Good morning and thank you for standing by. Welcome to the Fourth Quarter 2021 Harvard Bioscience Earnings Conference 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. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Mr. Dave Sirois. Please go ahead.

Thank you, Catherine and good morning, everyone. Thank you for joining the Harvard Bioscience fourth quarter 2021 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 Q4 2021 HBIO Quarterly Earnings Presentation and is located in the Investor Overview, Events & 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, 2020, our 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 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 difference between our GAAP and non-GAAP results are outlined in the earnings release in 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'll now turn the call over to Jim. Jim, please go ahead.

Thank you, David. Good morning, everybody. Let's move to Slide 4 of the presentation to look at the highlights for the quarter. Revenue was up 7% over a strong Q4 of '20 and up 7% over pre-COVID Q4 of 2019. Global supply chain continued to delay shipments, driving backlog up to approximately 2x our pre-COVID levels. Pre-clinical revenue was up 6% over a record strong prior quarter year. Cellular and Molecular Technology revenue was up 9%, with continuing recovery in spite of European headwinds. Adjusted operating margin came in at 16%, impacted by increased COGS and increased variable compensation and new investments in R&D. Adjusted gross margins came in at 60% in spite of higher COGS. Higher cost of goods were due to global freight costs and material inflation plus direct labor inefficiencies. OpEx was up year-on-year, primarily on variable compensation and growth in research and development investments. Let's move to Slide 5 of the presentation and look at the details of the quarter. In spite of global supply headwinds, we had solid revenue growth with Q4 coming in at $33.1 million, that's up 7% over the same quarter last year. Gross margin on a GAAP basis came in at 59%. That's up 200 basis points from last year, despite higher cost of goods. This quarter had GAAP operating income of $1.7 million or 5.1% of revenue. Our adjusted operating income was $5.3 million, so our adjusted operating margin measured 16% of revenue. GAAP earnings per share in the quarter was a positive $0.02 up from a negative $0.02 last year. Our adjusted earnings per share was $0.08, flat to a strong prior year. Our leverage ratio measured 2.7x EBITDA. We can move to Slide 6. Take a quick look at the revenue in the quarter by product family. Starting with the first row of the table, our Cellular and Molecular Technology revenue, which is primarily from academic research labs, was up 9% from last year, with orders and backlog up significantly from last year. Direct sales in Europe was impacted by academic lab closures from the Omicron variant. Backlog is up from last year. However, improving operations kept us stable sequentially over Q3 of this year. CMT product revenue was down about 5% from last year due to shipment headwinds and approximately $1 million in pruning of low value-add products from the portfolio. Looking at the second row of the table, our Pre-clinical product revenue was up 6% over a record strong prior year. That puts us up 18% for the year 2021. We saw strong growth across product lines for our core customer segments of CRO, pharma, and academic labs globally. European performance was very strong across customer segments. Asia Pacific and Americas were impacted by large CRO order timing in Q4, though we see strong growth trends looking forward in 2022. Overall Pre-clinical is now well above pre-COVID levels, up 28% from Q4 of 2019. Overall reported revenue grew 7% over last year in spite of global supply chain issues, and our backlog is up substantially over pre-COVID levels. Moving to Slide 7. We'll look at major activities in the quarter. Looking first at the operating environment, our productivity stabilized after the 2021 external supply chain and labor impacts. We announced retirement of our Chief Operating Officer in January, and we're moving to a flatter organization structure with new focused leadership in research and development and in global manufacturing operations and supply chain. Pricing actions have been initiated to help combat material inflation over the upcoming quarters. Now looking at new product development. Our new Vice President of Global R&D is on board, and we are seeing immediate benefits of strong professional product development leadership. We're ramping up investments in key strategic areas, including next-generation telemetry solutions and software systems to name a few. Brand enhancement is accelerating, and we already see positive responses from customers and employees. Now, I'll turn the call over to Mike for a quick look at key financials. Mike?

Thanks Jim and good morning, everyone. Our Q4 and full year results reflect the positive outcomes from our investments and focus on the stated 2021 goal to drive long-term profitable growth. We are pleased to be starting another year set up to extend on this trend of profitable organic growth. As we usually do, I'll walk through the full P&L and cash flow in more detail. But as a reminder, my discussion will focus on adjusted results or P&L performance, which aligns with measurements we use to internally manage the business. Reconciliations are available in the appendix of this presentation to GAAP results. On gross margin, despite the effects of external factors in the supply chain and the inflationary environment, our original September 2019 objective of 60% plus gross margins remains our target. Our Q4 results speak to this potential with 60% adjusted gross margin reported. And consistent with past trends, product mix remains our single biggest lever to driving margin expansion as our higher-margin Pre-clinical and Cellular products grew as a percentage of overall sales relative to prior year. This improvement is a direct reflection of our sales effectiveness and product rationalization activities we've been discussing. Also, we have been proactive, as Jim noted, on the price increases in this environment which has started to positively impact gross margins, though cost of materials and freight remain at similar inflated levels we saw in Q2 and Q3. Adjusted operating income for Q4 was down modestly versus prior year due to operating expense investments in critical R&D programs and higher variable compensation. We are confident the uptick in each area aligns well with our organic growth and gross margin objectives for 2022 and also supports long-term value creation via innovation and rewarding key talent. In terms of variable compensation, this includes higher commission levels due to sales performance above our internal plans for the year and higher bonus payouts to our overall workforce. Our bonus program is designed to reward both top and bottom line performance, and the accruals noted reflect full year '21 results where we grew revenue by 16% and increased adjusted operating income by 20%. Our operating expenses outside these areas of investment remain stable to recent run rates. Jim will speak to 2022 investments. We anticipate to drive further sales growth and product development, but I'd note that we see increases in wages aligned with broader market trends as well as travel and trade shows ticking back up as teams look to get back to face-to-face interactions after the COVID-driven environment over the last two years. On cash flow and debt, our leverage ratio, our total debt to adjusted EBITDA is 2.7x, down from 3.2x leverage at the end of 2020 at higher adjusted earnings. Net debt of $41.6 million is essentially flat to the end of 2020 and up slightly from Q3 '21 due to working capital growth. We have chosen to increase inventory levels throughout 2021 in response to the strong order growth and ensure stable order fulfillment during the period of supply chain volatility we've discussed. We currently do not see inventory growth in terms of days on hand as occurred in 2021 on a go-forward basis as fulfillment operations are stabilizing after increasing stock levels in 2021. AR levels increased in 2021 due to the double-digit revenue growth reported. However, bad debt levels remain very low, and we have isolated areas to bring down DSOs modestly in 2022. Interest expense is down significantly over the prior year due to the December 2022 bank refinancing. In terms of other uses of cash, capital expenditures in Q4 were $400,000 and $1.2 million for the full year, in line with past annual levels. Additionally, we incurred approximately $1 million of transformation costs in Q4, which are excluded from adjusted earnings consistent with past practice, given that our non-run-rate investments in our business infrastructure designed to ensure a solid long-term growth platform. Our CapEx and transformation costs in the second half of 2021 included IT manufacturing site investments consistent with those noted in Q3 to support growth and scalability in our core manufacturing centers, as well as analytical tools to enable sales effectiveness and overall more efficient operations in the business. We expect 2022 cash flow from operations to improve versus 2021 based on the earnings growth noted, and we do not expect the level of working capital growth experienced in 2021 as needed that year with the supply chain dynamics discussed. With that, I'll turn it back to Jim to discuss the full year outlook. Jim?

Thanks, Mike. Now moving to our summary on Slide 11. Looking forward, our primary goal is sales growth driven by improved sales effectiveness, marketing, and new product introductions. We will continue addressing cost of goods issues resulting from global supply chain disruptions and specifically hone in on freight optimization, material costs, labor inefficiencies, and tuning various overhead costs. As for our outlook for the year 2022, we're expecting to sustain double-digit revenue growth with further improving both gross margins and operating margins, while at the same time, increasing our investment in sales coverage and new product introductions. We now expect annual revenue growth on a reported basis to improve to approximately 10% to 13% growth versus last year. And that's net of pruning reduced low-value add products from certain CMT product segments. We see strong order growth and a solid backlog, driving double-digit growth in both our Pre-clinical and CMT product revenue segments. Tailwinds in the Americas and Asia Pacific and steps implemented to improve EMEA sales across the portfolio underpin our growth. Portfolio rationalization of pruning low-quality revenue of approximately $2 million to $4 million is well more than offset by new growth. Risks do remain with the global supply situation and could be further exacerbated by the hostilities we see in Ukraine. Now for adjusted operating margin, we expect to be in the 15% to 16% range. We expect to improve gross margins by a full percentage point and we'll continue to invest in research and development for new product development and for sales coverage expansion. Thank you. Now, I'll turn the call over to the operator to open the line for Q&A. Thank you.

Thank you. Our first question comes from Paul Knight with KeyBanc. Your line is open.

Hi, Paul.

Thank you for taking the call, Jim. As you look at academia which I know a lot of peers in the industry have been citing slow growth. You seem to be above that growth rate. Could you talk to that portion of your business exposure?

One of the things we see definitely coming back is that Europe has been really held back throughout the year, and the Omicron variant extended that, making it difficult for us to engage with our customers and slowing down the order process more than it should have been. We view Europe as a distinct component that will continue to grow and contribute to our overall growth. The Americas, in general, have a positive outlook and continue to expand. We review our rolling forecast over three months, six months, and annually, assessing budgets and growth areas, and we find ourselves positioned well with our products. China had an excellent year last year but started off slow in Q1, which we anticipated. However, we expect that Asia will truly begin to pick up in Q2, and all signs suggest that will happen, barring any political or external environmental issues. Overall, everything appears to be moving in the right direction. Our outlooks are positive, budgets look strong, and we're confident in achieving growth. We recognize that some of these products have long-term demand, but generally, there is growth in some of these technologies.

And Jim, you have guided to 10% to 13% revenue growth in the year. It looks like at least $200 million headwind due to portfolio rationalization. I guess it seems to be the highest growth you've guided to. Do you have a long-term thought on what growth could be?

Yes. Our goal is to achieve sustained double-digit growth, ideally in the low teens range, perhaps slightly better. We aim to consistently exceed 10% growth and reach the low teens. This growth will be driven by various factors, including pricing power. We will continue to improve our coverage and sales efficiency, expanding both into new territories and within customer segments. Additionally, we anticipate a significant increase in our new product introductions, which I expect will become the largest contributor to our growth moving forward. Our strategy involves new product launches, combined with expanded sales coverage and deeper engagement with customer segments, along with potential pricing adjustments as needed.

And then lastly, are you complete with your sales force reorganization?

The sales force is complete, but we are still in the refinement phase. We're starting to identify opportunities based on territory assignments, which might allow us to deepen our reach by expanding into additional territories and adding representatives. We have also noticed a significant opportunity to move our products into the CRO and pharmaceutical sectors, as our sales organization now has the necessary exposure. We have successfully transitioned two of our product lines to be offered through a channel that caters specifically to CROs and pharmaceutical companies, particularly our behavioral technologies, which are in high demand. We are recognized providers in the telemetry space, and adding behavioral products that are compatible with those required for pre-clinical FDA approvals creates a strategic advantage for us. Our systems and implantables already meet the crucial certification standards, so as we introduce our behavioral products, they'll share that same capability. Additionally, we have incorporated components related to individual organ testing, which presents another significant opportunity in the pharma and CRO markets. There will be a continued migration of these technologies, and while we will maintain our sales efforts in academic research, there will be necessary engineering changes to enhance compatibility for higher volume use in CRO and pharma customers.

Okay, thank you.

Thanks, Paul.

Thank you. Our next question comes from Tim Chiang with Northland Securities. Your line is open.

Hi, thanks. Hi, good morning. Could you talk a little bit just about your product mix that you expect? I mean I know you cited improving product mix as one of the factors for better margins this year. How do you see the product mix evolving as the year rolls out?

We see much of the growth driven by our expanding presence in CROs, pharma, and the biotech sector emerging from universities, which is a rapidly growing area. We are building on our pre-clinical offerings and adding products that will cater to those customers from our development and discovery sides. A significant portion of our growth is coming from telemetry and systems, particularly those that help process data for FDA and regulatory compliance. We're also seeing strong results in behavior-related products, especially inhalation products, which have shown remarkable growth since their introduction 1.5 years ago. Additionally, we see growth opportunities in natural areas like messenger RNA technologies and our electroporation technology, including BTX products for electroporation and electrofusion, which are in strong demand within academia. We anticipate further opportunities as we engage with small pharma and biotech. Furthermore, at the cellular level, we've previously faced challenges in demonstrating our cellular products, but now that we can engage with customers, we believe there is significant pent-up demand and an expectation to increase testing in the early stages of drug development. These are some key areas of growth for us, along with our precision infusion pumps, which have been a foundational product for many years. We are investing in new applications for these pumps, believing they will not only continue to provide steady revenue but also open new growth avenues.

That's good color, Jim. I mean, I know one thing you mentioned is ramping up investments in next-generation telemetry products. Can you comment just on what the investment level will be? And when do you think you'll have the next-generation products available?

What's happening in the market is that nonhuman primate models are being used at younger ages and are getting smaller. We want to stay ahead in this space where we're clearly the market leader. Our goal is to extend that lead by developing newer technology capable of handling much smaller animals with very small implants designed for environments with multiple animals in the same housing. This not only expands our offering but increases our throughput, allowing us to manage more animal models at the same time. This flexibility benefits our customers in managing their model populations. Telemetry is one of our foundational product technologies, and customers must use our base systems for data reduction and regulatory filings, which have become a standard in many places. As companies like Charles River and Covance start incorporating this into their core operations, our plan is to provide them with additional products that are compatible and networked with our base software systems. This integration ties everything together, making it compelling and fostering more strategic relationships with these large customers.

I see. And maybe just one last question, Jim. I mean, obviously, your Pre-clinical business did benefit from a lot of the research tied to COVID treatments. Do you still see your customers doing more studies in that area? Or do you think that ultimately will get reined in some.

I think anything that goes through the clinical phases, including pre-clinical stages and before human clinical use, must undergo safety pharmacology, toxicology testing, and behavioral assessments. We've observed that many of the large CROs had to postpone other therapies they were developing, such as those for Alzheimer's and obesity. We believe that while they will continue to focus on vaccines, we will also start to see a renewed focus on therapies for COVID and the projects that were delayed due to capacity issues. This is seen as a long-term addition to the demand. Ultimately, natural demographic trends and a growing population will drive the capacity needed to carry out these pre-clinical phases.

Okay, great. Thanks for the color, Jim.

Thanks, Tim.

Our next question comes from Lisa Springer with Singular Research. Your line is open.

Hi, good morning.

Good morning.

You mentioned the backlog is at twice pre-COVID levels. How long is it going to take you to work through the backlog?

I anticipate that our backlog will stay elevated for a while since we are operating at high levels. I have instructed our operations team to ensure that we have sufficient materials to maintain our main product lines for up to a year. I want to avoid a situation where being cautious with supply could lead to missed customer shipments. Being able to deliver when customers need their orders allows me to avoid aggressively reducing the backlog. I need to pay attention to ensure I'm meeting delivery timelines for my aging backlog and not falling behind on what customers expect. We will be increasing our capacity, and some of the incremental revenue growth will help reduce the backlog. It's important to have a backlog that is roughly in line with incoming orders. We will start to see some reduction in the backlog this year, but it won't be a significant decrease.

Okay. And you mentioned there's going to be $2 million to $4 million in terms of portfolio rationalization costs. Could you..

That's what we're thinking.

Okay. I am sorry. Go ahead.

Yes. As we evaluate market needs, it's clear that some products may be outdated and could benefit from newer technologies. Often, these older technologies are not only more expensive to produce but also provide lower value and pricing. Additionally, they can lead to inefficiencies in the business. When considering the total activity-based cost of products, including cost of goods sold, if these products were truly valuable and could be priced accordingly, that would be acceptable. However, if there isn't sufficient demand, it makes sense to remove them. I estimate that the potential savings can range from $2 million to $4 million, and if there’s an opportunity to enhance that to around $6 million, I would support that. Regardless, I believe there is enough growth from strong long-term business prospects to compensate for this. When we account for this, our growth rate for the core business is likely a few points higher than what we are reporting.

Okay. And in late February, early March, have you seen any impact on your European operations due to Ukraine?

No, we haven't. We don’t have much exposure to Russia and we don’t really ship there. At this point, I don't think it makes sense to. The rest of our business is just fine. The biggest concern, from a business perspective, is that while the situation is awful, we don't see it affecting travel in Europe at this point. If that changes, we might have to revert to more remote work and not be able to meet with all our customers. However, everything is currently up and running, and I haven't received any feedback indicating that there's been any negative impact on our business due to the hostilities.

Okay. And then my final question. Do you expect the quarterly cadence of revenues to be similar to past years and more backloaded?

I think we'll see a similar level of quarter-to-quarter variations. Typically, Q2 and Q4 are the strongest quarters for us, and we expect this trend to continue. Having some backlog might help us manage the fluctuations as we approach Q3. Overall, we're confident about this. For modeling purposes, you should anticipate similar levels of variations.

Yes. I believe that the growth rates are fairly consistent throughout the quarters of the year. Typically, Q4 will show higher growth, while Q1 tends to be somewhat lower compared to the middle two quarters. In summary, historical trends provide a solid basis for our planning assumptions.

Okay, great. Thank you, guys.

Thanks, Lisa.

And we have a question from Bruce Jackson with Benchmark. Your line is open.

Hi, thanks for taking my question. So getting back to the sales reorganization last quarter, so it was going to kick off on January 1. Where are we in that process? And what are some of the things that you're doing to reconfigure the sales force?

We have completed the organization of our sales force. We applied the successful strategy we developed 1.5 years ago in the U.S. to enhance our coverage and visibility across our portfolio. This approach significantly contributed to our organic growth, and we expect to see continued growth from it. We are implementing the same strategy in Europe, where we have similar overlaps among teams that target large accounts such as CROs, pharmaceutical companies, and major universities, and those focused more on technology in the CMT sector. We anticipate this will create a substantial opportunity for incremental growth, as we are better equipped to enhance our product presence throughout Europe. In China, we are examining the best approach for Asia. We have two teams: one focused on technology and the other on customer relationships and large accounts. We are adjusting our strategy as we believe there are opportunities in the CRO and pharma sectors, which are crucial to our business, where our CMT technologies, such as electroporation and cellular products, were not fully leveraged. These changes will improve our ability to offer products to a wider array of potential customers.

Okay. Okay, that's helpful. The other question I had, just generally, the respiratory research products have done quite well in the COVID environment. Are you seeing any change in the demand for doing inhalation research? And are there other areas of the business that are picking up? You mentioned the mRNA research and the cellular research, you're also involved in the gene research areas. Tell us a little bit more about just what you're seeing in terms of respiratory research? And is it being offset by the other businesses in the event that it is declining?

Yes. Look, Respiratory has done very, very well, and we're about to introduce some breakthrough technologies in that space that are going to continue to make it the premier type product. The opportunity in the past was it was limited in a way that we really didn't take advantage of all the customer segments. So it was kind of a mixed bag of academic research and CRO and pharma companies. What we're seeing is academic research, no question, substantial opportunity there with many more things being tested early on about how various diseases and such are dealt with and how they affect inhalation and breathing. On the CRO and pharma side, the opportunity for us is it's exactly the same thing, but it's in higher volume. It's where they're working with more animal models at a time. So both areas look very well for solid continued growth and expansion across all of the product segments and customer segments that we call on. This is a very interesting product, and it's going to have legs as we continue to make R&D investment and expand the capabilities of that product.

All right. That's great. Thank you very much.

Thank you.

Thank you. And there are no other questions in the queue. I'd like to turn the call back to Mr. Jim Green for closing comments.

Well, thank you for joining us here today and thank you for your interest in Harvard Bioscience. We look forward to you joining us in May to discuss the results of our fiscal first quarter results. Thank you very much. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.