Harvard Bioscience Inc (HBIO) 2019 Q4 法說會逐字稿

Welcome to the Fourth Quarter 2019 Harvard Bioscience, Incorporated Earnings Conference Call. My name is Paulette, 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. You may begin.

Thank you, Paulette, and good morning, everyone. 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 HBIO Q4 quarterly earnings presentation and can be 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, our Chief Financial Officer.

Let me remind you that on today's call, the company may make various remarks about future expectations, plans and prospects for Harvard Bioscience, Inc. that constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those discussed in our annual report on Form 10-K for our fiscal year ended December 31, 2018, and in subsequent filings made by the company with the SEC. To the extent the company utilizes non-GAAP measures, reconciliations will be provided in various press releases and on the company's website.

Further, I would like to inform you that the company, its directors and certain of its executive officers are participants in the solicitation of proxies from the company's shareholders in connection with the company's 2020 Annual Meeting of Shareholders. The company will file a proxy statement and proxy card with the SEC in connection with its solicitation of proxies for the 2020 annual meeting.

Shareholders are strongly encouraged to read the proxy statement, the accompanying proxy card and all other documents filed with the SEC carefully and in their entirety, as they contain important information. Information regarding the entity of company's participants and their direct or indirect interest by security holders or otherwise will be set forth in the proxy statement and other materials filed by the company with the SEC which can be found for free through the investor overview section of the company's website at harvardbioscience.com or through the SEC's website at sec.gov. We will not comment on Engine Capital or their direct to nominations on this call.

I will now turn the call over to Jim. Please go ahead, Jim.

Thanks, David, and good morning, everybody. Let's start by moving to Slide 4 and take a quick look at the highlights. We drove significant year-over-year adjusted operating margin expansion, going from 14% to 18%. We saw a strong cash flow, with year-over-year leverage reduction from 3.7x to 3.3x. We initiated a major restructuring, giving greater than $4 million in annualized savings. This year, we expect to return to organic growth, deliver significant operating -- adjusted operating margin expansion well into the mid-teens and strong cash flow to reduce our debt and our leverage ratio to below 2.5x by the end of the year.

Let's move on to Slide 5 of the presentation, and take a look at Q4. Q4 revenue came in at $31 million, down $2.9 million or 8.6% from Q4 last year and included impacts of a negative $0.2 million in FX and negative $1.3 million from low-margin portfolio rationalization.

Our gross margin on a GAAP basis measured 55.6%, up 30 basis points. Non-GAAP adjusted gross margin was 55.6%, down 30 basis points.

This quarter had GAAP operating income of $1.6 million or 5.3% of revenue. Our adjusted operating income was $5.6 million. So that means our adjusted operating margin came in at 18.1%, and that's up 4 percentage points from last year.

GAAP earnings per share was $0.01, our adjusted diluted earnings per share measured $0.08, up $0.01 from the prior year, though it was impacted and includes the impact of FX and some taxes, and Michael will talk to you about that a little bit later on. Finally, our cash flow from operations was $2 million.

Let's move on to Slide 6 and look at the full year. Revenue for 2019 was $116.2 million, down 3.8%. GAAP gross margin was 55.4%. Non-GAAP adjusted gross margin came in at 55.8%, up 10 basis points from prior year. GAAP operating income was $0.4 million or 0.3% as a percent of revenue, and our non-GAAP adjusted operating income was $14.9 million or 12.8% of revenue, up 70 basis points. GAAP earnings per share was a negative $0.12, and non-GAAP adjusted diluted earnings per share was $0.18, down $0.02 from prior year. Cash flow from operations measured $8 million.

Now let's move to Slide 7. Harvard Bioscience has historically shown the business as a various basket of product brands, which we believe do not do justice to describing the business. You'll see us transitioning to a more straightforward view of the business by showing the company's products and applications, but also showing them sold to various customer segments, well-known customer segments. These customer segments will typically include academic research, pharma, clinical research, labs and distribution, which will often include OEM sales, and we'll talk about that.

So starting with the first row of the table, our Cellular and Molecular product revenue, which is predominantly to academic customers was down in Europe for the first 3 quarters and recovered in Q4. We had a negative $1.3 million Q4 impact from product portfolio rationalization. We also had a negative $2.1 million full year impact for a few large OEM distributors, which we are now actively addressing in these relationships.

Looking at the second row of the table. Our preclinical product revenue was down throughout the year, primarily impacted by the consolidation of our largest 4 CRO customers combining into 2, academic sales in Europe and 2 large onetime purchases in Q4 last year. The CRO consolidation impact our -- impacted our run rate in the first half, started recovering in Q3 and recovered to normalized levels in Q4. Pharma had 2 large unique customer purchases in Q4 of '18. And revenue came to normalized levels exiting 2019.

In the academic space, Europe trended down through the year, exacerbated by gaps in sales coverage, which I can say now we are addressing. Mike will give you color a little bit later on in the presentation to the items in the lower section of this slide.

So let's move on to Slide 8 and take a look at the restructuring-related actions that took place in Q4.

We completed the TBSI consolidation into the Minneapolis operation. We initiated the Connecticut manufacturing consolidation to Holliston Mass. We initiated downsizing of our U.K. operation, and we started a global reduction in force of over 10% across all businesses. We expect annualized savings of over $4 million, phasing in primarily in the first half of 2020. And we expect onetime cost of $4 million to $5 million spread across this Q4 through Q4 of 2020.

So with that, I'll turn it over to Mike for the financials.

Thanks, Jim. So on Slide 10 of the presentation, folks. On the full P&L for the quarter, as noted, revenue was down 8.6% year-over-year. To augment Jim's commentary, the Americas were down due to planned product rationalization and large pharma orders in the prior year. In the rest of the world, where we have reported headwinds through Q3 '19, both Europe and China finished the year strong, a positive sign entering 2020.

Turning to profitability. We grew adjusted operating income and expanded margins 400 basis points through continued focus on reducing our cost base, via both manufacturing efficiencies and OpEx discipline. Gross margin was essentially flat, as cost reductions offset the impact of lower volume. Adjusted EPS increased $0.01 on the operating income improvement noted, with a higher effective tax rate, partially offsetting these gains. The reported tax rate is higher for the quarter and the year due to certain tax credits in Europe, which lapsed since the prior year. Overall, cash taxes remain low for the business.

Turning to the balance sheet. We reduced debt by over $7 million over the course of 2019, which included the benefit of a $3 million reduction in inventory year-over-year. We are pleased to exit 2019, having deleveraged the business and with the operating flexibility to execute the planned restructuring noted.

Turning to the full year financials on Page 11. The organic revenue decline for the year was due primarily to the CRO consolidation impact, Europe headwinds and product rationalization efforts noted. The full year results in 2019 include a net increase of approximately $2.4 million from the January 2018 acquisition of DSI and divestiture of the Denville distribution business, essentially, 1 extra month of DSI sales in 2019, which has overall improved the profitability of the business.

Adjusted operating income was modestly up with 70 basis point margin improvement based on the cost reduction focus we've noted. Gross margin was essentially flat as these cost savings and improved product mix offset the impact of a lower volume. Full year adjusted diluted EPS declined on the higher tax rate noted as well, to a lesser extent, FX and the share count.

With that, I'll turn it back to Jim to share our 2020 outlook. Jim?

Thanks, Mike. Okay. Let's move to Slide 13 and review the 2020 cost reductions that are designed to expand both our gross margins and our operating margins.

We expect $4 million in annualized savings from global restructuring announced in Q4 '19, with savings beginning in this Q1. These actions included consolidation of the Connecticut manufacturing into our core manufacturing operation. This action is expected -- it's in progress now and expected to complete by midyear. Restructuring the Cambridge U.K. operation is also in progress and also should complete by midyear.

Our global headcount reduction of approximately 10% across the functions. It's essentially complete here in Q1 and will pay back throughout the year.

Let's move on to Slide 14. Talk a little bit about the 2020 growth drivers. The impact of the CRO consolidations has annualized now, and we see a return to growth in the first half. Our CRO and pharma customers expect increased growth on demand of our next generation implantable telemetry devices and these start shipping here in Q1. We expect incremental pull through sales of our cellular based products on expanding use of cell-based testing in both CROs and pharma customers.

Our academic sales are expected to remain stable. And we see expanded opportunity in our CRISPR related products and cellular level testing. Our challenge is with certain distributors and OEM partners, where we expect a modest decline. It has our attention, and we're addressing better management of these channels. I'll say the coronavirus situation could be a mixed bag at this point. It's likely a headwind early in the year, there could be more demand for certain kinds of our products, when we looked at what's happening in the use of cellular and preclinical type testing products.

So let's move to -- finally, we'll look at Slide 15. Let me just take a minute to say that the Board and I believe the current share price does not reflect the true value of Harvard Bioscience. We have taken strong actions to address this, such as establishing a new management team, restructuring actions, focusing on growth and setting public targets against we are measured. So as I look to the outlook for 2020, we're on track with the public targets that we set last September.

We see revenue returning to organic growth in the low single digits for the year, primarily coming in the second half. We expect gross margin expansion of approximately 2 percentage points. We expect operating margin expansion of approximately 3 percentage points, reaching the 15% to 16% level for the full year. We continue to focus on debt reduction and expect our leverage ratio to be below 3 by the end of the first half.

Thank you. Now I'll turn the call back over to the operator and open the line for Q&A. Thank you.

(Operator Instructions) And our first question comes from Paul Knight from Janney Montgomery.

And the first question I had is, the product rationalization, what product line was that in the fourth quarter, Jim? And what kind of level of revenue would you say, are you looking at as -- is there any -- is there another $4 million, $5 million worth of an additional rationalization you think about, or you don't know yet? But starting with what was in that $1.3 million?

Yes, good to hear your voice, Paul. The first thing would be the TBSI products. Those are the jacketed type products that go -- typically actually sell through our DSI business with those products in the preclinical. That was an operation down in North Carolina. It was subscale, losing money, the revenue associated with it was on the order of annualized maybe $1 million or so last year.

So in moving that and just keeping the jacketed products, which have a life, those move forward. But I would say with that shutdown, there is probably affected on an annual basis, somewhere maybe a little around $1 million of revenue. Now again, that was what I would typically call bad revenue. It was older products, low margin. We have newer types of products that would transition to when I looked at it over time anyway. So it just made sense to take that out of the portfolio. But the little -- the small amount of continued revenue that we will get from these current jacketed products, they'll contribute but at a much lower revenue level. The other thing is there was kind of a -- there was -- there were -- the company had been selling large system that had very small company factored content in it. So -- which meant they were -- they might look like a big revenue number, but they're very low margin and very little contribution. And something like that just strategically doesn't make sense for this business. My focus is to drive growth with profitable business. That means gross margins that are accretive to our gross margin, not things that are -- that can be significantly dilutive. And in that space, I think, I identified that in a particular -- one particular product line that, that was a little over $1 million, maybe $1.5 million -- up to $1.5 million of that kind of a product offering that we are no longer offering, didn't operate this year, there was some of that in last year. So that comes out. Other than that, I also said that there's been a -- there's a couple of products and large customers that had been eroding, and they're been eroding over a few years. And it's almost out of our business at this point.

So that was coming down at about $1 million to $1.5 million a year. And part of why we were seeing kind of just an overall erosion. With that, it's going to -- it annualizes this year anyway. What we're deciding is, does it make sense for us to try to kick it back into the business. And that's on your order of about $1 million to $1.5 million. So that's kind of the total numbers. Some of it's already come out. There'll be a little bit more this year, maybe it's another $2 million headwind. But with driving growth across the rest of the business, you'll see that crossover, as we get into the year, as we -- certainly as we get to the second half, that's where we had predicted. The negatives are gone. If there are some that -- a couple that we want to keep that will -- if they're good and profitable, we'll at least move those to flat and you'll see the overall growth kicking in from the underlying growing products that are strategic. So I -- hope that answers your question. Does that get you what you need, what you're thinking, Paul?

Yes. And then you're mentioning the several things on Slide 7, like changing the large OEM distribution arrangement or impact and also gaps in European sales coverage. Do you expect these things you're changing in distribution in the sales group? Does that take first half? Or does that take the year to get the distribution network the way that you want it?

Some of it starts right away. The sales -- the gaps that we had in the sales area, where we had gaps of good coverage, we have already filled those spots, over the last couple of months. But as you know, these are quota based type opportunities. They take -- they might take a year for an individual rep to really get up to speed on average. But certainly, they start contributing even in the first half. As far as the one OEM customer, there's a couple of -- one main one that we're dealing with. That's not going to -- that's still going to be a bit of a headwind through the first half. So that's why, again, when I look at the business, I've kind of had predicted that we're kind of roughly flat in the first half. There -- again, we're -- kind of hard to predict the coronavirus thing, but that's going to have -- that's certainly going to have a bit of impact early on in the first and second quarter.

But we see other things that are growing, especially when you have the CROs now coming back to growth. And telling us that. I mean, actually indicating growth and demand. The pharma, also same thing. Some of the exciting products that you're aware of, like the CRISPR related products, those are -- those have some nice tailwinds. They're also, again, with the situation in China, you start to see some of these -- a number of these products, everything from cellular based testing through preclinical to some of the gene splicing things that are used for the -- for creating some of the potential solutions. These are getting a lot more attention now. And everybody is working on it, and these -- most of all these customers working at our customers of ours. So again, it's a mixed bag. We hate to see what's happening there. But it does highlight that we're in a place that can really help. So -- but yes, I think that's where we are, a little bit -- it will take a little while in the first half. But again, the other things are offsetting a lot of some of these downward movements in the first half. But as those are done and we -- as we address them, we're full speed ahead as the second half comes in.

And then what do you expect for a tax rate on 2020?

Mike, on the tax rate.

I'd say, low 20s is probably right rate to think about, Paul.

Okay. And then last question is the Cellular and Molecular product lines, I know that obviously, the cell and gene therapy market is the most rapidly growing part of the marketplace. What level of revenue do you have directly related to studies involved in cell and gene therapy and CRISPR related work, et cetera. Is it part of -- what part of cellular molecular is it?

It's a fairly large component of our academic sales and Cellular and Molecular. So you look at like the MCS or the Ephys related products for individual cell testing and the CRISPR related products where there's -- where you see a lot of the fusion type technologies for adjusting and loading different things into the cells.

So those are the 2, I guess, I would say, CRISPR related and the cellular based testing, which between the 2 of them, I would say, it's certainly in the range of around half of our CMT business, I would say, roughly speaking, that address those types of areas. And what's also very exciting to us is that our relationships with the CROs and the pharma companies, we've sold those technologies reasonably well into those markets in Europe, but never really did much in the U.S. So we're now talking with the big -- our big DSI customers, pharma and CROs and starting to offer those products there. And that's where we see it. That's where the additional incremental type pull through starts to come through. So they're interested in it. We're talking with them about it. And again, it's specifically those areas that you mentioned cellular testing and things that are associated with the biologics.

Our next question comes from Lisa Springer from Singular Research.

I wonder if you can comment on how the CRO landscape has changed over the past year. And how that might create future opportunities for you?

Yes. Well, we had -- our 4 largest CRO customers, consolidated it too. So now that we have Charles River and Covance. There are 2 -- I guess, they are our 2 largest customers now. There was, as you might expect, a little bit of chaos during those acquisitions, where they were sorting out who is going to -- which tools they were going to be using. The good news is, all 4 were using our tools. But the delays -- and they had told us point blank, that they knew there were going to be some delays in purchasing until things sorted out like which labs, we're going to be concentrating on what and who's going to be in charge. That's behind us now. And they both -- the large customers have indicated, they see both of them increasing demand on our products. And that's starting now. So we're pretty happy to see that, that not only has it stabilized, but they're moving back towards at least to where they were. And they look forward to growth. If you look at their -- if you look at what they project publicly, they're on a nice steep growth curve, and we -- we're able to draft that nicely with the CROs. And the pharma business is still moving more and more to the CROs, and that's part of growing it. So we could play both sides of that. If it's with pharma, that's great, if it moves with CRO, that's fine, too. And we are becoming the standard of the standard actual systems that are used by these folks. So that puts us in a great position.

Okay. And could you comment on expectations for R&D spending in 2020 and where that R&D is going to be concentrated?

I don't know that we say what the numbers are on R&D. But certainly, I will tell you this. We're putting it into the areas where we see expansion and growth. A lot of it really is targeted towards the commercial side of pharma and CRO. It's in the platforms that really are used by these folks that are, I would say, very sticky. And those then is to use our platforms and our data analytics systems, then they use our consumables and our telemetry devices. The other area, I would say is when you look at the areas that we see -- that we know are being used and expanding in academia, but also being pulled into the CRL and pharma world, comes down to the cellular based testing products. That -- those we see, that's where we're investing there and we're investing in the gene splicing or CRISPR related products, too. Those are natural tailwinds. And that's where we're making more investment to be able to offer a wider spectrum and be able to go more cross the full line from the academic sites that may be doing small numbers of tests to more high-volume things that are happening in the CROs and pharma.

Our next question comes from Bruce Jackson from The Benchmark Company.

A follow-up question on the coronavirus situation and the CROs. Have you heard anything from your CRO accounts about how the recruitment and trial work is going? And then does that have any impact on your product flow? And how do you see that playing out, over the course of the next couple of quarters?

Yes. Well, I mean, as we see it, the initial demand is primarily in the academic side. But as that starts to work and as we start to see vaccines, starting to be -- come out to where they're starting to move towards clinical testing. We see that as -- certainly, that demands our products. And in particular, we think that -- and we're starting to see a lot more interest and tick-up in the inhalation type products. So when you look at how you're going to test these -- situation like this. Inhalation is really critical. So that's something we're preparing for. We think that, that's going to be something that's going to be some upside for us. On the other hand, in China, we know a lot of the academic institutes. They've been told to stay home for another couple of months. So we know we've got some -- there will be some impact to the China revenues. And the good news for us is, I mean, good news or not, we don't have a lot of China revenue. I'd never made a big deal out of it. So it's not a massive exposure to us at all. It's more minor, but it is something that -- as that corrects, that will start to be an opportunity for growth. But the need -- but again, the need for -- our products are right in line with the kind of things that -- that are needed to help problems like this.

Okay. That's helpful. And then in terms of the CRISPR related product line, I assume you're referring primarily to the BTX Electroporation and...

That's right.

And electrofusion product lines?

That's right.

Is there -- was there anything else in the product line, that's gene therapy related or CRISPR related?

That's probably the most on the upfront side. And we've tended to have one product that was kind of one size fits all. And we knew -- we know if we really want to draft that with the growth opportunity that's there is for us to have a couple more configurations, one that'll get us higher volume. And then also for places where they don't have the budget to have a more value-based offering. So we're expanding that capability, and Electroporation is a big, big part of CRISPR. And then when you look to the Ephys type products, individual cell testing areas, that would be -- it's related but typically, we expect -- we see those both. Those are the 2 that apply to that space. But again, BTX is a big one, and we see a lot of opportunity for it.

Okay, great. And then last question for me on the product line rationalization. I think, the general idea was to migrate customers over to another product in the product line. How is that process going in. Do you have enough sales and marketing people right now to manage that process?

Yes. I think we do. I mean, it was a smaller -- it wasn't a large revenue stream, but it was a fairly older technology, moving away from these external jacketed type of ways of measuring signals to more implantable devices, which is right in our wheelhouse with implantables and telemetry, but also with headsets and things that are used for neuro that come out of our MCS and German facility. So that's more of a natural change. But again, I think in the longer run, these implantables, that's where it's all going to go.

This is all the time allotted for questions. I will now turn the call over to Mr. Green for final remarks.

Well, thank you, everyone, for joining us. Look forward to spending some more time with our investors. Really, again, I want to say, I think we've got the right Board and the right management team. We're making the changes to turn this into a real profitable growth platform of a business. I came here to do this. I appreciate your support, and I look forward to be joining us on our next call for Q1. Thank you very much, and have a good day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. And you may now disconnect.