Good morning and thank you for standing by. Welcome to the Fourth Quarter 2021 Harvard Bioscience 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 be advised, that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Mr. Dave Sirois. Please go ahead.

Thank you, Catherine and good morning, everyone. Thank you for joining the Harvard Bioscience fourth 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 Q4 2021 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. 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, reflects 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 in 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'll now turn the call over to Jim. Jim, please go ahead.

Thank you, David. Good morning, everybody. Let's move to Slide 4 of the presentation to look at the highlights for the quarter. Revenue was up 7% over a strong Q4 of '20 and up 7% over pre-COVID Q4 of 2019. Global supply chain continued to delay shipments driving backlog up to approximately 2x our pre-COVID levels. Pre-clinical revenue was up 6% over a record strong prior quarter year. Cellular and Molecular Technology revenue was up 9%, with continuing recovery in spite of European headwinds. Adjusted operating margin came in at 16%, impacted by increased COGS and increased variable compensation and new investments in R&D. Adjusted gross margins came in at 60% in spite of higher COGS. Higher cost of goods were due to global freight costs and material inflation plus direct labor inefficiencies. OpEx was up year-on-year, primarily on variable compensation and growth in research and development investments. Let's move to Slide 5 of the presentation and looked at the details of the quarter. In spite of global supply headwinds, we had solid revenue growth with Q4 coming in at $33.1 million, that's up 7% over the same quarter last year. Gross margin on a GAAP basis came in at 59%. That's up 200 basis points from last year despite higher cost of goods. This quarter had GAAP operating income of $1.7 million or 5.1% of revenue. Our adjusted operating income was $5.3 million, so our adjusted operating margin measured 16% of revenue. GAAP earnings per share in the quarter was a positive $0.02 up from a negative $0.02 last year. Our adjusted earnings per share was $0.08, flat to a strong prior year. Our leverage ratio measured 2.7x EBITDA. We can move to Slide 6. Take a quick look at the revenue in the quarter by product family. Starting…

Thanks Jim and good morning, everyone. Our Q4 and full year results reflect the positive outcomes from our investments and focus on the stated 2021 goal to drive long-term profitable growth. We are pleased to be starting another year set up to extend on this trend of profitable organic growth. As we usually do, 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 or P&L performance which aligns with measurements we use to internally manage the business. Reconciliations are available in the appendix of this presentation to GAAP results. On gross margin, despite the effects of external factors in the supply chain and inflationary environment, our original September 2019 objective of 60% plus gross margins remains our target. Our Q4 results speak to this potential with 60% adjusted gross margin reported. And consistent with past trends, product mix remains our single biggest lever to driving margin expansion as our higher-margin Pre-clinical and Cellular products grew as a percentage of overall sales relative to prior year. This improvement is a direct reflection of our sales effectiveness and product rationalization activities we've been discussing. Also, we have been proactive, as Jim noted, on the price increases in this environment which has started to positively impact gross margins, though cost of materials and freight remain at similar inflated levels we saw in Q2 and Q3. Adjusted operating income for Q4 was down modestly versus prior year due to operating expense investments in critical R&D programs and higher variable compensation. We are confident the uptick in each area aligns well with our organic growth and gross margin objectives for 2022 and also supports long-term value creation via innovation and rewarding key talent. In terms of variable compensation, this includes higher…

Thanks, Mike. Now moving to our summary on Slide 11. Looking forward, our primary goal is sales growth driven by improved sales effectiveness, marketing and new product introductions. We will continue addressing cost of goods issues resulting from global supply chain disruptions and specifically hone in on freight optimization, material costs, labor inefficiencies and tuning various overhead costs. As for our outlook for the year 2022, we're expecting to sustain double-digit revenue growth with further improving both gross margins and operating margins, while at the same time, increasing our investment in sales coverage and new product introductions. We now expect annual revenue growth on a reported basis to improve to approximately 10% to 13% growth versus last year. And that's net of pruning reduced low-value ad products -- product revenues from certain CMT product segments. We see strong order growth and a solid backlog, driving double-digit growth in both our Pre-clinical and CMT product revenue segments. Tailwinds in Americas and Asia Pacific and steps implemented to improve EMEA sales across the portfolio underpin our growth. Portfolio rationalization of pruning low-quality revenue of approximately $2 million to $4 million is well more than offset by new growth. Risks do remain with the global supply situation and could be further exacerbated by the hostilities we see in Ukraine. Now for adjusted operating margin, we expect to be in the 15% to 16% range. We expect to improve gross margins by a full percentage point and we'll continue to invest in research and development for new product development and for sales coverage expansion. Thank you. Now, I'll turn the call over to the operator to open the line for Q&A. Thank you.

Thank you. [Operator Instructions] Our first question comes from Paul Knight with KeyBanc. Your line is open.

Hi, Paul.

Thank you for taking the call, Jim. As you look at academia which I know a lot of peers in the industry, you've been citing slow growth. You seem to be above that growth rate. Could you talk to that portion of your business exposure?

Sure, sure. One of the things we see definitely coming back is -- Europe has been really held back all through the year and the Omicron variant really continue to extend, keeping it difficult for us to talk to our customers and kept the order process slower than it naturally should have been. So we see Europe as its own component continuing to grow and be incremental to our growth. Americas, just in general, has a great outlook, continues to grow. We look at our rolling forecast on three months, six months, a yearly view and looking at budgets and where the areas are growing, we're sitting in the right kinds of positions with our products. And China, China got off to a bit of a -- it had a good -- great year last year. We expected some slowness in Q1. We saw that in Q1 but we see the expectation was always -- expectation was always that Asia was going to really start to pick up in Q2. And all indications are that, that's true that we'll see an increase in Q2. Again, that's assuming we don't see some kind of a political or other external environment situation. But in general, everything is pushing in the right direction. All of our outlooks are good, people -- the budgets look solid and we're confident we're going to -- we put those together, we see nice growth. And again, these are products which we know, in some cases, there's long-off demand. But in general, it's just growth in some of these technologies.

And Jim, you have guided to 10% to 13% revenue growth in the year. It looks like at least $200 million headwind due to portfolio rationalization. I guess it seems to be the highest growth you've guided to. What's your -- do you have a long-term thought on what growth could be?

Yes. We're -- our goal is to see a sustained double-digit growth engine in that kind of low teens kind of range, maybe a little better but I can get above 10% and into the low teens on a sustained basis. And to have that content really be driven by -- there's always some pricing power expectations. No question, well, you'll continue to see improvements in coverage and sales efficiency. You see expansion both broader in territories and deeper within customer segments. And at the same time, now you're seeing -- you're going to see a ramp-up in our new product introductions. I expect product introductions to be probably the largest component of growth as we go forward. And that's kind of how we're modeling it. New product introductions, combined with sales coverage expansion and deeper product, deeper depth into the customer segments and maybe some pricing along the way, too, we'll see how that part goes.

And then lastly, are you complete with your sales force reorg?

Sales force, yes, it's complete but we're at the point now there will definitely still be some tuning. We're going to -- we're starting to see based on the territory assignments, where we have opportunities to go a little deeper, maybe expand territory into two territories and add a rep. And we're also -- as the product migration, we always felt like a lot of what was developed and typically only sold in into academic research, had a great opportunity into CRO and pharma but never really had the exposure to it. Well, now we have the exposure to it with the sales organization. And we've already seen one -- actually two of our product lines have already now moved to be offered through the CRO through the channel that really focuses on CRO and pharmaceutical companies that being the behavioral technologies which are very consistent and the need is significant. And we're a well-known provider in the telemetry space but that's a very good adjunct to add behavioral type products and have it be compatible with -- not just with our products but these -- the products that are used for pre-clinical, if you want to get -- if you want to get approval to the FDA and regulatory agencies, you have to have a kind of certification that you have to meet with your products. And that's a very nice for us. It's a nice barrier. We're already there with our systems and with our implantables. So as we start to offer our behavioral products, they'll have that same kind of capability and that same kind of high barrier. We're also -- we've also now added the components that are part of individual organ type of testing. That's also a big opportunity for us and a real need there in the pharma and CRO side. And you'll see more of that. So there will be more of a migration of these technologies and we'll continue to sell to academic research but you'll see changes -- engineering changes were needed to make them compatible for higher volume and utilization in CRO and pharma customers.

Okay, thank you.

Thanks, Paul.

Thank you. Our next question comes from Tim Chiang with Northland Securities. Your line is open.

Hi, thanks. Hi, good morning. Could you talk a little bit just about your product mix that you expect? I mean I know you cited improving product mix as one of the factors for better margins this year. How do you see the product mix evolving as the year rolls out?

Sure, sure. We see -- much of it is driven by the expansion in our exposure now into CROs and pharma and also the biotech world that's coming out of universities, that's a new space that's growing. And building off of what we have on the pre-clinical space, adding products that will also apply to those customers from more of our development side, from the discovery side. So we see much of the growth and a great mix for us is telemetry and systems and the systems that are used for reducing the data and collecting what it takes to get through the FDA and regulatory agencies. Adding to that, again, expanding the behavior in that same area, behavior products. The inhalation products have been doing absolutely fabulous. You saw what kind of tremendous growth that's been over the last 1.5 years since we introduced it. Also, natural growth areas with what's happening in messenger RNA. Those technologies, our electroporation technology, our BTX products for electroporation, electrofusion. We see that having a very strong solid demand with growth in academia. We'd like to -- we expect that's also going to be more opportunity there as we look into small pharma and biotech. And then at the cellular level, we've had -- in the past, it's been a little difficult to get into to demonstrate some of the cellular products that now that we're able to start seeing the customers, we see that also -- there's nice pent-up demand and an expectation that we'll see more testing done at the cellular level early in the drug development cycle. So those are just some of the key areas. And also there's always -- one of the cores of our precision infusion pumps. That's been one of the foundational products for years and years. There, we're working on investing in new areas to be able to apply new applications of that. So we think that's not only going to be a great continued annuity business for us but there's nice new growth as we apply that into new areas.

That's good color, Jim. I mean I know one thing you mentioned is ramping up investments in next-generation telemetry products. Can you comment just on what the investment level will be? And when do you think you'll have the next-generation products available?

Sure, sure. What's happening in the market is given so much the nonhuman primate models are having to be used at a younger and younger age and they're smaller and smaller. So we want to stay ahead. In this space, we're clearly well the market leader. We want to extend that lead by having the newer technology able to do -- to handle much smaller animals, so very, very small implants, also have them designed in a way that they can -- that they live in an environment where you can have multiple animals all in the same housing. So that's going to be a nice expansion but also just getting to the higher throughput, being able to handle more animal models at the time in parallel and that also lets our customers be more flexible with their model populations on how they do that. So telemetry was one of the basics -- one of the foundational product technologies for us. And with it, they have to use our base systems because the data reduction and how you put your filings together regulatory agencies, you get used to that, it becomes what you're used to become and in many places, I mean it is the gold standard. And as companies like Charles River and Covance and others and then others start to make that the core of the basis of what they use, our plan now is to be able to offer to them some of these other products and have to be compatible and networked with our base software systems. That really helps tie the whole thing together, makes it very compelling and really lets us not only provide what the customer needs but really, it becomes more of a strategic relationship with these large customers.

I see. And maybe just one last question, Jim. I mean, obviously, your Pre-clinical business did benefit from a lot of the research tied to COVID treatments. Do you still see your customers doing more studies in that area? Or do you think that ultimately will get reined in some.

I think the -- certainly, the -- anything that goes through the clinical phases and through pre-clinical and prior to human clinical use has to go through safety pharmacology, toxicology type testing and behavioral testing. So a lot of -- what we've seen happen is a lot of the big CROs, they had to delay other therapies they're working on for things like Alzheimer's, obesity type therapies and such. So what we think is going to happen is -- they're still going to continue to be an ongoing set of work on vaccines but we're going to start to see more -- an ability to go back and look at those therapies for COVID, of course. And then for the things that were actually put on delay because they just couldn't do it all. So for us, we see that as being a long-term adjunct to the demand. And then at the end of the day, it's the natural demographics and growing population which really show what's going to be done in the level of capacity requirements to do all these pre-clinical level phases.

Okay, great. Thanks for the color, Jim.

Thanks, Tim.

Our next question comes from Lisa Springer with Singular Research. Your line is open.

Hi, good morning.

Good morning.

You mentioned the backlog is at twice pre-COVID levels. How long is it going to take you to work through the backlog?

Well, we -- I expect it to remain somewhat high for a while just because we're running heavy. And I've asked our operations team to make sure that we've got material to be able to sustain our primary product lines for up to a year. I don't want to have a situation where trying to be lean on supply causes me to potentially miss customer shipments. So being able to ship when the customer needs it, lets me to be -- I don't have to be aggressive with bringing the backlog down. So I do have to be careful that I make sure I'm hitting my aging backlog and that I'm not missing expected delivery times from customers. We will be -- we are ramping up capacity. There's no question some of revenue -- incremental adjusted revenue growth will be -- someone of that will be helping to bring down the backlog. But having a run rate backlog that's roughly consistent with where you are on orders is the ideal where you want to be. But yes, we'll -- certainly, we will start to -- you'll see some of that come down this year but it's not going to come down dramatically.

Okay. And you mentioned there's going to be $2 million to $4 million in terms of portfolio realization costs. Could you..

That's what we're thinking.

Okay. I am sorry. Go ahead.

Yes. As we look at some of the areas where there's -- when you really evaluate the market needs and some of the products that might really have gotten older and maybe there's better technologies that we really want to migrate them to. And often when you see that, these technologies, not only the older but they are higher cost to make, they're lower value and price. So -- and not to mention that they may drive a lot of inefficiency across your business. So looking at the total activity-based cost of products in terms of COGS and the real value of those COGS, I mean, if these products were highly valuable and you could price them well enough, then that's fine. But if they really don't -- really just don't demand it, then it's just -- it's worth taking them out. So kind of eyeballing $2 million to $4 million could -- if I have an opportunity to take -- make it more like $6 million, I think I'd be fine with that. Either way, I see enough -- more than enough growth of really good long-term business to offset that. And then when you adjust for that, I mean, it's almost like your growth rate really -- when you look at your core business, is really another a few points higher than what you're reporting.

Okay. And in late February, early March, have you seen any impact on your European operations of Ukraine were.

No, we haven't. We haven't. We don't have much exposure to Russia. We don't really ship there. And at this point, I don't think it makes sense to. The rest of our business is just fine. The -- I guess, the biggest concern, I mean, from a business perspective, of course, the whole situation is awful. But we don't see it affecting travel in Europe at this point. If it starts to -- I guess we would have to maybe resort back to more work from home and not be able to maybe see all the customers. But at this point, if everything is up and running. I've got no feedback at all that there's been any holdback due to the hostilities there on our business at this point.

Okay. And then my final question. Do you expect the quarterly cadence of revenues to be similar to past years and more backloaded?

I think we'll see kind of a similar level of quarter-to-quarter variations. We typically Q2, Q4 are strongest. We expect Q2 and Q4 to be the strongest here, too. But with the -- having some backlog might help us -- additional backlog might help us smooth that out a little bit as we look at Q3. But in general, we're pretty solid with this. And I think, again, for modeling purposes, you probably think about kind of similar levels of variations.

Yes. I'd say that if you took the growth rates and they're pretty even over the quarters for the year. Q4 is always going to be higher, Q1 a little bit lower than the middle with the other two. So I think that's -- it's a short story is historical trends are good at planning assumption.

Okay, great. Thank you, guys.

Thanks, Lisa.

And we have a question from Bruce Jackson with Benchmark. Your line is open.

Hi, thanks for taking my question. So getting back to the sales reorganization last quarter, so it was going to kick off on January 1. Where are we in that process? And what are some of the things that you're doing to rejigger the sales force?

Yes. Well, we've rolled out the complete structure of the sales force. The change that took place is we used the philosophy that we first tried about 1.5 years ago in the U.S. which worked very, very well to maximize our coverage and exposure across the portfolio. That paid off very handsomely in terms of organic growth for us. And with that, we're even tuning and expecting more growth. We moved that same philosophy to Europe where we have we have an identical type of overlap between the people that call on more large account calls like things that are CROs, pharmas large, very large universities and have that overlap with the folks that are more technology specific in terms of the CMT side. So really -- we expect that's going to give us a really nice incremental growth type opportunity as we are much better able to handle coverage and depth of showing up our products into the full segment of Europe. China is -- there, we're looking at how to best handle Asia. We've had two groups that focus on more on technology, the other more on customer relationships and large accounts. We're doing some tuning there because we think that the way it was set up similar to the U.S. that there was opportunities on the CRO and academics -- our CRO and pharma side which is a very large part of our business, there -- we weren't really getting exposure there with some of our CMT technologies like some of the electroporation and our cellular type products. So this is going to -- we're going to see some changes there that are going to just allow us better offering of the products to a broader range of potential customers there.

Okay. Okay, that's helpful. The other question I had, just generally, the respiratory research products have done quite well in the COVID environment. Are you seeing any change in the demand for doing the inhalation research? And are there other areas of the business that are picking up? You mentioned the mRNA research and the cellular research, you're also involved in the gene research areas. Tell us a little bit more about just what you're seeing in terms of the respiratory research? And is it being offset by the other businesses in the event that is declining age maybe thought [ph]?

Yes. Look, Respiratory has done very, very well and we're about to introduce some breakthrough technologies in that space that are going to continue to make it the premier type product. The opportunity in the past was it was limited in a way that we really didn't take advantage of all the customer segments. So it was kind of a mixed bag of academic research and CRO and pharma companies. What we're seeing is academic research, no question, substantial opportunity there with many more things being tested early on, on how various diseases and such are dealt with and how they affect the inhalation and breathing. On the CRO and pharma side, there the opportunity for us is it's exactly the same thing but it's in higher volume. It's where they're working with more animal models at a time. So both areas look very well for solid continued growth and expansion across all of the product segments and customer segments that we call on. This is a very interesting product and it's going to have legs as we continue to make R&D investment and expanding the capabilities of that product.

All right. That's great. Thank you very much.

Thank you.

Thank you. And there are no other questions in the queue. I'd like to turn the call back to Mr. Jim Green for closing comments.

Well, thank you for joining us here today and thank you for your interest in Harvard Bioscience. We look forward to you joining us in May to discuss the results of our fiscal first quarter results. Thank you very much. Have a great day.

This concludes today's conference call. Thank you for participating. You may now disconnect.