Operator: Good morning, and thank you for standing by. Welcome to Harvard Bioscience, Inc. Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please note that today’s conference is being recorded. I will now hand the conference over to your speaker host, Dave Sirois, Director of SEC Reporting. Please go ahead, sir.

Dave Sirois: Thank you, Olivia, and good morning, everyone. Thank you for joining the Harvard Bioscience fourth quarter 2023 earnings conference call. Before we begin, I would like to suggest that you take a moment and download a copy of our presentation that will be referred to during this call. The file is entitled Q4 2023 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 Jennifer Cote, 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, 2022, 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 day. Also much of today’s call will focus on our non-GAAP quarterly results, which we believe that it represents the ongoing economics of the business, reflects how we set and measure our incentive compensation plans and how we manage the business internally.

The differences between our GAAP and non-GAAP results are outlined in the earnings release and today’s presentation. These two documents as well as a replay of this call 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. I will now turn the call over to Jim. Jim, please go ahead.

Jim Green: Thank you, David, and hello, everybody. Let’s move to Slide 3 of the presentation and take a look at the highlights for the quarter. Let me start with saying, I’m pleased to see growth in North America. However, similar to numerous life science tools companies, we were held back by post COVID lower demand in China. Revenue for the quarter was $28.2 million, down a modest 1% from last year on an as reported basis. This revenue includes the net effect of $900,000 of discounted products compared to the prior-year period. We did see a net positive currency effect of $400,000. So, adjusting for both currency and discontinued products, underlying core revenue was up about 1 percentage point from the same period last year.

Gross margin improved to $16.3 million or 58% of revenue, up 230 basis points from the same period last year. Our GAAP operating profit was $300,000, up from a negative $500,000 last year. Adjusted operating profit measured $3.3 million or 11.6% of revenue, about flat with prior year. Adjusted EBITDA measured as $3.7 million or 13% of revenue, again about flat to last year. GAAP earnings per share was $0.04 loss, again same as last year. And adjusted EPS measured a positive $0.04 a share, again same as last year. Cash flow from operations came in at $4.3 million, up from $2.7 million last year. In the appendix, you’ll find the bridge from GAAP measurements to adjusted or non-GAAP measurements. So, let’s move on to Slide 4 and take a look at revenue in the quarter by product family and by region.

Starting in the Americas, revenue was up 4.1% as reported and included a 2.1% net reduction from discontinued products. So, our core revenue is up about 6%. Pre-clinical had strong growth in core telemetry and Ponemah enterprise software. So, overall, was held back by lower demand in the respiratory products as a part of the recovery from the post COVID timeframes. Cellular and molecular products were up in electroporation and bioproduction and up in cell-based testing, but was impacted by also the discontinued low-margin products. By the way, we’re about done with discontinued products. I don’t expect to be having to talk much about this as we go forward. Moving to EMEA. Overall, EMEA revenue was up 3.1% as reported and included 2.1% net reduction from discontinued products and a positive currency effect of 4.1%.

So, adjusting for currency and discontinued, EMEA was up roughly about 2 percentage points. Pre-clinical systems showed modest growth and was helped by the first installation of our new high-capacity VivaMARS Behavioral System at a large CRO operation. CMT was down modestly, mostly on discontinued products. Now moving to China and Asia Pacific. Q4 reported revenue was down 15%. Adjusting for currency and discontinued products, Asia Pacific was down about 10%. Telemetry and Ponemah enterprise software held their own. Cellular and molecular products saw another tough quarter similar to Q3, and the primary impact again was academic customers where we saw continued weakness due to post COVID government academic research funding. We see the weakness in China continuing into Q1 2024, though we’re hopeful with recent news out of China that market conditions are going to start to improve in early — going into the second half.

And at worst case, we’ll at least see things annualizing at a level where we won’t see — hopefully won’t see so much back and forth with lumpiness like that. So, let’s move on to Slide 5 and let me tell you a little bit about some of the exciting new products and how we’ve positioned our base business to deliver solid growth with expanding margins, and those margins then support investments to commercialize our exciting new high-growth areas like high capacity behavior systems, advanced cell and organoids and bioproduction/electroporation applications. This year’s commercialization focus, it started with new product introductions that showcased at the Society for Neurology — the Society for Neuroscience, which was in Q4, just this last November.

And then, we’re also going to be showcasing these products again at next week’s Society of Toxicology. Our first focus is to strengthen our base, which is the vast majority of our business. We introduced our new SoHo Shared Housing Telemetry Family of implantables at the Society for Neuroscience last November. At the same time, we introduced our latest Ponemah software that integrates VivaMARS, the high-capacity behavioral testing system, but now — and now it’s onto a single GLP compliant platform. The Ponemah platform, which is used by the leading CROs, biopharma, large academic institutions around the world, it processes and manages the extremely large data pools acquired during tox and safety testing, now for both telemetry and behavior.

A doctor in surgical gloves performing a delicate operation using the company's products.

By combining these new applications in a single data management platform, the Ponemah system opens new opportunities for our customers to use emerging AI and machine language technologies to analyze these study data. And we’ll be working with some of our customers to implement these types of these new machine language type of applications, which then turn into what we use for tuning our algorithms. We’re also expanding our field service offerings designed to increase recurring revenues and consumables. Our second focus is expanding to high-volume industrial applications. We introduced VivaMARS, the high-capacity behavioral system at the November at Society for Neuroscience in Q4, and we had the first commercial installation of VivaMARS in Q4 with a large CRO customer.

And we’re showcasing VivaMARS at next week’s Society of Toxicology, where we will be meeting with many of our leading CROs and biopharma customers. Our third focus is expanding to the bioproduction with our leading electroporation and electrofusion technology. In January, we established a commercial and application science team dedicated to bioproduction and advances in electroporation. And in February, we released our GLP/cGMP compliant amino acid analyzer for bioproduction quality control. This system was adapted from our clinical amino acid analyzer in operation today all around the world in leading clinical laboratories. Finally, we’re focusing on commercializing our leadership position in advanced cellular applications. We launched the Mesh MEA Organoid Platform at the Society for Neuroscience.

We’re also showcasing Mesh MEA at next week’s Society of Toxicology conference. We’re excited to see strong interest for applications in research and biopharma discovery, which we expect will then lead to higher volume compound analysis and testing applications at higher volumes. Now, I’ll turn the call back over to Jennifer, our CFO, to give us a look at key financials. Thank you, Jen.

Jennifer Cote: Thank you, Jim. Let’s jump into our Q4 and full year financial results in a little bit more detail. If you can all please refer to Slide 7. And as a reminder, in addition to our reported GAAP results, we also include discussion about adjusted or non-GAAP financial results. These align with information we use to internally manage the business, and our slide deck includes a reconciliation between our adjusted results and the corresponding GAAP financial measures on Slide 12. So, if you could please refer to the top middle of the slide, on a reported basis, our Q4 gross margin was 58.0% compared to 55.7% last year, an improvement of 230 basis points. Our gross margin can fluctuate based on mix of products, but the year-over-year improvement in our gross margin primarily reflects the impact of the product portfolio improvement initiatives that we completed in 2022.

If you refer to the top right of the slide, our adjusted EBITDA during Q4 was flat to last year. It did include investments to complete and launch our new VivaMARS behavioral system and our shared housing SOHO platform and to introduce our new Mesh MEA system at Society for Neuroscience in November. And with the challenging macroeconomic environment, we continue to manage our overall operating expenses ensuring that our spend is tied tightly to our highest priorities. Let’s move to Slide 8 where we’ll discuss full year results and also our success this year with improving operating cash flow and liquidity. Our full year gross margin truly demonstrated the impact of the changes we made last year and finished at 58.9% compared to 53.7% last year, an improvement of 520 basis points.

Last year’s gross margin did include inventory write-downs related to the discontinued product of $1.5 million, which accounted for 1.3 percentage points of the improvement. Adjusted EBITDA finished in alignment with our expectations at 13%, a strong improvement over last year’s 9.6%. Moving to the bottom left where we show both reported and adjusted loss earnings per share, the differences between our reported and our adjusted diluted earnings per share are highlighted in the reconciliation tables. Last year, we incurred $5.8 million in restructuring and other costs related to the transformation of our business, which accounted for $0.14 of the diluted loss per share on the bottom left chart. Now switching gears to highlights on cash flow and liquidity.

Please refer to the graph in the middle of the bottom row. During Q4, we added an additional $4.3 million in cash flow from operations, bringing our full year cash flow from operations to $14 million, a substantial improvement over $1.2 million in 2022. Our 2022 operating cash flow was reduced by $4 million in conjunction with the settlement of the [indiscernible] litigation. We received stock as part of the settlement. As opportunities present itself, we are unwinding our position to assist with the continued pay down of our debt, and so far in 2024, we’ve unwound over $300,000. Our debt paydown for 2023 was $10.5 million and exceeded our expectations of $10 million Net debt at year-end compared to prior year is down $10.4 million. This is a significant improvement in net leverage, which finished the year at 2.3 times compared to 4 times at the end of last year.

Also, February 2024, we received a net cash benefit of $2.6 million for the employee retention credit provided by the CARES Act. This is a credit that allowed to encourage the retention of staff by employers that were impacted by government orders associated with COVID-19, and this credit will also allow us to reduce our debt in 2024. Further details on all of this will be available in our 10-K and the non-GAAP reconciliation tables included in our press release and in the appendix to the presentation. And I’m now happy to hand things back over to Jim, who’ll cover our 2024 guidance.

Jim Green: Thank you, Jen. So, moving to Slide 10, let’s take a look at what we see for the full year 2024. As we enter the year with continued market headwinds from China, we expect 2024 to be a tale of two halves. Taking everything into account, we expect flat to modest revenue growth for the full year. We expect weakness in the first half versus a strong and very difficult prior-year comparison. And this is especially true in our China revenue, where in Q1 2023 was up significantly from 2022 and where we’re expecting revenue to be down significantly in Q1 2024 entering this year with these continued headwinds coming in from China. The good news is we do think it’s going to annualize by the going into the second half and even with the latest news that we’ve been hearing out of China, it looks like there might even be some upside from that.

We do, however, expect strong second half growth versus the first half of this year and versus the second half of last year. So, the second half is really the key for the business here and we’re preparing for the second half of this year. You see the new products entering production, commercialization, this is going to augment what’s happening in the market. So, we feel very good about the second half, and we’ll get through the first half here. We expect meaningful growth from new product commercializations, and we expect China funding to improve going into the second half. We expect gross margins in the 60% range, up from 59%, and we expect adjusted EBITDA margins improving to the mid-teens, up from 13%. With that, I’ll turn it over back to the operator and open the line for questions.

Thank you.

Operator: Thank you. [Operator Instructions] And our first question coming from the line of Paul Knight with KeyBanc. Your line is open.

Paul Knight: Hi. Jim, as I look at Slide 5, the SoHo product, the other products on that slide, what portion will they be of your incremental growth in 2024? Or will they be half of — what’s the level of their importance?

Jim Green: Yes, good question. Certainly, if I think about those four driving pillars, first with the products introduced into our main, what I call, base business, the introduction of SoHo and the ability to now offer shared housing and more longitudinal testing, we think that’s going to add a nice — that will continue to support our base business, and my expectation is that keeps us at or above at kind of the market level. And then, the incremental new items, which is the ones you see to the right, starting with VivaMARS, we had the first sale of that last year, which approached $1 million. We see that growing fairly — even though it’s starting with a small base, we see that growing very fast. So that could easily be doubling as we get into this into ’24.

And then, our goal, I would be disappointed if we didn’t see it doubling again going into ’25 and that’s kind of a growth vector. And in time, I see the behavioral product with VivaMARS really becomes part of the base business, because it really provides that overall ability to do your acquisition and your data reduction and consolidation of not just telemetry data, but now you can combine it with all the behavioral data, the neuro safety data, all of that comes together now on a big high-volume data analytics system, which is really designed for the ability for getting — deriving the right kind of information from it. And that’s again where we plan to start to apply some of the new technologies of machine learning to that. Electroporation/bioproduction, that’s the third area.

That’s again an area where coming off of a lower base, maybe this last year, it was — if you put all of it together, it’s probably somewhere around 5% of our business. But that should be growing fast also. The bioproduction part, I would expect to see that growing at close to 100% a year, but off of a low base. So that alone could be also now adding another couple of points of growth to our core business. And then, on the advanced cellular products and the introduction of this of the new advanced organoid platform, this is getting a tremendous amount of interest. And even with the first show at SFN, we had customers coming up and want to buy immediately. So, we have a situation here. We have to be careful with how we roll that out. I will be somewhat limited for at least the first year in terms of volume.

So, what we’re pushing there is if customers really want to start using measuring internal organoids and we know these applications and the customers — we know where this is — we believe we know where this is going to go. But what we’re doing is having them — they need to qualify themselves by first being using our current system. And these systems for MEAs, I mean, this is a $70,000, $80,000 system. And then with the assumption that if they want to buy it for Mesh, then we would — they would transition from standard MEA chips to the Mesh Organoid chip. But we’ll be really — we’re going to limit the first number to go to certain universities and certain commercial companies for advancing specific applications that we think are going to really drive the future of it.

So, in that space, again, if I look at where we are in MEAs, it’s typically, again, probably in that same region of maybe 5% of our business. That should be growing dramatically. And by dramatically, I’d be — I guess, I’d be disappointed if we didn’t see north of a 30% growth vector on that part of the business.

Paul Knight: And then, should we be in what low-single-digit declines in first half and mid- to high-single in second half on revenue?

Jim Green: Yeah. I think that it’s fair to say that. Coming in, I mean, certainly, given such a tough comparable to last year, I mean, Q1 last year, that was a record. I mean, I think it was an all-time record. And it was primarily driven by China. So, imagine that. So, China gives us a difficult comparison and then turns around a year later and gives us a low entry into the year. But we do think that’s going to correct. So, I think to your point, I would expect Q1 is going to be tough. But then I would expect us to be improving throughout the year from there. Certainly, the second half should really be a great business for us by then, because we’ve at least got the headwinds. They’re no longer headwinds, maybe they’re tailwinds, but they’re at least no wind, and we’ll take that over headwinds anytime.

So, this is going to be — I’d say, will be weak in the first half and I think very, very strong in the second half. And that’s with the new products kicking-in to augment that. There’s no reason to think that that’s not going to be driving the trajectory of our growth vector in — from second half and going forward. Because this is a sustainable growth structure that we put in place really driven so much by the introduction of these new exciting products.

Paul Knight: Okay. And last question, what’s your long-term growth rate target, Jim?

Jim Green: I mean, certainly, I would target to be double digits. I mean, I think a company like this, we have to be somewhere near 10%. And depending on how these growth areas, these new growth areas with bioproduction, with organoids and such, that will determine just how far above or below 10% we are. I mean, I see the base business, my target would be base ought to be at or a better — a little bit better than market, maybe it’s 5% to 7%. And these new growth areas, maybe they’re adding another 4% or 5% early on, but then adding another — moving up from there. So, I think in that range. And again, it will really depend on how fast we can commercialize in the adoption of these areas. And keep in mind, these product technologies, we have very few competitors that can do this.

I mean, we are the leader in MEAs. We are — we will be the leader — and we’re going to be the intel inside when it comes to how you measure and use — how you use organoids. So that and bioproduction, when we — very few companies do we see as competitors, that gives us a great position, scarcity value, pricing value. And now that we’re done fixing things, I feel like we’re putting our foot on the gas pedal, you’re going to see now commercialization of these products.

Paul Knight: Okay. Thanks, Jim.

Jim Green: Thanks, Paul.

Operator: Thank you. [Operator Instructions] And our next question coming from the line of Frank DiLorenzo with Singular Research. Your line is open.

Frank DiLorenzo: Good morning. A question about the…

Jim Green: Hey, Frank.

Frank DiLorenzo: Hey, how are you? A question about the 2023 sales. Can you give us an idea of what the dollar amount in 2023 for overall revenue was related to discontinued and divested products? And following along the idea of the long-term growth objective, is that something we could begin to assume getting close to that 10% beginning in 2025 from say 2024 base being that this year looks relatively flat, mostly due to China?

Jim Green: Yeah, good question. I mean, I think the number of discontinued this last year on a net basis was a little over $5 million. So $5 million on $113 million or something like that, that gives you kind of a base underlying of the core growth, and that’s prior to what we see as far as with the new introductions and the new growth areas. So, if I’m building on a base like that, then that kind of underpins what I would suggest to that kind of a base business of [5% to 7%] (ph) going forward as you look into out years. And then, with these new areas augmenting that by arguably — and we’ll see how it goes. I mean, maybe we add with the other new areas, we add 2 points or 3 points, maybe we add 5 points or 6 points. So that will be the swing on it as to how well adoption happens with the new areas.

Frank DiLorenzo: Okay. Regarding — you’ve been talking about a lot of new products et cetera and the launches, is that back-ended or front-ended as far as some of the new products getting out there and being purchased by clients? And also, can you maybe give a little more granularity on your strategy, expect in China? But aside from China, but what your strategy might be outside of the United States to garner maybe some incremental growth expansion into some countries you’re currently in or to other regions?

Jim Green: Well, I guess, first, the question on — I want to make sure, could you repeat your first question, because I think that was — you say…

Frank DiLorenzo: Just you’ve been talking a lot about the new product launches, things of that nature. Can you give us an idea of what the ramp might look like? Is that going to be more of a second-half or first-half event, et cetera?

Jim Green: Yeah. I mean, these — the newer products, as you can tell, are they’re higher content, they’re higher value, they’re higher numbers, and they are little — and they’re more — they’re a little bit longer, more of a consultative sale. So, the introduction started in SFN in November. We’re reinvigorating it again with society with applications to toxicology. So, we see — we’re at the point now we’re in full commercialization. So, the time from order to shipment can vary, but typically, you’ll spend products, I would say, on average, you might spend a few months getting to — secure the order and then you’d look at another few months for the first sale of that order. So, it certainly is a little more back-end loaded.

That’s why we’re seeing the conversion to shipments and revenue really starting to happen in the second half of this year and then extending from there and expanding from there. And then, the other question about outside the U.S., we tend to focus really on what works and is needed in the U.S. is a good proxy for what’s needed outside the U.S. So, we tend to, again, design mostly for the U.S. to start with the assumption that China is going to want the same thing. There’s a heavy investment there and expect that’s going to be recurring or — returning again now to really bring up their ability to do the kind of drug development and discovery and research and then production that’s going to be happening — that’s going to continue to happen there.

Europe also, I mean, we see a lot of science work in Europe. So, I would think that we’ll — in Europe, we’ll focus a little bit more on the science side. And then, with the U.S. and China, they’re actual more higher-volume commercial applications and again, high-volume type of operations.

Frank DiLorenzo: Okay. Thanks. Just kind of a quick follow-on. You did talk quite a bit about some of the new product launches that have been going on. Is there any potential later in this year into 2025 for some additional new product introductions or line extensions? And also, somewhat related to that, what is the landscape look like out there for potentially maybe some partnerships or small sort of M&A activity to kind of bolster some of your current future offerings? Thanks. That’s it.

Jim Green: Yeah. Good question. Let’s talk about — the partnership thing is certainly, there’s no question, there’s a lot of companies that would really like to penetrate some of the things like areas like bioproduction. There’re companies that really want to see — are interested in some of these technologies that might be used even in clinical applications. So, there are areas there that we could look — that we will be looking to potentially license out, and that would be in areas that where we’re not — where we really don’t have the capacity or the funding to be able to go after all of it. So, to me, the focus is going to be if you look at those core growth areas, that’s where as we develop new products, we’ll continue to do that, they will fit primarily into those four focus areas.

And hopefully, again, like I said, the things that I can’t do with a company our size, but I can do if I leverage some other major players that really heavily want to be in some of these areas that I can look to license some of what we’re doing through them. And again, I may as well create the value if I can’t get it directly. I’m happy to get it through working with some partners. And your thoughts about acquisitions, we now are at the point where I think we have the — we have capital structure in place. As we start to think about acquisitions, there are areas that are very interesting that could fit nicely into our product portfolio. And some of these areas are certainly — bioproduction provides some areas that we could potentially augment some of our portfolio.

And then, expanding and accelerating what we’re doing with the cellular work with organoids, that could be interesting. And a number of our products — as you know, in the past, there was not a lot of recurring revenue with some of these products. You see the new ones we’re doing, they’re designed specifically to bring in recurring revenue, to have consumables, to have services and field services. We’re going to continue to explore and ramp those up. And that’s an area that we have some interest potentially for acquisition. When you think about some of the consumables and buffers and things that are provided — that are needed by our — that our products consume in order to provide the function for their customers. So, there’s a plethora of items for us to expand here.

We do have — again, we’re not that big, so we have to be selective of where we make that investment. But it’s nice to be in a position where you have a wide area that you could do. But again, we’re going to focus on the areas that are going to give us that pricing power and keep us — and the ability to stay in our niches and expand from there.

Frank DiLorenzo: Okay. Thank you.

Jim Green: Thanks, Frank.

Operator: Thank you. And there are no further questions in the queue at this time. I will now turn the call back over to Mr. Jim Green for any closing remarks.

Jim Green: Okay. Well, thank you, everybody. Thank you for listening in today. This ends today’s presentation. I hope that you’ll join us in May for our first quarter results of fiscal 2024. Thank you very much. This ends the presentation.

Operator: Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.

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