Hamilton Thorne Ltd. (HTLZF) CEO David Wolf on Q4 2020 Results - Earnings Call Transcript

Hamilton Thorne Ltd. (OTCPK:HTLZF) Q4 2020 Earnings Conference Call April 8, 2021 11:00 AM ET

Company Participants

David Wolf - President and CEO

Michael Bruns - Chief Financial Officer

Conference Call Participants

Devin Schilling - PI Financial

Paul Stewardson - Industrial Alliance

Operator

Welcome to the Hamilton Thorne Limited Fourth Quarter and Year End 2020 Earnings Conference Call.

Before turning the call over to your hosts today, please be reminded of our standard public community company policy on forward-looking information. Certain information presented or otherwise discussed on this call may contain forward-looking statements. These statements may involve, but are not limited to, comments relating to strategies, expectations, planned operations, product announcements, scientific advances or future actions. This information is based on current expectations that are subject to significant risks and uncertainties that are difficult to predict. Should one or more risks or uncertainties materialize or should assumptions underlying for the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by these forward-looking statements.

These factors should be considered carefully and prospective investors and other parties should not place undue reliance in these forward-looking statements. The company assumes no obligation to update such forward-looking statements or to update the reasons why the actual results could differ from those reflected in the forward-looking statements unless until required by securities laws applicable to the company. Additional information identifying risks and uncertainties is contained in filings by the company with the Canadian securities regulators, including without limitation to the Company's Management Discussions and Analysis for the quarter and year ended December 31, 2020, which filings are available under the company's profile at www.sedar.com.

Now, let me turn the call over to Hamilton Thorne's CEO, David Wolf. Sir, please go ahead.

David Wolf

Thank you very much, and good morning to all, and welcome to all to the Hamilton Thorne Limited fourth quarter and year end 2020 earnings conference call. I would like to introduce myself. I'm David Wolf, President and CEO of Hamilton Thorne. On the call with me today is Michael Bruns, our Chief Financial Officer. This morning's call will have the following format. First, I'll provide a summary of operational and financial results for the quarter and year ended December 31, with a focus on our sales, markets and operational performance. Michael will follow with a more detailed discussion of our financial results for the periods as well as a review of our financial position and liquidity. I will then return for a few minutes to provide some information on our outlook for 2021. And then we will open the line up for questions. I would like to remind all participants that we do not provide financial guidance, so we're likely to ask you to limit your questions to the historical periods, our general trends and the business.

With that, I'll begin with our sales results. I'm extremely pleased to report that company performed well this year. Despite the headwinds from the COVID-19 pandemic leading to a sales decline in 2002 and dampened results in certain quarters, we grew sales 12.5% for the year to $39.8 million and closed off 2020 with our best quarter ever returning to well above market organic growth rates. Let me give you some of the highlights from our performance. As mentioned, sales increased 12.5% to $39.8 million for the year. Sales were up 13% to $12.3 million for the fourth quarter. Sales in constant currency increased 1% for the year and 10% for the quarter. Gross profit increased -- I should say, organic sales increased 1% for the year and 10% for the quarter. Gross profit increased 7% to $20.4 million for the year, up to 6% to $6.5 million for the quarter.

Net income increased 22% to $971,000 for the year and to $961,000 for the quarter. Adjusted EBITDA decreased to $6.6 million for the year. We'll discuss a little bit more of that in Michael's remarks, up 14% -- that was up 14% to $2.5 million for the quarter. EBITDA margin was 20.7% for the quarter, well above the performance in the other quarters this year. Organic growth was 1% for the year and 1% in constant currency. Organic growth was 13% for the quarter and 10% in constant currency. Cash flow from operations was $5.9 million for the year, down 7%, and still I think is solid number considering some of the headwinds. And total cash at December 31 was $28.8 million, an increase of $9 million during during the year. From a mix perspective, capital equipment sales are up for the year largely due to the contribution from the full year of Planer products versus 4.5 months of sales in 2019. Consumable sales, which largely represent organic growth, were up double digits. Service revenues were up slightly.

Looking at field of use, sales into the human clinical market grew substantially, again, primarily due to the addition of Planer sales for the full year, as well as strong consumable sales, offset by reductions in the sales of third party equipment and certain of our own branded clinical products. Sales into the animal breeding market was up slightly for the year, while sales into the research and cell biology markets were up significantly, largely driven by the contributions from Planer as well as strong toxicology system sales. Gross profit margin as a percentage of sales showed variability during the year, and was down 51.3% versus 53.8% for the prior year. Operating expenses were generally in line with expectations with reduced travel and trade show expense, offset by increased personnel costs associated with maintaining the decisions we made pre COVID for investments in sales and support personnel. Adjusted EBITDA of $6.6 million was negatively impacted by the pandemic related sales declines in some areas, particularly in the second quarter. And while we deferred some hiring I want to make clear we did continue to make investments in research, development and sales and support resources, particularly in the US and Europe to support our long term growth.

Turning to the fourth quarter. With sales of $12.3 million, adjusted EBITDA of $2.5 million, this was a record quarter for Hamilton Thorne with, as I mentioned, sales up 13% on an organic basis and 10% in constant currency organic. We increased our gross profit margin and EBITDA margin versus rest of the year while continuing to invest in R&D and sales and marketing. And on an percentage basis, adjusted EBITDA was up 14% over $2.5 million for the quarter. Sales of capital equipment, which now include Planer products in both periods, were positively impacted by typical end of the year buying, motivated in part by some expiring lab tax incentives in Europe that were slightly down for the quarter. Consumable sales were sharply as we continue to gain market share and in this case supported by some forward buying in Europe due to expiring tax incentives. Service revenues for the quarter were roughly even with last year.

I'll turn the call over to Michael to provide some more detailed discussion on the numbers.

Michael Bruns

Thank you, David. Good morning, everyone. I am Michael Bruns, the CFO of Hamilton Thorne. I will review the full year results, add some short remarks for the fourth quarter and discuss the liquidity and cash flow of the company. Hamilton Thorne sales, as David outlined, increased 12.5% or $39.8 million for the year ended December 31, 2020, an increase of $4.4 million from the prior year.

Total equipment sales increased 18% to $18.3 million for the year due primarily to the Planer acquisition. Equipment sales were negatively impacted by the first spending for capital equipment due to the COVID-19 pandemic. Consumables and services, which largely represent organic growth, increased 9% to $21.5 million and comprised 54% of HTL’s total enterprise sales in both 2020 and 2019.

Gross profit for the year increased 7% from $1.4 million to $20.4 million for the year compared to $19 million in the prior year, primarily as a function of sales growth. Gross profit as a percentage of sales was down at 51.3% for the year versus 53.8% for 2019, primarily due to the complexities of our product mix. The addition of somewhat lower margin sales of the full year Planer products, as well as somewhat lower margin sales of higher margin proprietary equipment and quality control testing services, all of which were partially offset by increases in sales of higher margin branded consumables. Quarterly gross profit percentage showed variability during the year with the fourth quarter exceeding the three prior quarters. Operating expenses increased 11% or $1.7 million to $17.5 million for the year, primarily due to the addition of a full year of Planer operating expenses, continued investments in sales and support resources, increased R&D spending and increased G&A spending, [also was] offset by reduced travel and trade shows spending due to COVID, reduced acquisition expenses and other cost savings. Total operating expenses on operations prior to the addition of Planer increased only 2% in 2020.

Research and development expenses increased 18% or $120,000 to $2.7 million for the year, primarily due to the addition of Planer's expenses, as well as new product amortization expense. Sales and marketing expenses increased 6% or $477,000 to $8.1 million for the year due primarily again to the addition of Planer and the continued investment in direct sales and support resources in Europe and the US.

G&A expenses increased 14% or $835,000 to $6.7 million for the year, primarily due to the addition of Planer's full year expenses, as well as increased public company costs, including spending on professional fees related to the company's security filings and compliance, all of which were offset by reduced acquisition expenses incurred in 2019. Interest expense decreased $417,000 or 38% from $1.1 million, down to $687,000 for the year, primarily due to reductions in outstanding convertible debentures due to their conversion to equity earlier in the year and in the prior year, as well as reduction in other scheduled term debt due to principal reductions and movements in the company's revolving line of credit, all of which were partially offset by increased term debt incurred in 2019 to partially finance the Planer acquisition and reduced interest earned on the company's cash balances.

The loss on the fair value of derivative increased to $321,000 for the year, increasing from a loss of $274,000 in 2019 to a loss of $594,000 in 2020, primarily due to the 35% increase in the company's share price for the year 2020, as well as changes in the euro to dollar exchange rate. This derivative was fully converted to equity in April of 2020 and there will be no further evaluation charges.

Income tax expense decreased 42% to $594,000 for the year compared to $1 million in 2019. Current income tax expense increased to $365,000 for the year due to the mix of income and rates between foreign and US states in 2020 versus 2019. Deferred income tax expense decreased to $228,000 for the year compared to $830,000 in the prior year. In 2020 and in 2019, US federal income taxes were largely offset by the utilization of a portion of federal NOLs incurred and booked in prior years.

Net income increased 22% to $971,000 for the year ended December 31, 2020 versus $793,000 in the prior year, primarily attributable to increased revenues and profitability despite the substantially reduced revenues and profitability due to the COVID-19 pandemic, which generated losses in the second quarter and substantially impacted performance in Q3 as well, as well as decreased interest and income tax expense, all offset by increases in operating expenses loss in fair value derivative and the continued strategic investments in research and development and sales and marketing expense resources.

Other comprehensive income for the year was $1.2 million due to increased currency translation income by the parent company from the foreign operations of its subsidiaries. Total comprehensive income for the year was $2.2 million versus $1.5 million in the prior year. Adjusted EBITDA, which we consider an important measure of our financial performance, decreased 7% to $6.6 million versus 7.1% achieved in 2019 due to the overall revenue and gross profit growth despite substantially reduced revenues and profitability attributable to the COVID-19 pandemic, which generated net income loss and only $573,000 of EBITDA in the second quarter and negatively impacted performance in the third quarter as well.

Adjusted EBITDA was also impacted by increased operating expenses in the period as we strategically chose to maintain our highly valued and knowledgeable workforce throughout the pandemic in order to continue to serve our existing customer base and take full advantage of new opportunities.

And now a brief summary of the results of operations for the fourth quarter. Q4 performance continued to recover from the pandemic with sales up 13% to $12.3 million. Gross profit was up 6% to $6.4 million. Gross profit percentage actually decreased from 56.5% to 52.8% for the quarter, primarily due again to product mix. Quarterly gross profit percentage showed variability during the year and the fourth quarter rebounded substantially and exceeded the prior three quarters. Operating expenses decreased 3% to $5 million, primarily due to reduced trade show and travel expenses.

In the fourth quarter, the company's operating income increased 51% to $1.5 million. Net income increased 3% to $961,000 while adjusted EBITDA increased 14% to $2.5 million, again, a new record for Hamilton Thorne. This EBITDA performance is primarily attributed to increase sales and gross profits, as well as decreased operating expenses. Please see the reconciliation in our management discussion and analysis of adjusted EBITDA to net income for both the year and the quarter, which is posted on SEDAR and on our website, as well as our expanded definition of organic revenue and constant currency.

Turning now to the company's balance sheet and cash flow for the year. Company's cash balances at December 31, 2020 increased to $21.8 million, an increase of $9 million over the prior year. Working capital increased to $22 million, up from $11.2 million in 2019. The increases in cash balances and working capital are primarily due to the completion of the May 2020 equity private placement of a net $4.9 million, the draw down of the company's line of credit in the first quarter, largely as a precaution against potential liquidity issuance related to the COVID-19 pandemic and subsequently offset by repayments during the year, as well as COVID-19 related bank loans in the second and third quarter and the generation of operating income during the year.

These increases were offset by the company's operating loss in the second quarter, as well as increases in inventory as the company intentionally increased some inventory levels as precaution against COVID-19 supply chain challenges. The substantial planned payment was also made for accrued interest as the 2017 convertible debentures matured and were converted to equity under those debenture agreements.

Cash generated by operations totaled $5.9 million for the year compared to $6.4 million in the prior year, up almost 7% in a year impacted by the COVID-19 pandemic. Performance in the third and fourth quarters overcame a negative $791,000 of cash from operations six months into the year at June 30th. Company has invested $614,000 in inventory growth in 2020 to continue to facilitate expanded product offerings to enhance production efficiency and to provide the industry's best fulfillment turnaround in Germany and the EU. Receivables increased due to the strong Q4 sales performance and they were offset by payables and accrued liability increases, which included scheduled increases in the current maturities of our terms debt. Cash used in investing activities was $1.7 million for 2020 for ongoing investment and capitalized intangible development costs as for next generation and new product development, as well as CapEx for equipment and demo units for sales teams. In 2019, investing activities included $6.3 million for the Planer acquisition, as well as ongoing investments.

Cash generated by financing activities was $4.8 million for the year, attributable to the completion of the May 2020 private placement, the precautionary draw down of the company's line of credit, company's obtaining COVID related loans, all of which were partially offset by the normal scheduled term loan debt, lease obligations and measured reductions in the company's line of credit versus $394,000 of cash generated in finance activities in the prior year. In addition, we have $5 million of availability in our expanded bank acquisition line of credit, as well as another $2.5 million of availability in our revolving line of credit. The $7.5 million of bank lending activity is an important resource in our ability to complete acquisitions in a relatively low cost of capital. This availability combined with our increased cash balance of $21.8 million makes us very well positioned to support our operations in the coming months, including continuing our acquisition program and financing further growth as the business climate continues to improve.

Now, let me turn the call back over to David to comment on the HTL outlook.

David Wolf

Thank you, Michael. Looking forward into 2021, we are extremely optimistic about the long term, about the continued prevalence of COVID-19 and recurring waves continues to make us cautious about the short term, in part due to encouraging progress with vaccines, ART clinics are largely open and the consensus is that on a worldwide basis they're operating at roughly 90% of capacity. With encouraging signs that in our two largest markets, Germany and the US, many clinics are seeing above pre pandemic demand. On the other hand, the COVID-19 pandemic continues to evolve in a number of countries, including those in some of our major markets in Europe, populations are subject to new lockdowns and restrictions, which could lead to reduced demand for consumables so reduced caution on capital equipment purchasing.

As we mentioned in our last call, our planning for 2021 is based on the assumption that our markets will largely normalize in the second half of the year. While we will carefully watch developments, I want to emphasize that we are planning to continue to make investments in personnel, R&D programs and systems to support our growth with an eye to balancing top line growth and sustained EBITDA performance in the midterm and then EBITDA expansion over the longer term. Also as discussed on our last call, there are a number of initiatives that we are working on that we expect will contribute positively to 2021 and beyond. I thought I'd provide some updates on those. First, as mentioned, we are launching broad range Gynemed cell culture media products for sale in the US. During the first quarter, we accelerated our product sampling and have begun to receive initial orders. As a reminder, you should not expect an immediate dramatic increase in sales from this initiative. But clearly, over time, we expect media to provide meaningful addition to US sales and profitability. Second, we mentioned that we were aggressively launching our direct sales and field service initiatives in the UK to support the Planer, Gynemed and Hamilton Thorne brands, augmented by a select range of third party capital equipment, consumables to allow us to support an entire lab.

During the first quarter, we made an additional hire and now have an albeit small a full sales team that can cover the entire UK. We are seeing impressive results as we picked up some established third party product lines and they're now making sales to varying degrees to nearly every clinic in the UK. Third, our product development teams are hard at work on developing next generations of some of our existing products as well as new products to expand our offering. I'm reluctant to disclose too many specifics here for competitive reasons, but you will see some interesting announcements as the year develops. Finally, I'd like to repeat that despite the uncertainties around the COVID-19 outbreak, we continue to work on our acquisitions program with a goal of accelerating acquisitions to a pace of is faster than the one acquisition every 12 to 18 months we have done historically. We have an active pipeline right now and are actively working multiple opportunities. We are mindful, however, that acquisition completion is hard to predict and compounding with the effects of the COVID-19 outbreak this could affect our goals.

I'd like to add a few comments to reiterate Michael's points on how we improved our balance sheet over the quarter. During the year, we generated $9 million in cash. Accordingly, we maintain a strong balance sheet with cash on hand of approximately $22 million and about $7.5 million available under our lines of credit to support our continued investments in growing the business and more importantly, maintaining ideally accelerating our acquisition program. In closing, I can say without reservation that I'm glad to see 2020 in the rearview mirror. This has been a challenging year at both the business and personal level for all of us. And I'd like to again thank our employees who've shown remarkable resiliency and dedication to our business and our customers, as well as thanking our business partners and, of course, our shareholders for the support they've shown our company during this challenging period.

We will now open the line up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Devin Schilling of PI Financial.

Devin Schilling

Just wondering if you guys are able to quantify the amount of sales that you expected were likely go forward during the quarter here due to the tax incentives expiring? Is there any range like maybe less than 10% in the quarter? Any color here would be great.

David Wolf

Well, it's obviously very difficult to quantify the amount of sales that may be pulled back or push forward. I would certainly say it's well less than 10% of quarterly sales, but still a meaningful amount, perhaps in the EUR500,000 range.

Devin Schilling

Also looking at your sales here, I guess, for the year end as a percentage of overall revenue, it looks like sales were quite a bit stronger outside the Americas compared to some of your prior years. Was this largely COVID related, or was there maybe some other factors at play here?

David Wolf

We've clearly seen substantial growth outside the US. Now a portion of that is a function of adding Planer. The business was almost, not exclusively, but significantly outside the US. So again, on a quarter-to-quarter comparison, you wouldn't see it quite as distinctly, but certainly on a year-to-year comparison that would show up. We've also saw really strong Q2 accepted. Saw really strong growth in parts of Europe and parts of Asia Pac on the consumables product lines. And we clearly saw a little bit of a -- in US where a larger percentage of our business is capital equipment sales, we had a -- that impacted -- that had an impact -- from a decline in that regard.

Operator

Your next question is from Paul Stewardson.

Paul Stewardson

Just calling on behalf of Chelsea from Industrial Alliance. Congratulations on the quarter and honestly, the whole year. Just wondering if you could sort of comment on where the R&D has been focused. You talked about kind of keeping up those investments? And where is that really getting allocated to for the most part?

David Wolf

Again, as I mentioned, we do spend a lot in R&D but we try to be somewhat close lift from a competitive perspective. I would say, in general, well, we continue to invest in R&D across our entire product lines. In general, the parts of our business that are more software and hardware oriented tend to have more continued investment on, I would say, what you might call sustaining R&D, which is continuing to stay current, adding new features, fixing bugs, replacing end of life's components and those sorts of things.

And they’re both software and hardware, is a little bit more of an arms race. A lot of competition always adding new features. On the consumable side, there's frankly, a little more stability in that, a little less continued innovation. But I can tell you, we're working on our next generation of cell culture media in clinical trials right now for that. And we're working on upgrades of many of our means -- we've last upgraded our laser system just last year so that one's good for a few years, but we're working on upgrades sort of next generation of many of our other major product lines on the capital equipment side.

Paul Stewardson

And just in terms of the M&A. So is it fair to say that -- you said you have quite an active pipeline. Is it fair to say that you'll basically wait until restrictions have kind of calmed down a little bit, COVID has calmed down, or is that something that you could just proceed with right away and there's no reason to hold off?

David Wolf

So, I think that's a little bit geography related. But in general, we're ready willing enabled based on our balance sheet. The fact that we do have worldwide operations already not in every country, of course, but we do have worldwide operations. And again, we have an optimism about certainly even midterm, if not the long term, though there might be some bumpiness in the short term on COVID. So I think the quick answer is, for the right deal, we would pull the trigger. That being said, COVID has clearly slowed everything down, slowed down due diligence, obviously, travel restrictions and a number of other things, but we're not holding off, first half of last year, we absolutely were. Certainly, right now, we are not holding off due to COVID.

Operator

[Operator Instructions] Your next question is from [Jose Aram].

Unidentified Analyst

So, I guess I have like the 200 feet question here. So when you see the trends from egg freezing and fertilizing solution, which one is driving more demand for your product, for your solutions right now?

David Wolf

So, on a percentage basis, I would say, increasing and not in every country because in some countries you don't do it much and they don't even allowed. Egg freezing is clearly -- US I would say, particularly, is the fastest growing segment of all, but it's still on a comparative basis relatively small. So there maybe other -- in the order of magnitude, 10,000 to 20,000 procedures a year, 250,000 to 300,000 ART cycles of some sort of year. So, I would say on a broad basis trend that is driving the growth of our business, again, with some impacts last year from COVID is the overall growth of the IVF sector driven by the demographics that are driving that, which is a combination of families waiting longer to have children, which fertility certainly declines as you get older, some environmental factors and other factors. So, I think the broad macro trends are the key and some of the, I would say, kind of the smaller more micro trends like egg freezing increasing at this point are additive but every bit helps. So it's an important additive.

And then given the trends, we certainly do keep an eye on that.

Unidentified Analyst

So both of them are positive for your trend, for your company trend, both of the egg freezing and fertilizing, both?

David Wolf

Yes, absolutely. But again, on a worldwide basis, the amount of activity that's going on in what I would call conventional IVF just dwarfs egg freezing. So don’t get too carried away.

Unidentified Analyst

And the next and last question of mine is about landscape of competition, competitive landscape. So when we hear about the companies like Progyny, so if they grow, are they using your product at all or they're all in house, they don't use yours?

David Wolf

So Progyny, I think is really in no way a competitor to ours. They are -- or our customer. They are a benefits organization that provides and insists employers to provide IVF benefits to their employees, either because they're in -- they're primarily US companies. So I'll focus on the US again, either because they're in states that do not have a mandate or don't require IVF benefits or large certain employers who are either self insured or maybe too large who can opt out of it can then especially tune their benefits. So the idea is they can offer in general, better, more appropriate benefits to their employees to attract -- companies to attract and retain employees and a company like Progyny manages that. So review Progyny as a very -- one of the other positive trends, which maybe I should mentioned earlier, that is growing IVF, which is the availability of more funding for the payment of IVF, whether it's through government insurance mandates or in the case of Progyny through voluntary employer supported contributions. So they are benefits providers. So they would pay for procedures that are done in the clinics. And then the clinics we would hope would utilize our products and services there and back to the competitive side, that's where we fight it out every day and the week to get our fair share. And as I said, we've been growing faster than the market for some time. So we view our fair share as more than everybody else's.

Unidentified Analyst

So it's a positive catalyst for you guys?

David Wolf

Yes, not just for us.

Operator

No questions at this time, sir. Please continue.

David Wolf

Is that it for questions?

Operator

No questions at this time.

David Wolf

All right. Well, if that's the case, maybe we did a very good job in describing the business. So I want to thank everybody for attending our fourth quarter and year end conference call. The way the year drops this year as you know, we will be doing our Q1 call in May. So somewhere between 30 and 45 days from now. So I look forward to catching up with as many of you who attend that call at that time. And thank you, again, thank you very much for ending this call and for continued interest and support of our company.

Operator

This concludes today's conference call, and thank you for participating. You may now disconnect.