Good day, and thank you for standing by. Welcome to the Q2 2022 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, David Sirois. Please go ahead.

Thank you, Bella, and good morning, everyone. Thank you for joining the Harvard Bioscience Second Quarter 2022 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 Q2 2022 HBIO quarterly earnings presentation, and is located in the Investor Overview, Events and 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 are projected due to risks and uncertainties, including those described in our annual report on Form 10-K for the period ending December 31, 2021, 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 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 and 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.

Thanks, Dave. Good morning, everybody. Let's go ahead and move to Slide 4 of the presentation. We'll look at the quick summary. Revenue in the quarter was $29 million, flat to Q2 last year, with 17% growth in Cellular and Molecular offset by preclinical, which was down 9%. Our focus on direct sales of high-margin cellular products is driving growth as we rotate out of lower-margin products, which are sold mostly through distributors. Our preclinical revenue had a tough comparison to a very strong prior year. The strong U.S. dollar versus the pound and the euro drove a currency impact of approximately $900,000 in the quarter. And China's COVID-related shutdowns caused -- added shipment delays for our shipments. Adjusted operating margin came in at 11%, and that's versus 15% last year, held back by order and shipment delays, inflation and investments in R&D and marketing. Gross margins came in at 58%, that's up 100 basis points from last year. Higher COGS continue from global freight costs and material inflation plus direct labor inefficiencies. OpEx was temporarily up on timing of sales and marketing activities versus a COVID-driven low prior year. The research and development investments increased as planned to support our long-term growth. Finally, we announced actions in July to optimize our product portfolio, obsoleting nonstrategic product lines and reduce our overall operating costs. These actions underpin our gross margin and operating margin targets for 2023 and beyond. And as part of this action, we've announced a global workforce reduction of approximately 5% to complete by the end of this year, with the severance-related costs in line with previously discussed expectations at approximately $1 million a quarter during the second half of this year. Let me move on to the next slide. Q2 revenues came in at $29.2 million, flat…

Thanks, Jim, and good morning, everyone. Before I jump into the details on the full P&L and cash flows, I wanted to provide some additional perspective on the current operating environment. For one, China is a critical market for life science tool companies. And this year, we accelerated moving into 1 united sales channel versus separate preclinical and CMT sales in China, and see real evidence that this will serve us well when this market normalizes. But clearly, since we spoke on the Q1 call, the outlook for China in 2022 has become much more ambiguous given lockdowns and general economic conditions, and the prudent thing to do is to plan our revenue-related cost base at a lower level. Also, we've referenced volatility in Europe. In the markets we serve, we see steadiness in academics, but to place the hunt strategically, commercial biopharma with CROs and pharma are quieter right now. Finally, we've been consistently speaking to focus on sales of high-end niche products through direct sales, a clear benefit for us in the long run. However, in this global environment where bottom line-oriented operators are demonstrating fiscal prudence, sales of higher ASP equipment is slowing down. We looked really hard at this, and this is what we're seeing. So the environment is once again changing rapidly, but the conviction around delivering the profitable growth platform and fiscal discipline stands. Turning back to the P&L cash flow details. As a reminder, my discussion will focus on adjusted results for P&L performance, which aligns with measurements we use to internally manage the business. Also, for investor reporting, as noted prior quarter, we are now reporting our preclinical and CMT product families to more tightly align with how we are driving the business. Our preclinical revenues are reported now to include our…

Thanks, Mike. Now moving on to our summary slide, Slide 10. Given significant currency impact, volatility in Europe and Asia, we're taking a more conservative view on the annual revenue outlook for the rest of this year. We expect year-over-year revenue growth in the range of 1% to 5% versus last year. We expect solid growth in North America. EMEA is slowly recovering throughout the year and continued impact for China shipments due to their COVID policy and returning to growth in Q4. Imported revenue will be net of currency impacts and a further rotation out of nonstrategic product sales. All in all, we see a nice solid return to solid growth in the Q4 time frame. As for adjusted operating margins, we expect to range from 13% to 14% of revenue, gross margins to improve to 58% in spite of higher purchase prices and shipping costs, with the continued potential shipping delays to China. Operating margin includes a higher investment in growth-oriented R&D for new product development. And we expect positive improvements in free cash flow and reductions in net debt for the second half. Thank you, and I'll turn the call back over to the operator and open the line for Q&A. Thank you.

[Operator Instructions] And our first question comes from the line of Bruce Jackson with Benchmark.

Looking at the new guidance, how does this impact your long-term perspective? I think that you've been looking at maybe 6% to 8% organic long-term revenue growth. When you think you might get back on that trajectory?

Yes. Well, certainly, we feel that much of the changes that we're making are really designed to help us get to that pure growth structure for 2023. Q4 though looks like -- that's where we're expecting the recovery to really start to come in for the rest of this year and then extend into 2023. So if you look at removing some of the older technologies that were really nonstrategic, not growth oriented and lower margin, that naturally helps us -- gives us the natural mix improvement. Also lets us invest more in R&D for new product development in the more strategic products that do have tailwinds, nice growth vectors on them and good pricing power. So the combination of getting rid of -- obsoleting the older technologies that were really not part of the future, not part of growth, not really contributing at the level we need them to contribute, really puts 2023 right in line with where our plan has been. Our goal has been to be at that kind of double-digit revenue growth target, gross margins at 60% and operating margins in the mid- to upper teens. 2023 looks to be right on track for that with Q4 being a nice pathway right into 2023 and getting us to the numbers that we really felt this company needs to be at.

Okay. Great. And then 1 follow-up question on the guide and also on the gross margins. You didn't mention anything about inputs or inflation. Have you seen any changes in that?

Well, we've seen -- with $900,000 impact in the quarter, that's about 3 percentage points off our top line. Our expectation is we're going to continue to have that in our numbers. And that's one of the drivers and why we're taking the overall expectation and range down, and there's about 3 points right there. And then with the transition and rotation out of some of these lower-margin products, that's kind of -- that adds up. I think if you put that all back and think about it, it's really not too far off of what our original plan was. But as we get into next year, I mean, this is going to -- I expect that we're going to be at that double-digit number is what our plans are, and we think we've got this underpinned. And if you think about some of the volatility, I mean, some of the things that we're seeing that -- I think we're hearing a lot of other companies are going to talk about, is that a lot of people in the U.S. and Europe, you have a long vacation process right now. So we think Q3 is going to be a little volatile. It's going to be second half loaded, second half of the quarter -- or second part of the quarter. But it really becomes Q4 when things really start marching back as we see it. But we've included inflation in these numbers, we've included the higher -- the cost of higher interest rates. But we're also projecting what we're looking at as far as pricing and the new products that are being introduced into the portfolio.

And your next question comes from the line of Paul Knight with KeyBanc.

Jim, so the portfolio pruning, I think you're implying maybe a 300 basis point impact this year?

Well, we've got -- on the interest -- on the currency alone, there's about 3 point -- or 300 basis points right there. I mean when you look at the currency impact translation -- with the portfolio rationalization, they're certainly going to be somewhere in the neighborhood of a couple of points there. But that's why I'd like to give you a reported view. So net of currency, net of things coming out and the rotation, out of some of these lower-margin products, which we've talked about this a lot, that need to move away from and actually obsolete or sell off, some of these things that really aren't part of a growth vector that don't have natural tailwinds. And to really focus on these technologies that we all -- that we know are really strong growth products for the future. And you're very much aware of what those are, Paul.

And Paul, just to clarify, I think, make sure -- on the portfolio actions, I think what you asked about, all what Jim said makes sense. But the real impact on that, in terms of -- it's not substantial to this year. Those products will get sold out. It's really next year. But I think that if we've been 57%, 58%, that action alone with the portfolio getting us back above 60%, at these run rate levels, so I think that 300 basis point-ish, that supports us getting back over 60% in '23.

As you'd expect, some of the rotating out of a lower margin product. A lot of that -- most of that really goes to distribution and it's been kind of commoditized. Those are things strategically we just don't want to be in. But we will -- a lot of it that we've now announced obsolescence of, we'll still sell some of that off. We'd like to maximize getting that out the door to sell off the inventory associated with it. So it will be more -- we'll still see revenues for that as those last-time buys come in, but we expect to be done building anything to do with the obsoleted products by the end of this year. And then there'll be some burning down of the sales of those. And we'll be able to, next year, give you a better view, or of a pro forma view, and be able to extract what are those product revenues that really shouldn't be looked at when we think about the performance of the company within the real strategic areas that we're in. But I'll always give you both the reported number and what we see as more on an adjusted basis of what's coming out and how that changes the portfolio, and how that changes the vectors.

And what two products would you highlight were driving the -- some -- I see obviously some growth in Cellular and Molecular. What are the couple of products that stand out right now?

Well, I mean the things that we're seeing that's naturally moving in the right direction, and we had projected that a lot more work happening at the cellular level. So some of the products, like patch clamp and MEA, kind of those very high-end cellular-based testing products, we see -- we expect to see more and more movement toward cellular-based testing in addition to our -- the normal late-stage preclinical work in terms of our safety pharmacology and toxicology. So that's been growing very nicely, and we've been investing in that space. The inhalation has been a very strong growth for us last year. We've introduced a whole new kind of capabilities on inhalation. That's going to be a big driver as we go forward. That's a very recent introduction. And we've also introduced a new set of -- a new line of spectrophotometers. We're moving -- we've specifically selected a certain -- in spectrophotometry, we're really only going to stay in the areas that are very high margins, that are very strong capabilities, where there's very few companies that can compete in some of these particular areas. So the growth areas that we see, a lot of it on CMT is in the cellular side, and that's where we've been focusing. And that's not only growing in CMT, but we expect to see that, to start to offer that more also into the pharma and CRO side at the beginning of next year.

And Paul, I'd just add that on the cellular side, the electroporation is selling well within that, and that's driving the growth. So everything Jim said, that electroporation speaks to the market, and that's seeing real growth there, only in that lineup.

Yes. One question on electroporation. It seems to me like some of your competitors out there sometimes would attach royalties to the instrument that they're selling, but you don't. Do you think you're gaining share in electroporation? Or what's that market doing today?

Yes. Well, I can tell you, we've -- where we've been growing electroporation, much of that's still been in the research side. But we are starting to see more being adopted into biopharma. We're -- as you know, we're investing in making that much more applicable to more industrial-type users. So we will have an opportunity to start to look with start-ups, with some of these companies to look at actually being -- concerning ourselves into the revenue stream of the actual product that they sell. That's certainly a goal of ours. And that will make very -- that will make a nice difference for us. Plus as we sell the electroporation product and now that we have much more exposure to pharma and CRO companies, in the past, we've never -- we didn't really even try to sell there because we didn't really have the exposure there like we do now, now that we have the DSI team in place and the products that we're selling there. But as we sell into there, there we see when we sell 1 -- even 1 system into those types of industrial customers, there we additionally get opportunities with the consumable services. There's a lot more revenue associated with the sale into the industrial side than there is with just a onetime sale of a product like that into academic research. We're going to continue to get the academic research and the growth there, which is very strong. But incrementally, as we migrated more and more into the industrial side, that's going to be a very nice driver for business for us.

And I see no questions at this time. I'll turn it back over to the presenters.

Well, thank you, everyone, for joining us today. This ends the presentation, and we hope you'll join us in November for a look at our results for the third quarter of fiscal -- third quarter fiscal. Thank you very much. Have a great day. Thanks, bye.

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