Earnings Call Transcript - HBIO Q1 2023

Dave Sirois, Director

Thank you, Amy, and good morning, everyone. Thank you for joining the Harvard Bioscience First Quarter 2023 Earnings Conference Call. Before we begin, I suggest you take a moment to download a copy of the presentation that will be referenced during this call. The file is titled Q1 2023 HBIO Quarterly Earnings Presentation and can be found 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 hand it over to Jim, I will read our safe harbor statement. In our discussion today, we may make statements that are forward-looking. Our actual results and performance may differ significantly from what we project due to risks and uncertainties, including those outlined in our Annual Report on Form 10-K for the period ending December 31, 2022, 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, reflect our estimates as of today and should not be considered as estimates for any future date. Much of today’s call will focus on our non-GAAP quarterly results, which we believe better represent the ongoing economics of the business, how we structure and evaluate our incentive compensation plans, and how we manage the business internally. The differences between our GAAP and non-GAAP results are detailed in the earnings release and today’s presentation. These documents, along with a replay of this call, can be found on our website under Investor Overview, Events & Presentations. Additionally, any material financial or other statistical information shared during the call that 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, CEO

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 strongly. 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. 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.

Jennifer Cote, Interim CFO

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 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 is demonstrated in our margin improvement in Q1. Moving to our adjusted EBITDA; as 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 a 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, CEO

Thank you, Jen. Now moving to our summary on Slide 9 and a look to see what we expect 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.

Paul Knight, Analyst

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, CEO

Thank you, Paul, for your kind words about our performance. We have established a sales force that effectively engages with academic research sites while continuing to deliver high-quality products and advanced technologies. At the same time, we have expanded our reach, allowing our sales force to also serve the industrial segments of CROs and pharmaceutical companies. There is a focus on the academic side for those dedicated to advancing the technology, but we are also designing products for the industrial sector where we anticipate significant growth in both average selling prices and revenue, along with an increase in recurring revenues. It's a good balance between the two, and I would say we are now in the final stages of shaping how that coverage works.

Paul Knight, Analyst

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, CEO

Yes, that's a great question. When I consider the overall growth of the business, I usually break it down into three main components. The largest factor is new product introductions, which significantly influence the business's trajectory. These introductions contribute increasingly to our recurring revenue, which I now report more frequently. Last quarter, I noted that over 35% of our revenue is recurring. If we examine the primary growth drivers, they are mainly new product introductions, the expansion and volume of our existing and improved portfolio, and pricing enhancements. Regarding new product development and its impact on growth, I would typically anticipate around 10% growth from new products. Of course, some of that growth will be offset by cannibalization. However, if I achieve my growth goals, primarily through new product introductions and expanding our current portfolio with a better mix, it supports the growth targets I’ve established for the business. It is also encouraging to see us phase out lower-end products. Since I became CEO, we have eliminated about $10 million from lower-margin, less strategic revenue segments, mainly products sold through distribution. This allowed us to refine the scope of our business, which is reflected in our significantly improved margin profile. With the products we've discontinued, we have more than replaced them with new, better offerings, which is evident in the increase of our gross margin into the 60% range.

Paul Knight, Analyst

Okay. And the last question I have at this time would be about the supply chain. Have you moved past that period?

James Green, CEO

Yes, I think we are. We certainly see significant improvements. We're starting to notice a decline in purchase prices, and supply issues are less prevalent. We did experience some inflation, and last year we had to secure inventory in advance to ensure continued production and shipping, which involved higher costs. However, these factors will impact our financials. Overall, the supply chain situation is much better now, with fewer disruptions than before. The same applies to freight, which is also expected to improve in time. Our focus has been on managing working capital effectively, as we had to increase inventory to maintain shipping capabilities, but this will improve this year. The combination of enhanced EBITDA and better working capital is generating cash flow, allowing us to reduce our debt. Overall, the situation has stabilized significantly. While unexpected events can occur, we are prepared to manage any small impacts. At this moment, everything appears to be in good shape for us.

Paul Knight, Analyst

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

James Green, CEO

Typically, we pay down 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.

Bruce Jackson, Analyst

Congratulations on the quarter.

James Green, CEO

Thanks, Bruce. Thank you.

Bruce Jackson, Analyst

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, CEO

In 2021, we experienced a slight increase in demand, particularly for our respiratory products due to COVID. While that demand has tapered off somewhat, we launched a new version called SmartStudy that is helping us maintain our levels without a significant decline. Looking ahead, we anticipate continued growth in our business. Overall, we haven't noted a significant drop-off in most of our products related to COVID, as they are primarily utilized in the development of drugs and vaccines. New vaccines, like those for COVID, employed the same technologies we use for other drugs that typically progress in areas like neurology, cancer, and diabetes. We expect to see a return to more standard drug development processes, with fewer products specifically focused on COVID moving forward. Overall, while COVID provided a temporary boost in 2021, we believe we are now on a more steady growth trajectory.

Bruce Jackson, Analyst

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?

James Green, CEO

Yes. When I reflect on the year, I anticipated that with the shift away from low-end products and our ability to replace most of those with new offerings, the first half would be relatively stable, followed by a return to significant growth in the second half. However, we’ve experienced strong upfront growth with the new products. Looking ahead to the rest of the year, Q2 may be somewhat similar to Q1 as we continue this transition. Nevertheless, we are seeing notable improvements that help offset this transition. In the second half, we expect to see strong growth from the new products. I’m not sure this year will follow the typical pattern for Q2 and Q4, but historically, Q4 tends to be our strongest due to the purchasing cycle, and it’s likely to be the case again this year. As we approach the next quarter, I’ll provide more clarity on the revenue side. Overall, we’ve raised our revenue expectations, projecting mid-single digits, accounting for about four percentage points of headwinds. We see this as a strong year of development, as demonstrated by our improved cost structure. Our overall cost organization has reduced significantly, reflected in our gross margins and EBITDA margins. We are back on a solid growth trajectory, supported by these new products. The combination of new offerings and an enhanced product portfolio illustrates that we've established the platform we aimed to build.

Bruce Jackson, Analyst

Okay, great. That's, it for me. Thank you for taking my questions.

James Green, CEO

Thank you, Bruce.

Unidentified Analyst, Analyst

Hi everyone. I was curious if you could provide some details on how much the increase in price and volume growth, compared to the new products, has contributed to your overall growth.

James Green, CEO

Yes. Overall, we are experiencing growth driven by both increased volume and better pricing across our entire portfolio. We don't typically break these down separately in our reports, but I anticipate that around half, or perhaps slightly more, will come from new products, while the other half will be from the expansion of existing products, which includes both volume increases and price adjustments. Both factors are performing well together. We've seen success from the new bioproduction product we launched at the end of last year, which is now contributing to our revenue stream this year and is expected to generate approximately $1 million annually in consumables from that single deal, and we are pursuing many additional opportunities. I also mentioned the launch of our new high-capacity behavioral system, with an initial order exceeding $800,000, which will be recognized as revenue this year. Given that a large contract research organization (CRO) is adopting this system, we foresee significant growth potential among our other CROs and at major academic research sites conducting extensive studies, including pharmaceutical research. This represents a new area of incremental growth for us. Historically, behavioral systems sold to academic research were around $10,000, but now we are looking at solutions worth hundreds of thousands of dollars, reflecting a strong demand for this technology, especially when integrated with our telemetry offerings to enhance data collection and streamline regulatory submissions. We are genuinely pleased to witness substantial growth fueled by new products designed to generate recurring revenues alongside the expansion of our current offerings. It’s a positive situation to see both growth paths moving in a favorable direction.

Unidentified Analyst, Analyst

Great. Speaking of new products, it seems that you are achieving significant traction in Asia and EMEA in terms of telemetry. However, I may be interpreting this incorrectly, but it appears that the momentum in the Americas might not be as positive as in Asia and EMEA. Is that the case? If so, could you provide more insight on how the developments in Asia and EMEA could impact the Americas?

James Green, CEO

We're seeing strong performance across all areas of our telemetry, with Asia showing significant demand and potential for long-term growth. EMEA, which had been struggling with our telemetry products, has also shown a nice recovery. While Asia is growing rapidly and EMEA is bouncing back, we shouldn't overlook the Americas, as the US is also experiencing good growth, and we expect this trend to continue. It's challenging to identify differences when all regions are performing well, especially when one region is notably outperforming the others, as all areas are doing quite well in this market.

Unidentified Analyst, Analyst

Great. So as the new product momentum is building up and you continue to get new orders and further in the pipeline, there are even more new products. In like midterm, like in the next couple of years, how do you see the end customers, the mix of end customers changing like OEM distributors, government, academics, CRO, pharma? How do you see that mix changing from maybe what it was in 2022?

James Green, CEO

Yes, that's an excellent question. We view academic research as a significant opportunity for continued growth, especially with strong funding from sources like the NIH. However, much of our new growth is focused on adapting those technologies for industrial applications. I anticipate that we'll see growth in both academic research and industrial sectors, but with a larger increase in industrial segments. This is where we expect to develop recurring revenue streams as well. Thus, I forecast a shift toward a greater portion of our business being in the commercial arena with pharmaceutical companies, contract research organizations, and industrial sectors, while still maintaining our leadership in academic research. We need to stay at the forefront of technology, particularly in areas such as electroporation for transfection and new drug development. In summary, we expect more growth on the industrial side moving forward. Okay. Well, thank you for joining us. This ends today's presentation. We hope you'll join us in the summer for our second quarter results for fiscal 2023. Thank you. And this ends the presentation.

Operator, Operator

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