Good day, and thank you for standing by. Welcome to the Q2 2024 Harvard Bioscience, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Kathryn Flynn, Corporate Controller.

Thank you, Josh, and good morning, everyone. Thank you for joining the Harvard Bioscience second quarter 2024 earnings conference call. Leading the call today will be Jim Green, 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 or 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 for 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 income 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 a 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.

Thank you, Kathryn. Hello, everybody. Let's move to Slide 3 of the presentation and look at our quarterly results. We had a tough first half of the year, and Q2 was more challenging than expected. Revenue in the second quarter came in at $23.1 million. That's down $5.7 million from last year. Taking a minute on the market environment, as expected, slower sales to China and Asia Pacific continued through our second quarter. Q2 also saw the effects of reduced capital spending by our CRO and biopharma customers in Europe and in the U.S., which primarily affected our preclinical product shipments. And I'll mention, we're still seeing the impact of some of the supply chain issues, which we do expect to be able to resolve over the course of the second half of this year. Our gross margin came in at 57.2%, but remained strong with primary differences to our target of lower absorption of fixed expenses. On a GAAP basis, we reported an operating loss of $2.1 million. On an adjusted basis, our operating profit measured $800,000 or 3.5% of revenue and adjusted EBITDA came in at $1.3 million or 5.5% of revenue. All of that said, we continue to focus on our operating cost structure and our new product initiatives, which we -- while we weather the challenging market environment. As we announced in April, we took advantage of operating synergies to reduce our operating cost structure and support our ongoing investments in new products. We're seeing these investments come to fruition and expect them to add new revenue streams starting in the second half and help underpin our long-term double-digit revenue growth goal. I'll give some more color to our new product commercializations later in the presentation. But first, let me turn it over to Jennifer Cote, our CFO, to discuss our second quarter financial results in more detail. Jen?

Thank you, Jim, and hello, everyone. Let's dive further into our financial statements. As Jim mentioned, this was a challenging quarter. Please move to Slide 4, where we'll look at revenue for the quarter by product family and region. Starting with the Americas, revenue was down 12% as reported from last Q2 and slightly down sequentially 3% from Q1 2024. Preclinical sales were down compared to prior year Q2 and also sequentially to Q1. Pharma and CROs are still delaying spending on capital equipment, and going forward, we are starting to see signs for market optimism with increases in biotech related capital raises and increased drug development activity. But as we learned from recent announcements, the CROs, while optimistic, are challenged over the course of the rest of the half of the year. As this recovers, we expect to see improvements to cascade to our business as things get better. While Cellular and Molecular was down slightly 5% compared to Q2 of last year, CMT showed sequential growth of 9% compared to Q1 2024. And so we're encouraged to start to see some return to growth in our academic markets. Moving on to Europe. Overall, revenue was down 29% as reported versus last year Q2 and was essentially flat sequentially to Q1. Both Preclinical and Cellular and Molecular saw large declines versus last year but are essentially flat sequentially to Q1. We attribute the year-over-year decline in Europe to the overall economic environment, including higher interest rates, energy costs and the Ukraine war, resulting in tighter spending by CROs, pharma companies and the government. Moving to China and Asia Pacific. Overall APAC revenue was down 22% against prior year Q2 and 16% sequentially to Q1. Preclinical sales in Q2 saw further erosion compared to prior year and sequentially from Q1…

Thank you, Jen. Let's move on to Slide 6. I'm not going to drain this whole slide, but I do want to take a minute to remind you how we think of our base business and investments for expanding into high-growth applications with significant consumable and recurring revenues. Our base business is designed to deliver long-term better-than-market growth. New base product revenue combined with new high-growth revenue streams from bioproduction and MEA Organoid applications begin in the second half and underpin our long-term double-digit growth target going forward. Now let's move to Slide 7 to discuss our considerable progress on our key new product launches in more detail. The first row of the table highlights the commercial status of two new products we consider part of our base bread-and-butter business. Early in Q3, we began production shipments of our new SoHo family of telemetry devices, which now enable real-time telemetry measurements in a shared animal housing environment. This, we believe, will lead to additional demand, especially in Europe, though likely starting really in 2025. Late last year, we announced the initial delivery of our groundbreaking VivaMARS neurobehavioral monitoring system to one of our largest CRO customers. This CRO has adopted the system as part of their preclinical testing offering. Later in the second half, we expect to ship additional VivaMARS products to this customer as they expand their use in these systems to more locations. As an aside, we expect to see posters describing the initial results of testing using the VivaMARS system at this September Safety Pharmacology Society show. We're also encouraged by the initial response to VivaMARS, which supports our optimism as we are seeing strong interest from other CRO and biopharma customers and expect expanding sales in 2025 and beyond. The second row of the table highlights…

[Operator Instructions] Our first question comes from Paul Knight with KeyBanc Capital Markets. You may proceed.

Hi Jim, regarding APAC, I guess you say in the release that China is most of it. What total APAC exposure as percent of revenue at this time?

Historically, Asia Pacific has been about 1/4 of our total revenue with again, predominantly, that's predominantly China, but it does include a few others like Korea and Japan, but it is predominantly China.

And your outlook there?

We feel like we've pretty much reached the bottom there. Our funnels are growing. Early indications look pretty good. I mean we got quote rates going up. So we're -- and we have seen the first recovery in Asia really seems to be -- have come from the academics. We do expect things to have stabilized there, just be starting to move back to growth on the academic side. The part that has been a little more struggling was more the industrial side with biopharma and CRO type companies in China. The outlook there, again, what we're seeing is the funnels are growing, but the problem we've seen has been the velocity through the funnel. So we measure things like funnel aging, and we look at math on things like the quote, the time from quote to order. That's been -- that has remained slower. So that's taken a little more time. And again, as Jen mentioned, we're thinking it's fairly stable at this point for that revenue stream but as far as going back to real growth, that's probably later in the second half, maybe moving into 2025 as far as the growth vector on that stream.

And then Slide 7, most of these products are going to be introduced here in the second half of '24 and early '25. Are you getting orders now, any of your sales force -- I think the sales force years ago got that heat up.

Yes. Great question. We actually introduced to the market starting at SFN last -- near the end of last year. So we've been -- these are now products that we are selling. We're already collecting -- getting -- working toward orders in each one of these segments. We've talked about what we expect in these areas. And as I look at the base business, this is targeted overall to be giving us -- to be better than market growth. Now of course, the market has been an issue. But the two new areas in the base business, adding the new SoHo implantable devices, that's going to support our growth in the base business. And then when you look at the VivaMARS system, we're going to -- you'll see announcements at SPS for our first large CRO customer who bought the first article last year, they're starting to buy more of these now. So that's going to be expanding revenue growth here in the second half of this year. So that's -- those are products in the acquisition process now. And we have other CROs and biopharma companies lining up, also looking at moving towards this technology for their neuro testing. In the bioproduction side, that we know has been a nice entry for us. It's a little longer sale, but that's been growing quite well. We expect to have another new drug announced with this -- the same large pharma company that's now spending right now about -- consuming like $1 million of consumables just on that one drug today. We're working with them now to move toward adoption in another drug. So this could be another very large book of business added to the bioproduction side. And there we're seeing -- we're working with a number of customers out…

Jim, last question is if the market goes to 5% growth, which is kind of what most companies in the sector are saying, this is maybe next year or normalized, if the market is at 5%, what do you think Harvard Bioscience's growth would be?

Yes, that's a great question. The way I model it is, I expect my new product development in these areas to give me roughly double-digit growth with new products. So if I can get to somewhere around 10% with incremental new business and if the market is growing at 5%, then I should be able to reasonably underpin low double digits for this business. If the market stays flat, then at least I've got my new products driving me arguably up towards double digits on its own. That is the long-term growth vector here. It's not so much that I have to count on the market growth. I can count on the new products going in. These are exciting new things. And these are areas where very few, if any, competitors have a position in it. And these are areas that leverage technologies that we've developed over 30-plus years. So I just -- to me, this is a very exciting time for the company and how this develops. It's going to be really interesting and fun to see how organoids start to take over. And again, what this system does is it makes the use of organoids efficient. Normally, if you're looking at with today's state-of-the-art, you take -- you're building various proxies for organs and then you're pulling them out and with a PhD scientist you look at them under a microscope, that is not an efficient way to run -- to do the kind of automation that you need to be able to do. Today, there's such high volumes of small animals that are used to get through the large population testing, that's the only thing that they can do today. But this is an alternative that should make that a lot safer and a lot less costly and a lot more efficient for the pharma companies. So this is going to be the one to watch. I'm really excited about it.

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

Hi. Good morning, and thanks for taking my questions? Jim, if you could just finish your thought on if the market is flat next year, what would your growth be? Would it be like high single digits, low single digits?

Well, when I look at these new products coming out, I would think -- I would expect to get somewhere close to 10% growth out of the new products, independent of whatever the market is doing. And if you look at the growth rate inside of these -- especially these new areas like bioproduction and the Mesh MEA Organoid products, I mean even in the first year, between them, they should put -- they should arguably put 5% to 8% of new -- of total growth on the business and that should be expanding. So a year out, I mean, I would expect this -- I mean, I look at the revenue stream for the organoid side, that's -- it's a low base, maybe it's $5 million or $6 million today, but I'm targeting somewhere around 50% or better CAGR on that revenue stream. So you look maybe in the first year it adds 3 or 4 points, in the next year you're adding another 7 or 8 points. So this really moves the needle. And if the base business is growing at -- even if it's growing 0, like you say, this -- and I don't -- I think our base business should do better than that anyway simply because we've now added the VivaMARS product, and that expands our served opportunity there pretty substantially. So that alone is going to cause our base business to well outperform the market itself as it just sits today. So that's kind of how we see it. And to me, the main thing is these are sustainable growth drivers. These aren't just things that, well, let's get to a market growth of 5% and then ride that out. This is incremental, it's new, it's exciting, and we're going to make a great success of this.

Okay. Got it. And then if we could just go into a little bit more detail about the organoid marketing strategy here. Obviously, it's a very important product for you and you're going to be moving deliberately. It looks like the strategy here is like it's some lead users and some publications going. Can you kind of just talk a little bit more how you intend to build this business and build the market?

Sure, sure. If you -- we have great exposure to the academic researchers. That's our bread-and-butter customer. And that's where we were used initially for these first beta units to prove the technology because what comes out of there are the papers and the -- whether they're peer-reviewed papers and posters on the use of this technology. And even with the first 4 or 5 beta users, we're also testing with a small CRO who is focusing on all of the primary compounds that are used in safety and tox testing. So this is not only going to be for researchers. We'll get the neuro researchers, we'll have the cardiac researchers. That's going to be a big driver for us. But then the adapting of that toward safety pharmacology and tox is a real critical area for us to now potentially go into a multibillion-dollar market of going after what today has to happen through large volume -- large populations of small animals. And so if we can show that, and that's why you'll see in the second half of the year, it's not just going to be academic researchers. We now are lining up the NIH to be one of the adopters here, but then biopharma companies. You're going to see -- I expect to be able -- and part of this is I want to be able to publicly announce who they are because a lot of times the big pharma guys they don't like their names mentioned unless -- and if you have to get their agreement on a press release, it gets a little tough. But I can -- the leverage I have is if they want to work with me on it, they're going to have to let me talk about it. So you're going to see some very interesting names and very interesting places, and you'll see where these things are going. So I think the revenue growth -- the growth markets that we're looking at here is, certainly it's very big on the neuro side. You see what's happening right now at University of Texas and a few other places with neuro or neuro organoids. Cardiac is going to be a big one. But then again, adapting it to safety, pharmacology and tox applications, that is a massive market, and it's right in our wheelhouse with customers that we already sell to.

Okay. Great. And then last follow-up question on that. Would you expect to see more of these studies coming out later this year or in 2025?

You're going to see some of them. In fact, some have already started to come out. I'd say some of the bigger ones that you'll see in at the Safety Pharmacology Society, that's in September. There you're going to see papers with the use of our neuro testing with our MEA MR system. And you should also see it with the well-known large CRO who we sold this first -- who's adopted this technology first. And there we're now working with them to place a few more systems into a few more of their labs. So you'll see it there. When you get to SFN, Society for Neuroscience, that's when you really start to see the papers coming out and the posters on the use of Mesh MEA and organoids. So those -- for neuroscience and then for safety. The last big one would be The American College of Toxicology. That's where you'll see really the rollout of MeshMEA. And by then, we're looking at -- I think that's going to be in March. By then we should be in full production with these systems. And keep in mind, these are not cheap systems. These are arguably up to $100,000 for the system, plus you have services, you have software licenses. And then the consumable on this, depending on the customer type, there could be a very large revenue -- consumable revenue stream on this product. So again, the way I look at it is the initial work comes out with the beta testers that have already started, those papers are in progress now. You'll see those coming out at the various shows, whether it's the SFN, College of Toxicology, Safety Pharmacology. You'll see -- and then you'll also see more of our stuff starting to come out with The Bioprocessing Summit. So across the board, these are not just things that we're talking about. These are things that we're now selling. And again, the big drivers are going to be bioproduction and then the organoid work with MeshMEAs.

Our next question comes from Chris Sakai with Singular Research. You may proceed.

Hi. Good morning. Can you talk about academic research in China? Is it coming back like you've expected?

Yes. Yes, it is. In fact, we did see even in the Q2, I think if we look on the one slide, I think that we'll see that the CMT business actually did see some recovery there in Asia Pacific. Is that right, Jen?

Yes. Yes, that's right, Jim. And I think we're starting to see more activity in terms of quoting. And the delays, I think, are more timed with those companies wanting to take -- or those academic groups wanting to take advantage of the funding that's available. So they're going through the application process, but in parallel talking to us about their business.

Yes. So the academic side, we feel like it's already bottomed out and it's starting -- we're starting to see some recovery on the commercial side with CRO and pharma companies. That's taken a little longer. We are seeing larger funnel, so more opportunities. But with the way the budgeting works there, that's not expected to really hit us for revenue growth until we get later in the second half or maybe even into 2025.

Okay. Sounds good. And then I guess regarding recurring revenue, do you have a target for that for the year?

Yes. We started the year, as we first started measuring it, we were at about -- we were a little above 35%. Now given that we've all seen pressure on capital purchases, at this point right now we're probably closer to 40% recurring. So as you would expect, when there's pressure on capital purchases, then you'll see less purchase of higher cost equipment, but you'll still maintain much of your recurring revenue. And you'll notice that each of these new products that we've talked about today, whether it's in bioproduction or whether it's with mesh organoid, these are all products that have heavy pull-through. I mean, especially the electroporation and bioproduction. I mean, that first customer we talked about, there were 4 systems, and you're talking $1 million of consumable just for that one drug. So the leverage there massively changes and the ratio changes quickly from -- as far as the percentage of our revenue being recurring as those products become more and more adopted into the market.

Okay. Great. And then for the $4 million cost savings you mentioned, where should we expect to see that on the line items?

Yes. It's -- well, it's about $4 million annualized. I think we saw about $700,000 in Q2. It's overall OpEx, but it is heavy on the operational side. So part of it would be in cost of goods, but much of it is going to be, I think, straight up on the OpEx line.

Yes, it's probably about half and half, Chris. There's -- the piece that's operational, you'll see it bleeding through margins over time, whereas the rest of it, you'll start to see it coming through SG&A, R&D.

Thank you. I would now like to turn the call back over to Jim Green for any closing remarks.

Yes. Thank you for joining us. This ends today's presentation. We hope you'll join us in November for our third quarter results for fiscal 2024. Thank you very much. This ends the presentation.

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