Harvard Bioscience Inc (HBIO) 2020 Q3 法說會逐字稿

Thank you for standing by, and welcome to the Third Quarter 2020 Harvard Bioscience Inc. Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to David Sirois. Thank you. Please go ahead.

Thank you, Elisa, and good morning, everyone. Thank you for joining us for the Harvard Bioscience Third Quarter 2020 Earnings Conference 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 Q3, 2020, HBIO Quarterly Earnings Presentation, and is located in the Investor Overview Events & 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.

All right, 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, 2019. Our quarterly reports on Form 10-Q filed in 2020 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, we'll 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 GAAP and our non-GAAP results are outlined in the earnings release and today's presentation. These 2 documents can be found on our website under Investor Overview, Events & 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. A replay of this call will also be available at the same location on our website.

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

Thank you, David. Good morning, everybody. Let's go ahead and move to Slide 4 of the presentation, and take a look at the highlights for the quarter. Despite revenue being down 12% from Q3 last year, our gross margin was up 80 basis points, and adjusted operating margin was up nearly 3-4 percentage points.

Academic labs sales continue to recover as labs reopen, and our combined CRO, and Pharma revenue continued stable at 2019 levels or pre-pandemic levels. And we're happy to see expanding growth in our new inhalation product line.

As we look forward, revenue and profitability growth will support adding back certain organizational costs as our employees return. We will continue our disciplined cost and cash management approach with leverage around 3x and we expect to refinance our debt soon.

Finally, we expect to deliver second half operating margin in the mid to upper-teens beating last year.

Move to Slide 5 of the presentation and we'll look at the details of Q3. As expected, we continued to see improvement with our Q3 revenue coming in at $24 million, that's down $3.4 million or 12% down from Q3 last year. Remember, though, Q2 was down 21% from prior year all impacted by the COVID-19 situation. Our gross margin on a GAAP basis measured 56.1%, that's an improvement of 150 basis points from last year.

Our non-GAAP adjusted gross margin was 56.4%, an improvement of 80 basis points from last year. This quarter, our GAAP operating income was $200,000 or 0.8% of revenue, and it's up from a negative $1.4 million in the prior year.

Our adjusted operating income was $3.6 million, so our adjusted operating margin improved to 14.8%, up over 2.5 percentage points from the same period last year. GAAP earnings per share was negative $0.03. Our adjusted earnings per share was $0.04 flat to last year. Our cash flow from operations was $1.6 million and we paid down our net debt by $0.5 million.

So move on to Slide 6, look at our Q3 revenue by product family. Starting with the first row of the table, our Cellular and Molecular product revenue, which is primarily from academic research labs was down 21% worldwide. It's an improvement though from Q2, which was down 33%. We see continuing improvement as labs reopen and restart their research and development for new therapies and vaccines.

Looking at the second row of the table, our pre-clinical product revenue is maintaining the recovery at pre-COVID-19 pandemic levels. And within that, our pre-clinical academic level academic revenue is still down, but improving again as labs reopen.

Moving to Slide 7, we'll look at restructuring activities and major actions in Q3. Finishing up on the restructuring plan that was announced back in Q4 of 2019, the Connecticut manufacturing consolidation and the UK downsizing are now complete. As for actions in Q3, the COVID-19-related actions taken in Q2 and Q3 support getting us to a sustainable lower overall cost of organization. And also on the bright side, we're seeing expanding demand of our new inhalation products.

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

Thanks, Jim, and good morning everyone. I'll speak to our full P&L and our liquidity, and as is our practice, I'll focus on our adjusted or non-GAAP operating results, which we used to run the business. We note our GAAP results and related reconciliations to adjusted results are included in the appendix of this presentation. As noted, we continue to improve our margin profile despite the unique environment created by COVID-19.

Gross margin improved versus prior year on product mix and the positive impact of our restructuring plan, which includes a modest benefit from eliminating certain low-margin products in the second half of 2019. We continue to accelerate our efforts on both sales effectiveness and product line improvements recently to ensure we're balancing cost management and driving profitable top line growth.

These efforts along with continued academic labs recoveries should provide us a path to the 60% gross margin target set forth in 2019. I do note that we're down sequentially on gross margin due to the uniquely strong mix in Q2 as well as seasonality. Adjusted operating income increased versus prior year despite lower revenue due to the gross margin improvements noted and continued execution of our restructuring plan.

The plan announced in December 2019 is substantially complete with Connecticut and UK site activities fully executed, and other permanent cost structure changes implemented post-COVID-19, provide an additional $1 million of additional of annualized cost savings. As communicated last quarter, the combined effect of these activities is total annualized cost savings of $5 to $6 million.

OpEx for the quarter was $10 million or 20% down over prior year and essentially flat to Q2. However, we note, we relied more on permanent cost reductions in Q3. As a reminder, last quarter, we leverage temporary work and pay reductions. And in Q3, much of our workforce return to work full time.

Finally, on cash flow, we continue to reduce net debt with DSO and inventory reductions contributing to a $1.6 million cash flow from operations for the quarter. We have reduced net debt by over $5 million, thus far in 2020, and nearly $10 million in the past year as the new management team.

Our leverage ratio or total debt over adjusted EBITDA is stable at slightly below 3x, and we are compliant with all debt covenants. Based on all the actions we are taking to improve the business, and the underlying solid cash flow profile, we believe market conditions exist to refinance our debt to a lower cost facility in the near term.

With that, I'll turn it back to Jim for perspective on the rest of 2020. Jim?

Thanks, Mike. Let's move to Slide 11. Taking a look forward, we expect combined -- our combined CRO and Pharma revenues to continue to grow. We expect the sequential growth as academic labs reopen over the upcoming quarters. We will maintain our leaner organization while continuing investment in targeted product lines.

We'll manage our cash flows and continue to pay down debt, and work to finance to a much less cost repaying debt. In all, we expect continued sequential quarterly revenue improvement and we expect to deliver second half operating margins at the mid to upper-teens level. Thank you.

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

(Operator Instructions) Your first question comes from Lisa Springer of Singular Research.

Congratulations on pulling out a pretty decent quarter.

Thank you, Lisa.

Regarding the product mix, what was the product mix impact on gross margin and was the products mix similar to the product mix in Q2?

I think first is Q2, Q2 had a very strong product mix. Heavily, heavily leaning toward the telemetry products, which are one of our highest margin products. As we got into Q3 and Q3 is from -- normally, Q3 is one of our lighter quarters. It was a little lighter.

Our mix was a little heavier towards some of the newer or some of the CMT products starting to come back in the lab, so that had a bit of a negative mix on us. Yes, so you noticed that the gross margin is down a little bit from the prior quarter, but again as we get into Q4, our overall mix shift back to where we think it's is -- it naturally would be at.

So we are a little heavier on a little bit of a negative mix. It also had some, a number of things that couldn't revenue recognized in the quarter.

So that has a slight negative effect on the mix piece. But overall, the fairly lumpy business moves up and down and the gross margin will shift a little up and down with that. But overall, we, our target for the second half is to get up there close to the 57%, 58% net on the second half. And our targets for 2021 are -- I've been very clear about that. And we're pretty, we're -- we feel real strong about all the things that we're doing here this year and in the second half to position 2021 to be on target for what we want this company to be.

Okay. And could you provide me with a little more color around the demand for the inhalation products? Where is that demand coming from and how does that compare to demand in Q2?

Yes, that's a great question. It's a really exciting growth area for us. We introduced the inhalation product, because it's the first of its kind that allows you to measure what you're putting into a subject, in terms of what their breathing. And then at the same time and real-time measure of what of that is getting through the lungs and into the blood system. The same thing goes for medications or things that you're trying to treat a particular disease, whether it be COVID or other.

The initial big demand we saw develop was in the CRO and Pharma side. And again, it started in China, where you would expect where they came back to work very quickly working on vaccines and such. We also, as expected, saw that demand moving around the world. Again, primarily and initially in pharma and CROs.

However, our feeling is that a much -- a very large driver for demand for this is going to be the academics as they come back, the work they're doing it's going to be heavily targeted toward airborne type diseases. And this is a perfect kind of product, perfectly timed to let these large academic sites researching in this area, and developing therapies in this area to adopt this. So we think this demand is really just starting. Overall, starting in -- with CRO and Pharma, and then expanding and extending as the -- all the academic start to come back. Other areas, we do have a number of other products that are in a similar situation with cellular testing type of products like with electrophysiology that are also very much involved with testing at the cellular level that will be an area that we also expect to see demand growing and specifically at the academics really start to come back.

Okay. And my last question is about the refinancing of the debt. Is that something that you anticipate might happen still this year, and what kind of rate are you envisioning you might be able to get? What kind of reduction?

Well, the pressure that we have on ourselves to get to a lower cost of debt. Certainly, we're targeting, we'd like to get it done this year. There's always some things that can happen with the marketplace and such, but certainly we're targeting to get it done here in the very near future. Certainly, I'd like to see it done this year, and so would Mike.

When you look at the kind of savings that, that will generate, I think, Mike, do you want to comment on what we're thinking as far as what bank level interest rates look like? It's certainly in the kind of a couple of million dollars a year in interest savings that we would project on that, Mike?

That's right, Jim. And market conditions have improved there and that people like the credit profile. And we're paying close to over 9% right now, will be -- it should be less than 5% all in is the opportunity out in the marketplace right now.

Next question is from Bruce Jackson of The Benchmark Company.

First off, a good operating expense control during the quarter, do you have any additional special charges coming in the fourth quarter?

Mike, you know what roughly what you expect that?

Yes, there still some things there we're finishing off. And so I think in total way to think of it, Bruce, is with the $5 million to $6 million of savings that I talked about. Over between Q4 last year and this year, there'll be about $5 million to $6 million in total. So there'll be some left. But should be around what we are in Q3, which is a little less than a $1 million.

Okay. And then if we could just talk a little bit more about the academic market. So how fast is that coming back and you mentioned the inhalation in particular. But are there any other areas of demand coming from that market?

Sure. If you look, I think a good proxy for as the labs -- our labs are coming back is looking at the CMT level revenue that we report on, initially we thought that the labs would be down somewhere in the neighborhood of 50%, and then recovering sequentially at something like maybe moving from 50% to 30% to 15% or so, what we've seen in our numbers is, we were down around 33% to 34% in Q2, and that improved this quarter to I think 21% down. So we're seeing about a 10 -- slightly over 10 point improvement per quarter as it moves back to the norm.

And I think the good news is like -- has been like you mentioned, but new products coming out is we expect to see the recovery, it looks like a general growth improved for us. But then with these new products coming in, that's going to be additional underlying organic growth that we expect will continue to move our natural growth sector forward. As we get into next quarter and then certainly in next year, I'll be able to show you kind of a pro forma restated view, and also be able to show you with the products. We've decided on certain product lines that they're not really strategic, they might be low margins, they might -- they're -- they may not be a part of what we think is a real strategic growth driver for the business. So we're working to remove those -- some of those from the portfolio.

I'll also, at that point, be able to show you what it looks like on a pro forma basis. And then what we would be expecting to see as far as natural organic growth. As we get -- as we go to 2021, maybe even in Q4, I'll be able to give a better view of that and give you a better ability to forecast what the underlying natural growth rate of the business is. And of course, you'll see us on a much more valuable product mix because it's more strategic, these are products with more natural tailwinds. And by the way, products that are -- and have better pricing power and will be the future of this business.

So speaking of the product portfolio, there is the pipeline nationalization that's going on. And then you also have in the past discussed how some of the products or maybe can you get a refresh or maybe some new products coming out. Is there anything that's coming up near term that we can look out for?

Absolutely. Certainly, you already know about the inhalation products. You'll see extensions in that area. There is going to be expansion in new technology on the implantable telemetry side. That's our fastest growing, our -- it's our fundamental business is what we do with the implantables for what's used in all of the final pre-clinical testing. And then in addition to that we see expansion and we're going to continue to invest in the cellular level testing activities more and more of what happens in the pre-clinical phases is being able to test things like safety, toxicology at the cellular level.

So that is going to be expanding some of our multi-channel type products, that's again, an area that we continue to invest in. We think that yes, the AAA area has been, I mean to me, it was really kind of left alone for a long time. The product haven't been updated or refreshed or improved on and I want to say 10 years. So that's an area that we see real opportunity in the marketplace.

We were the leader in the original amino acid analysis technologies. And it's been doing okay in clinical or in research, but that's an area that we're investing in. We expect to introduce some new technologies there, some faster technologies. And also, we've kind of that seems like the company just kind of let go of the clinical applications of that. Even though it's a leading product in the clinical space, and it's a product that's used heavily. AAA is something that's used for every new or just about every newborn baby.

So there -- it's got a great installed base, it has a great consumable stream. Man, shame on us for not having really driven that and having that become a growth part of this business.

So that's just to name a few and there are others, with some of the advanced development that's taking place in patch clamp work that's, that's a natural area also that with the expanding research, and that you also see that we've tended to do -- I kind of thought of the business when I first really got into it as looking too much like a basket of brands and some of these brands might be very strong at a particular region.

Like our MCS products are very strong in Germany, but you don't see -- it doesn't make any sense, why they're not heavily demanded in the US.

So you'll see those things start to move over also. So as we get to the end of the year, I'll be going through and showing more of what we're doing, not only with products, but give you a better view of how we're putting the sales organization together in a way that really expand sales efficiency. So we're pretty excited about all the stuff coming out. And it's -- I mean, it's natural. It's right in line with where the market's going both in the research space and in the commercialization in Pharma and CRO.

There are no further questions at this time, I would like to hand the conference back to our speakers.

Well, thank you very much. Appreciate you joining us for Harvard Bioscience. And look to see you listening in on our Q4 call as it comes up next quarter. Thank you very much and have a great day. This is the end of the presentation.

Ladies and gentlemen, this concludes the conference call. Thank you for participating. You may now disconnect.