Harvard Bioscience Inc Q1 FY2024 Earnings Call

Thank you, Josh. And good morning, everyone. Thank you for joining the Harvard Bioscience First Quarter 2024 Earnings Conference Call. Leading the call today will be Jim Green, Chairman of the Board, President and Chief Executive Officer; and Jennifer Cote, Chief Financial Officer. In conjunction with today's 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.harvardbioscience.com. Please note that statements made in today's discussion that are not historical facts, including statements or expectations of 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. Actual results may differ materially from those expressed or implied. Please refer to today's press release or other disclosures on forward-looking statements. These factors and other risks and uncertainties are described in the company's filings with the Securities and Exchange Commission. Harvard Bioscience assumes no obligation to update or revise any forward-looking statements publicly, and management's statements are made as of today. During the call, management will also reference certain non-GAAP financial measures, which can be useful in evaluating the company's operations related to our financial condition and results. These non-GAAP measures are intended to supplement GAAP financial information and should not be considered as substitute. Reconciliations of GAAP to non-GAAP measures are provided in today's earnings press release.

Thanks, David. Hello, everybody. Let's go ahead and start and move to Slide 3 of the presentation, take a look at the highlights for the quarter. Well, as expected, we had a tough start to the year. However, I will say that, with strong gross margins combined with previously communicated cost reductions, it positioned us to underpin our commercial investments for growth while at the same time meeting our earnings targets. Also as expected, significantly slower sales in China and Asia Pacific continued through Q1, further exacerbated by some slowing in Europe and in total a tough comparison to a record-high prior year Q1. I'll also mention we're still seeing some supply chain issues. As an example, Q1 saw one product alone that had $1 million in revenue shipment delays pushing it out of Q1. So now let's go ahead and look at the numbers. Revenue in the quarter came in at $24.5 million, down $5.5 million from last year. Gross margin remained strong at 60.3%. On a GAAP basis, we recorded an operating loss of $2.3 million. On an adjusted basis, operating profit measured $1.2 million or 4.8% of revenue. And adjusted EBITDA measured $1.6 million or 6.6% of revenue. Let's move to Slide 4, look at the revenue for the quarter by product family and looking at the regions. So starting with the Americas. Revenue was down 6.6% as reported. Preclinical revenue was slow on reduced demand for COVID-related respiratory products. Cellular and molecular products were up modestly, primarily with the advanced cell-based testing systems. We saw slow sales in academic research, with NIH grants that seem to be taking longer to approve, but we believe much of that is due to the uncertainty that was around the congressional continuing resolution situation last quarter. We're hopeful that the more recent longer budget resolution will start to solve some of this for us. Pharma and CROs are still keeping tight strings on spending, but we're encouraged to see biotech-related capital raises improving. Biotechs, we see, represent a potential long-term tailwind for our technologies. Moving on to Europe. Overall EMEA revenue was down 16% as reported, and that includes about a 1% currency headwind. Preclinical systems were down on tight budgets for both pharma and CRO companies. Cellular and molecular saw some slowness due to tight government spending for academic research. The European economic environment is being impacted by the higher interest rates. And government spending was also affected by the situation occurring in Ukraine. Now moving to China and Asia Pacific. Q1 reported revenue was down 35% on continued slower spend levels, which should annualize in the second half of this year. Preclinical revenue was down on continued slow capital equipment spending by pharma and CRO companies. Cellular and molecular products saw continued headwinds as academic customers awaited news on government academic research funding. We see the weakness in China continuing into Q2, though we're hopeful that the recently announced Chinese stimulus package will lead to improved market conditions entering the second half for us here. Let's move to Slide 5 and discuss some new product launches designed to strengthen our base business while at the same time investing in new high-growth opportunities. Our commercialization focus started with new product introductions showcased at the latest Society for Neuroscience and the Society for Toxicology. Our primary focus is to strengthen our bread-and-butter base business, which represents nearly 85% of total revenue and which we target to deliver better-than-market growth. We invest to continue our leadership position in telemetry for safety and toxicology applications. We introduced our new SoHo shared housing telemetry family of implantables to expand our offering to multi-animal shared housing environments. At the same time, we introduced our latest Ponemah software that integrates VivaMARS, the high-capacity behavior testing system, onto a single GLP-compliant data system. Adding high-capacity neuropharmacology testing expands our addressable market by expanding the test menu offering to neuropharmacology and builds on our base business. The Ponemah platform, which is used by leading CROs, biopharma, and large academic institutions around the world, processes and manages extremely large data pools acquired during tox and safety testing, now for both telemetry and behavior. By combining these new applications on a single data management platform, the Ponemah system opens up opportunities to use emerging AI and machine learning technologies to analyze study data. At the same time, we continue to fortify our leading position in cellular, molecular, and inhalation technologies for research and discovery. Also, at the same time, we're expanding our field service offerings designed to increase recurring revenue and consumables. This year, we're driving to commercialize exciting new high-growth opportunities. Electroporation and amino acid-related products make up around 10% of our revenue, and advanced microelectrode array products about 5%. Bioproduction and organoids provide exciting new opportunities for high growth well above our base business. As such, we've established a commercial and application science team dedicated to bioproduction and to advance cellular applications with emerging organoids. We're now offering bioproduction configurations of our well-known BTX family of electroporation and electrofusion systems. Bioproduction is an opportunity to drive significant recurring consumable revenue for us. We recently also announced a cGMP-compliant amino acid analyzer targeted for bioproduction applications. This AAA system is adapted from our clinical amino acid systems that are in operation today in leading clinical laboratories around the world. Finally, we're leveraging our historical leadership position in advanced cellular applications to drive high-volume growth in both biopharma and CRO. We launched the Mesh MEA organoid platform at the Society for Neuroscience. We also showcased the mesh organoid at the Society for Toxicology, where we see potential for in vitro neuro and cardiac safety and toxicology applications. We're excited to see strong interest for applications in research and biopharma discovery, which we expect to then lead to high-volume compound analysis and testing applications.

Thank you, Jim. Let's jump into our Q1 financial results in greater detail, if you can please refer to Slide 7. As a reminder: In addition to our reported GAAP results, we also include discussion about our adjusted or non-GAAP financial results, which aligns with how we internally manage the business. Our slide deck includes a reconciliation between our adjusted results and the corresponding GAAP financial measures in the appendix. I will specifically call out the activity during Q1 which we pulled out as non-GAAP. Jim has taken you through revenue performance, so I'll take you through some of the other key financial metrics in more detail, so please refer to the top middle of the slide. I'm excited to share, as Jim mentioned, that on a reported basis, our Q1 gross margin was 60.3%, which is in alignment with our long-term target of 60% gross margin. This was slightly behind last year's margin of 61.2%, but please keep in mind that our revenue last Q1 was $30 million, a record Q1. We are pleased to maintain our gross margin performance despite lower revenue absorption in this year's Q1. We continue to expect a 60% margin for the year. If we can please refer to the top right graph on the slide. Our adjusted EBITDA during Q1 was down from $4.8 million last Q1 to $1.6 million this year. The primary driver for reduced adjusted EBITDA was the decrease in revenue and flow-through of lower gross margin dollars. We continue to invest in our growth strategy and the commercialization of our newly launched products such as VivaMARS and SoHo and growth opportunities in bioproduction and organoids that Jim mentioned earlier. These applications are starting to penetrate the market, starting with our key academic partners, with additional opportunities ahead in CROs and pharmaceutical companies. We continue to manage our overall expenses; and in early April, implemented an action to reduce our labor force to improve our cost structure and support our ongoing investments in growth. We expect to realize overall annual run rate savings from these actions of approximately $4 million, beginning in the second quarter. Severance associated with the action was about $500,000. We continue to drive operational improvements and stay focused on achievement of our financial targets. Move to the bottom left, where we will talk about reported and adjusted loss and earnings per share. The differences between GAAP diluted loss per share and our adjusted diluted earnings per share are highlighted in the reconciliation tables on Slide 11, but the primary typical drivers continue to be stock compensation, amortization, depreciation, and income tax expense. I'd also like to point out some additional unusual drivers for the difference between Q1 of 2024 and Q1 of 2023 when viewed on a GAAP basis. These include a loss on equity securities of $1.3 million or $0.03 per share, commissions of $500,000 or $0.01 paid in connection with the receipt of employee retention credits, and an estimated loss related to an unclaimed property audit wrapping up with an impact of $500,000 or $0.01. Last year, in Q1, we had a gain on the sale of a discontinued product line of $400,000 or approximately $0.01, so these unusual Q1 items amount to a total swing of $0.06 for Q1 2024 versus Q1 2023 in our GAAP results, which you see on the left. So a lot of unusual activity has been removed in our adjusted EPS. When you look at the adjusted EPS, the primary driver is the lower gross margin dollars from the lower revenue. Switching gears to cash flow and liquidity, if you refer to the middle bottom row. During Q1, we had cash flow from operations of $1.4 million compared to $1.8 million in Q1 2023. In February 2024, we received a cash benefit, net of commissions, of $2.6 million for the employee retention credit provided by the CARES Act. This is a credit that was allowed to encourage the retention of staff by employers that were impacted by the government orders associated with COVID-19. Due to the evolving IRS regulations and guidance, these are included in our other current liabilities on our balance sheet. We were also able to unwind a portion of our investment position in HRGN; and during Q1, sold $500,000. We paid down our debt by $1 million in Q1, and net debt is down $9.2 million compared to Q1 2023. As discussed, further details on the above items and the non-GAAP reconciliation are included in our press release and also in the appendix to the presentation and will be available in our 10-Q.

Thank you, Jen. Moving to the summary on Slide 9 and take a look at the full year. We expect the full year to be roughly flat to 2023. We see weakness in the first half versus a strong and difficult prior year comparison. This is especially true in China, where Q1 2023 was up significantly from Q1 2022. We expect second half growth compared to both the first half of this year and the second half of last year. We expect meaningful growth from new product commercializations and we expect China funding to improve going into the second half. We continue to expect gross margin in the 60% range, up from 59% last year. We also expect adjusted EBITDA margins improving to the mid-teens, up from 13% last year.

Jim, on the quarter, where are you with electroporation? Do you think that's the biggest driver of growth here in 2024? And overall, what portion of revenue in '24 do you think will be from products introduced in the last year?

Great question. I mean certainly bioproduction and electroporation are a key part of our business. We've been expanding in that area. We're certainly expecting that to start being to drive meaningful growth for us. If you look on the chart that I put together here on one of the slides, it shows we're breaking out the base business and what we expect there. We expect to be at or better than market growth in the base business. And that's almost in the 80% to 85% range of our business. Electroporation and bioproduction represent somewhere around 10%. We're also, as you know, starting to include our AAA product, which is now starting to sell into bioproduction and production-type applications, so there we're looking at it's probably somewhere in the neighborhood of 10-plus percent of our business. That's going to be a major driver of growth for us. It will be and we expect that to be ramping up over the years, so in this first year, we'll see some growth out of there. Maybe in the 1 point or 2 kind of region. As we look into next year, we expect that to ramp up to 2, 3, 4 kind of points of overall growth for adding that kind of growth to the business. So that's kind of the numbers that we're looking at. It's a bit of a long sale, bioproduction, because you have to introduce it. You have to build it into their production facility. You have to go help them with certification processes. That takes a little bit of time, but in the meantime, we're expanding the product capability to make it also now applicable for the new-generation technologies that are coming out with cell and gene therapy. So again, that's a really nice growth driver for us. And also, as we've talked about, what we're doing with organoids, we see that as a great growth area for us and a very long-term large market opportunity for us.

So the second quarter is generally either flat or down over the first quarter, but you've got that one order that shifted out from the first quarter. Can you kind of give us a rough idea of what your expectations are for second quarter revenue?

I don’t usually provide quarter-level splits, but historically, the second and fourth quarters tend to be stronger than the first and third. While I can't definitively say we're returning to that usual pattern just yet, we anticipate improvements as the year progresses. Typically, this trend has been influenced by government funding aligning with the academic calendar and year-end budget expenditures. We expect to see some sequential improvement and anticipate significant growth in the second half of the year. By that time, we expect the challenges from China to subside, which will positively impact our results. Additionally, our recent product introductions should begin to generate substantial revenue as we enter the second half. Overall, we are focusing on the entire year and believe we will see results that are largely flat compared to last year, with most of the improvements occurring in the second half, although we expect some progress in the interim as well.

Just following on with China. And you talked about growth getting back on track in the second half of this year. Would that be a potentially Q3 or Q4 event? I was also wondering. You talked about growth coming back in the funding. Can that be sustained for multiple quarters?

Yes. Well, yes. I mean we're expecting to see things picking up going into the second half, so by Q3, Q4, we expect to see revenue shipments moving back up into that segment. Again, that's been a headwind on a comparable basis for a few quarters now. And it was primarily waiting on clear budgetary announcements. They clearly identified areas they wanted to support, and academic research was a big part of it, so we're pretty happy to see that. Customers should start feeling now that they're free to go ahead and start preparing for their work. All right, well, thanks everybody, appreciate you sticking with us here. This ends today's presentation. We hope you'll join us back next, for Q2, in August of this year. So this ends the presentation. Thank you. Have a great day.