Harvard Bioscience Inc (HBIO) 2021 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Q2 2021 Harvard Bioscience Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Dave Sirois. Please go ahead.

Thank you, Alicia, and good morning, everyone. Thank you for joining the Harvard Bioscience Second Quarter 2021 Earnings Conference Call. 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 Q2 2021 HBIO Quarterly Earnings Presentation and is located 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 Mike Rossi, Chief Financial Officer. 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 described in our annual report on Form 10-K for the period ended December 31, 2020, 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, represent our estimates as of today and should not be relied upon as representing our estimates as of any subsequent date.

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, reflect how we set and measure our incentive compensation plans and how we manage the business internally. The difference between our GAAP and non-GAAP results are outlined in the earnings release and today's presentation. These 2 documents as well as a replay of this call can be found on our website under Investor Overview, Events and Presentations.

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

Thanks, Dave. Good morning, everybody. Let's move to Slide 4 of the presentation and take a look at the highlights for the quarter. Starting off, revenue was up 25% over Q2 2020, improving to pre-COVID levels. Preclinical DSI revenues were up 20% on strong demand with growth across all of our key product lines. Cellular and molecular revenue was up 22%, continuing its recovery as labs reopen. We saw very strong order growth and backlog growth. However, we had some fulfillment delays from global supply chain disruptions that all companies these days are having to deal with.

Operating margin came in at 15%, that's versus 18% last year and 12% in Q2 of '19. Gross margins were impacted as we experienced significant COGS increases in the quarter, driven by material costs, freight and direct labor with COGS of approximately $1 million in the quarter. With gross margin being a focus of ours, you can be sure that this has our attention, and we'll be dealing with it.

Q2 was a difficult comparison because of the cost actions that we took last year in response to the developing COVID situation. Let's move to Slide 5 of the presentation and look at the details.

As expected, we continue to see strong revenue growth with Q2 coming in at $29.2 million, that's 25.3% over last year. Gross margin came in at 56%, and that was down 340 basis points from last year, but on higher costs from the global supply chain issues, which we've talked about, and we'll talk a little more about in the future. This quarter had GAAP operating income of $100,000 or 0.2% of revenue. Our adjusted operating income was $4.3 million, so our adjusted operating margin measured 14.6%. GAAP earnings per share was negative $0.01, up from a negative $0.04 last year. Our adjusted earnings per share was $0.06, up from $0.05 last year. Our cash flow from operations was $800,000, and we paid down debt by an additional $900,000 in the quarter.

Move on to Slide 6, take a look at the revenue in the quarter by product family. Starting with the first row of the table, our cellular and molecular product revenue, which is primarily from academic research lab, was up 22% from last year, with orders and backlog up significantly. We experienced significant revenue shipment delays caused by global supply chain disruptions in a number of materials. Planned pruning or removal of lower-value products impacted our reported revenue by approximately $1 million in the quarter. European labs are still slow, but we see signs of recovery looking later in this year.

Looking to the second row of the table, our preclinical products revenue grew 20%, driven by strong order growth across the product lines from our core customer segments of CRO and pharma and academic labs globally. Sales in the Americas was up 28% and Europe was up 32%, with expanding academic lab demand for our preclinical product lines. Our new inhalation product is growing at a clip of over 50%, our preclinical revenues are now exceeding the pre-COVID levels of 2019. Overall reported revenue grew 25%, and on a currency adjusted basis, revenue was up 21%.

Moving to Slide 7, taking a look at the major activities in the quarter. The post-COVID dynamics continue to impact global supply chains, and that really has hit us with material, purchase price variance issues, freight and labor costs. European restructuring actions for the 2020 plan are complete. We completed the move of our U.K. engineering to Boston, and we closed 2 smaller sites. As for new product introductions, we introduced 9 new or refreshed products, which were announced at our June global sales meeting. So far this year, we've introduced 17 new products, which we expect to contribute meaningfully in next year.

Now I'll turn the call over to Mike for a quick look at the key financials. Mike?

Thanks, Jim, and good morning, everyone. The first half of this year demonstrates true momentum from our stated 2021 focus on organic sales growth while continuing to deliver improved bottom line performance and an overall more efficient business. I'll walk through the full P&L and cash flow in more detail. But as a reminder, my discussion will focus on adjusted results for P&L performance, which aligns with the measurements we use to run the business. Reconciliations of adjusted results to GAAP are included in the appendix of this presentation, including a reference to adjusted EBITDA we've added this quarter given this is a common metric utilizing the investment community.

Clearly, year-over-year expectations or comparison versus 2020 will be influenced by the unique cycles and reactions due to the COVID onset last year, which is why we'll make certain references back to 2019. On that note, our performance continues to reflect the fundamentally better business with adjusted operating margin of 15% compared to 12% in Q2 '19 on comparable revenue levels. We reported 18% adjusted operating margins in Q2 2020 with significantly lower operating expenses in the prior year, given the rapid progressive interim cost measures put in place with the onset of COVID and related revenue reductions.

Also, as Jim noted, this year, we experienced significant increases in cost of goods sold due to higher materials, freight and direct labor costs driven by the global supply chain disruptions and other macroeconomic factors we are seeing globally in this post-COVID world.

I'll expand on the gross margin dialogue in a bit as we continue to believe strong sustainable organic top line growth and high gross margins are important outcomes for long-term shareholder value creation. Product mix is a significant driver behind gross margin for us, and today, this mix is stronger than ever. This is a direct result of our focus on driving growth in high-end niche products through more efficient direct sales channels as well as the pruning of low margin, low growth SKUs, all contributing to gross margin expansion.

As Jim will detail in the guidance section, we're expecting margins will be modestly lower than planned in 2021 based on the inflation we are all seeing but gross margins will uptick sequentially as volume and mix continues to improve, and we accelerate actions to address new realities. On our cost base overall, operating expense levels are in line with our planned expectations and also reflect completion of our 2019-'20 restructuring program in Q2. As previously noted, the turnaround restructuring program initiated in 2019 created $7 million of annualized cost savings.

In terms of business optimization in the rest of the year, we anticipate we'll spend around $1 million in the second half to accelerate improvements in our core manufacturing operations, which we will record as transformation costs and exclude from our adjusted earnings, given these are nonrunning -- run rate investments to support scaling our operations for expected growth.

Our run rate OpEx is lower than pre-COVID levels with a fundamentally new and improved organization in place as well as compensation plans, including variable comp accruals to ensure to reward and retain the strong workforce in place. On cash flow and debt, our leverage ratio, our total debt to adjusted EBITDA is less than 2.5x, relatively consistent with prior year, but well below our roughly 3.5x leverage about a year ago. Cash flow from operations was lower than prior year due primarily to higher working capital, in line with higher revenue and a strong outlook, including inventory growth to improve our fulfillment operations to make sure we take the backlog down and get our -- achieve our revenue goals given the disruption in the supply chain we've discussed.

Finally, I called out in the slides here, our higher share count for adjusted EPS calculations. Diluted shares have increased over the last year due to the significant improvement in our share price since 2020. Option exercises aligned with the price appreciation contributed to this, but the majority of this is based on the dilutive effect of outstanding stock awards. The calculation of our GAAP is based on assumed share buybacks. And as the stock goes up, the theoretical amount of buybacks is lower, thus the higher share count.

With that, I'll turn it back to Jim to discuss the full year outlook. Jim?

Thanks, Mike. Let's move to Slide 11 and take a look at the outlook here. With most of the structural improvements behind us this year, our primary goal is sales growth, driven by improved sales effectiveness marketing and new product introductions. In addition, we'll be addressing COGS issues resulting from the global supply chain issues and disruptions, specifically honing in on freight optimization, material costs, labor and efficiencies and also looking to tune our operating expenses in areas like in Europe.

As for our outlook for the year, we're taking up the revenue outlook and narrowing the operating margin target to account for the potential of extended sales -- our supply chain-related cost increases that we've seen. We now expect revenue growth on a reported basis to improve approximately 12% to 15% growth versus last year. With the strong order growth and a strong backlog, driving sustained growth in our preclinical product revenues, academic labs are expected to continue recovering with strong order growth and a strong backlog there, too.

Portfolio rationalization improved low-quality revenue of approximately $1 million of -- from our FY '19 baseline and another $4 million from FY '20 baseline. Risks do remain on the impact of global supply for certain materials, so we're managing it closely and brute forcing manufacturing and supply as we best we have -- as best we need to meet the demand for our customers.

As for adjusted operating margin, we're narrowing our expected improvement to the mid-teens range. In spite of these global cost issues, we expect continued gross margin expansion on increased volume, improved margin mix somewhat offset by the higher supply chain costs, which we've been dealing with more recently.

Thank you. Now I'll turn over the call to the operator and open the line for questions and answers.

(Operator Instructions)

Your first question comes from the line of Paul Knight of KeyBanc.

Could you talk about how the supply chain issue is? Is it fixable in the quarter? Is it taking the year? What's the timing on that?

Yes. It's a great question. When you think about $1 million of incremental COGS in the quarter, I mean, that would be, what, 3 to 4 points of operating margin. And it is pretty well split up between purchase price issues, which we think the purchase price thing, some of that's going to stay. We know there's some general inflation in there. But on the other hand, as we continue to improve the way we do our supply chain, we know we'll get better improved purchase price for the actual materials.

On the freight side, that was a big piece of it, too. That's going to improve given the delays that we saw, we were -- many times, we had to move to flight to fly in materials and to fly materials to customers that really put a cost -- extra cost on us, now that's not going to be sustained. In time, over the course -- our belief is that over the course of the next couple quarters, that's going to really smooth out and we'll get back to some reasonable level of freight cost.

And again, now that we're focusing much more on it, I've got the team in place that knows how to manage not just purchasing and acquisitions but also the -- how we freight in and out. And we've had to make up for these issues with labor inefficiencies, having to throw more people at things, that's inefficient, that adds cost. So certainly, we would see that a large majority of this is going to improve as we approach the end of the year.

And then the other side, that's going to help us anyway, as you see the strong order growth we have, which is pretty amazing and the backlog that we've built, we will get improved operating leverage on that growth. So that growth alone will likely more than cover this issue. But either way, you know me, we've got to handle it both ways. We've got to get to the cost, get the cost out, continue to improve, get the efficiencies right, and we'll see the natural -- in addition to that, we'll see the natural improvement of operating leverage on the revenue growth.

And Jim, could you highlight any of the products that were driving this 25% Q2 growth?

It was pretty much -- well, first of all, the DSI preclinical products were fabulous. I mean they really drove a ton of growth there, pretty much across the board. The inhalation product, that continues to just grow by leaps and bounds, we're making more investments in that too. The -- we had some issues with shipments on -- and supply issues, constraining the shipments that we would have had on the BTX line, the electroporation line, but that's been pretty much resolved now. But we had some impacts from that in the quarter, but that's going to really start speeding up now. As you know, that's a big -- a lot of tailwinds there in terms of needs in the market. So I mean order intake on that is great. Again, but we were held back somewhat on the -- on being able to ship in this last quarter because of these supply chain disruptions.

But again, I would say the big drivers we saw were pretty much across the board on the preclinical side of the products. The BTX order intake is very strong revenue will pick up much faster there in the second half of the year. The cellular thing, we -- cellular was -- had some issues mainly with there being -- so much of it being academic lab customers. And they're still down and some of these products are pretty complicated, and you pretty much have to have a technical sales rep or an ASP person in the lab to really close those deals. So that's still been held back pretty substantially.

But the outlook is, it really is improving on these academic labs. It's funny the academic labs, even though they were down overall for us in certain areas like the inhalation products, that -- those still drove a lot of demand. Even though there's quite a bit fewer labs out there operating, they knew they needed -- they wanted that kind of technology in their labs. So bottom line is the overall academic labs are coming back. Europe has been slow, it's still slow, but the outlook is improving there.

So we're -- we expect the European labs to really start to march back towards somewhere near where they used to be. And when they do, that's a big chunk of incremental demand on the business. So this -- the rest of this year looks very strong. And that's in spite of -- we've had to, again, brute force a number of things to be able to make shipments, we've built the backlog. And on the one hand, it's great to see real strong backlog. On the other hand, you've got to be -- that needs to be moving into revenue growth. But everything points towards us ending up where we really wanted to be this year. And that means in getting our gross margins by the end of the quarter, back up to where we expect them to be, again, dealing with the cost issues and having the natural growth of revenue contribute through operating leverage.

And lastly, Jim, based on guidance, your revenue growth will decelerate from 25% in Q2 due to comps, I'm assuming that is one part of that question. Second part is what level of organic growth do you think the company has with these low growth product lines being paired and you entering, let's say, more normal environment.

It's -- when I look at -- just our overall -- our expectation is -- and I've always felt like there's no reason as we get this business properly sized, we get the coverage in place and the product portfolio in place and the cross-selling now that you see, for instance, with some of these -- a number of these preclinical products now being getting good solid penetration into economic labs. I'd be really disappointed if I don't have a sustained double-digit revenue growth business here. I mean just on the fundamentals of it.

So -- and then for this year, with the recovery, and it's unfortunate that we have some delays due to the supply chain, that's not going to last forever. That's been -- that will resolve. But this is going to be a very good year, we're going to -- we'll end up building backlog even through the year. I need to be a little bit conservative on, if something can happen with supply chain, suddenly, there's something you're on ship hold with, I have to account for that, too. But overall, this is continuing to improve. And I think as we get into next year, I'm pretty comfortable to be able to talk about a double-digit business.

Your next question comes from the line of Tim Chiang of Northland Capital.

Jim, could you talk just a little bit about the rollout of new products. Has the supply chain disruptions also impacted the launch of new products in the second quarter? I mean will some of those products be delayed into the second half of the year?

I don't think there's any doubt that we'll have some delays depending on which materials we're still struggling with. But like Mike said, we've ticked up working capital to be able to overbuy especially things that we believe are not going to obsolete. But in general, we see a pretty big portion of our sustained revenue growth being driven by new product introductions. This is a scientific engineering organization and our long-term life is based on new products, exciting new products and technologies that are entering production based on the needs of the customer.

So we will have -- there will certainly be some impact from supply chain. But overall, we're going to see the primary drivers of growth be the ones that you wanted to be, getting the sales coverage right and having new and exciting products. And I think examples of it are like the inhalation product that's growing at 50%, 60-plus percent a year. You take something like that, it has now become a material number. There's other products like that in our portfolio that are following -- will follow the same kind of trajectory. We'll see large growth in some areas. And some things that don't make sense, you'll see us strategically removing them from the portfolio.

And Jim, just one follow-up. You mentioned that academic labs are recovering. Do you expect an increase in demand as we get to the fall school year starting?

We do. I think this fall school year is part of it. New budgets often, we'll see budget cycles based on the academic year, which kicks in, in the September time frame and then the rest of the academic at the end of -- in the calendar year. And I think just given that we're on order basis, we're really close to where we would have been pre-COVID anyway.

And the only real slowdown has been some restriction on the supply side. That will settle out and the -- we didn't usually -- didn't talk a whole lot about cross-selling, but now the way you have the sales organization, the way it's set up, the fact that Europe -- European academic labs is up substantially on our preclinical product lines. That tells you that as those labs get the full speed, there is a natural incremental growth happening right there simply because of being able to penetrate the academic labs with those products that in the past we really didn't sell there.

Those were primarily products that sold into pharma and CRO type companies. So there's a lot of that natural growth is going to be happening there, products like the inhalation products, I mean those are perfect fits that you would expect to see. We always expected that the largest demand there might come from academic labs and not from the pharma companies.

So net-net, I mean, we feel like we've got a really -- we're going to end this year very strong. We'll be pretty much right on target. And as we get into next year, this is a very good, strong growth, profitable growth business, and you'll see that all developing just like we had expected with the turnaround of the company.

Your next question comes from the line of Lisa Springer of Singular Research.

My question is regarding the backlog. You mentioned there's been a pretty significant lift in the backlog for CMT products. I wonder if you expect to work through that entire backlog -- the entire existing backlog in the second half of this year.

Yes. I don't think so. But I do think is that by the time we get to the end of the year, we should be closer to what the normal backlog, sustained backlog should look like. It's going to be tough. It's going to be a little more costly for us because we're having to make up for -- with inefficient labor to get things through, and we're having to -- other things having to delay.

And then -- so -- but as we get through this, we will get this back to a normalized backlog. So it's kind of fun again, always a bit of two-edged sword. When the backlog grows substantially, burning it down and getting back to normal shows very nice growth. But we do see sustained general order intake growth, and that's what I would look at. So we'll burn down some of that backlog this year. I doubt that we'll get it all back to where the levels we were, but it will be incremental to the natural order growth that we see developing. So trajectory looks very solid.

Okay. Very good. And regarding new products, are the vast majority of new products in the preclinical line? Or are there some CMT products under to?

They're mostly of the new ones that came out this year, a lot of it -- a lot of investment went into the preclinical line because we're really putting more of the investment where the tailwinds are. But also, we're putting it into the cellular and molecular pieces. So some of the cellular areas, those are seeing -- they've been kind of held up on growth, mainly because on the revenue side because of some of the supply constraints. But you look at products like the electroporation, COVID-related products, there's dramatic demand there. And we're putting the investments in there. The new products that came out this year, a lot of them on the -- expanding our position in the clinical side and then also on the molecular and testing side.

Your next question comes from the line of Bruce Jackson of The Benchmark Company.

You mentioned that you launched 17 new products this year. Can you tell us a little bit about what areas those products were in? And then to the extent you can disclose the ones that you're working on for the next couple of quarters, that would be great.

Sure. Just I would say, in general, more -- most of the new introductions were in the preclinical side. A lot went there into the software systems, what I call building up the sockets, which was -- when a company, a large company or even a large academic site when they adopt our systems, then it locks them into using our consumables, our implants. So that's the primary driver in the investment, a lot of investment going in there, a lot of that is software, getting the systems -- getting the customers used to using our systems.

We'll be working to move more of this to the cloud. A lot of it comes down to data analytics capability that large CROs and pharma companies need to be able to pull together with large data sets to establish and build the cases for moving into clinical. So that's 1 area. We're continuing to invest on the inhalation side. We see that there's a long runway there, a lot of opportunity, significant demand there, and that's going to continue to drive and there's some new technologies there, which we're rolling out that are going to make that product even more unique. So that's an area.

On the cellular side, we're putting more effort into the ability of the products that allow you to do single, multiple and then large array of cellular testing at the same time. So we see more and more testing taking place at the cellular level. Some it is designed for use with the genetically modified cells, human cells. So that's an expected area of growth, we know that demand is going to be developing. Now we also know that a lot of that is really targeted to these academic labs. So as they come on, we'll get a double effort there of the expansion of the labs coming online and us having these new technologies and capabilities right in line with where they want to go.

There are some new activities happening on the fluidics and molecular side, too. So with 17 products, I would say -- I'd say over half of it's on an investment level is on the preclinical side and then also targeting exactly where the tailwinds are on the cellular side. And we all know where those are, anything electroporation, electrofusion and CRISPR-related type technologies and then the ability to do cellular-based testing also.

Okay. That's great.

Just to follow on to Jim's point, it's really this -- there's a lot -- the tailwinds in preclinical we're investing there, it's the cellular side where the future stuff, we'll see -- you'll see more from us there with what electroporation does in the marketplace, what the cellular stuff we've already invested in and the new, that's really where biotech and biopharma is going, right? So we're going to go with the market tailwinds basically. It's really those preclinical and cellular assets, the ones that we're going to double down on more.

I mean, an example is like the BTX line. I mean that was the main product that was used for much of these initial forays into some of the new vaccines that we're not dealing with that really brought those out very rapidly based on the ability to do these modifications to the cells with our equipment. And that's now -- you're seeing companies like Moderna and the way they do think that's going to become more and more the way large molecule drugs are going to be built. So we're right in line with that. That's where -- I really want to grab that tailwind, not just be a part of the advanced research on it, but really start to move towards volume and penetrating more companies that are doing this and move toward -- getting more towards a higher volume.

Okay.

There was not a lot of investment in R&D in the company for a while, which, on the one hand, it says a lot that a company could continue to move along without much new product development. But now that this is -- the new product introduction is the primary driver to getting to really expanding the business. And that's our focus. That's my focus.

That's great. And obviously, been a big focus for you. So congratulations on the progress and the results for the quarter.

There are no further questions at this time.

Okay. Well, thank you, everyone, for joining us. This ends today's presentation. we'll hope you'll join us in November for the results of our third fiscal quarter. Thank you very much. Have a great day.

This concludes today's conference call. You may now disconnect.