Harvard Bioscience Inc (HBIO) 2019 Q3 法說會逐字稿

Welcome to the Q3 2019 Harvard Bioscience, Inc.

Earnings Conference Call.

My name is Daryl, and I will be your operator for today's call.

(Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to David Sirois.

David, you may begin.

Thank you, Daryl.

Good afternoon, everyone.

Thank you for joining us for the Harvard Bioscience Third Quarter 2019 Earnings Call.

Before we begin, I would like to suggest that you take a moment and download a copy of the presentation that will be referred to during this call.

The file is entitled HBIO Q3 quarterly earnings presentation and is located in the Investor Overview section of our website.

Leading the call today will be Jim Green, President and Chief Executive Officer; and Mike Rossi, Chief Financial Officer of Harvard Bioscience.

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 in our annual report on Form 10-K for the period ended December 31, 2018, and our other public filings.

Any forward-looking statement, including those related to the company's future results and activities, represent our estimate 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 earning release and the slide presentation.

These documents can be found on our website under investor overview.

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.

A replay of this call will also be available for 1 week at the same location on our website at harvardbioscience.com.

I will now turn the call over to Jim.

Jim, please go ahead.

Thank you, Dave.

Good afternoon, everybody.

Let's go right to Slide 4 of the presentation.

Our -- shows our Q3 revenue came in at $27.4 million.

That's down 4.3% from Q3 last year.

Our gross margin on a GAAP basis was measured at 54.6%.

On a non-GAAP basis, adjusted gross margin was 55.6%.

This quarter had an operating loss of $1.4 million on a GAAP basis.

Our adjusted operating income was positive at $3.3 million.

So our adjusted operating margin was 12.1%.

GAAP earnings per share was negative $0.07, and our adjusted dilutive earnings per share was $0.04.

Finally, our cash flow from operations on a year-to-date basis was $5.8 million.

Moving on to Slide 5, we'll take a look at our revenue by product family.

As you know, we've combined our legacy PCMI and Ephys teams into 1 combined group called Cellular and Molecular Technologies.

This group engineers, manufacturers, sales and services leading-edge equipment and support of discovery and research for new drug development.

In the quarter, Cellular and Molecular Technologies saw growth in North America and Asia-Pacific driven by CRISPR-related products and Precision Infusion Pumps.

Europe declined on large equipment order and shipment timing.

Our preclinical systems team, also known as DSI, is an industry leader in the engineering, manufacture, sale and service of telemetry and monitoring technologies for the preclinical safety testing with animals required by regulatory bodies prior to human clinical trials.

In the quarter, North America was up driven by growth in pharma sales.

We saw clinical research organizations return to historic run rates.

However, Q3 prior year was an all-time high giving us a tough comparison.

Europe declined modestly.

Asia-Pacific was down on continued trade uncertainty, however, we do see signs of improvement coming.

So we move to Slide 6. And I'll give you an update on our 2019 actions plan that position us to deliver on the 2020 financial targets that we published this last September.

First I'm happy to say, we've completed the leadership team with the addition of Mike Rossi, our CFO; Ken Olson, our leader of the preclinical or DSI team in Minnesota; and Yash Singh, who leads our Cellular and Molecular team.

In the quarter, we completed the consolidation of our North Carolina TBSI operation into the Minnesota operation.

We're closely managing our operating expenses.

We're in the process of consolidating our Cellular and Molecular sales teams into 1 well-run team with improved physical and technical support coverage.

We're finalizing consolidation plans for a leaner global footprint, and we continue to reduce our debt, while at the same time, securing flexibility that we need to cover the cost of restructuring.

So now I'll turn it over to Mike for further financial review.

Mike?

Thank you, Jim, and good afternoon, everyone.

As a reminder, I will be referring to certain non-GAAP measurements with the line -- with our internal reporting and management processes, and any references to adjusted results represents a non-GAAP measures, we have reconciled to GAAP figures within today's release and presentation.

I will walk through financial highlights for Q3, including our cash flow and debt before covering the full P&L.

On revenue, in our largest market, North America, we sold -- we showed solid growth across multiple product lines, including growth from our higher-margin products such as Infusion Pumps.

As Jim noted, CRO revenue improved in Q3 after low volume over the first half of 2019, but we're down year-over-year on peak sales in Q3 '18.

Outside of North America, we did see declines in EMEA and APAC, which drove an overall 3% reduction in constant currency sales.

We believe these declines are primarily driven by timing of large equipment or system orders, and expect to see improved sales in Q4 in these markets.

Adjusted operating income increased 3.6% or 90 basis points as cost reduction and improved product mix more than offset lower revenue.

On the balance sheet, we continue to reduce debt with $6 million in year-to-date cash from operations, driving a $7 million reduction in net debt since December 2018.

Improving cash flow and reducing debt is a top priority as reflected in the leverage targets we communicated in September.

As articulated in our 2019 action plan, we were recently able to amend the terms of our existing debt to provide operating flexibility required to drive our business improvements.

This includes a higher maximum leverage ratio and an increase in permitted restructuring-related costs, while reducing interest expense remains as a priority.

In the short-term, this amendment will allow us to invest in transformation activities over the next 6 to 9 months to deliver our second half 2020 targets.

Turning back to the P&L on the next slide.

Adjusted gross margin was down 20 basis points or nearly flat to prior year at 55.6%.

This result was delivered despite lower sales volumes and an inventory charge of approximately $300,000 due to the improvement in product mix discussed.

We believe our action plan is addressing the primary margin headwinds experienced in Q3 with new operating leadership actively addressing inventory management and footprint consolidation.

Adjusted operating expenses were lower with ongoing focus on cost reduction with both head count and nonhead count spend declining year-over-year.

Adjusted net income improved over prior year with the marginal improvement noted and lower interest expense.

This translated into flat adjusted diluted EPS due to a higher share count associated with the methodology change we found best for our investor communications.

In prior periods, the company had a practice of using diluted shares per GAAP, which essentially resulted using the basic share count and periods with a GAAP loss.

We are implementing this change prospectively starting with these Q3 results and have not altered prior results as not significant to those periods.

Finally, I note that our GAAP loss for the quarter of $2.6 million or $0.07 per share includes approximately $2.2 million of costs associated with the CEO transition in July and the consolidation of our North Carolina facility.

With that, I'll turn it back to Jim to provide our 2019 outlook and summary.

Jim?

Thanks, Mike.

Let's move to Slide 10 of our summary and outlook.

We continue our strategic actions to underpin next year's profitability and growth targets.

Consolidations and operating efficiencies will drive gross margin and operating margin improvements for 2020, the significant improvement in the second half of 2020.

We expect the current headwinds to annualize in the first half of 2020 and sales optimization with improved products to drive top line growth throughout the year and significantly in the second half.

Now for our 2019 outlook, we see revenue stabilizing at this lower run rate into Q4, so we expect for the year a range of $116 million to $118 million.

We remain on target for adjusted gross margin at approximately 56% for the year.

Adjusted Q4 operating margin should improve to 17% to 18%, that's up 3 to 4 full points from 14% last year, bringing the full year to a range of 12% to 13% versus 12% last year.

And finally, we expect to deliver adjusted diluted earnings per share of $0.19 for the year.

Thank you.

And I will turn the call back over to the operator to open the line for questions and answers.

Thank you.

(Operator Instructions) And our first question comes from Bruce Jackson.

With regard to China, you've had some continued weakness here.

Some of the other life science companies that have reported have been doing all right.

I'm just kind of curious to know why you think you might be having some slower growth relative to the other companies.

And then if you could remind us what is your exposure to China directly.

And then do you have a sense of, like, how much exposure you've got via your distributors?

Okay.

Well, look, actually, maybe -- I want to make sure that I understand your question.

So starting with China.

We have good exposure to China.

But as we've seen, if you look at -- as we look at our sales into China, we've seen things -- it slowed down for a little while.

And as we look, particularly of the discovery-type products.

That's where -- the products that sell into research institutes, that's where much of the funding comes from the Chinese government.

And many of these institutions have been instructed to try and buy other than U.S. goods.

So in that particular space, that's where we've seen a slowdown for probably at least the last few quarters.

Now in the -- with our DSI and our preclinical work, that business has tended to do pretty well, though it was down for a bit.

And at this point, we do see things starting to pick up.

As we look forward into the next quarter and forward, we see things actually picking up nicely in that area.

So again, I would ask you to – Bruce, to maybe reamplify, I didn't answer much of your questions.

We were kind of -- I was kind of distracted for a second there.

We were looking at something.

But...

Yes.

No worries.

That's fine.

Then my other question is just with regard to some of the restructuring that you've discussed with your new strategic plan.

Have you looked at closing down any sites?

And what are some of the restructuring activities we can look forward to over the next quarter or 2?

Okay.

Yes.

It's a great question.

Well, we've already shut down our TBSI site, which is in North Carolina.

We select the product and the design -- we set the manufacturing of those products into our Minnesota operation.

That operation has been completely shut down at this point.

Again, the products will continue to sell though through our -- it was offered through our DSI product line, and that will continue.

So that's been completed.

We have a number of other smaller operations that we're looking at that are essentially part of the plan.

And we're looking at -- on the larger operations in Europe, we're looking to see how we're going to better share those opportunities and view Europe as more of one logical operating site as opposed to a number of smaller ones.

So I would -- so again, we'll have more detail for you on the call next time.

And actually, we'll be announcing a little more detail on what exactly it will be made up of the restructuring because we have to establish what the charges will have to look like.

We'd like to take much of these actions here.

I'd like to get much of it either started or at least defined here in this year, so that we understand what kind of charges we're looking at and have that done in time so that we see the improvement in the overall business as we see it clicking in, starting in the first half but really going full steam in the second half of next year.

And I do expect that much of these consolidations are going to result in improvement in both gross margin.

And that's where I would expect to see much of the improvement.

So lower cost of goods, improving our gross margins, lower overall cost of organization and OpEx.

And you'll see us investing much of the savings into areas that we can expand sales, that we can improve on some of the products to help drive the top line.

So expanding the coverage of the top line, expanding our sales organization and coverage and technical support, along with refreshing certain other products is going to help drive the top line of the business at the same time.

But again, all that kicking in, we think about the same time as we'd annualized the lower run rate we've been sitting at for the last few quarters.

We expect that to annualize in the first half of next year.

And then when you combine that with the improvements in the top line and the changes we're making to optimize growth.

That's why we see a nice -- moving to a nice organic growth vector as we get into the second half of next year.

(Operator Instructions) And our next question comes from Paul Knight.

Yes.

Can you hear me, Jim?

Yes.

Can you talk about the reorganization of the cellular and the molecular technologies?

Is it kind of interrupting sales?

What do you have to do?

How many people is it?

And how long does it take?

Yes.

It's actually one of our top priorities.

It's really consolidating those 2 teams.

It's not really necessarily lowering cost, it's really getting better coverage.

If you look at the 2 teams, essentially, the PCMI and the Ephys legacy teams.

They called on the same call point.

They called on primarily academic research areas, selling the discovery and research products.

So it just -- it didn't seem to make much sense to have them split where you had coverage split, where you have a small number of people covering a large group like the United States.

By combining them, they -- both groups carry the same product lines.

And we're able to have better physical coverage to the customers.

In addition, we can -- we'll be able to put more technical support in place.

Always, as you make certain changes.

That's one area.

I'm always very careful about when you start making improvements or changes in your commercial channel.

We don't see any issues in doing this.

Certainly, we've secured our sales force.

They understand what's going on.

The sales leadership and the sales team are involved in much of the design changes here for the organization.

So again, this is something that -- by getting -- by expanding our coverage we see that as being a primary driver to helping us get back to an organic growth vector for this business.

In DSI, can you talk about what you're seeing about?

Are we past these CRO mergers?

Where are you seeing...

Yes.

We're making a lot -- we're actually in pretty close contact with the CROs at this point.

We do see, first, with the 2 primary customers there with Covance and Charles River.

We do see them stabilizing.

In fact, as I said on the call, we see the CRO revenues actually coming back to about -- to the historic numbers.

The more annual average type numbers.

So we're happy to see that happening.

And we -- when we think that we'll now start to see with those combined groups, there will be incremental revenue.

It'd be incremental volume of drugs going through those groups.

So we're -- again, we're paying close attention to it.

Certainly, much of the kind of impacts of the changes we think are behind us.

We do think this is going to start improving here now going forward.

Certainly, it's stabilized and we're back at run rates.

At least in the U.S., we're back on the growth side, too.

I think it's taking maybe a little bit longer outside the U.S., but the majority of our CRO business is really here in the U.S.

And then Jim, could you talk on -- you had mentioned on your corporate -- the handout here for Q3, CRISPR-related products, how much of that?

CRISPR is what -- affecting what percent of the Cellular and Molecular Technology segment?

And what is the growth rate there?

Is it double-digit?

Could you flush out CRISPR?

And...

Sure.

Sure.

With much of the new drug development these days are moving to the Biologics, so we're seeing a lot more happening on -- in things like gene splicing and such, where our BTX product is a well-known product.

It is one of the fastest-growing parts of our business, and I believe it is.

And it's growing at double digits.

It's an area that we're putting a lot of attention to.

You're going to see us investing more in that area.

You'll also see us investing to make that -- to make those products even more attractive into the pharma and the CRO space.

Typically, we really haven't taken much of our discovery product into the CROs and pharmas, where we have a very strong connection.

We have -- it's a place where our name is well-known and very well connected in -- through our DSI business.

So as the CROs and the pharma groups start to do more and more testing, even down to the cellular level, where -- typically, it was almost -- all that's in the past been required by much of this has been the animal testing where -- which is really, really great for our preclinical business.

But as that starts to expand into getting more and more to cellular level, products like our BTX-type product and things that are involved with CRISPR and electrophysiology.

These are products that we think are going to start to be -- will be able to pull more into those spaces.

And lastly, I know that you were trying to sort out -- maybe sorting out your interest costs.

Where are you in that process?

Yes, I'll let Mike respond to that.

Sure.

Paul, this is Mike.

So what you -- we talked about is, I think our first priority was to get the business improved from an operating margin perspective.

And we got the operating flexibility with our debt amendment.

I think as we start to deliver margin improvements and get the leverage down, that there will be opportunities in 2020 to get to a lower interest rate.

Yes.

We made -- the strategic decision was first make sure we have the flexibility with the balance sheet to take the charges, to get the business rightsized.

Certainly, we're also very interested, as you know, in getting the debt to the point where the interest rate is more in line with what we would expect to get as we get into the next -- early part of next year.

But again, priority was, be able to make the changes we need to do.

And you do see, we are cash flow nicely.

We're paying down the debt.

And we are going to be working on next Friday, we'd make sure we get the interest rate in the right place at the right time.

(Operator Instructions) And our next question comes from Lisa Springer.

You are guiding for a pretty nice sequential improvement in operating margin for the fourth quarter.

I was wondering if you could kind of summarize what are going to be the growth drivers for that big surge in operating margin.

Sure.

Hi, again.

Thanks, Lisa.

It's nice to hear your voice.

We -- typically, Q4 is a stronger quarter for us.

So certainly, there's going to be -- and there'll be growth sequentially over Q3.

That -- when you combine that with the fact that we're really managing the run rate cost of the business.

So we'll see revenue growth.

We also expect to see a stronger mix as we get into Q4, where the business is focusing on the higher-margin product.

And we're expanding in some of these areas, like we talked about with BTX product and such.

So we think Q4, we see that coming nicely.

And with these costs -- with the cost improvements that we're doing, not only does that lead into Q4.

It also moves into next year with a lower cost basis.

When you combine that with the actions that we're taking, we expect to see gross margin improving, we expect to see OpEx continuing to drop, and we expect to start seeing more organic growth rolling into the business.

And that is all the time we have for -- allotted for questions.

I will now turn the call over to Mr. Green for final remarks.

Thanks for joining us this evening.

This ends today's presentation.

And we look forward to you dialing into our Q4 call as we get into the -- beginning of next year.

Thank you very much.

And have a good night.

Thank you, ladies and gentlemen, this concludes today's conference.

Thank you for participating.

You may now disconnect.