Good day and thank you for standing by. Welcome to the Q1 2024 Harvard Bioscience, Inc. Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Dave Sirois, Director of SEC Reporting.

Thank you, Josh. And good morning, everyone. Thank you for joining the Harvard Bioscience First Quarter 2024 Earnings Conference Call. Leading the call today will be Jim Green, Chairman of the Board, President and Chief Executive Officer; and Jennifer Cote, Chief Financial Officer. In conjunction with today's recorded call, we have provided a presentation that will be referenced during our remarks that is posted to the Investors section of our website at investor.harvardbioscience.com. Please note that statements made in today's discussion that are not historical facts, including statements or expectations of future events or future financial performance, are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied. Please refer to today's press release or other disclosures on forward-looking statements. These factors and other risks and uncertainties are described in the company's filings with the Securities and Exchange Commission. Harvard Bioscience assumes no obligation to update or revise any forward-looking statements publicly, and management's statements are made as of today. During the call, management will also reference certain non-GAAP financial measures, which can be useful in evaluating the company's operations related to our financial condition and results. These non-GAAP measures are intended to supplement GAAP financial information and should not be considered as substitute. Reconciliations of GAAP to non-GAAP measures are provided in today's earnings press release. I will now turn the call over to Jim. Jim, please go ahead.

Thanks, David. Hello, everybody. Let's go ahead and start and move to Slide 3 of the presentation, take a look at the highlights for the quarter. Well, as expected, we had a tough start to the year. However, I will say that, with strong gross margins combined with previously communicated cost reductions, it positioned us to underpin our commercial investments for growth while at the same time meeting our earnings targets. Also as expected, significantly slower sales in China and Asia Pacific continued through Q1, further exacerbated by some slowing in Europe and in total a tough comparison to a record-high prior year Q1. I'll also mention we're still seeing some supply chain issues. As an example, Q1 saw one product alone that had $1 million in revenue shipment delays pushing it out of Q1. So now let's go ahead and look at the numbers. Revenue in the quarter came in at $24.5 million, down $5.5 million from last year. Gross margin remained strong at 60.3%. On a GAAP basis, we recorded an operating loss of $2.3 million. On an adjusted basis, operating profit measured $1.2 million or 4.8% of revenue. And adjusted EBITDA measured $1.6 million or 6.6% of revenue. Let's move to Slide 4, look at the revenue by the -- for the quarter by product family and looking at the regions. So starting with the Americas. Revenue was down 6.6% as reported. Preclinical revenue was slow on reduced demand of COVID-related respiratory products. Cellular and molecular products were up modestly in advanced -- primarily with the advanced cell-based testing systems. We saw slow sales in academic research, with NIH grants that seem to be taking longer to approve, but we believe much of that is due to the uncertainty that was around the congressional continuing resolution situation…

Thank you, Jim. Let's jump into our Q1 financial results in greater detail, if you can please refer to Slide 7. As a reminder: In addition to our reported GAAP results, we also include discussion about our adjusted or non-GAAP financial results, which aligns with how we internally manage the business. Our slide deck includes a reconciliation between our adjusted results and the corresponding GAAP financial measures in the appendix. I will specifically call out the activity during Q1 which we pulled out as non-GAAP. Jim has taken you through revenue performance, so I'll take you through some of the other key financial metrics in more detail, so please refer to the top middle of the slide. I'm excited to share, as Jim mentioned, that on a reported basis, our Q1 gross margin was 60.3%, which is in alignment with our long-term target of 60% gross margin. This was slightly behind last year's margin of 61.2%, but please keep in mind that our revenue last Q1 was $30 million, a record Q1. And we are pleased to maintain our gross margin performance despite lower revenue absorption in this year's Q1. We continue to expect 60% margin for the year. If we can please refer to the top right graph on the slide. Our adjusted EBITDA during Q1 was down from $4.8 million last Q1 to $1.6 million this year. The primary driver for reduced adjusted EBITDA was the decrease in revenue and flow-through of lower gross margin dollars. We continue to invest in our growth strategy and the commercialization of our newly launched products such as VivaMARS and SoHo and growth opportunities in bioproduction and organoids that Jim mentioned earlier. These applications are starting to penetrate the market, starting with our key academic partners, with additional opportunities ahead in CROs…

Thank you, Jen. Moving to the summary on Slide 9 and take a look at the full year. We expect the full year to be roughly flat to 2023. We see weakness in the first half versus a strong and difficult prior year comparison. This is especially true in China, where Q1 2023 was up significantly [ in ] Q1 2022. We expect second half growth versus both the first half of this year and the second half of last year. We expect meaningful growth from new product commercializations and we expect China funding to improve going into the second half. We continue to expect gross margin in the 60% range, up from 59% last year. And we continue to expect adjusted EBITDA margins improving to the mid-teens, up from 13% last year. Thank you. Now I'll turn the call back over to the operator to open the line for questions. Thank you.

[Operator Instructions] Our first question comes from Paul Knight with KeyBanc.

Jim, on the quarter, the -- where are you with electroporation? Do you think that's the biggest driver of growth here in 2024? And overall, what portion of revenue in '24 do you think will be from products introduced in the last year?

Great question. I mean certainly bioproduction and electroporation are a key part of our business. We've been expanding in that area. It's certainly we're expecting that to start being to be meaningfully growth -- to drive meaningful growth for us. If you look on the chart that I put together here on one of the slides, it shows -- we're breaking out the base business and what we expect there. And then there I, we expect to be at or better than market growth, in the base business. And that's almost -- it's in the 80% to 85% range of our business. Electroporation and bioproduction, that represents somewhere around 10%. We're also -- as you know, we're starting to include our AAA product, which is now starting to sell, into bioproduction and production type of applications, so there we're looking at it's probably somewhere in the neighborhood of 10-plus percent of our business. And that's going to be a major driver of growth for us. It will be -- and we expect that to be ramping up over the years, so in this first year, we'll see some growth out of there. Maybe it's in the 1 point or 2 kind of region. As we look into next year, we expect that to ramp up to 2, 3, 4 kind of points of overall growth for adding that kind of growth to the overall business. So that's kind of the numbers that we're looking at. So it's a bit of a long sale, bioproduction, because you have to introduce it. You have to build it into their production facility. You have to go help them with certification processes. That takes a little bit of time, but in the meantime, we're expanding the product capability to make it also now applicable for the new-generation technologies that are coming out with cell and gene therapy. So again, that's a really nice growth driver for us. And then also, as we've talked about what we're doing with organoids, that's also, we see, a great growth area for us and a very long-term large market opportunity for us.

What do you think your exposure is to the cell and gene therapy market? Is it 10%, 20%?

It's hard to say. Early on, with many academic researchers and folks in the discovery side of pharma companies, they've been using our product pretty much for a lot of the initial development for cell and gene therapy. That's why we think it's a good candidate for us to migrate that to be an easier use for production as we start to see the actual cell and gene therapy type of applications come into play here. As far as how much of it is with our product, it's hard to say. There's only a small number of companies that have a product that can do this kind of transfection. So those tend to be very large companies, but we focused, because we're so well known, in the academic side, so I think we got -- we have a good position and a good brand with the academics. And it will really depend on how well we're able to transfer that capability into the more production and larger-volume applications and to get it with the biotechs as they start to develop.

Our next question comes from Bruce Jackson with The Benchmark Company.

So the second quarter is generally either flat or down over the first quarter, but you've got that one order that shifted out from the first quarter. Can you kind of give us a rough idea of what your expectations are for second quarter revenue?

Yes, I don't -- well, I typically don't give quarter-level splits, but I would say, historically when you look at the environment of the business, typically the second and the fourth quarter are stronger than the first and the third. I don't know that we're yes -- that I can say yes, that we're starting to get back into that kind of a natural change, environmental change, across the quarters. And that was always due to the government funding with you had the academic year and then you had the year-end year and budgets needed to typically be expended during the time frame, but certainly we expect to see things improving throughout the year here. There'll be -- we would expect to see some sequential improvement. And then the second half is where we really see things adding up because, by the second half, we expect to see -- the headwind from China, we expect that to be reversing here going into the second quarter. That moves the tide. At the same time, the new product introductions, they take time to really catch on. We started introducing these over the last year or so, so we expect that, though, to really start shipping for revenue shipments as we more -- and meaningfully as we get into the second half. So I would -- again, we're really looking at the total year. We think we'll see kind of basically flat to last year, mostly driven in the second half, but certainly I would expect to see some level of improvement even sequentially going forward.

Okay. And then with China you've got an organization that's keeping an eye on potential contracts and things like that. How confident are they that they can capture some of this new stimulus?

Well, we're very well known there. The -- again there's very few companies that do the kind of things that we do. Academic research has really been the part that has really been depressed in China and Asia Pacific. And often what was happening, what we saw is the university researchers were just holding off because they just -- they didn't feel like they had full approval in the budget and the approval to go forward with purchasing. So we think, with the announcements that came out back in March, that, that should clear the way. The Chinese government had indicated they expect to see overall a 2-year budget plan with about 25% growth over the 2-year period, so certainly we'll -- if nothing else, we're certainly going to annualize and see some level of growth off of where we are, but the real question will be does it pop back faster or not. The good news is people are now starting to really explore and get ready to place their orders, so we think China is going to be a significant part of the business for us. If it -- if that growth just annualizes, well, that's unfortunate, but we -- it at least will be a headwind like we've seen for the last couple of quarters, because it will annualize here as we get into -- as get through Q2 and into Q3.

Our next question comes from Frank DiLorenzo with Singular Research.

Just following on with China. And you talked about growth getting back on track in the second half of this year. Would that be a potentially Q3 or Q4 event? I was also wondering. You talked about growth coming back in the funding. Can that be sustained for multiple quarters? I mean because it looks like [ comps might make that easy ] in the second half of next year [ too ].

Yes. Well, yes. I mean we're -- we expect to see things picking up going into the second half, so by Q3, Q4, we expect to see revenue shipments moving back up into that segment. Again that's been a headwind on a comparable basis for a few quarters now. And now we're again -- and it was primarily waiting on clear budgetary. And in the announcement, they were -- they clearly identified areas that they wanted to support, and academic research and these types of areas was a big part of it, so we're pretty happy to see that. So they, customers, should do -- should start to feel here now that they're free to go ahead and start preparing for their -- the work that they're working on.

Okay. Regarding recurring revenue, do you have a target or a goal for fiscal '24, the percentage of our revenues? [ I don't know if you -- I mean, if you'd relay ].

Yes. Well, we're expecting -- well, I mean our long-term growth. Clearly, I expect to be able to have this be a double-digit growth business, so we're targeting how can I underpin getting to 10% or better. Coming with strong growth in the second half, that should be a nice pathway toward being the kind of growth vector that I would expect to take into '25, so -- and again the second half of '24 is really where we see things really starting to pick back up. And then that should dovetail right into 2025.

Okay, just one other thing. Could you give us a little more granularity on the cost initiatives, the areas that we're in and the rationale behind it?

Yes. It -- my philosophy is always, if you don't have to spend in a certain area and you have efficiencies that you can garner, you should take it because I do need to fund the growth activities that we're taking on. We're expanding commercialization into some of these new areas that are really interesting, like with the organoid work and then bioproduction, so -- and you pay for that, but also, at the same time, I'm committed to delivering the EBITDA number for the business, so it's a bit of a tightrope. But you -- I feel like we have to do both. And if there's an opportunity to take advantage of some of the savings as we find that we -- as the platform gets built and we start to really see better improvement in things like gross margin, we need to be looking to continue to find out where are the areas we really can reduce spend in order to be able to make those investments.

[Operator Instructions] And I'm not showing any further questions at this time. I would now like to turn the call back over to Jim Green for any closing remarks.

All right, well, thanks, everybody, appreciate you sticking with us here. This ends today's presentation. We hope you'll join us back next, for Q2, in August of this year. So this ends the presentation. Thank you. Have a great day. Thanks.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.