Harvard Bioscience, Inc. (NASDAQ:HBIO) Q1 2023 Earnings Call Transcript

Harvard Bioscience, Inc. (NASDAQ:HBIO) Q1 2023 Earnings Call Transcript April 25, 2023

Harvard Bioscience, Inc. beats earnings expectations. Reported EPS is $0.06, expectations were $0.05.

Operator: Good day, and thank you for standing by. Welcome to Harvard Bioscience First Quarter 2023 Earnings Conference Call. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Dave Sirois, Director of — SEC Director. Please go ahead.

Dave Sirois : Thank you, Amy, and good morning, everyone. Thank you for joining the Harvard Bioscience First 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. The file is entitled Q1 2023 HBIO 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 Jennifer Cote, Interim 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, 2022, our subsequently — subsequent Quarterly Reports on Form 10-Q and our other public filings. Any forward-looking statements, including those related to the company’s future results and activities, represent our estimates as of today and should not be relied upon as representing our estimates as of any subsequent 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 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 & 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.

James Green : Thank you, Dave. Hello, everybody. Let me start by saying how pleased I am to have the last two years in the turnaround phase behind us and to now focus on delivering the profitable growth platform we envisioned. Let’s go to Slide three of the presentation to take a look at the highlights for the quarter. Reported revenue for the quarter was $30 million, up 4% on an as-reported basis. When I think about $0.5 million of negative impact from currency and consider the $1.1 million of discontinued products, I see underlying core growth of around 10% over Q1 last year. Gross margin improved to $18.3 million, or 61% of revenue. That’s five percentage points above last year. Adjusted operating profit improved to $4.4 million, or 15% of revenue, up seven percentage points.

Adjusted EBITDA measured $4.8 million, or 16% of revenue, also up seven percentage points from last year. GAAP earnings per share improved to a positive $0.01 from negative $0.17 last year. Adjusted EPS measured $0.06 per share, up $0.02 from last year. Cash-flow from operations was $1.8 million versus a negative $2 million last year. And in the appendix, you’ll find the bridge from non-GAAP measurements to GAAP. Move to Slide four. Take a look at the revenue in the quarter by product family. This slide shows Q1 ’23 revenue adjusted to reflect Q1 ’22’s exchange rates. Starting with the first row of the table, our cellular molecular technology revenue was roughly flat when adjusted for currency and includes an impact from the discontinued products.

We had solid growth in Asia Pacific, which was offset somewhat by slowness in the Americas and Europe. BTX Electroporation growth was driven by our new focus in bioproduction. Cell-based testing products were up strong. We continue to rotate out of low-margin products primarily sold through distribution and discontinued product sales decreased by approximately $1.1 million versus prior year. Next, our preclinical product revenue was up 10.3% as reported, and up 11.6% on a constant currency basis. Asia had strong growth in Ponemah enterprise software, telemetry and respiratory systems. Americas saw strong growth in respiratory systems. US dollar compared to the euro and British pound caused a currency impact of $0.5 million. All said, we grew 4% as reported, and this includes a $0.5 million negative impact of currency and further negative impact of discontinued products of $1.1 million compared to last year.

Photo by National Cancer Institute on Unsplash

Now let’s move to Slide five. I can tell you a little bit about some of the exciting new product introductions. Before I start, let me explain a little bit about this slide. Over the last three years, we’ve optimized our product offerings to critical areas of the drug and therapy continuum. Our product strategy is to continue to introduce new technologies and applications in academic research and at the same time, apply these technologies to further penetrate larger industrial applications with our customers in pharma, CROs and biotech. A key benefit to this approach is to offer higher-value products with higher ASPs and recurring revenue streams. We do this by capitalizing on our strong call points with preclinical customers. I’d like to highlight three of the new products that we’ve introduced so far this year.

Starting from the left, our new SmartUssing Epithelial System, which builds on our Ussing technology for metabolism and permeability studies, which has already been proven in academic research labs, this new system has been designed for ease of use, making it attractive for higher volume needs of CROs and pharma customers. I’m pleased to report that the first SmartUssing system has been installed and is in use at a large pharma lab in Europe. In the middle is our new STG5 Stimulation Generator. Building on our leadership in stimulation, this new product follows the theme of simplicity, modularity and ease of use, which opens access to our technology in higher-value industrial labs where automation and ease of use enables lab techs as opposed to highly trained PhDs to operate.

Last, we’re excited to announce that after the quarter end, we received the first order for our new high-capacity behavior monitoring system from a large CRO customer. This system combines our high-precision activity tracking with our GLP-compliant Ponemah enterprise software, which is heavily used by CROs and pharma today for safety and efficacy, data collection and regulatory reporting. Scalable and with substantially higher technology content, we expect the industrial level systems to provide higher ASPs and additional recurring revenue streams compared to academic research focused products. This new offering is the basis of our expanded industrial-level product line with substantially higher ASPs, ranging well into the hundreds of thousands of dollars.

As an example, this first order is in excess of $800,000. Now, I’ll turn the call over to Jennifer Cote, our Interim CFO, for a look at key financials. Jen?

Jennifer Cote: Thank you, Jim. I’m excited to be able to share our Q1 financial results in greater detail. If you can please refer to Slide seven. 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, and reconciliation between our adjusted results and the corresponding GAAP financial measures is included in the slide deck. Jim has already taken you through our revenue performance, and I’ll take you through some additional details on our expenses, balance sheet and cash-flows. Q1 gross margin was 61% compared to 56% in Q1 of FY ’22. This is also a strong consecutive improvement over Q4 FY ’22 margin of 56%. In general, our gross margin will fluctuate from period-to-period based on revenue mix and volume, inflation, impacts of supply chain and other factors.

We had a higher mix of our preclinical products during Q1, which has stronger average margins, and we are also realizing the impact of pricing improvements and the impact of lower mix of discontinued products. We also entered Q1 2023 with lower labor and overhead costs, as the headcount reductions related to our portfolio rationalization are now complete. The implementation of these improvements, together with our pricing increases are demonstrated in our margin improvement in Q1. Moving to our adjusted EBITDA; a discussed in Q4, we are now reporting on adjusted EBITDA. The primary difference to adjusted operating margin is depreciation on our fixed assets. We believe this change aligns more closely with our focus on cash-flow improvements and is consistent with the presentation of other comparable companies.

Our Q1 adjusted EBITDA was $4.8 million or 16%, compared to $2.7 million or 9% in Q1 2022. The improvement was primarily driven by our increased gross margin. We also see favorable impact of our cost reduction activities in our Q1 results. These are partially offset in Q1 by accruals for our employee annual incentive plan. As mentioned last quarter, we do expect an increase in capital expenditures in 2023, as we invest in the consolidation of certain business tools and also invest in tooling and capital equipment related to new products. Turning my attention to cash-flow, our cash-flow provided by operations was $1.8 million in Q1 FY ’23, and represents our third consecutive quarter of positive cash-flow from our operations. This is a result of our strong EBITDA, together with our continued focus on working capital management.

We continue to keep our improved DSO steady and continue to implement activities that will start to shift our inventory downwards. We are also excited to share that we reduced our net debt by $2.2 million during Q1. The combination of strong gross margins, strong adjusted EBITDA and solid operating cash-flows and our reduction in net debt results in a great start to FY ’23. I’ll now hand this back to Jim to cover our 2023 guidance.

James Green : Thank you, Jen. Now moving to our summary on Slide 9 and a look to see what we see for the year 2023. With growth from new products, a stronger portfolio and expanding recurring revenues, all running through our improved cost structure, we see 2023 as the year we deliver the profitable growth platform that we’ve envisioned. We now expect reported revenue growth in the mid-single-digit range, and that’s inclusive of approximately four percentage points of discontinued product revenue compared to 2022. We expect gross margins to remain strong at the 60% level. We expect adjusted EBITDA margin in the 16% to 17% range. With expanded EBITDA, combined with improving working capital driving strong cash-flows, we plan to significantly pay down our debt.

Finally, this quarter, we reduced our debt leverage to 3.2x, and we plan to further reduce our debt leverage to approximately 2x levels by the end of 2023. Thank you. Now, I’ll turn the call over to the operator to open the line for questions. Thank you.

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Q&A Session

Operator: And our first question is from Paul Knight with KeyBanc.

Paul Knight: Hey Jim, congratulations on what looks like a great quarter. Can you talk, I guess, first of all, where are you with your sales force reorganization? And what do you have now and where are you with that process?

James Green: Thanks, Paul, and thanks, again, for your kind comments about our performance. What we’ve done is we’ve established the sales force now where we’re able to effectively fit and approach the academic research sites and continue to deliver high-end products and advanced technologies there. But at the same time, we’ve expanded our reach to be able to have our sales force also call on the industrial segments of CROs and pharma companies. So, there’s a bit of a split there. There is a focus on the academic side for people who are focused on advancing the technology. But we’re also, like I said, working to design these products, and you see them now being introduced into the industrial side for where we see substantial growth in not only the ASPs and revenue growth, but also recurring — generating much more recurring revenues in the process.

So it’s a good mix of the two. And at this point, I’d say we’re pretty much in the final shape as far as how that coverage works today.

Paul Knight: And then every quarter, you’re getting a little more granular on new product launches. Can you quantify that? I mean, is 10% or 20% of sales from new products in the last year? Or how do you like to talk to this Slide five on new products?

James Green: Yes. That’s a great question. To me, when I look at overall growth of the business, I typically expect to see — I split that into 3 main components. Our biggest driver is new product introductions because those change the inflection of the business. They move more and more toward the addition of recurring revenues that we — and you also see that I now report more on our recurring revenue basis, and I reported last quarter that we had indicated that over 35% of our revenue today is recurring revenues. So if you look at the big drivers for growth, it’s primarily new product introductions, it’s also expansion and volume of our existing and improved portfolio. And then along with that, you see pricing improvements.

When I look at what do I expect to see as far as new product development and how that drives growth, typically, I would expect that to — we would shoot to see something like 10% growth with new products. Now, of course, some of that is going to be cannibalized. But if I can deliver on my growth targets and have it be predominantly new product introductions and then also expanding our existing portfolio, again, with a much better mix that we have now, it lets me underpin the growth targets that I’ve set for the business. And it’s also nice to see us rotating out of these lower end products. If you think about back when I took over as CEO, since then, we’ve arguably taken about $10 million out of lower margin, less not as strategic revenue segments with — and these are mainly products that are sold through distribution.

But that allowed us to get the size of our business, to get the size right and you see that in the margin profile dramatically changing. And we’re more than — with the product that we’ve discontinued, we’re more than replacing that with new products and much better. And again, you see that measured very well in the migration of our gross margin into that 60% range.

Paul Knight: Okay. And then the other last question for me at this time would be on supply chain. Are you through that kind of — are you through that period?

James Green: Yes. I think we are. I mean, we certainly see. It’s really — it’s improved dramatically. And we can also see that with — now we’re starting to see some improvements on purchase price there. Things are starting to come down. We’re not seeing so much of situations where things get bought up and are hard to find. But we did have some inflation. And if you think about last year, we had to buy ahead, just wanted to make sure that we could continue to produce and ship. So, we did have to buy ahead at somewhat higher prices, but that will flow through our numbers here. But certainly, overall supply chain is really improving. We don’t see the kind of disruptions that we saw in the past. And the same thing goes for freight.

Freight will start to improve here in time too. But our focus is making sure that we worked on our — we had to take on quite a bit of extra working capital with building up inventories to make sure we could ship. So, that’s going to improve this year, too. So the combination of much improved EBITDA and improvements in working capital, those drive cash-flow that lets us get our debt down. But at the end of the day, things have really smoothed out quite a bit. You never know if something else is going to happen, but we’re positioning to make sure we’ve got the headroom if we do see some small impacts. But at this point, everything looks very solid for us.

Paul Knight: Okay. And then I have just one more on the debt. Are you paying down long or short debt?

James Green: Typically be paid on the higher priced debt first. So, that would be the shorter. And then we’re working on getting it down overall. We have put a hedge in place, so we’re hedged pretty well. And the part that’s not hedged, that’s the piece that we pay off first.

Operator: And our next question is from Bruce Jackson with The Benchmark Company.

Bruce Jackson: Congratulations on the quarter.

James Green: Thanks, Bruce. Thank you.

Bruce Jackson: So just a general question about the impact of COVID-19 research right now in the life science tool space. There’s been a kind of a drop-off in activity around that. You do have some respiratory research products. I’m kind of curious to know, have you seen any drop-off in demand for those products? Or are there other types of respiratory disease research going on that are helping out that business?

James Green: Yes. Well, I think, certainly, there’s no question in 2021, we did see what looked like a little bit of a COVID bump and very specifically around the respiratory type products. And some of that demand had slowed down somewhat, but we also introduced a new version of it called SmartStudy, which is helping us keep — helping us to stay close to those same levels and not really see a drop-off of it. It is part of what we see, continue to grow in our business as we look forward. We didn’t really see — but most of our products, we really haven’t seen a drop-off per se associated with COVID itself because as you know, most of our products are used — heavily used for development of any drug and or any vaccine. So if they’re using it, if there’s a new vaccine coming through like we saw with COVID, it utilized the same technologies for that and that substituted for what would have been other drugs that were in the pipeline like in some of the neurological drugs that were in development in the typical situations with cancer and diabetes and such.

But that’s going to rotate back. We see that rotating back to more natural development of the drugs and the drugs that are in the pipeline and less of them may be on specific to COVID. So, I think the main thing is for us, the COVID, it had a bit of a bump for us in 2021. That settled out, and we see we’re on more of a natural growth path here going forward.

Bruce Jackson: Okay. Great. And then one quick question on the revenue cadence. Generally, you’re up in the second quarter sequentially and then third quarter is kind of like flat to sometimes down, and then fourth quarter is generally pretty big. Is that the same pattern you expect to see in revenue this year? Can you just give us a little bit of guidance there?