Q3 2024 Harvard Bioscience Inc Earnings Call
Okay.
Speaker Change: Good day and welcome to the third quarter 2020 for Harvard Bioscience, Inc. Earnings Conference call. At this time, all participants are in listen only mode. After the speaker's presentation there'll be a question and answer session and instructions will be given at that time.
As a reminder, this call maybe recorded.
Speaker Change: I'd now like to turn the call over to Kathryn one corporate controller. Please go ahead.
Kathryn: Thank you Michelle and good morning, everyone. Thank you for joining the Harvard Bioscience third quarter 2024 earnings conference call, leading the call today will be Jim Green, President and Chief Executive Officer, and Jennifer Cody Chief Financial Officer.
Kathryn: In conjunction with todays recorded call. We have provided a presentation that will be referenced during our remarks that is posted to the investors section of our website at investor Harvard Bioscience Dotcom.
Kathryn: Please note that statements made in today's discussion that are not historical facts, including statements of our expectations or future events or future financial performance are forward looking statements and are made pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Kathryn: Yes.
Kathryn: Actual results may differ materially from those expressed or implied please refer to today's press release for other disclosures on forward looking statements.
Kathryn: These facts and other risks and uncertainties are described in the company's filings with the security and Exchange Commission Harvard Bioscience assumes no obligation to update or revise any forward looking statements publicly and management statements are made as of today.
Kathryn: During the call management will also reference certain non-GAAP financial measures, which can be useful in evaluating the companys operations related to our financial condition and results.
Kathryn: These non-GAAP measures are intended to supplement GAAP financial information and should not be considered a substitute.
Speaker Change: Reconciliations of GAAP to non-GAAP measures are provided in today's earnings press release, I will now turn the call over to Jim Jim. Please go ahead.
Jim: Thank you Catherine and good morning, everybody.
Jim Green: Let's move to slide three of the presentation.
Jim Green: Our quarterly results.
Jim Green: Revenue in the third quarter came in at $22 million, that's 13% below Q3 last year.
Jim Green: Central basis, we were down about 5% impacted primarily on weakness in China or Asia Pacific.
Jim Green: Taking a minute now on the market environment.
Jim Green: Americas and Europe seemed.
Jim Green: Seem to be stabilizing with three sequential revenue quarters that were roughly flat China APAC saw further weakness in Q3 that was not expected to flatten our improved modestly going forward.
Speaker Change: Despite the delayed market recovery overall, we believe we have a stable base revenue run rate that we'll be building on with new products now going into production.
Speaker Change: Gross margin came in at $12 8 million or 58, 1% close to our 60% target despite a low revenue quarter.
Speaker Change: On a GAAP basis, we reported an operating loss of $1 $9 million on an adjusted basis, our operating income measured $800000 or three 8% of revenue and adjusted EBITDA came in at $1 3 million or 6% of revenue.
Speaker Change: Worth mentioning a major operating milestone.
Speaker Change: During Q3, we successfully transitioned and merged all U S operations under one modern ERP system.
Speaker Change: This enterprise tools that enable significant improvement in both inventory and supply chain management and we already see in early Q4 improvements in supply chain related delayed shipments, which have plagued us for well over a year.
Speaker Change: In addition, with our continued focus on efficiencies and operating costs. We took additional actions during Q3 and early Q4, which are expected to reduce operating expense by an additional $1 million a quarter beginning here in the fourth quarter. These reductions are designed to structurally in long term optimize our overall cost.
Speaker Change: Of our business.
Speaker Change: And to enable self funding from operations, even on low revenue quarters.
Speaker Change: Operating cost reductions combined with new product introductions now shipping are expected to further improve gross margins.
Speaker Change: And with strong operating leverage significantly improved EBITDA in the fourth quarter and beyond.
Speaker Change: Yes.
Speaker Change: I'll give some more color on our new product commercialization later in the presentation, but first let me turn it over to Jennifer <unk>, our CFO to discuss our third quarter financial results in more detail.
Speaker Change: Yes.
Jennifer Cody: Thank you, Jim and Hello, everyone.
Jennifer Cody: Dive into further details on our financials.
Jennifer Cody: You can move to slide four where we will look at revenue for the quarter by product family and region.
Speaker Change: Starting with the Americas revenue in the third quarter was down 12% as reported from last year Q3, and it's stabilizing sequentially as you can see compared to Q2 and Q1, we are pleased to see the signs of stabilization in the Americas.
Speaker Change: Preclinical sales saw a 26% decline compared to the prior year quarter, primarily due to COVID-19 related respiratory products and telemetry system software.
Speaker Change: Sequentially preclinical sales have leveled off starting with Q2 down slightly.
Speaker Change: Cellular and molecular showed revenue growth of 15% compared to Q3 of last year sequentially CMT showed modest growth.
Speaker Change: Pharma and CRO are still keeping a tight hold on spending but there is optimism as we listen to industry updates.
Speaker Change: Moving onto Europe overall revenue was down about 12% compared to Q3 last year that has also stabilized sequentially.
Speaker Change: <unk> has remained effectively flat for the last three quarters, we are experiencing overall stabilization in our European sales.
Speaker Change: Preclinical sales were down 21% year over year and remains challenged on a sequential basis as compared to Q2 of this year.
Speaker Change: Cellular and molecular sales were down 7% compared to prior year comp.
Speaker Change: Compared to Q2, CMT saw sequential growth driven primarily by increases in cell based testing.
Speaker Change: Well budgets remain tight as a result of the general economic environment in Europe. Overall revenue has stayed flat and we are starting to see improvements in orders at the start of Q4.
Speaker Change: Moving to China, and Asia Pacific Overall, APAC revenue was down 20% against prior year, Q3, and 20% sequentially to Q2.
Speaker Change: The APAC Marsh market has been especially difficult this past year, which has affected sales in both preclinical and CMC preclinical sales in Q3 saw further erosion down 32% compared to prior year and down sequentially from Q2.
Speaker Change: Due to lower continued lower spend by Cro's cellular and molecular products are down 5% compared to the prior year and down sequentially from Q2 to 16%.
Speaker Change: We are expecting flat to moderate.
Speaker Change: Improvement sequentially starting in Q4.
Speaker Change: What is encouraging is when we look at our global trailing three month order profile, we see a clear inflection point to growth at the end of June that has now been increasing for four months our booking trend is on its way up we are now growing.
Speaker Change: We are also on track with revenue shipments to early adopters of our new mesh EMEA products and I know Jim is excited to speak about that shortly.
Speaker Change: If you can please refer to slide five will share some additional financial metrics.
Speaker Change: Please refer to the top middle of the slide as Jim mentioned gross margin. During Q3 was 58, 1% in both 2024 and 2023, we continue to see strong product margins, but experienced lower absorption of fixed manufacturing costs. During Q3, we stay encourage.
Speaker Change: That our gross margins remain close to our target of 60%. Despite a tough revenue quarter, we continue to make improvements in our cost structure and that should drive increased margin dropdown with expected improvements in revenue.
Speaker Change: If you refer to the top right graph on the slide our adjusted EBITDA. During Q3 was down from $2 2 million last year to $1 3 million this year.
Speaker Change: The primary driver for reduced adjusted EBITDA with the dropdown of the lower gross margin dollars of approximately $2 million offset by reduced operating expenses of $1 million as a result of the cost reduction actions we took in Q2.
Speaker Change: We initiated additional cost actions in Q3, and early Q4, primarily related to employee expenses that we expect to drive additional quarterly run rate savings of approximately $1 million.
Speaker Change: As Jim mentioned, we completed an impactful project during the second quarter, we successfully consolidated our U S. ERP systems and went live on Labor day weekend.
Speaker Change: We expect this migration to one ERP environment in the U S will allow us to mature our sales and operations planning supply chain management and will enable inventory reductions.
Speaker Change: This will also enable automation and efficiency improvements throughout the operation.
Speaker Change: We continue to manage through market headwinds and have made additional cost reductions, which positions us for improved profitability going forward. We also stay focused on prioritizing our spending towards the critical areas of growth for our business.
Speaker Change: Moving to the bottom left where we show both reported and adjusted loss earnings per share.
Speaker Change: First I will describe the primary differences between GAAP EPS and adjusted EPS. The differences between these results are highlighted in the reconciliation tables on slide 11, but the primary drivers continue to be stock compensation amortization and depreciation all of which are noncash items together these items.
Speaker Change: Impacted both years by approximately five to six cents per share.
Speaker Change: During Q3, we settled a defined benefit plan in the UK, which will remove a future annuity payments to former employees of the company.
Speaker Change: Pension assets were used to acquire annuities for the participants and did not require any incremental cash funding by the company.
Speaker Change: Our GAAP loss per share included an impact of approximately <unk> <unk> per share from the noncash realized loss on the closure of the pension plan.
Speaker Change: $1 2 million.
Speaker Change: Adjusted EPS declined <unk> <unk> compared to last year, primarily on the gross margin declines from lower revenue, partially offset by lower operating expenses.
Speaker Change: Please refer to the graph in the middle of the bottom row cash flow used in operations was zero point $8 million for Q3 2024 compared to cash provided by operations at $4 4 million in the same period last year.
Speaker Change: This decline is largely driven from the dropdown impact of lower sales during the quarter.
Speaker Change: Our net debt at the end of Q3 2024 was slightly above our net debt at the end of the year.
Speaker Change: As we discussed last quarter during the first half of 2024, we received cash benefit net of commissions of $2 6 million for the employee retention tax credit provided by the cares Act and also we were able to sell all of our investment in HRD and stock for $1 9 million, which is included in our cash flow from investing activities.
Speaker Change: <unk>.
Speaker Change: These additional sources of cash help support our cash position, which has minimized our net borrowings against our revolver to $1 2 million since the end of 2023.
Speaker Change: As previously disclosed we amended our credit agreement earlier in Q3.
Speaker Change: We are in compliance with our financial covenants. We are currently unable to make additional borrowings under our revolver facility due to net leverage ratio limitations under the credit agreement.
Speaker Change: This limitation will continue until we report our annual financials in March 2025.
Speaker Change: Based on our current plans, including the cost reduction actions I discussed earlier, we expect better available cash and cash flow from operations will be sufficient to finance operational and debt service needs for the next 12 months.
Speaker Change: That said, our ongoing cash flows and ability to meet our debt covenants are dependent on our ongoing revenue and operating performance. So we'll be keeping a close eye on our liquidity situation.
Speaker Change: Further details on the above items can be found in the non-GAAP reconciliation tables included in our press release and in our appendix to this presentation and will be available in our 10-Q.
Speaker Change: I am now happy to hand things back to Jim.
Speaker Change: Thank you Jim I'm, just going to take a quick second and reflect on John's comment about.
Speaker Change: The trailing 12 months trailing three month trend on our order intake.
Speaker Change: Now that we're seeing an inflection back to growth, it's very exciting I do want to mention though that with the first thing that happens with order growth. There is a timing between order and shipment in sale and such so it does take a while for that to then turn into.
Speaker Change: Revenue growth, but certainly it is the prime indicator and it also gives us good comfort that now as we start to look towards our expectations and outlook.
Speaker Change: Should be we expect to be able to do a much better job than we've done in <unk>.
Speaker Change: The last recent few months just brief a few quarters, where we had had this kind of falling situation that was hard to predict, especially driven even lately by China, but now that we see that stabilizing and we look at the fundamental about three months three four months trend is a very key indicator for us to be able to underpin what we see as our base run rate.
Speaker Change: That will be building on with the new products. So it's very good timing for us.
Speaker Change: It's a great thing to see I don't know that I would call. It a return of the great of the market, but certainly from my perspective, we see things stabilizing and something really strong that we can build on and much better be able to predict.
Speaker Change: Go to slide six do you want to take some time and go through and discuss our.
Speaker Change: More and more consider our considerable progress that we've seen on some of these new product introductions.
Speaker Change: If you look at the table the first of all the table on the slide highlights the commercial status of two new products, we consider part of our base, our bread and butter business. Early in Q3, we began production shipments of our new Soho family of telemetry devices, which now enable real time telemetry measurements in a shared animal housing environment and now.
Speaker Change: Also concurrently during behavioral testing together, we believe this new capability will lead to additional demand starting now and large government lab and then expanding globally in 2025.
Speaker Change: Also as part of our base business late last year, we announced the initial delivery of our groundbreaking highly automated <unk> neuro behavioral monitoring system to one of our largest CRO customers this customer and its not a secret that his lab core has adopted our system as part of their preclinical testing offering in Q4, we <unk>.
Speaker Change: <unk> to ship additional <unk> products to this customer as they expand their use of these systems to more locations where.
Speaker Change: We are encouraged by the initial response to <unk> and are seeing strong interest from other cros and biopharma customers and expect expanding sales in 2025 and beyond.
Speaker Change: In the second row of the table highlights the commercial status of our products targeted to high growth electroporation and bio production. This year, we began in earnest a selling process in the bio production segment.
Speaker Change: Late in 2023, we announced that a large pharma company had adopted our Bts electroporation system configured for bio production.
Speaker Change: Looking at the commercial status, we're now pleased to see that the consumable revenue.
Speaker Change: From this particular customer has now grown to approximately $1 million annually at are at a run rate and it's in line with our original expectations.
Speaker Change: Customers now exploring the use of Bts for bio production of an additional mrna drug application. We're also very encouraged by the number of new customers in consideration of our Bts as a bridge to bio production for their new generation drugs.
Speaker Change: Also in Q3, we began shipping our new cgmp compliant amino acid analyzer system for bio production bio processing applications are AAA is an adaptation of our leading Biocrime AAA system currently operating and clinical labs around the world and is expected to do well and bio production applications.
Speaker Change: The first couple of shipments were in Q3, and we expect to ship another handful of systems in this quarter.
Speaker Change: The third row, the table highlights the commercial status of our emerging new high growth mesh MAA organized platforms.
Speaker Change: We have adapted our market, leading EMEA electrophysiology systems to be the industry's first in vitro organize data acquisition and analysis system capable of supporting long life launched no analysis of organized.
Speaker Change: We see these new systems, well positioned to support emerging fundamental research by academic customers. Initially in neuro disease applications. In addition, we believe biopharma and CRM companies can streamline safety and toxicology testing as well as reduce costs reduce test time and expensive animal model usage for new drug does.
Speaker Change: <unk> and safety assessment.
Speaker Change: As far the commercial status at this time, we have five operating beta sites three academic sites, including University of Texas, <unk> University in France University of Michigan and expect to install at the NIH in Q1.
Speaker Change: So in access and advanced <unk> in France is focusing on safety and toxicology applications and are leading a leading biopharma company with operations in Cambridge and throughout California is focusing on longitudinal viability testing for neuro and cardiac organized.
Speaker Change: As for academic and Biopharma early adopters. The first couple of units shipped in Q3, and we expect to have up to 10 installed and operating by the end of Q4.
Speaker Change: And finally, we're now positioning for initial production ramp for the consumable mess chips and preparation for higher volume shipments in 2025.
Speaker Change: I'd like to point out that each of these new revenue streams are based on leveraging our well established technologies and adapting them to significantly larger biopharma applications with high pull through recurring revenues.
Speaker Change: So now let's go ahead and move to the summary on slide eight and take a look at what we see for the year in the fourth quarter.
Speaker Change: Given the continued delay of market recovery.
Speaker Change: And the difficulty of predicting China and Asia Pacific more recently, we're taking a more conservative approach in reducing our full year revenue 2020 for revenue guidance to 93% to $96 million.
Speaker Change: We expect Q4 revenue to range from 23 to 26 sequentially up from Q3 on incremental growth for Martin from our new product introductions.
Speaker Change: There could be a seasonal Q4 bump, though we're not counting on it.
Speaker Change: We expect Q4 and the full year gross margin to be in the 59% to 60% range.
Speaker Change: Finally, with an incremental $1 million savings and operating expense combined with gross margin improvement on increased revenue over Q3, we expect Q4 adjusted EBITDA margins in the mid teens.
Speaker Change: So doing the math, we continue to expect full year EBITDA margin in the high single digits.
Speaker Change: Now I'll turn the call over to the operator and open the line for questions. Thank you.
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Speaker Change: Our first question comes from Paul Knight with Keybanc. Your line is open.
Paul Knight: Hi, Jim could you are you could you go over the.
Paul Knight: Crow dynamics, what are they about half.
Paul Knight: Half of company revenue and then.
Paul Knight: Kind of what happened here I think we all know that.
Speaker Change: <unk> financing was down like 30% and 22 down 20% in 'twenty three and now we're seeing the reality of Crows, having less to spin, but now we're seeing more capital raised it again. So does this like I guess this is what you see in your orders this kind of pick up and then what do you see.
Speaker Change: <unk> do you agree and then how big are they as a percent of company.
Paul Knight: Sure.
Paul Knight: <unk> revenue is if I look at the split I think we show it at about a quarter of our revenue globally is that about right. John If you were to look on that.
John: It's about a quarter of our total revenue.
Paul Knight: It's been a bit of a mixed bag because we sell to all of the big <unk> that we are the gold standard in the standard.
Paul Knight: Some of the CRM, we've actually seen.
Paul Knight: And they've gone publicly and said they see improving output.
Paul Knight: More new drug starts in their production line not big growth, but certainly at least the way they've described it to us its more of a return to normalized run rate in their safety and safety assessment.
Paul Knight: It was a little hard to tell like with Charles River exactly what their last call. It was a little confusing for us, but certainly I think we would expect to see the same kind of thing happening there, but in general we look across the board.
Paul Knight: We see the second half in Q3, Q4, mainly and certainly in Q4 more of a normalized demand for that you're right about the about the biopharma the big biotech company.
Paul Knight: Big pharma companies. They certainly have been have been tightening their belt.
Paul Knight: We think that we know that they have had a series of layoffs throughout the year I don't know if thats continuing but we have seen that some of that has slowed down in our our thought was.
Paul Knight: A lot to do with the election, because we do tend to see that every four years there were some questions about with the <unk>.
Paul Knight: Pharma companies about whether how their reimbursements are going to look like in.
Paul Knight: Pricing and such so there always seems to be a little bit of noise there, but in general our R. R. Pharma company businesses is seems to be doing pretty well it seems to be pretty it's been running pretty flat at least for the last few quarters and if you look at the one slide on the presentation slide four youll see that that we're pretty stable in the Americas, which is our half our business.
Paul Knight: <unk> and EMEA also very stable for the last three quarters.
Speaker Change: As Jen said, we're seeing kind of a longer range uptick in the as we look at the three to four months trending outlook as order rate comes in.
Speaker Change: So certainly were and so the biotechs and pharma companies seem to be doing okay, and they seem to be.
Speaker Change: Expecting to start start buying more of our equipment, they're all everybody seems to be saying, though in general 2025 is really what they expect to see this real return to the market.
Paul Knight: Kind of tired of hold my breath by the market return on what we're doing is looking at how is our how our product actually selling.
Paul Knight: Now that we believe we have a very nice stable run rate on an order basis and the inflections moving positive that we will have a good stable base business to run on and to build on with these new products and as you can see these new products.
Paul Knight: Designed to drive very nice incremental growth in the business.
Paul Knight: Crosspiece across these four new areas I mean this this we expect to underpin high single, maybe close to double digit growth.
Paul Knight: Whatever our basis and if the base is pretty flat those should give us some nice incremental growth and lot of thats starting here in Q4.
Paul Knight: So thats kind of how we see a China has been the one where it's been a little it's been tough.
Paul Knight: We'll tell you, though the academic piece of China did seem to recover and it's doing better than budget seem to be stable. It is it has been the big pharma Biopharma and CRO, specifically that really we're seeing the reductions in demand really for the last few quarters in a row, we do think that with that looking forward that we're expecting.
Paul Knight: Acting that's stabilizing now that's the word we're hearing we have of course, we're hoping that things are going to go well with us with the new budgeting cycle, there and that will start to improve.
Paul Knight: Crow and pharma side of China. So all said, though again, we've seen this kind of tightening of <unk>. We think that's loosening up now not going to big growth, but but at least going to stable business for us.
Paul Knight: And the big and the farmers doing seem to be doing fine.
Paul Knight: And we'll see how it will see everybody has got a positive outlook for 2025. So that's that's kind of what we hope in the meantime, we're going to run lean you can see that that's how we run.
Paul Knight: We have adjusted the size of our business to make sure that even on a on a very low quarter will be essentially self funding and that's that's how I'd like to run the business and what we decided to what we have and as the growth comes the operating Leverages solid. So I mean, we could we would.
Paul Knight: Certainly we would expect.
Paul Knight: Every dollar of new growth drops 50 sensor so to the EBIT line and then on so.
Paul Knight: Overall, we're pretty optimistic about 2025, and even just this even somewhat slight or move up growth into Q4, which we're projecting and of course it could be better, but we're planning we want to plan for if it doesn't come back as fast we still want to make sure that we're really delivered on the bottom line.
Paul Knight: Jim on slide six you have these new products.
Paul Knight: Looking at Electroporation and <unk>.
Paul Knight: EMEA.
Paul Knight: Most people can kind of understand the promise there.
Speaker Change: How big are those businesses or can you talk to <unk>.
Speaker Change: <unk> jaw on percent of revenue and then I guess you are saying those should be.
Speaker Change: High single digit growers double digit growers thats kind of what youre, saying, there, yes, I guess the way I look at it the base business, assuming the market is stable.
Speaker Change: The base business and given that we're adding new technology, new products to the base business I expect that to run at we're pretty much where the market is now you know we are heavily.
Speaker Change: Exposed more to the equipment side. So if there is downturns or something than what we saw over the last year or so with the.
Speaker Change: A reduction in spend that tended to hit equipment more than companies that had a lot of recurring revenue so but with these new products. We think the base is essentially going to align with how the market's developing for US. We think that's at least going to be stable. Your question. My electroporation about production. This is new its growth. The overall that means that revenue segment for us is.
Speaker Change: With a combination of bio production and.
Paul Knight: Specific electrification and they're connected because they will use our buyout our electroporation systems to design, a new drug and the concept is then there'll be now with the opportunities for bio production. That's that's somewhere in the neighborhood of maybe 10% of our business. We expect that to have a nice solid growth vector certainly in the 20% or better range for that.
Paul Knight: <unk>, so that we would expect to be adding a couple of points or more to our overall business now the mesh EMEA is another story. This is this is arguably.
Paul Knight: It's in the neighborhood of $6 7 million today, historically in electroporation, and electrophysiology and MBA type of systems. This we expect to be growing at better than 50% CAGR, maybe it's even 100%.
Paul Knight: This could be and again I would expect I'd be disappointed if this didn't add four or five plus points, a total compound growth to the business.
Paul Knight: Today again, it's about six or $7 million and we are seeing fast adoption you can even see just starting here with the early adopters will be putting about 10 systems in just here in the fourth essentially within the fourth quarter essentially in each of these systems. There are $70 million to $100 million system and you also know they are designed for.
Paul Knight: Substantial recurring revenue consumption of these buyout tissue chips.
Paul Knight: So this is this is a big grower here.
Paul Knight: <unk> for ramping up production and.
Paul Knight: Again, but I would be I would be expecting to see multiple points of incremental growth on our business purely from the introduction of this new capability and you can see who is interested in who is buying this I can't go into the named sometimes of who specifically but.
Paul Knight: This is serious.
Paul Knight: The early adopters in the Biopharma companies and biotechs exploring this we see a fabulous opportunity for this technology.
Paul Knight: And we're definitely it's definitely going to be a big driver for the business and that growth rate should be expanding as we go as we go forward each year.
Speaker Change: And then last on my side would be the I guess, you see core growth rate around what standard services have like evaluate which is what kind of a two six low single digit kind us biopharma R&D growth rate do you think Thats fair, Yes, I think it's <unk>.
Speaker Change: Too many things have stabilized now that even though we're all kind of looking at a lower base rate, but yes. We certainly we would expect that that to be sit in the low to mid single digits and normalized kind of years. So that's why I like to look at that base rate and then the new high growth areas and you'll also notice that each one of these new areas.
Speaker Change: Are really targeted to drive substantially more consumable recurring revenue than we've tended to be able to do in the past that's been our strategy adapt these technologies start them test them out and academic research and adapt them to much higher volume much higher consumable recurring revenue based applications with our customers in <unk>.
Paul Knight: Pharma Crows.