labor dynamics that emerge over the last year. The restructuring plan, we're finishing now and we will have head count down approximately 10% from Q2 and with a workforce. We believe can support growth and operating leverage in 2023.

Adjusted operating income for Q3 is down meaningfully due to the factors noted above most notably due to the drop in revenue discussed, which we believe represents a trough quarter for revenue due to the unique end market slowness experienced this past summer.

On cash flow and debt net debt is up $4 million over prior year due to primarily to the legal settlement we have discussed previously.

For the rest of 2020 to expect net debt will be at a similar level to Q3, we expect to maintain strong collection efforts and to bring down growth inventory levels. In Q4, However, net working capital typically increases overall in Q4 due to higher sales seasonally.

Restructuring transformation costs for Q3 of $1 7 million inventory write downs and severance costs associated with the portfolio actions and restructuring.

These costs were partially offset by a reversal of accruals associated with the litigation.

The line item detail of these costs are included in the GAAP to non-GAAP reconciliations included in this presentation.

We anticipate up to $1 million of additional charges in Q2 or in Q4, rather to.

To complete the restructuring plans noted importantly, with these actions we believe the major restructuring initiatives needed to construct the growth platform. We've been discussing are behind us exiting 2022, and we're planning for a significantly lower transformation costs in 2023.

Our leverage ratio of total debt to adjusted EBITDA in Q3 and as.

Is three nine times up from $2 seven at year end due to the softening earnings, particularly in Q3.

We believe this amendment combined with the plans we are executing to set up 2023, which includes reducing inventory levels was spiked up over the last year due to two.

Jim will give initial thoughts on the 2023 margin targets in his conclusion and we are all laser focused and accompanying this with strong positive cash flows and deleveraging in 2023.

I'll turn it back to Jim to discuss the full year outlook, Jim Thanks, Mike.

Moving to our summary on slide 11.

First looking at the upcoming fourth quarter, we expect revenue, we expect fourth quarter revenue in the $30 million range.

We see sequentially, improving revenue and an improved product mix returning our adjusted gross margin to first half range and adjusted operating margin to the 14% to 15% range pulse improving inventory and working capital management will further improve cash flow.

For the full year FY 'twenty, two we expect revenue of approximately $115 million gross margin in the 55% to 56% range and adjusted operating margin in the 9% to 10% range.

Despite a challenging third quarter, we continue to drive the transformation of our business to the profitable growth oriented platform we envisioned.

These actions support next year's targeted gross margins in the 58% to 60% range and EBITDA margins in the high teens.

New product introductions and improved portfolio with pricing power will underpin profitable organic growth for the future.

Finally, our transformation costs are expected to be significantly lower with restructuring essentially complete at the end of Q4.

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

Thank you.

As a reminder to ask a question you will need to press star one on your telephone.

Please standby will compile the Q&A roster.

Okay.

Our first question comes from the line of Paul Knight with Keybanc. Your line is now open.

Yes.

Hi, how are you what's your what's your goal now on organic growth potential.

Although I think about next year, our plan organically is too.

The revenue that.

And we're no longer selling next year, so roughly speaking somewhere in the neighborhood of.

10% to 11% on a pro forma basis, and then again accounting for the <unk>.

That we're exiting probably somewhere somewhere in that neighborhood of 6% on a.

Pro forma basis are actually.

On a reported basis.

And then on this.

BT ex electroporation configuration.

You're mentioning that you had a sale to a major pharma.

Yeah.

Is there more pipeline behind that.

Yes, we've been working on this for a while we've been very well known and in the initial discovery of the various new drugs coming out our Bts electrification systems have been used for a very large number of new drugs.

Including things like the Covid vaccines.

But historically, we were typically only used either in the in the development of the initial drug either.

The research labs academic labs or in the pharma companies, but not necessarily in the production <unk> production of those drugs. What we've been working on is the ability to provide a.

A bridge from if someone's using our equipment to to generate the first line, if theyre going to if they're going to be using electroporation in the line itself.

We're now working on offering the ability to transition from the creation of the drug to the initial levels of production.

Depending on the amount the amount of demand we are certainly seeing the initial production up through medium and maybe low levels.

So low to medium levels of production rates that can change a lot.

Just on the drug and based on how it's used and based on how much is actually specific electric rated.

It shows up in the vial and the end drugs. So this is an area we've been working on for a while it's an exciting time to be able to offer this it's a new growth opportunity for us.

We've been working with a number of companies.

As we highlighted this one in particular, because it's a large order.

We see this becoming a multi year opportunity.

Reaching $1 billion plus in annual consumable revenues just with this one particular order alone.

You add up the ability to bring others into this.

An exciting growth area for us.

The bps was that for cellular cell and gene therapy.

And gene therapeutic applications.

It can do that too it actually is.

It was actually one of the very first electrification systems out there involved with because the first cloning moving on to the development of things like monoclonal antibodies it's used in.

In the development of not just the drugs, but also the.

Just the the ability to provide a.

A transition or a bridge from the initial drug to something they can start producing in some level of volume is really important because.

Especially if they've used our technology to create it it's much we think we'll be able to show that it's much safer just expand that volume of it and start to enter production low level productions, and then growing from there.

And then lastly, the spectrophotometry.

Product.

First of all on the <unk>.

Can you.

Give us a gauge of how big the overall.

Spectrophotometry business is at Harvard Bio is that more than 10 less in 'twenty is there any metric you can give us I know, it's been large but if that'd be helpful. Thanks.

Yes.

<unk> business itself is somewhere I would say in that kind of five or 6% of revenue range. So it's meaningful it's not it's not too large but it is an area. We again again, where we've tended to focus on selling through distributors and into academic research.

New version is also designed to be either transition and sold into <unk>.

And the pharma companies, where we have direct sales, where we have really good connections. So it's an expansion on our.

Our spectrophotometry business.

Okay. Thanks.

Thank you.

Our next question comes from the line of Bruce Jackson with Benchmark Company. Your line is now open.

Hi, good afternoon, and thank you for taking my questions.

Thanks, Greg.

Hey, So I wanted to take a little time to talk about the emulation business obviously.

Got a big boost during COVID-19, you've got the leading.

Leading products in that space, how much of the current downturn would you say is due to just general economic conditions and how much could potentially be.

Shifting the market towards a more normalized level.

Yes, that's a good question I don't think Theres any doubt at least in hindsight that given that we had offered the product about the time that.

Debt.

<unk> was coming out it had an immediate uptick.

What we did was we worked on and then a transition new capability into the product to then be able to have it more targeted toward long term use and then compete on that.

The specifics of being able to measure exact amount of what was delivered.

Through <unk>.

Through the system and inhaled by by the model.

So I would certainly I would expect that we had some buildup of additional sales of the inhalation units.

Because of everything happening with Covid and we did see a lot of those sales go to pharma companies.

Round, the world and they adopted it fairly quickly so we could very well be like I say moving toward more of a normalized.

Level of of revenue there in sales and we'll grow off of this level then based on the new capabilities that we are adding including the ability to specifically measure the amounts inhaled.

Okay. Okay.

And then you mentioned that there is going to be about $5 million to $6 million of revenue impact from discontinued products and in 2023 was there was there any discontinued products in this quarter that had any impact on the top line numbers.

Yes, certainly we start with what we started in this last actually in Q3, we started.

Identifying and telling customers that we were rotating out that we are obsoleting certain products. So.

We did see.

Our continued rotation out of and again, if you look at it.

What I look at what we sell through distribution around the world again, mainly to academic research sites. Some of the Obsoleting products, we saw a downturn somewhat as we would've expected a rotation out of those I see that as a good rotation.

Then with the introduction of the 7500, that's a new premium unit that takes over and replaces a number of other units that were in production that were lower margin lower capability.

This is going to this is going to bring back and keep us.

And that revenue stream doing doing well, even though even though it's rotating out of those lower margin products.

Okay.

Then last question from me you discussed the fourth quarter.

<unk> pipeline, we're starting to look a little bit better I was wondering if you could maybe give us a little bit of color.

The types of studies.

The types of products that are catching some of this upturn in the fourth quarter. Thank you.

Yep.

We've always done really well with our implantable telemetry continuous monitoring systems.

We in the summer.

The summer time July August things really slowed down very much in Europe .

And pretty much we.

We saw the slowdown globally and it seemed that it seemed to.

Slow down fairly quickly in around and that kind of mid summer or late summer timeframe and then start recovering. So we saw that the recovery is happening and of course, we're very happy to see it recovering and our implantable telemetry space.

So thats coming back nicely.

And then can be augmented because the glucose the new glucose product is brand new.

<unk>.

It's incremental business for us.

That academic research has really been been looking for including government labs and pharma companies. So that will augment the growth in our high margin <unk>.

Telemetry and monitoring business.

That's the piece, where again with it when your highest margin products.

Hit some delays like they did in the summer there.

That had a real effect on us because it was youre, losing some very high margin revenue in the quarter at the same time that would've been.

That also forces you then to have it.

An issue with absorption of overheads.

And to really fix the long term overhead issue.

Is that to have the real kind of cushion that we need as a company. Those are the structural changes that we're making to bring down the overall cost of the business. So the two things that are happening as we see our great margin products and the introduction of the new glucose product getting us back to where we need to be and improving our margins at the same time.

Cost reduction activity in the.

Associated with changing and improving the portfolio and taken out cost of the organization down it gives us the kind of cushion and headroom in our margins. So that we could absorb when we have a one off quarter that happens to be particularly slow for whatever reason, whether it be something with COVID-19 or something with the supply chain.

And companies are countries that are buying in euros and pounds, which is a significant part of our business that really turns into a currency translation problem.

So the only way to really solve that but just to get our cost structure down and.

In good quarters in good years, we'll be we'll be in really good shape, but if we have we have some issues that pop up for a point of time, it's not going to be quite as hard on us on a.

Quarter basis.

Got it thank you.

Thanks Bruce.

Our next.

Question comes from the line of Christopher Sakai with singular research. Your line is now open.

Hi, Christopher.

This is the same for cash.

I was wondering if.

You can provide us a little bit more detail.

Clinical revenue stream in terms of what happened this quarter and how do you kind of see going forward.

Yes, I mean.

It was the preclinical.

Revenue in the quarter that where we really saw a slowing and a lot of it just seem to be delays and we know much of our preclinical products go to pharma companies and <unk> and companies that really have to pay attention to the topline and bottom of our bottom line. So we saw some of it was.

Belt tightening in the quarter.

And then some of it was just people getting back to work after Covid and we knew that.

But the summer was going to be a tough summer people that Europeans, who typically take four to five weeks off we saw people.

Nobody around even Paul will talk to you in some of the some of the centers until summer was fully done and be able to start to come back to work really in the September timeframe.

I think it was a combination of that I have no doubt that we have some belt tightening happening in the aerospace.

And I think to what Bruce had mentioned.

Could very well have been some additional sales prior year, we had a very strong prior year very strong Q3 last year.

Where some of the pharma companies made some major purchases, we had a an individual million dollars purchased by <unk>.

One of the largest <unk> in China.

What's really great news for us except that makes for a tougher comparable when you think about a $1 million incremental deal just in one case in the prior prior quarter. So we see that coming back the mix is going to start improving here. It improves already as we look to Q4, and then with the cost changes that we're making.

Our revenue stream will have strong strong margins and strong dropdown.

Thanks.

And then.

The other way up.

Some of the slowdown.

In U S, especially in biotech considering we are at.

Hi.

Spec market collapsed towards like yet but.

But you mentioned, mostly this is all U S. So do you have do you think that that is sort of similar situation all U S and U S.

In terms of slowdown or.

We might see a slowdown in a little bit in <unk>.

<unk> yet.

Well, we did see some slowing in the U S.

In the preclinical revenue stream.

You are mentioning.

Bring up a good point with the biotechs that was that was something we always saw and still see as a great growth opportunity, especially now that we have some of the new products with the <unk> the ability to start to to offer to smaller biotech and pharma companies that are involved with more orphan drugs and such to help to provide them.

Other options for bridging to production.

But the biotech I would say that that wasn't really there wasn't a lot of revenue for us when I think about when I look at that.

Our north American revenue much of it is <unk> and pharma companies.

So with some slowing there in that quarter and like I've said, we've already seen the pipeline improving.

Even going into our expectations, our natural growth from Q3 to Q4.

As we look as we look within this year and then going forward, so augmenting it with new products, especially with the new glucose.

Continue to drive toward a very positive.

And mix for us on implantable monitoring.

And then just.

Watching as as we deal with the headwinds in Europe , China.

We all believe China, we see as we see it improving somewhat we think it's going to we think it does.

Do quite a bit better as we think about they have been going through these periodic shutdowns.

There is strong feeling that China is going to pick back up very strong.

Europe is a always a place where we always have some level of concern just because of.

The market there and of course the <unk>.

Currency situations.

And finally.

Platform the premium products that get talked about in terms of highly stable.

If you can talk to.

Can you give us some update.

<unk> blockbuster cooking.

Okay.

Sure.

Yes.

Well good question.

You can see where we're making our investments we're making the investments in areas, where we have.

The high barriers to entry good pricing power.

And a good ability to sell our products. So investments we continue to invest in the cell and molecular side very much on the cellular approach, we think theres going to be a lot more adoption of cellular testing technologies into the into the stream of how you get products through the preclinical and into clinical so that's an area of <unk>.

Investment you saw that with Etfs, youre going to see that with more of our.

Multi electrode array type products that'll be coming in.

Then the implantable telemetry of course is a area, where we continue to we need to stay the market leader in there and we'll continue to invest and you'll see new products coming out on the software side.

That's an area that we've talked about it in the past, but now now we see the ability to really manage data and to provide the right kind of capabilities not just to <unk>, but also to farmers and to have versions that sell well into academic research. So youll see more investment on the software side of our business too.

Perfect. Thank you.

Okay.

Thank you.

This concludes the question and answer session I would now like to hand, the conference back over to Jim Green for closing remarks.

Well. Thank you for joining us this ends our presentation today, we hope you'll join US again for our Q4 <unk>.

In February timeframe. So thank you very much and we'll see you soon thanks.

This concludes today's conference call. Thank you for your participation you may now disconnect.

Q3 2022 Harvard Bioscience Inc Earnings Call

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