Q2 2023 Harvard Bioscience Inc Earnings Call
Yeah.
Thank you for standing by and welcome to the Harvard Biosciences second quarter 2023 earnings call. At this time, all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one to one on your telephone again Thats Star one one on your telephone to ask a question to remove yourself from the queue. You May Press Star one one again I would now like to hand, the call over to Yahoo.
Host, David Joyce Director of SEC reporting. Please go ahead.
Thank you Latif and good morning, everyone. Thank you for joining the Harvard Bio's Science second quarter 2023 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 Q2, 2023, H by a quarterly earnings presentation 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 Jennifer Cody Chief Financial Officer.
Before I turn the call over to Jim I will read our safe Harbor statement.
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, 2022, our subsequent quarterly reports on Form 10-Q.
In 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 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 Hello, everybody I'm.
I'm pleased to see Q2, supporting our strong start to 2023.
Now, let's go to slide three of the presentation to look at the highlights for the quarter.
Revenue in the quarter of $28 8 million down modestly from last year on an as reported basis the.
The year over year comparison includes the net effect of $1 6 million of discontinued products compared to the prior year period.
This is a pretty smooth transition to our much improved and simplified portfolio as we are already seeing new product introductions from last year are gaining traction.
Gross margin improved to $16 7 million or 58% of revenue, which includes the typical puts and takes of product mix and volume along with the impact of the financial process updates that Jen will describe further in a few minutes.
Adjusted operating profit improved to $3 6 million or 12, 4% of revenue up two percentage points from last year.
<unk> EBITDA measured $3 9 million or 13, 6% of revenue also up two percentage points from prior year.
GAAP earnings per share was a <unk> <unk> loss. This includes quite a bit of noncash related accounting complexity that Jen will discuss with you in a few minutes.
Adjusted EPS metric of <unk> per share down from <unk> and <unk>.
Last year.
Cash flow from operations was $3 6 million versus a negative $200000 last year.
In the appendix, you'll find the bridge from GAAP measurements to adjusted to adjusted or non-GAAP measurements.
Now, let's move to slide four take a look at revenue in the quarter by product family.
This slide shows Q2, 'twenty three revenue adjusted to reflect Q2, 'twenty twos exchange rates.
Starting with the first row of the table, our cellular and molecular technology revenue was down 12% as reported and down three 6% when adjusted for currency and the impact of discontinued products.
We had strong growth in Asia Pacific.
EMEA was roughly flat to last year, and we saw slowness in the Americas.
We continue to rotate out of low margin products, primarily sold through distribution.
And our revenue includes a net revenue a net reduction of $1 6 million from discontinued products compared to last year, which were predominantly cellular and molecular products.
Next our preclinical product revenue was up 10% as reported and up 11, 5% when adjusted for currency and discontinued products.
Asia had strong growth driven mostly by inhalation in respiratory products.
EMEA had very strong growth across the entire preclinical product portfolio.
Americas was down modestly on slower sales and installation of the respiratory products.
We were down one 5% as reported and up three 9% when adjusted for currency and discontinued products.
Let's move to slide five I can tell you about some of our exciting new products and new product introductions. This year.
Before I start let me explain a little bit about the slide over the past three years, we've optimized our product offerings to target key technologies in the drug and therapy development continuum.
Strategies to continue to introduce new technologies and applications and leading academic research labs.
And at the same time adaptive technologies for further penetration into the larger industrial applications of our customers and pharma CRO and biotech.
Following this strategy we've introduced two more product technologies. This year designed to support our growth opportunities and advanced cell based testing, we expect initial demand in both academic labs in Biopharma discovery and.
An expanding opportunity in preclinical regulatory testing for toxicology safety pharmacology.
First I'd like to highlight our new mesh array Organoid MAA platform building on our relationship or relate to our leadership position in single well high density.
Multi electrode arrays that are used today in academic research and discovery, we're introducing the first organoid centric MAA that measure signals from inside the organoid.
This technology is essentially targeted to neuro and cardiac applications, such as activation metabolism and toxicology we.
We expect organized level testing to enable applications that historically were performed using full organ systems, our animal models.
We have next introduced our second generation multi well EMEA platform with multiple platform.
It's designed for higher volume MBA applications, giving us a vehicle to penetrate various industrial applications.
This is another proof point, where we leverage our leading position in high density MAA and academic research and discovery and expand to industrial CRO and Biopharma applications.
We plan for advanced applications, such as organized to transition from the single to multi well and enable penetration of higher volume industrial usage in Crs and Biopharma.
This is an exciting time for Harvard Bioscience, and we continue to introduce leadership, leading technologies and research and discovery and drive new opportunities in industrial applications with our CRO and Biopharma customers, where we already have a well established relationship and a great reputation.
Now I'll turn the call over to Jennifer our CFO for a look at the key financials et cetera.
Thank you very much gentlemen, let's jump into our Q2 and year to date financial results in greater detail and if you can please refer to slide seven.
As a reminder, we include discussions about our adjusted or non-GAAP financial results, which aligns with information we used to internally manage the business. Our slide deck includes the reconciliation between adjusted results and the corresponding GAAP measures on slide 12.
Jim has already taken you through our revenue performance. So a few more details on our gross margin adjusted EBITDA EPS and cash flow.
Our FY2023 Q2 gross margin grew to 58% compared to 57% in Q2 FY 'twenty two.
During Q2 of 2023, we aligned our global inventory costing process, which had a slightly unfavorable impact to gross margin.
We aligned to a common time frame globally to amortize our capitalized inventory variances.
This change happened in parallel with our annual standard cost S. Raul.
<unk> this quarter excuse me.
As described by John our gross margins will fluctuate from period to period based on the revenue mix volume inflation et cetera, among other factors.
But year to date, our gross margins of 59, 6% or up three.
12 percentage points compared to last year.
Outlook considers the impact of any process changes this quarter.
Now, let's discuss operating expenses and adjusted EBITDA.
Adjusted EBITDA during Q2 was $3 9 million compared to $3 4 million last year.
Our operating expenses are reduced since last Q2, primarily as a result of the restructuring and cost reduction activities. We executed during the second half of 2022.
Offsetting these reductions or increases in employee compensation related to annual merit increases as well as the fact that we've reserved for our expected bonus payouts for 2023, which were not included last year.
Now, let's take a few minutes to discuss the year over year variation in our GAAP EPS that Jim alluded to earlier.
A large part of the variation is due to accounting charges related to the <unk> litigation, which was resolved in Q2 last year.
Although this matter is behind us the impact of these charges is reflected in our GAAP EPS, our adjusted EPS excludes these impacts.
On a GAAP basis. Our Q2 2022 results included the reversal of litigation related reserves. Originally recorded the prior quarter Q1, 2022 of approximately $4 9 million. This favorably impacted last year's GAAP EPS.
Also at that time, we received stock from bio stage as part of the settlement.
Beginning in Q2 of this year, we adjusted the value of these shares to reflect mark to market accounting.
This resulted in an unfavorable charge of approximately $1 6 million in Q2.
Taken together these two litigation related items create an unfavorable year over year swing in our GAAP EPS of <unk> 10 per share.
We do not believe that these items reflect the fundamentals of our ongoing business. We do expect to see the impact of mark to market adjustments in future EPS numbers. So long as the shares remain on our balance sheet.
Again these items are excluded from adjusted EPS and these mark to market adjustments are noncash and do not impact our liquidity.
The year over year changes in our GAAP EPS also included the favorable impact of approximately <unk> <unk> per share as we wound down last year's restructuring activities.
The above items are excluded.
Adjusted diluted EPS.
Further detail on the above items is available in our 10-Q and the non-GAAP reconciliation tables included in our press release and in the appendix to this presentation.
Now I am excited to switch gears to highlight on cash flow and liquidity.
We had solid cash flow from operations of $3 6 million this quarter, representing our fourth consecutive quarter of operating cash flows.
Our year to date Paydown against our credit facility is $5 4 million.
We expect modest additional investments in capital expenditures during the second half of 2023, as we invest in the consolidation of certain business tools.
And also invest in tooling and capital equipment related to new products.
We are solidly executing against the financial targets, we laid out at the start of the year and I'm now happy to hand things back to Jim to cover our 2023 guidance.
Alright, Thank you Tim.
Now moving to our summary on slide nine and I'll look to what we see for the year of 2023.
New product introductions and expanding service offerings are expected to continue to fuel new growth for the year 2023, we expect reported revenue in the $116 million to $120 million range inclusive of approximately four percentage points of discontinued product revenue compared to 2022.
We expect gross margin to remain strong at around 60% level, we expect adjusted EBITDA margin in the 15% to 17% range.
With expanded EBITDA combined with improving working capital driving strong cash flows we plan to continue significantly paying down our debt and expect to further reduce our net leverage ratio to approximately two times by the end of 2023.
Finally, as I think about the remainder of 2023 I'm encouraged by our start of the year as our recent product launches are gaining traction and we realize the benefits of last year's restructuring actions.
We're also mindful of reports of possible headwinds affecting our industry and the broader economy that could affect us.
Our company is in a much stronger position than we were just a year ago and we look forward to continuing our progress.
Thank you now I'll turn the call over to the operator to open the line for questions. Thank you.
Thank you as a reminder to ask a question you will need to press star one one on your telephone again Thats Star one one on your telephone to ask a question to remove yourself from the queue. You May press Star one one again.
Our first question.
It comes from the line.
Paul Knight.
Keybanc.
Hi, Jim.
Sure.
Guidance, you provided regarding product headwind minus 4% headwind is that changed or kind of going to play in in terms of what you were phasing out of.
Yes, it's coming up pretty much right on what we expected when we looked at the at the revenue that was in last year of the discontinued products and the revenue of those discontinued products and this year. The net difference is that around 4%. It's been that I think from we've seen that coming and it's turning out to be exactly that is the case. So that's a.
A headwind of again that transition and as you can see where we're replacing predominant replacing that even as it is going through here. So.
A great transition to the new much improved product line.
And.
The DSI sales force can you.
Stay there.
Part of the way there all the way there in terms of selling the <unk>.
Legacy Harvard bio product.
I would say part of the way, we've been selecting which products really makes sense as we basically our strategy is to take these products that historically have sold into academic research and into discovery and pharma companies.
And to adapt them for much of a higher level of commercial operation. So.
You see the introduction and now the traction with the new behavioral product, which.
As you know I mean, historically behavior products sell in academic research for maybe eight to $10000 as a capital purchase and the first unit. We're selling here this year to a large CRO I mean, the first of its own is $850000 and that'll that'll ship and recognized in the year and that's certainly not the last of it that's the start of a new product offering.
So clearly we are seeing great traction with our sales force able to bring.
The behavioral type technologies into the <unk> and this is as you know anything that sells into the CRM like this has to be GMP compliant. So it has to meet all the regulatory requirements for being able to generate the reports the regulatory reports to the FDA and other regulatory agencies. So this was I think the first one we see that happening with <unk>.
There's more coming now.
We've said this things.
I can package into higher volume industrial use.
Youll notice on this call I introduced the concept that we've introduced the very first Organoid type system. That's initially selling in with where we can have a great reputation and we're the market leader with these high value high density MBA systems, but historically, that's always been in research with academic researchers and discovery parts of industry, but that we.
As we start to combine that then with a multi with a larger higher volume.
Well configuration, that's going to be a real opportunity for us to move brand new growth for us with Cros and pharma companies as we know theyre going to move more and more toward testing at the cellular level and now at the Organoid level, where you can do so much more and you don't have the useful Oregon. So you don't have to use nearly the amount of animal models that have historic.
We have been used in the past. So this is right in line with our strategy and certainly we feel like I feel like the adoption is happening in our force is doing pretty good at adopting them.
With EMEA technology it be appropriate for.
Small molecule large molecule cell and gene based therapies, what's it most applicable for Jim.
Additionally.
If you think about what's been done in the past you look at something like patch clamp, where youre using the testing at a particular, one particular cell at a time and then EMEA historically you'd use a cluster.
Now as you can if you can start to actually move toward having an organised instead of looking at a handful of sales, let's say liver with every drug that goes through testing there is something they have to do they're going to go through everything goes through cardiac testing you want to make sure that those cells and now are keeping as organoid you can actually have a proxy for the heart to see it how does the heart Riyadh.
What does the metabolism change in that in that Organoid does the depolarization work properly. It does the drug to have an effect on the Q T segments. So that's one of the things that's tested I believe on every anything thats going to be eventually use the humans.
The fact that level.
Part of the initial core testing for toxicology safety pharmacology. So this is going to be something that we will see not only on the development side. This will be the big opportunity I see if this can start to really penetrate high volume talks and regulatory testing.
And as you know if you can use organoid you basically have a proxy for each of the organs.
Our first initial version of this we're testing with we're testing with neuro and then we'd expect that will very quickly moved to cardiac and then of course there'll be involved with everything from cancer to any other treatment, but neuro and cardiac are two of the very first things that you really want to get high volume testing and if you could deal with organized as opposed to.
Again, and a lot of our organs, it's much more efficient and much faster way to get these answers.
How long do you think before it would be an animal model replacement or release reduction of.
It's a good question.
I think in theory, you could start to reduce animal fairly quickly, but on the other hand, it's suggest is likely that there'll be a much higher ramp up of the test early testing at the cellular level on organised level. So that you avoid taking taking drugs that at some point still have to go through the next sets of animal models.
You fail them quickly if theyre going to fail you want to know talks right away. If you can find it out in 30 days versus six months.
That's really good for you and that actually let you have a much higher yield of drugs that go through the regulatory cycle to get through the full preclinical set. So I mean again I think thats going to be one of those choices will either be at least there'll be able to test things quicker and have much higher.
Yields as far as not having to risk more animals for early testing that can be done at the cellular level.
And then my last question Jim is regarding you know you've obviously got the business focus on.
The growth product lines that you want to have in your sales.
Distribution strategy.
Align as well is it making your view onto M&A situations easier.
Are we ever going to get M&A targets at a price that makes sense to the public market.
Yes, that's a great question.
Always felt that as we.
Have a clean year this year really get to our targets that we're expecting in for next year to be at our long term targets our balance sheets much much stronger you can see what we've done with that.
We're going to be in a much better position to be able to look at acquisitions.
I'm accustomed to looking at not just acquisitions, but also licensing structures.
At products that will help me really fill out this portfolio as I as I go into and start to penetrate you've got bio production penetration. That's an area that has real interest that I might be looking at areas there of whether that's acquisitions or whether thats licensing.
Some collaborations same thing with the expanding the use of these systems for earlier testing for Tox Sates pharmacology.
It also gave us some time to better understand the market and the needs of the customer segments I always look at where do I have cut where do I have reps I know they can.
They can knock on the door theyre going to get in their respected theyre understood. We have a relationship with these large <unk> large pharma companies, what can I bring and put in their bag, that's going to let me.
Leverage what I've already got in place. So there's no question as we get to the end of this year start to look at Q1.
I'll be in a position to start to target things that makes sense. We're looking now, but again I always believe you have to earn the right to use the balance sheet or if we're going to do more investment in areas like that I want to finish up what we're doing this year.
And as I get to Q1, we're certainly have been a much better position to understand where those opportunities are and then how do we do that in a way that we can afford.
Okay. Thank you Jim.
Thanks, Paul.
Thank you.
Our next question.
Comes from the line Bruce Jackson of benchmark.
Hi, good morning, and thank you for taking my questions.
Hey, Jim I was.
I wanted to talk about the discontinued product impact. So you put out an estimate for the year how much of that have we seen so far and how is that going to roll off over the remainder of 2020 period.
Sure I think when we look we gave US we gave a year to date view I think it was around.
But to $2 $8 million or something like that as a half point of the year and we're expecting about 5% to five and a half for the total year is that right. Jeff. That's correct. That's correct, it's about a million and a half a quarter and will roll through pretty evenly yes. So that'll that will roll off pretty quickly here at the end of this year youll see that again fairly linear each quarter up and down.
But like a $1 6 billion was this quarter.
And then again about another two five or so to go.
Okay, and then is that hitting both of the housing both in the business units is there one that.
Getting a disproportionate impact from the rollout.
Continued products.
Yes, it's really predominantly in the cell and molecular side digitally more of the lower individual products are typically sold through distribution.
Not really part of what I would call our strategic selling proposition. So again predominantly on the cell and molecular side I mean, probably 95 plus percent of it's there I would I'm guessing, but it's really predominantly CMT.
Okay. Okay.
And then.
A follow up question on the new product front. So you talked about the EMEA EMEA launch.
Last quarter, you talked about the Bts.
By our production and then also in previous quarters, you've talked about glucose monitoring of those still.
Still growth drivers for you.
You bet. They are there because there are new for us there are new areas new spaces new customers.
Incremental growth, we know that certainly bio production, we've seen some headwinds over everybody is talking about headwinds, but for us because we haven't since we're going from a very small number negligible to meaningful numbers.
It doesn't really affect us, but in the longer run certainly what we hope to see all of that turnaround. We think we have a great offering and we will be.
Turning to showcase this morning will be at the bio production show coming up later this month in Boston.
To make sure that we're ready for this and I like the idea now that I've got real deals and I've got real customers already adopting it I've got a great a great case.
I think a good selling proposition here.
Okay, great. Thank you very much.
Thanks, Bruce I appreciate it.
Thank you.
Our next question.
Comes from the line of Christopher Sakai of singular research.
Hi, Chris.
Hi, Jim again.
Jean Paul Kress.
Just wanted to see if you can give us a little bit more color on.
Gross margin.
The decrease from first quarter to 58.
From 61 to one.
One could rival.
Yeah, I guess first of all I'd say Q.
We saw a.
A couple of things first of all Theres always going to be puts and takes on.
Mix and volume we did have a couple of other things that we launched a new product.
When you launch new products like the new multi well theres always going to be some startup costs, there and some inefficiencies associated with that so that has had some effect.
And then really looking forward we've looked through this and I think Jan also mentioned some accounting level changes on how we put this company has been around for a long time and with multiple sites. There were some some areas where the way things were accounting for manufacturing accounting.
They weren't identical everywhere and they needed to be synchronized so that we didn't have things like how you depreciate something.
Some of it through the cost roles, how things depreciate as far as purchase price variance and that again I'm not an expert on it. So that's why I'm an engineer I would like to let the finance people do the hard work like that.
But in general I mean, it's a.
Aligning that there was some effect on gross margin with that realignment of that processing and we've considered all of that going forward as we look to what we look at for the rest of the year and for our year outlook.
Thanks.
On the <unk> and <unk>.
<unk> products, if you can give us more color.
In terms of weakness in North America also what's Hoffmann.
EMEA.
Yes.
It's interesting because we have there is they.
They operate a little differently. This year. This last year EMEA was weak U S was strong this year EMEA is very strong and we're talking about pretty much across the board.
Especially in the preclinical side that really picked up nicely in EMEA.
Asia is very strongest area.
<unk> was a little slower in that now again I said the <unk>.
When I look at something slowing down a little bit I look at what slowed down and what we saw some slowing on was it was the inhalation related products now that could that be because we had a much larger year last year in the U S with emulation probably.
So it is it does seem to be fair.
Fairly narrow in terms of the product.
And again, it could very well be more of.
A harder comp comparison on that level with last year, a lot of things still being purchased that were really dealing with COVID-19 COVID-19 related products in insulation was one of the key product areas that we introduced that about the right time with Covid at heavy use very quickly.
We're kind of past the Covid world, there and I think that's going to settle into kind of a standard type it up of operation, but again, because it's growing we said growing in Europe , we say growing in China and not so much here at all.
I was asked some questions, but again, it's limited again, just basically to one product line.
Thank you very much that's all.
Sure.
Thanks, Chris.
Well at this point I don't think there's any more questions.
I should ask first the operator do we have any more questions coming in or as I think we've cardamom.
No Sir.
Alright, great well then.
I think this will end the call. Let me. Thank you for joining US. This ends today's presentation hope youll come join us in the fall for our third quarter results for fiscal 'twenty three thank you very much and that since the presentation.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
[music].
Okay.
Yes.