Good day, and thank you for standing by. Welcome to the Q2 2022 Harvard Bioscience, Inc. 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, David Sirois. Please go ahead.

Thank you, Bella, and good morning, everyone. Thank you for joining the Harvard Bioscience Second Quarter 2022 Earnings Conference Call. Before we begin, I would like to suggest that you take a moment and download a copy of our presentation that will be referred to during this call. The file is entitled Q2 2022 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 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 project due to risks and uncertainties, including those described in our annual report on Form 10-K for the period ending December 31, 2021, 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 day. Also, much of today's call will focus on our non-GAAP quarterly results, which we believe better represent 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 and Presentations. Additionally, any material, financial or other statistical information presented on the call, which is not included in our press release and presentation, will be archived and available in the Investor Relations section of our website. I will now turn the call over to Jim. Jim, please go ahead.

Thanks, Dave. Good morning, everybody. Let's go ahead and move to Slide 4 of the presentation. We'll look at the quick summary. Revenue in the quarter was $29 million, flat to Q2 last year, with 17% growth in Cellular and Molecular offset by preclinical, which was down 9%. Our focus on direct sales of high-margin cellular products is driving growth as we rotate out of lower-margin products, which are sold mostly through distributors. Our preclinical revenue had a tough comparison to a very strong prior year. The strong U.S. dollar versus the pound and the euro drove a currency impact of approximately $900,000 in the quarter. And China's COVID-related shutdowns caused shipment delays for our shipments. Adjusted operating margin came in at 11%, compared to 15% last year, held back by order and shipment delays, inflation, and investments in R&D and marketing. Gross margins came in at 58%, up 100 basis points from last year. Higher COGS continues from global freight costs and material inflation, plus direct labor inefficiencies. OpEx was temporarily up on the timing of sales and marketing activities versus a COVID-driven low prior year. The research and development investments increased as planned to support our long-term growth. Finally, we announced actions in July to optimize our product portfolio, obsoleting non-strategic product lines and reducing our overall operating costs. These actions underpin our gross margin and operating margin targets for 2023 and beyond. As part of this action, we've announced a global workforce reduction of approximately 5% to be completed by the end of this year, with the severance-related costs in line with previously discussed expectations at approximately $1 million a quarter during the second half of this year. Let me move on to the next slide. Q2 revenues came in at $29.2 million, flat to last year. Gross margin on a GAAP basis was 57%, up 100 basis points from last year despite the higher cost of goods. This quarter had GAAP operating income of $4 million, or 13.7% of revenue, and includes a facet of $4.9 million associated with the resolution of previously announced litigation. Our adjusted operating income was $3.1 million or 10.5% of revenue. GAAP earnings per share in the quarter was $0.06, up from a negative $0.01 last year. Our adjusted earnings per share was $0.05, down from $0.06 in the prior year. We consumed about $200,000 in cash flow in the quarter, and our net debt increased by $600,000 in the quarter. Our leverage ratio measured 3.1x EBITDA. Move on to Slide 6, take a look at our revenue in the quarter by product family. Starting with the first row of the table, our Cellular and Molecular technology revenue was up 17% from last year, driven by strong performance of our direct sales team. Both the U.S. and European direct sales teams did great work and saw strong growth. As we expected, we continue to reduce sales of lower-margin products sold through distributors. We see government-funded research in the U.K. continue to be impacted by Brexit, so we expect that to recover over time. Looking to preclinical, revenue was down 9% on lower demand from Europe and shipment delays in China relating to China's COVID policy shutdown. European CROs and pharma were slower than usual compared to a very strong prior year. China was flat to the prior year; however, we still see a return to growth coming later in the year, likely Q4. The strong U.S. dollar compared to the euro and British pound drove a currency impact of $900,000, which will likely continue to hurt us throughout the year. Overall, strong growth in Cellular and Molecular offset the combination of currency and lower sales in preclinical. Now I'll turn the call over to Mike for a quick look at our key financials. Mike?

Thanks, Jim, and good morning, everyone. Before I delve into the details of the full P&L and cash flows, I wanted to share some insights on the current operating environment. China is a vital market for life science tool companies. This year, we made significant strides in consolidating our sales efforts into one unified channel rather than separate preclinical and CMT sales in China, and we believe this will benefit us when the market stabilizes. However, since our discussion during the Q1 call, the outlook for China in 2022 has become much less clear due to lockdowns and broader economic conditions, prompting us to adjust our revenue-related cost base downward. Furthermore, we've noted volatility in Europe. In the markets we operate, academics appear stable, but commercial biopharma, particularly with CROs and pharma, has been quieter at the moment. Lastly, we have consistently emphasized our focus on selling high-end niche products through direct sales, which we see as a long-term advantage. Nonetheless, in the current global environment where operators are being fiscally careful, sales of higher ASP equipment are beginning to slow. We've investigated this closely, and this is our current observation. The environment is shifting once again, but our commitment to a profitable growth platform and fiscal discipline remains strong. Now, moving on to the overall financial results. We reported a 58% adjusted gross margin for Q2 2022, which is 100 basis points higher than the previous year, despite experiencing lower volumes and currency impacts. Pricing has positively influenced gross margins, while product mix and labor and materials COGS have had relatively neutral effects compared to the prior year. We first observed the effects of global supply chain issues and labor dynamics in early Q2 2021, and these impacts are now being incorporated into our results. Additionally, product mix slightly hindered gross margin since our preclinical products generally have higher average gross margins. Although preclinical margins are historically strong, the growth in direct sales of niche cellular products and better operating performance in the primary operations that manufacture our CMT products are expected to enhance CMT margins. Adjusted operating income for the quarter has decreased due to planned investments in marketing and R&D, which Jim mentioned, alongside general inflation impacts and disappointing revenue stemming from the market dynamics. For the near term, we continue to target mid-teens operating margins and solid recurring positive cash flows. As mentioned in our Q1 call, we took steps in the first half to ensure our cost base reflects the current market conditions in 2022. After reviewing our portfolio, we identified a 5% reduction in workforce in areas not contributing to growth or margin expansion. This process has recently been completed, with notifications to employees and customers communicated after the end of Q2. A portion of these reductions involves direct labor related to low-value products we are discontinuing, with cost savings and improved margins anticipated from eliminating low-margin, high-work products that strain internal operations and sales, expected to significantly benefit us in 2023. Regarding immediate effects from these actions, the fixed costs from managerial or overhead roles we eliminated represent approximately $1.5 million in annualized savings. As a result of these reductions and efforts to limit non-headcount spending in the second half, we expect operating expenses in the latter half to decrease compared to the first half. On cash flow and debt, our leverage ratio, or total debt-to-adjusted EBITDA, stands at 3.1x, up from 2.7 at year-end due to reduced earnings in the first half and payments related to settling our litigation. Working capital improved with enhanced collections and accounts payable days in Q2, including better collection efforts in China affected by lockdowns. Our bad debt exposure remains minimal. Looking ahead, we are planning for accounts receivable days in the mid-50s and aim to reduce this figure. As for inventory, after growth over the last year addressing supply chain uncertainties, inventory levels have stabilized in dollar terms, and we expect them to remain steady for the remainder of 2022. Our primary goal is to stabilize and then improve our manufacturing COGS. This expectation is factored into our cash flow predictions for the upcoming months. I’d like to provide more detail regarding the litigation settlement. In Q1 2021, we recorded charges of about $5 million based on the settlement reported in April. Cash outlays for this matter were made in Q2 2022, and we don’t foresee any significant future cash outflows related to this issue. This is a crucial milestone in terms of cash and overall leadership focus. In Q2, we entered an agreement with a co-defendant to obtain convertible preferred stock valued at $4 million, equivalent to what we paid to settle this arrangement under our indemnification agreement. This preferred stock will convert to Biostage common shares upon a new offering we expect to complete. Biostage is currently trading on the over-the-counter market and secured meaningful cash inflows in a private placement during Q2. In light of these developments, we recorded a $4 million asset associated with this convertible preferred stock in Q2. The P&L gain on a GAAP basis for Q2 includes $1 million of litigation fees paid by Biostage for which both parties shared liability. Both of these transactions were related to the settlement, with details in our upcoming 10-Q. We aim to liquidate our position with Biostage following a qualifying event, such as relisting or an offering on NASDAQ. While we noted positive cash inflows in Q2 to cover our settlements, we are not currently including any cash inflows related to this in our 2022 cash flow or net debt projections. On capital expenditures, we had $400,000 in Q2 and $900,000 year-to-date. We expect CapEx in Q2 to moderate in the second half due to market volatility and lower revenue trends. We also incurred $1.1 million in transformation costs in Q2, which are excluded from adjusted earnings as they relate to non-recurring investments in our business infrastructure that support long-term growth. These costs were primarily associated with a thorough review of operations in Massachusetts and Minnesota, which account for most of our revenues and led to the previously mentioned portfolio actions. We expect cash transformation costs for the remainder of 2022 to be about $1 million per quarter, maintaining the plans we discussed last quarter as we prepare for a strong 2023. Consistent with our Q1 call message, we anticipate cash flow from operations in 2022 to improve compared to 2021 as earnings grow, and we do not expect a repeat of the working capital growth seen in 2021 due to the previously discussed supply chain dynamics and the resolution of the litigation settlement.

With that, I turn it back to Jim to discuss the full year outlook. Thanks, Mike. Now moving on to our summary slide, Slide 10. Given significant currency impact, volatility in Europe and Asia, we're taking a more conservative view on the annual revenue outlook for the rest of this year. We expect year-over-year revenue growth in the range of 1% to 5% versus last year. We expect solid growth in North America. EMEA is slowly recovering throughout the year and continued impact for China shipments due to their COVID policy and returning to growth in Q4. Imported revenue will be net of currency impacts and a further rotation out of non-strategic product sales. All in all, we see a nice solid return to solid growth in the Q4 timeframe. As for adjusted operating margins, we expect to range from 13% to 14% of revenue, gross margins to improve to 58% in spite of higher purchase prices and shipping costs, with the continued potential shipping delays to China. Operating margin includes a higher investment in growth-oriented R&D for new product development. And we expect positive improvements in free cash flow and reductions in net debt for the second half. Thank you, and I'll turn the call back over to the operator and open the line for Q&A. Thank you.

And our first question comes from Bruce Jackson with Benchmark.

Looking at the new guidance, how does this impact your long-term perspective? I think that you've been looking at maybe 6% to 8% organic long-term revenue growth. When do you think you might get back on that trajectory?

Yes. We believe that the changes we are implementing are aimed at achieving a pure growth structure for 2023. We anticipate that the recovery will begin in Q4 and continue into 2023. By phasing out some older, non-strategic technologies that do not contribute to growth and have lower margins, we can improve our mix. This also allows us to invest more in research and development for new products that are strategically aligned and have strong growth potential and pricing power. Eliminating the outdated technologies that do not align with our future growth goals supports our plan for 2023. Our objective is to reach a double-digit revenue growth target, gross margins of 60%, and operating margins in the mid to upper teens. We are on track for this, with Q4 positioning us well for 2023 and helping us achieve the targets we believe are necessary for the company.

Okay, great. And then one follow-up question on the guide and also on the gross margins. You didn't mention anything about inputs or inflation. Have you seen any changes in that?

We observed a $900,000 impact in the quarter, which accounts for approximately 3 percentage points of our revenue. We expect this will continue to affect our figures, which is one reason we're adjusting our overall expectations and ranges downward. This also relates to the transition away from some lower-margin products. When considering all this, our current position isn't far from our initial plan. Looking ahead to next year, we anticipate reaching that double-digit growth target, and we believe we have a solid basis for it. Regarding market fluctuations, many individuals in the U.S. and Europe are currently on extended vacations, leading us to expect some volatility in Q3, particularly in the latter half of the quarter. However, we anticipate significant progress in Q4. We have factored inflation and the impact of rising interest rates into our projections, as well as the pricing strategies and new products being added to our portfolio.

And your next question comes from the line of Paul Knight with KeyBanc.

Jim, so the portfolio pruning, I think you're implying maybe a 300 basis point impact this year?

Well, considering the interest from currency alone, there's about 300 basis points right there. When you examine the impact of currency translation along with the portfolio rationalization, it will likely account for a couple of points as well. That’s why I want to provide a reported view. After accounting for currency and the changes involving the phase-out of lower-margin products that we've discussed, we need to focus on technologies that are strong growth products for the future. You're already aware of what those are, Paul.

And Paul, to clarify regarding the portfolio actions you asked about, everything Jim mentioned makes sense. However, the real impact will not be substantial this year. Those products will be sold out, and the significant effects will be felt next year. If we have been at 57% or 58%, that alone will help us exceed 60% with the portfolio adjustments at these run rate levels. So I believe that around a 300 basis point improvement will support us in getting back over 60% in 2023.

As expected, we are moving away from lower-margin products, much of which is being funneled into distribution and has become somewhat commoditized. Strategically, we prefer not to be involved in those. Nevertheless, we will still sell off some of the products we have announced as obsolete, aiming to clear out that inventory. While we anticipate continued revenues from last-time purchases, we expect to cease any new developments related to obsolete products by the end of this year. There will be a gradual reduction in sales of those products, and next year we will provide a clearer pro forma view that will help differentiate the revenues from these products that do not align with our strategic focus. I will always provide you with both the reported figures and what we consider to be a more refined adjusted view of our performance and how that impacts our portfolio and strategic direction.

What two products would you highlight that are driving growth in Cellular and Molecular? What are the couple of products that stand out right now?

We are seeing positive trends in our operations. We anticipated increased activity at the cellular level, and we expect that products such as patch clamp and MEA, which are advanced cellular-based testing tools, will trend towards greater adoption in addition to our ongoing late-stage preclinical efforts related to safety pharmacology and toxicology. This area has been expanding well, and we have been investing in it. Inhalation services experienced strong growth last year, and we've introduced new capabilities in this field, which we believe will be a significant driver for us moving forward. This introduction is recent. We've also launched a new line of spectrophotometers, focusing on high-margin, high-capability areas where competition is limited. The primary growth we observe in CMT is in the cellular sector, and we have concentrated our efforts there. This growth is not only expected in CMT but will also begin to extend to the pharmaceutical and CRO markets starting next year.

And Paul, I'd just add that on the cellular side, the electroporation is selling well within that, and that's driving the growth. So everything Jim said, that electroporation speaks to the market, and that's seeing real growth.

Yes. One question on electroporation. It seems to me like some of your competitors out there sometimes would attach royalties to the instrument that they're selling, but you don't. Do you think you're gaining share in electroporation? Or what's that market doing today?

We've been experiencing growth in electroporation, primarily on the research side, but we're beginning to see increased adoption in biopharma. We're focusing our investments on making it more relevant for industrial users. We plan to collaborate with startups and other companies to explore opportunities for generating revenue from the products they sell. This is a key goal for us and will positively impact our business. Additionally, as we sell the electroporation product, we're seeing greater engagement with pharma and CRO companies. Previously, we didn't pursue sales in that area due to limited exposure, but now with the DSI team and our product offerings, we have made significant progress. When we sell even one system to industrial customers, we open up more opportunities with consumable services. The revenue potential from industrial sales is much greater than that of a single product sale to academic research. We will continue to grow in the academic sector, which remains strong, but expanding into industrial markets will be a significant growth driver for us.

And I see no questions at this time. I'll turn it back over to the presenters.

Well, thank you, everyone, for joining us today. This ends the presentation, and we hope you'll join us in November for a look at our results for the third quarter. Thank you very much. Have a great day. Thanks, bye.

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