Good day, and thank you for standing by. Welcome to the Q3 2021 Harvard Bioscience, Inc. Earnings Conference Call. [Operator Instructions]. I'd now like to hand the conference over to your speaker today, Dave Sirois. Please go ahead.

Thank you, Elissa, and good morning, everyone. Thank you for joining the Harvard Bioscience Third 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 Q3 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 2 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.

Thanks, Dave, and good morning, everybody. Let's go ahead and move to Slide 4 of the presentation, look at the highlights for the quarter. Revenue was up 23% over Q3 '20 and up 8% over pre-COVID Q3 '19. Our pre-clinical revenue was up 28% on strong global demand and across all key product lines. Cellular and Molecular Technology revenue was up 19%, continuing its recovery as labs reopen. Again, this quarter, we saw strong order growth and backlog growth. However, we continue to have fulfillment delays from global supply chain disruptions and issues associated with it. Adjusted operating margin came in at 13%, that's versus 15% in Q3 '20 and versus 12% in Q3 '19. Adjusted gross margins came in at 56%, impacted by over 3 percentage points from higher COGS. And higher COGS continued from Q2 on global freight costs, material inflation plus direct labor inefficiencies. Q3 '20 was a difficult comparison due to the dramatic onetime cost reductions we took last year to handle the COVID headwinds. Let's move on to Slide 5. I look at the details of the quarter. As expected, we continued to see strong revenue growth. Q3 coming in at $29.7 million. That's up 23% over last year. Gross margin on a GAAP basis came in at 55%, down 110 basis points from last year on higher cost in the global supply chain. This quarter had GAAP operating income of $0.5 million. That's 1.8% of revenue. On an adjusted basis, our adjusted operating income was $3.9 million, so our adjusted operating margin measured 13.3% of revenue. GAAP earnings per share was 0, up from a negative $0.03 last year. Our adjusted earnings per share was $0.06, up from $0.04 last year. Our cash flow from operations was negative $700,000 and our debt increased by…

Thanks, Jim, and good morning, everyone. We're very pleased as the leadership team to see continued momentum and top line growth and on track to achieve our stated 2021 goal to drive long-term profitable 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 for P&L performance, which aligns with measurements we used to internally manage the business. Reconciliations are available in the appendix of this presentation to GAAP results. Consistent with Q2 reporting, I will make certain references against 2019 due to the unique comparability issues with 2020 due to COVID-19. On that note, our performance continues to reflect the fundamentally better business with adjusted operating margins of 13% exceeding Q3 2019 of 12% despite the roughly 300 basis point negative impact of supply chain and labor costs noted. Looking back to Q3 '20, the decline in margin from 15% includes the COGS impact as well as unique onetime cost measures, Jim noted to preserve cash flow during the height of COVID. Our operating expenses in Q3 '21 include investments to return sales, marketing and R&D spend to pre-COVID levels with a vastly improved set of capabilities to leverage as well as higher variable compensation accruals. In terms of bottom line performance as well as long-term value creation, delivering superior gross margin levels remains in focus despite the impact of supply chain trends noted. Adjusted gross margin was 56% were in line with historical performance as headwinds and COGS were largely offset by improved product mix. Within the COGS increases, the majority of the impact is due to vendor cost increases starting in the first half of this year. We also experienced higher manufacturing labor costs due to both market forces…

Thanks. Thanks, Mike. So looking forward, if we go to -- move to Slide 11. Our primary goal is sales growth driven by improved sales effectiveness, marketing and new product introductions. Over the next few quarters, we'll be addressing COGS issues resulting from the global supply chain disruptions, specifically honing in on freight optimization, material costs and labor inefficiencies and tuning our overhead costs in various places such as Europe. As for our outlook for the year, we're taking up our revenue outlook and maintaining our operating margin targets despite the extended supply chain-related cost increases. We now expect revenue growth on a reported basis to improve to approximately 15% to 17% growth versus last year. We see strong order growth and a strong backlog, driving sustained growth in our pre-clinical product revenue. Academic labs are expected to continue recovering with strong order growth and a strong backlog. Portfolio rationalization pruned low-quality revenue of approximately $1 million from our FY '19 baseline and another $4 million from FY '20. Risks do remain on the impact of the global supply chain for certain materials, though we are managing it closely and brute forcing manufacturing and supply to best meet our demand. As for adjusted operating margin, we are maintaining expected improvement to the mid-teens range. In spite of these global supply chain issues, we expect continued gross margin expansion on increased volume and improved margin mix, somewhat offset by higher supply chain costs. With that, I want to thank you. And now I'll turn over the call to the operator and open the line for Q&A. Thanks.

[Operator Instructions]. Your first question comes from the line of Lisa Springer from Singular Research.

I wanted to ask you. So you've mentioned that the supply chain issues have been a factor in terms of cost for labor and freight materials. Have you encountered any issues in terms of sourcing components for some of your higher tech products? Or are they generally available just at a higher price?

This happens off and on, especially in high tech development. But yes, we've seen a mix of items being very hard to get a number of suppliers either shut down our operation and had to restart. In a number of cases, we've had to go out to the market and try and find parts that maybe -- you have to get through areas instead of directly from the original manufacturer, you have to sometimes go out and pay a fairly high price for something that's available, but somebody has to go out and put it together. So in those cases, the prices on an individual component basis can go up dramatically. But in time, that all settles out, sometimes we have to do things like a redesign part of the circuit to be able to move along with a different product, move on with a different set of chips. But definitely, that's probably the largest problem we have in terms of supply chain disruption is with the supply we need from our suppliers. And we've done things like reached out and the team has evaluated basically the full suite of electronic chips that we use across the portfolio. And I've asked them to make sure that we -- where we can make sure we've got a year supply available. And that means that's why you're seeing things like inventory going up. And then also, if there's things that are just real hard to find, we end up having to pay a higher purchase price for it. But yes, that's where the disruption is really hitting us is with the supply of parts to our manufacturing sites.

Okay. And Jim, could you comment on the revenue contribution from newer products, say products introduced in the past 12 months and how the gross margins compared to the average product?

Yes. That's a great question, Lisa. An example would be the inhalation product that was virtually a new product, something like 1.5 years ago. That's become a significant contributor to revenue growth in the business. That's just 1 to mention. We've introduced just in this last year, a 17-year new products or enhanced products of what we're already offering. Those are driving new growth in the business, incremental growth. And in some kind -- in some cases, it's replacing existing growth with a product that's a better product and it's going to be more sustained. But certainly, new product development is a key portion of our growth plan and will continue to be.

Okay. And Jim, my final question I wanted to ask you about -- you commented that U.S. government contract reductions were a factor impacting pre-clinical. Could you provide a little more color on that and what you see happening with that in the fourth quarter?

Sure, sure. When COVID hit, we saw the government redirect a lot of their investment from things that they historically would have invested in. For instance, for us, we were pretty heavily exposed to what they were doing with trying to test for biohazards. So some of our products that were used for that, and were -- those are pretty good -- pretty significant -- I mean, it was a measurable part of our revenue. But the government -- basically, those labs had either slowed down or shut down and redirected their focus from biohazards in areas like that to things that were more associated with COVID. So in that particular segment, there we saw a pretty good drop off of the revenue. It's in the numbers. But that's probably going to take a while for that to all come back. And I think a lot of it just as the government's focus shifted from worrying about biohazards, to worrying about how are we going to make sure we accelerate things like vaccines. And we do think that that will come back in time. But at this point, we've been able to replace any of that lost revenue plus some with areas that are core to our business.

Your next question comes from the line of Paul Knight from KeyBanc.

Paul, you might be muted. I don't know if you're speaking.

Could you go over your CRO exposure, your academic exposure level and the growth you are seeing in those 2 markets, Jim?

Sure. In the quarter, the CRO business for us is very big and it's very lumpy. So in this quarter, timing caused us to have a little bit lower than what we would typically see on the CRO side. But at the same time, pharma grew very strong. So that's why we saw global substantial growth on the pharma side with our pre-clinical products. So definitely, that -- and the academic revenue, the academic research side, they're still coming back. It's solid and it's growing across our lines. So both the CMT lines and a lot of our growth that we always -- that we've been seeing on the pre-clinical side is also going to academic research sites, especially sites where they're doing more animal model work and working on start-ups of new pharma or new biotech-type companies.

And Jim, you, I think in the presentation, had shown growth year-over-year compared to 2019 pre-COVID of about 8%. Would -- is that kind of the normalized growth rate of Harvard Bioscience? Or are you guiding to what your long-term goal really is?

Yes. Our goal is to certainly get into that -- or close to that 10% region. That's the target for us is 10-plus looking at, it's kind of hard to take and extract all the puts and takes from '18 -- '19 to '20 to '21. If you think -- one of the things we took out revenue of something like $5 million in '21 than it would have been in '19. So when you do the puts and takes and adjust for all that, the underlying growth we see is in the double digits. And that's kind of what we look at for how we're going to sustain that kind of growth. I think our global targets -- formal targets were more in that 6% to 8% originally. Well, certainly, we see that as a very achievable. And our target at this point is to get up to more like the 8% to 12% region. That's where we're shooting for. But certainly, getting to 10% is -- would be a real important milestone for us on a sustained basis.

Yes. And then I know the earlier question was around products as well. But specifically electroporation, other -- were there any product highlights besides the inhalation product line?

Yes. Good question. Certainly, we are investing. There's natural tailwinds with the electroporation technology. And we're introducing some new technologies and products along that phase that's -- we expect that to be one of the fastest-growing parts of our business. Also in our net revenue growth, there are some areas that aren't really growing that fast, and we are looking at those now as to whether some of these other products that are not right in the tailwind of where we're really focusing, whether or not those make a lot of sense to make the investment to turn those into good growth, additional drivers or whether there's something else that we should be thinking about doing with. There's no question that there's still another -- somewhere in the neighborhood of $4 million to $6 million that we think will likely need to be pruned out over the upcoming year or so. But then there's also a couple of areas that we want to look at that we just have to make a decision. Can we turn those into something that contributes on an accretive basis to the kind of growth vector that we want? That's really -- it fits the sales reps' bags. That's going to take a little bit longer. That's probably another -- but so you'll see some evolution of those. But I'd like to get to where I have, again, a good sustained double-digit growth, and part of that will be positive through extracting some negatives. And that's just part of the natural thing. And as we do that, we'll let you know what those numbers look like, like the last $5 million that we took out from the '19 time frame.

Your next question comes from the line of Tim Chiang of Northland Capital.

So you talked a little bit about how European labs are improving sequentially. And I think that's still about, what, 1/3 of your total revenues. Could you talk a little bit about how you see Europe coming back in the fourth quarter and into 2022?

Yes, there's clear strengths that we see with a lot more order activity, a lot more quoting, a lot more things taking place on the European labs because they've really been slow for us. We -- certainly, as we look to Q4 and Q1 next year, the next couple of quarters, we do expect the European labs to get back where they were. That's going to be a piece of our overall business. But the good news for us is our fundamental businesses outside of there have been more than taken up the slack there. So that's going to help -- that's going to help us as they get back to where they really should be. And at the same time, we're tuning what our product offerings are going to be. So we want to stay in those areas that really make sense that have a good natural tailwind form.

Okay. Good. And maybe just 1 follow-up, which is how much ability do you have to take up price on your CMT and pre-clinical product lines? Obviously, the costs are increasing, but are you able to pick up costs or prices, especially, let's say, in the fourth quarter and into next?

Yes, that's something that we know is always -- it's challenging. But what we've seen is, it depends on the customer segment, it depends on the product. If the things that we sell direct, we have quite a bit of pricing power. So if our reps are out there, it's a highly technical sale. It's a sticky sale. Areas like that, we have really good pricing power. Some of the things that we sell through distribution may take a little longer and may or may not have the kind of pricing power that we'd like to see. We've implemented some new pricing that's rolling out here now. It will really start to stick as we get late into Q4 and then more into Q1, new orders will be at a better pricing point for us. And it's a mix. In some cases, we modified pricing very slightly. In other areas, there's things that really needed to go up pretty much. So you might see things move up from -- certain things might go up as much as 15% to 20%. On net average, if we dial in 3% or 4% price increase net, we'd expect to get 2% to 3% ASP average. So that's kind of what I -- if I can get 2% to 3% improvement on ASPs, that really helps us offset the inflation. That's part of our cost structure that's come in. The other parts of COGS that are following us, those are things that we have a handle on. We'll get to the efficiencies of labor. There's no question about that. We'll get to what it takes to get COGS where they need to be. But some of the inflation on some of these parts, it's likely to be with us. But if that's I don't know, 2 points or so of gross margin that we hope to be able to make up on its own with pricing and then get further improvements as we do the natural improvements of COGS.

Your next question comes from the line of Bruce Jackson from Benchmark Company.

So you launched 17 products -- new products this year. You've already discussed some of the stuff that you're working on in terms of inhalation products. Are you still working on the new cellular molecular testing products for CRISPR? And is the supply chain situation at all impacting your new product cadence for 2022?

Yes. We're working on a series of products across the portfolio. There's new things coming out in the -- on the cellular side with individual cell testing and back cell testing. That's a natural growth area for us where we have a great technology, not a lot of players there, high barriers, good pricing. You're going to see further improvements there with new products. A lot of what we've also been focusing on is things that really fit the pre-clinical bag. And I've also mentioned that the behavioral-type products that in the past typically sold on their own as individual products into academic research. We're not working to bundle those more with the technologies that we already sell into the pharma CRO markets. So that's a nice fit for us, and that's why you're going to see the teams that rep the products to pre-clinical are having a broader integrated sale that they'll be able to sell them. You put that together with our overall systems that are qualified for pre-clinical formal testing. I mean that's a very nice barrier for us, and it's -- it just makes sense. It's a piece of cross-selling, but it's more than that. It's actually realigning the portfolio best for driving growth to our -- to all of our primary segments. But there's new products coming out. We'll be announcing new sets as we get to our new -- our global sales meeting in January. This is a technology company. We have to keep innovating. A lot of companies aren't doing it these days. So that's a real advantage for us. And the fact that we're a little more nimble, we can put a lot of effort in 1 or 2 key places where the bigger companies tend to peanut butter everything and everything kind of moves along slower. So that's an advantage for us.

Your next question comes from Ailon Grushkin from Nano-Cap Growth.

I have more of a comment because you're doing a great job turned the company around growing again, making money, everything looks good. But I feel like from a stock perspective that you're failing, there's no investor relations. There's no press releases intra-quarter. I feel like there's so much more you can do. And if I saw this company the first time and it was brought public, the thing would be worth $800 million to $1 billion in this market. So I feel like you have to do more on the Investor Relations front. And that's really my comment. I know you guys were supposed to try and start doing something, and I haven't seen anything yet.

Well, thanks for your thoughts. And that's first I hope -- certainly, I think the more we -- the more our message is out there that will certainly help the business. We are planning some roadshows. We are planning with our sell-side folks to get out there in front of more customers. No question that we have some opportunities there. And certainly, thank you for your thoughts.

But also with like 17 new product introductions this year, could you put out some press releases to just keep the name alive intra-quarter, while nothing is going on. Just so we know you're alive and something's happening.

Great. Okay. Appreciate your thoughts and thank you so much.

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

Great. Thank you for joining us and look forward to listening in at our Q4 call in February. Thanks. Take care, everybody.

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