Harvard Bioscience Inc (HBIO) 2024 Q3 法說會逐字稿

Good day and welcome to the third quarter, 2024 Harvard Bioscience Inc earnings conference call.

[Operator Instructions].

As a reminder, this call may be recorded.

I would like to turn the call over to Kathryn Flynn corporate controller.

Please go ahead.

Thank you, Michelle and good morning, everyone.

Thank you for joining the Harvard Bioscience third quarter, 2024 earnings conference.

Leading the call today will be Jim Green, 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 or 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 1,995.

Actual results may differ materially from those expressed or implied.

Please refer to today's press release for other disclosures on forward-looking statements.

These facts and other risks and uncertainties are described in the company's filings with the Security and Exchange Commission.

Harvard Bioscience assumes no obligation to update or revise any forward-looking statements publicly and management 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 a substitute reconciliations of GAAP to non-GAAP measures are provided in today's earnings press release.

I will now turn the call over to Jim.

Please go ahead.

Hi Katherine.

Good morning, everybody.

Let's go ahead and move to slide 3 of the presentation and take a look at our quarterly results.

Revenue in the third quarter came in at $22 million.

That's 13% below Q3 last year on a sequential basis, we were down about 5% impacted primarily on weakness in China or Asia Pacific taking a minute.

Now on the market environment, Americas and Europe seem to be stabilizing with three sequential revenue quarters that were roughly flat.

China APAC saw further weakness in Q3 that is now expected to flatten or improve modestly going forward.

So despite the delayed market recovery overall, we believe we have a stable base revenue run rate that we'll be building on with new products now going into production.

Gross margin came in at $12.8 million or 58.1% close to our 60% target.

Despite a low revenue quarter on a GAAP basis, we reported an operating loss of $1.9 million on an adjusted basis.

Our operating income measured $800,000 or 3.8% of revenue and adjusted EBITDA came in at $1.3 million or 6% of revenue.

It's worth mentioning a major operating milestone.

During Q3, we successfully transitioned and merged all us operations onto one modern P system.

This enterprise tool set enables significant improvement in both inventory and supply chain management.

And we already see in early Q4 improvements in supply chain related delayed shipments which have plagued us for well over a year.

In addition, with our continued focus on efficiencies and operating costs, we took additional actions during Q3 and early Q4 which are expected to reduce operating expense by an additional $1 million a quarter.

Beginning here in the fourth quarter.

These reductions are designed to structurally and long term optimize our overall cost of our business and to enable self funding from operations even on low revenue quarters, operating cost reductions combined with new product introductions.

Now shipping are expected to further improve gross margins and with strong operating leverage to significantly improve EBITDA in the fourth quarter and beyond.

I'll give some more color on our new product commercialization's later in the presentation.

But first, let me turn it over to Jennifer Cody, our CFO to discuss our third quarter financial results in more detail, Jen.

Thank you, Jim and hello everyone.

Let's dive into further details on our financials.

If you can move to slide 4, where we will look at revenue for the quarter by product family and region.

Starting with the Americas revenue in the third quarter was down 12% as reported from last year, Q3 and is stabilizing sequentially.

As you can see compared to Q2 and Q1, we are pleased to see these signs of stabilization in the Americas.

Pre clinical sales saw a 26% decline compared to the prior year quarter.

Primarily due to COVID related respiratory products and telemetry system software.

Sequentially, preclinical sales have leveled off starting with Q2 down.

Slightly cellular and molecular showed revenue growth of 15% compared to Q3 of last year.

Sequentially CMT showed modest growth.

Pharma and CROs are still keeping a tight hold on spending but there is optimism as we listen to industry updates.

Moving on to Europe, overall revenue is down about 12% compared to Q3 last year but has also stabilized sequentially, revenue has remained effectively flat for the last three quarters we are experiencing overall stabilization in our European sales.

Pre clinical sales were down 21% year over year and remained challenged on a sequential basis.

As compared to Q2 of this year, cellular and molecular sales were down 7% compared to prior year compared to Q2 CMT saw sequential growth driven primarily by increases in cell based testing.

Well, budgets remain tight as a result of the general economic environment in Europe, overall revenue has stayed flat and we are starting to see improvements in orders at the start of Q4.

Moving to China and Asia Pacific.

Overall APAC revenue was down 20% against prior year.

Q3 and 20% sequentially to Q2.

The APAC marsh market has been especially difficult this past year which has affected sales in both preclinical and CMT pre-clinical sales in Q3 saw further erosion down 32% compared to prior year and down sequentially from Q2 due to lower continued lower spend by CROs cellular and molecular products are down 5% compared to the prior year and down sequentially from Q2 16%.

We are expecting flat to moderate improvement sequentially starting in Q4.

What is encouraging is when we look at our global trailing three-month order profile, we see a clear inflection point to growth at the end of June that has now been increasing for four months.

Our booking trend is on its way up, we are now growing.

We are also on track with revenue shipments to early adopters of our new mesh me A products and I know Jim is excited to speak about that shortly.

If you can, please refer to slide 5, we'll share some additional financial methods.

Please refer to the top middle of the slide.

As Jim mentioned growth margin during Q3 was 58.1% in both 2024 and 2023.

We continue to see strong product margins but experienced lower absorption of fixed manufacturing costs.

During Q3, we stay encouraged that our growth margins remain close to our target of 60%.

Despite a tough revenue quarter, we continue to make improvements in our cost structure and that should drive increased margin drop down with expected improvements in revenue.

If you refer to the top right graph on the slide, our adjusted EBITDA during Q3 was down from $2.2 million last year to $1.3 million this year, the primary driver for reduced adjusted EBITDA was the drop down of lower gross margin dollars of approximately $2 million offset by reduced operating expenses of $1 million as a result of the cost reduction actions we took in Q2, we initiated additional cost actions in Q3 and early Q4, primarily related to employee expenses that we expect to drive additional quarterly run rate savings of approximately $1 million.

As Jim mentioned, we completed an impactful project during the second quarter.

We successfully consolidated our USP systems and went live on Labor Day weekend.

We expect this migration to one P environment in the US will allow us to mature our sales and operations planning, supply chain management and will enable inventory reductions.

This will also enable automation and efficiency improvements throughout the operation.

We continue to manage through market headwinds and have made additional cost reductions which positions us for improved profitability going forward.

We also stay focused on prioritizing our spending towards the critical areas of growth for our business.

Moving to the bottom left where we show both reported and adjusted loss earnings per share.

First, I will describe the primary differences between GAAP EPS and adjusted EPS.

The differences between these results are highlighted in the reconciliation tables on slide 11 but the primary drivers continue to be stock compensation, amortization and depreciation, all of which are non-cash items.

Together these items impacted both years by approximately $0.5 to $0.6 per share.

During Q3, we settled a defined benefit plan in the UK which will remove a future annuity payment to former employees of the company pension assets were used to acquire annuities for the participants and this did not require any incremental cash funding by the company.

Our GAAP loss per share included an impact of approximately $0.03 per share from the non cash realized loss on the closure of the pension plan of $1.2 million.

Adjusted EPS declined $0.03 compared to last year, primarily on the gross margin declines from lower revenue, partially offset by lower operating expenses.

Please refer to the graph in the middle of the bottom row.

Cash flow used in operations was $0.8 million for Q3 2024 compared to cash provided by operations of $4.4 million in the same period last year.

This decline is largely driven from the drop-down impact of lower sales during the quarter.

Our net debt at the end of Q3 2024 was slightly above our net debt at the end of the year as we discussed last quarter.

During the first half of 2024 we received cash benefit net of commissions of $2.6 million for the employee retention tax credit provided by the Cares Act.

And also, we were able to sell all of our investment in HRG and stock for $1.9 million which is included in our cash flow from investing activities.

These additional sources of cash help support our cash position which has minimized our net borrowings against our revolver to $1.2 million since the end of 2023.

As previously disclosed, we amended our credit agreement earlier in Q3.

While we are in compliance with our financial covenant, we are currently unable to make additional borrowings under our revolver facility due to net leverage ratio limitations under the credit agreement.

This limitation will continue until we report our annual financials in March 2025.

Based on our current plans including the cost reduction actions I discussed earlier, we expect that our available cash and cash flow from operations will be sufficient to finance operational and debt service needs for the next 12 months.

That said our ongoing cash flows and ability to meet our debt covenants are dependent on our ongoing revenue and operating performance.

So we'll be keeping a close eye on our liquidity situation.

Further details on the above items can be found in the non-GAAP reconciliation tables included in our press release and in our appendix to this presentation and will be available in our 10-Q.

I am now happy to hand things back to Jim.

Thank you, Jen.

I'm just going to take a quick second and reflect on Jen's comment about the trailing 12 months or the trailing three month trend on our order intake that that now that we're seeing an inflection back to growth and It's very exciting.

I do want to mention though that with, the first thing that happens with order growth, there is a timing between order and shipment and sale and such.

So, it does take a while for that to then turn into revenue growth, but certainly it is the prime indicator and it also gives us good comfort that now as we start to look toward our expectations and outlook, we should be able to, we expect to be able to do a much better job than we've done in during the last recent few months, few quarters where we had this kind of falling situation that was hard to predict, especially driven even lately by China.

But now that we see that stabilizing and we look at the fundamental that three-month, 3,4-month trend.

It's a very key indicator for us to be able to underpin what we see is our base run rate revenue that we'll be building on with the new products.

So it's very good timing for us.

I think it's a, it's a great thing to see.

I don't know that I would call it a return of the great of the market.

But certainly from our perspective, we see things stabilizing and something really strong that we can build on and much better be able to predict.

So if we go to slide 6, I do want to take some time and go through and discuss our more and more consider our considerable progress that we've seen on some of these new product introductions.

If you look at the table, the first row of the table on the slide highlights the commercial status of two new products.

We consider part of our base, our bread and butter business.

Early in Q3, we began production shipments of our new soho family of telemetry devices which now enable real time telemetry measurements in a shared animal housing environment and now also concurrently during behavioral testing.

Together, we believe this new capability will lead to additional demand starting now in large government labs and then expanding globally in 2025.

Also in as part of our base business.

Late last year, we announced the initial delivery of our groundbreaking highly automated Beva Mars neurobehavioral monitoring system to one of our largest cro customers this customer and it's not a secret that it's labcore has adopted our system as part of their preclinical testing offering in Q4.

We expect to ship additional viva mars products to this customer as they expand their use of these systems to more locations.

We're encouraged by the initial response that even Mars and are seeing strong interest from other cros and BioPharma customers and expect expanding sales in 2025 and beyond.

Now, the second row of the table highlights the commercial status of our products targeted to high growth electroporation and bioproduction.

This year we began in earnest the selling process in the bioproduction segment.

Late in 2023 we announced that a large Pharma company had adopted our BTX electroporation system configured for bioproduction.

Looking at the commercial status.

We're now pleased to see that the consumable revenue from this particular customer has now grown to approximately $1 million annually at a, at a run rate and it's in line with our original expectations.

This customer is now exploring the use of BTX for bioproduction of an additional MRNA drug application.

We're also very encouraged by the number of new customers in consideration of our BTX as a bridge to bioproduction for their new generation drugs.

Also, in Q3, we began shipping our new CGMP compliant amino acid analyzer system for bioproduction bioprocessing applications.

Our AAA is an adaptation of our leading biochrome AAA system currently operating in clinical labs around the world and is expected to do well in bioproduction applications.

The first couple shipments were in Q3, and we expect to ship another handful of systems in this quarter.

The third row of the table highlights the commercial status of our emerging new high growth mesh MEA organoid platforms.

We've adapted our market leading me a electrophysiology systems to be the industry's first in vitro organoid data acquisition and analysis system capable of supporting long life longitudinal analysis of organoids.

We see these new systems well positioned to support emerging fundamental research by academic customers initially in neuro disease applications.

In addition, we believe BioPharma and CRO companies can streamline safety and toxicology testing as well as reduce costs, reduce test time and expensive animal model usage for new drug development and safety assessment.

As for the commercial status.

At this time, we have five operating beta sites, three academic sites including University of Texas Tempa University in France, University of Michigan and expect to install at the NIH in Q1 SynXis, an advanced CRO in France is focusing on safety and toxicology applications and a leading a leading BioPharma company with operations in Cambridge and throughout California is focusing on longitudinal viability testing for neuro and cardiac organizes.

As for academics and BioPharma early adopters, the first couple of units shipped in Q3 and we expect to have up to 10 installed and operating by the end of Q4.

And finally, we're now positioning for initial production ramp for the consumable mess chips in preparation for higher volume shipments in 2025.

I'd like to point out that each of these new revenue streams are based on leveraging our well-established technologies and adapting them to significantly larger BioPharma applications with high pull through recurring revenues.

And now let's go, let's go ahead and move to the summary on slide 8.

Take a look at what we see for the year and the fourth quarter.

Given the continued delay of market recovery and the D and the difficulty predicting China and Asia Pacific.

More recently, we're taking a more conservative approach and reducing our full year revenue. 2024 revenue guidance to $93 to $96 million.

We expect Q4 revenue to range from 23 to 26.

Sequentially up from Q3 on incremental growth from our, from our new product introductions.

There could be a seasonal Q4 bump but we're not counting on it.

We expect Q4 and the full year gross margin to be in the 59% to 60% range.

Finally, with an incremental $1 million savings and operating expense combined with gross margin improvement on increased revenue over Q3, we expect Q4 adjusted even to margins in the mid 10s.

So doing the math, we continue to expect full year EBIDTA margin in the high single digits.

Thank you.

And I'll turn the call over to the operator and open the line for questions.

Thank you.

(Operator instruction).

Our first question comes from Paul Knight with KeyBanc Capital Market.

Hi, Jim.

Could you, how are you, could you go over the CRO dynamics?

What are they about half of company revenue?

And then, kind of what happened here.

I think we all know that biotech financing was down like 30% and 22% down 20% and 23.

And now we're seeing the reality of CROs having less to spend, but now we're seeing more capital raised again.

So, does this like, I guess this is what you see in your orders, this kind of, pick up and then what do you see?

Do you agree?

And then how big are they as a person?

Of company.

Sure, sure CRO revenue is, if I look at the split, I think we show it at about a quarter of our revenue globally. is that about right, Jen, if you were to look at it about a quarter of our total revenue, we, it's been a bit of a mixed bag because, we sell to all of the big CROs, we are the gold standard and, the standard.

Some of the CROs we've actually seen, and they've gone publicly and said they see, improving output, they see, more new drug starts in their production line, not big growth, but certainly, at least the way they described it to us is more of a return to normalized run rate in their safety and safety and assessment.

It was a little hard to tell, like with Charles River exactly what they, their last call, it was a little confusing for us, but certainly, I think we would expect to see the same kind of thing happening there.

But in general, we look across the board, we see the second half and, Q3 Q4 mainly and certainly in Q4, more of a normalized demand for that.

You're right about the, about the BioPharma, the big biotech company or, the, the big Pharma companies, they certainly have been, have been tightening their belt. we know that they've had a series of layoffs throughout the year.

I don't know if that's continuing, but we have seen that, some of that has slowed down, our thought was they have a lot to do with, with the election because, we do tend to see that every four years.

There's some questions about.

But in general, our, our Pharma company business is seems to be doing pretty well.

It seems to be pretty, it's been running pretty flat at least for the last few quarters.

And if you look at the, the one slide on the presentation slide for, you'll see that, that we're pretty stable in the Americas, which is our, half our business and in Mia also very stable for the last three quarters, rate comes in.

So, certainly we're, and so the Biotech's and the farmer companies seem to be doing okay and they seem to be, expecting to start buying more of our equipment.

They're all, everybody seems to be saying though, in general 2025 is really when they expect to see this real return to the market.

I've been kind of tired of holding my breath while the market return.

What we're doing is looking at how is our, how are our products actually selling now that we believe we have a very nice stable run rate on an order basis and the inflections move positive that we'll have a good stable base business to run on and to build on with these new products.

And as you can see these new products are really designed to drive, very nice incremental growth in the business, across these, across these four new areas.

I mean, this, this we expect to underpin, high single, maybe close to double digit growth on our on whatever our base.

And if the base is pretty flat, those should give us some nice incremental growth and a lot of that starting here in Q4.

So that's kind of how we see it.

China has been the one where it's been a little, it's been tough.

And I will tell you though, the academic piece of China did seem to recover and it's doing better, the budget seems to be stable.

It is, it has been the big pharma, the BioPharma and the cro specifically that really, we're seeing the reductions in demand and really for the last few quarters in a row, we do think that with that, looking forward that we're expecting that stabilizing.

Now, that's the word we're hearing. we have, of course, we're hoping that things are going to go well with us with the new budgeting cycle there and that will start to improve the CRO and Pharma side of China.

So you all said though, again, we've, we've seen this kind of tightening of CROs, we think that's loosening up now, not going to big growth, but at least going to stable business for us.

And again, the farm is doing seem to be doing fine.

And we'll see how we'll see how everybody's got a positive outlook for 2025.

So that's, that's kind of what we're hoping in the meantime, we're going to run lean.

You can see that, that's how we run. we've adjusted the size of our business to make sure that even on a very low quarter, be essentially self-funding.

And that's how, that's how I like to run the business and what we size it to what we have.

And as the growth comes, still want to make sure that we're really delivering on the bottom line.

Jim on slide 6, you have these new products and looking at electroporation and mesh MEA I think most people can kind of understand the, the promise there.

How big are those businesses or can you talk to, range on percent of revenue?

And then I guess you're saying those should be high single digit growers, double digit growers.

That's kind of what you're saying there.

Yeah, I guess the way I look at it, the base business, assuming the market is stable, the base business and given that we're adding, at where pretty much where the market is now, ng that, and what we saw over the last year or so, with the, reduction in spend that tended to hit equipment more than companies that had a lot of recurring revenue.

So, but with these new products, we think the base is essentially going to align with how the market's developing for us, we think that's at least going to be stable.

Your question about electrification, about production.

This is new, it's growth.

The overall that I mean that revenue segment for us is again with a combination of bioproduction and and a specific elect operation and they're connected because they'll use our our electrification systems to design a new drug.

And the concept is then they'll, they now have the opportunity to use it for bio production.

That's right.

That's somewhere in the neighborhood of maybe 10% of our business.

We expect that to have a nice solid growth vector, certainly in the 20% or better range for that segment so that we would expect to be adding a couple of points or more to our overall business.

Now, the mesh MEA is another story.

This is, arguably n business.

It, it's today again, it's about $6 or $7 million and we're seeing fast adoption.

You can even see just starting here with the early adopters for ramping up production.

And again, but I would be, I would be expecting to see multiple points of incremental growth on our business purely from the introduction of this new capability.

And you can see who is interested in who's buying this.

I can't go into the names sometimes of who specifically, but each year.

And then last on my side would be the, I guess you see core growth rate around, what standard services have, like, evaluate, which is what kind of a 2.6 low single digit kind of BioPharma R&D growth rate.

Do you think that's fair?

Yeah, I think if, assuming things have stabilized now that even though we're all kind of looking at a lower base rate, but yeah, we certainly, we would expect that that to be sitting in the, low to mid single digits in a normalized kind of years.

So that's why I like to look at that base rate and then the new high growth areas.

And you'll also notice that each one of these new areas are, are really targeted to drive substantially more consumer recurring revenues than we've tended to be able to do in the past.

That's been our strategy, adapt these technologies, start them, test them out in academic research and adapt them to much higher volume, much higher consumable recurring revenue-based applications with our customers in BioPharma and CROs.

Thank you.

Thank you.

Our next question comes from Bruce Jackson with The Benchmark Company

Hi, good morning and thank you for taking my questions.

I'd like to get, hey, so I'd like to get back to your comments about China.

This has been kind of an ongoing issue in terms of like trying to predict what's going to happen.

So you think that it's stabilizing, my question to you is why couldn't this get worse?

And maybe you could give us some of the market indicators that you're keeping an eye on.

Yeah.

No, I mean, certainly you never know, it could get worse and given the political situation with China, to some level of growth that's more on the cellular technologies and such.

It's also an area where as we have unique technology and everybody knows in, in China that if you're, if you're, you have a product that's, that can be commoditized, you probably aren't going to have it for long if you're selling it there.

So we really focus on the products that have techno technological elect property with pricing power and they, and they want and need this kind of technology because they want to be able to do, they want to be able to compete with the Western world in these new drug development targets.

So, the academic piece we think is stable and it'll start to, we think grow it at a modest level in China.

What was really been hurting over the last few quarters has been the availability of capital to the CROs and Pharma companies there.

And they've, they're the ones who really pulled back and delayed purchasing over the last few quarters, including, this last quarter, Q3, that was where we saw some further erosion, everything else is stabilized.

But in China, we saw some further erosion.

But we have seen and again, with, with China, we do get a pretty good outlook of where we think orders are coming in, quote rates are up.

Where and, and then we, so we see Q4 as being stable, maybe there's some slight growth there off of Q3, which is, not, the, great, but at least it, it's better than it's, further falling, but at least we see some stability there and going forward.

So the budgets we think are going to get resolved.

I would not say that we're going to see, trying to go back to the kind of numbers, 25% of our business again, but I do think it's a stable and we'll see growth off of this lower rate and our focus is on these technologies that we know they, they're going to have to come to us if they want to get into, if they want to do organized work, that's a great opportunity for us.

We're seeing a lot of interest and you're starting just starting to quote that there.

So, no, we're, we're, we're thinking we think it's going to at least be stable.

So I don't know, I don't know if that answers your question.

Yeah, that sounds very helpful.

The other question I have is around the, the order patterns for the mesh MEA and organize.

So, what's the, the lag time between getting an order and then, and then shipping it just trying to kind of gauge what the lift might look like in 2020 five.

Well, you can, you can bet, I want to make sure that I can meet the demand.

But we've, we've actively kept it scarce because we, with something like this, we want to make sure we get through all the, the beta site testing.

We make sure we have a product that really is reliable and it meets the demand.

The indications are very solid.

The beta site testing is going quite well. we now have the data and we have the applications in place now to be able to start the early adopters, the early adopters are ramping up fairly fast.

I mean, if I put, I mean, this could easily be, $1million to $2 million, quarter of new growth and, that with these systems, you put a system in, you might get the same amount of the, and if a system cost you $100,000 we'd expect to get, ere close to that, in terms of the consumable going forward.

Now, the academics will tend not to have a need as much, consumable.

But when you start to put this into the BioPharma companies or into safety assessment type testing, now, you could be looking at a whole different story as far as the ratio of consumable to, product revenue.

But, your base question, how fast can we ramp.

Right now we're, again, we are, we are fairly, really limited in terms of the number of these bio chips we can make, but we're setting this up now.

So that by the second quarter, we're able to, to ramp up that production, something like 10 fold.

Now, whether that'll be enough or not, I'd be happy with, getting tenfold.

But, again, we have to be careful with how many we can shift to different operations for now until we really ramp up that ability to produce the equipment and the systems themselves is not, we've been making me a systems for years and, and now this is really a customization of an existing system to allow it to work with these, long life organoids.

So it's not a, it's not like it's a brand new system.

It's a, it's a well known system that's adapted to this and, and the activity now is really about this, this new SME a chip or this tissue chip that is the consumption.

But that's as anything.

It, it's really, and it is a semiconductor type based system, it's so it's similar to the kind of things I've been done in the past with most of my products where you have to, contract with the foundry for, for the silicon work.

Then you contract with somebody that's going to dice it out and bump it and chip it onto your system onto your consumable device.

So we know how to do this.

But I don't know, I don't think it's going to be a limit to how many we can make.

But there is time to get to the point where you're going from, let's say 50 chips a month to 500 then on from there.

But certainly as I get into the second quarter next year, this has the opportunity to be a big growth driver.

For us.

Okay, great.

That's it for me.

Thank you for taking my questions.

Thank you, Bruce.

Thank you.

I'm showing no further questions.

I'd like to turn the call back over to Jim Green CEO for closing remarks.

Okay.

Well, thank you very much for joining us today.

This ends today's presentation.

We hope you join us in March for our fourth quarter results for fiscal 2024.

Thank you so much and have a good day.

Thank you.

Thank you.

This does include the program.

You may now disconnect.

Good day.