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Edited Transcript of HTL.V earnings conference call or presentation 22-Apr-20 3:00pm GMT

Q4 2019 Hamilton Thorne Ltd Earnings Call

BEVERLY Jun 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Hamilton Thorne Ltd earnings conference call or presentation Wednesday, April 22, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David B. Wolf

Hamilton Thorne Ltd. - President, CEO & Director

* Michael W. Bruns

Hamilton Thorne Ltd. - CFO

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Conference Call Participants

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* Andrew Hood

M Partners Inc., Research Division - Research Analyst

* David C. Martin

Bloom Burton & Co., Research Division - MD & Head of Equity Research

* Doug Cooper

Beacon Securities Limited, Research Division - MD and Head of Research

* Tania Rae Gonsalves

Canaccord Genuity Corp., Research Division - Analyst of Healthcare

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Presentation

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Operator [1]

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Welcome to the Hamilton Thorne Ltd. Fourth Quarter and Year-end 2019 Earnings Conference Call. Before turning the call over to your host today, please be reminded of our standard public 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 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 not be considered -- should be considered carefully, and prospective investors and other parties should not place undue reliance on these forward-looking statements.

The company assumes no obligation to update such forward-looking statements or to update the reasons why actual results could differ from those reflected in the forward-looking statements unless and until required by securities laws applicable to the company.

Additional information identifying risks and uncertainties is contained in the filings by the company with the Canadian securities regulators, including, without limitation, the company's management discussion and analysis for the quarter and year-end December 31, 2019, which filings are available under the company's profile at www.sedar.com.

Now let me turn the call over to the Hamilton Thorne CEO, David Wolf. Please go ahead.

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [2]

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Thank you. Good morning, and welcome to the Hamilton Thorne Ltd. Fourth Quarter and Year-end 2019 Earnings Conference Call. I'd 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.

As our calls have always had, we will have the following format. First, I'll provide a summary of operational and financial results for the quarter and for the year-end December 31, 2019, 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 at the end of December. I will then return for a few minutes to provide some information on our outlook for the remainder of 2020, during which I will address COVID-19 virus' impact on our business and the steps we've taken to address this outbreak. We will then open up the line for questions.

I'd like to remind all participants that we do not provide financial guidance, so I would like to ask you to limit your questions to either historical periods or general trends in the business.

I will begin with our sales results. I'm pleased to report that our strong start to the year continued in the fourth quarter, resulting in another successful year for Hamilton Thorne.

Let me give you some highlights from our performance.

Sales increased 21% to $35.4 million for the year ended December 31, 2019, up 34% to $10.8 million for the fourth quarter. This includes only 4.5 months of sales from our latest acquisition of Planer Limited, which puts our pro forma sales, assuming we had on Planer for the entire year at about $39.5 million for the year. Sales in constant currency increased 24% for the year, 36% for the quarter.

Gross profit increased 15% to $19 million for the year, up 34% to $6.1 million for the quarter. Adjusted EBITDA increased 15% year-over-year to $7.1 million, up 28% to $2.2 million for the quarter. Organic growth was 12% for the year, 15% in constant currency. And organic growth for the quarter was 17% and 18% in constant currency.

Cash flow from operations was strong at $6.4 million for the year, up 48%, and total cash at December 31 was $12.8 million.

Digging a little deeper into the numbers. Revenues for the full year increased through a combination of organic growth of equipment and consumable sales and, to a lesser extent, service sales augmented by the contribution from 4.5 months of revenues from the Planer acquisition. Sales into the human clinical assisted reproductive technologies, or ART markets, increased significantly for both periods as we added new products and direct sales and support resources.

Sales into the research and cell biology markets were significantly up as well, primarily from the contribution from our Planer acquisition. Sales into the animal market were relatively flat for the year and a little down in Q4.

As I mentioned, we also closed an important acquisition in mid-August as we completed the acquisition of Planer Limited. Planer is a leading worldwide provider of incubators, control rate freezers and lab monitoring equipment. With manufacturing sales and support operations in the U.K., this acquisition enhances our product offerings in incubation, cryopreservation and lab monitoring solution and provides us a foothold for future direct sales in United Kingdom.

Gross profit margins were up sequentially each quarter of 2019, ending at 56.5% for the fourth quarter and 53.8% for the full year. Our gross margin variations were primarily due to product mix, and we're happy to see margins up in Q4 despite the Planer business delivering somewhat lower margins than the overall blend. In part as a result of the introduction of our next-generation LYKOS DTS product laser sales contributed to margin growth, with laser sales in the fourth quarter substantially ahead of prior year's quarter.

We also made substantial progress in several of our other business goals this year, including completing several large build-outs, many in the U.S., one in Germany; and substantially increasing cell culture media sales.

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

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Michael W. Bruns, Hamilton Thorne Ltd. - CFO [3]

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Good morning, everyone. Thank you, David. I am Michael Bruns, the CFO of Hamilton Thorne. I will review the full year results, add some remarks for the fourth quarter and then discuss our liquidity and cash flow for the year.

In the results of operations, annual sales increased 21% to $35.3 million for the year, an increase of $6.1 million over the $29.2 million achieved in 2018. The sales were up due to organic growth in operations owned by the company for more than 1 year and were augmented by the added 4.5 months of revenues from the Planer acquisition.

Total equipment sales increased 39% to $16.3 million for the year, due in part to the Planer acquisition. Consumables and services increased 9% to $19 million and comprised 54% of HTL's total enterprise sales in 2019.

Gross profit for the year increased 15% or $2.5 million to $19 million for the year compared to $16.5 million in the previous year, primarily as a function of sales growth. Gross profit as a percentage of sales was down at 53.8% for the year versus 56.5% for 2018, primarily due to product mix. We have aggressively pursued growth, particularly direct sales of lower-margin third-party products in the U.S. We also added the somewhat lower-margin sales of Planer products as planned through acquisition.

Profit margin was enhanced by increases in direct sales of higher-margin proprietary equipment, branded consumables and quality control testing service sales.

Operating expenses increased 22% or $2.9 million to $15.8 million for the year due primarily to the addition of Planer expenses post-closing, increased acquisition expenses and increased depreciation and amortization. Excluding those acquisition-related expenses for both periods, operating expenses would have been up 18.5% on sales growth of 21%. Operating expenses were also affected by continued strategic investments in research and development as well as sales and marketing resources.

Research and development expenses increased 35% to $2.3 million for the year, primarily due to the acquisition of Planer's R&D expenses and new product amortization expenses, partially offset by those expenses relating to the development of products, which the company capitalizes under IFRS.

Sales and marketing expenses increased $985,000, up 15% to $7.6 million for the year, primarily due to the addition of Planer expenses as well as amortization of intangibles, increased investment in direct sales and support services and increased marketing and travel costs.

General and administrative expenses increased $1.3 million or 29% to $5.9 million for the year. Over half of that increase is attributable to acquisition expenses related to the Planer purchase.

Excluding those acquisition-related expenses for both periods, G&A expenses were up 16%. G&A expenses also increased due to the addition of Planer's general and administrative expenses for 4.5 months as well as increased compensation expense and increased amortization and depreciation.

Net interest expense actually decreased $47,000 to $1.1 million for the year, due primarily to reductions in the company's revolving line of credit, convertible debentures due to the June 2019 partial conversion and other long-term borrowings plus interest earned on the company's cash balances, all of which were partially offset by increased term debt in August to partially finance the Planer acquisition.

Fair value of the derivative decreased $846,000 for the year ended December 31, 2019, from a noncash gain of $573,000 in 2018 to a noncash loss of $274,000 in 2019. This, of course, is all driven by the variables of the fluctuations in the currency value of the euro as well as the increase of the company's share price between measurement dates.

Income tax expense was $1 million for the year ended December 31 compared to a net expense of only $48,000 in the prior year. Current income tax expense decreased $195,000 in 2019 -- to $195,000 compared to $266,000 in 2018 due to the favorable mix of rates and activity between foreign and U.S. states in 2019 versus 2018.

Deferred income tax expense was $830,000 for the year 2019 compared to an actual deferred income tax recovery of 2018 for the year ended December 31, 2018. I remind everyone that in 2018, the company recognized approximately $1.1 million of deferred tax assets primarily generated by the company's historical U.S. NOL carryforwards. For 2019 and 2018, U.S. federal income tax cash payments were largely offset by the utilization of a portion of these deferred tax assets, and that will continue to be utilized in 2020.

Net income actually decreased to $793,000 for the year ended December 31, '19, versus $2.6 million for the prior year. 2019 profitability is attributable to increased revenues and profitability for the relevant periods, offset by increased operating expenses, changes in fair value of the derivative, increased income taxes, increased acquisition expense and continued strategic investments in both research and development as well as sales and marketing. The 2018 results included the gain in fair value of the derivative and the tax asset recovery mentioned earlier.

Other comprehensive income for the year ended December 31 was $684,000 compared to the comprehensive loss of $792,000 in 2018, all of which are attributable to foreign currency translation activity by the parent company from the foreign operations of its subsidiaries primarily in Europe.

Adjusted EBITDA, which we consider an important measure of our financial performance, increased 15% to $7.1 million for the year 2019 versus $6.2 million in 2018 due to revenue and gross profit growth and partially offset by increased operating expenses in the periods. Please refer to the reconciliation of adjusted EBITDA to net income in our MD&A report filed today on SEDAR and also on our website.

And now I'd like to provide some brief comments on the results of operations for the fourth quarter of 2019. For the 3 months of Q4, sales were up 34% or $2.8 million to $10.8 million. Gross profit was up 34% to $6.1 million. Sales and gross profit were up due to organic growth in operations owned by the company and augmented by the added revenues and gross profit from the August 2019 Planer acquisition.

Gross profit percentage was largely flat at 56.7% in 2019 versus 56.5% for the prior year quarter primarily due to product mix. Quarterly gross profit percentages continue to increase sequentially in 2019.

Operating expenses were up 34% to $5.2 million versus $3.8 million for the prior year, primarily due to the addition of Planer operating expenses post-closing for the full quarter of Q4 of 2019.

In the fourth quarter, the company's operating income increased 31% to $961,000. Net income decreased 66% to $931,000, while adjusted EBITDA increased 28% to $2.2 million versus prior year net income of $2.8 million and adjusted EBITDA of $1.8 million, respectively. These changes were due primarily in the case of net income to the substantial prior year gain in the fair value of the derivative and the increased income taxes.

Adjusted EBITDA are a true measure of our operating performance. After elimination of the anomalies of the Q4 noncash derivative and income taxes, was attributable to substantially increased sales and gross profits and partially offset by increased operating expenses.

Now I'd like to turn to the balance sheet and speak a bit about the liquidity of the company. Cash flow generated by operations was up 48% for the 12 months ending December 31, 2019, to $6.4 million compared to $4.3 million in the prior year, including a very strong fourth quarter. The company has invested over $1.7 million in inventory growth as of December 31 to continue to facilitate expanded product offerings across all companies but primarily in the Americas, to enhance production efficiency in the U.S. and the U.K. and to provide the industry's best fulfillment turnaround in Germany and the EU. We continue to review and manage our inventory to optimize our new and existing opportunities.

Cash used in investing activities was $7.6 million in 2019, including $6.3 million net cash for the Planer acquisition as well as $1.2 million for ongoing investments in intangible development cost by our R&D teams for next generation and new product development, including the 2019 introduction of the LYKOS Dynamic Targeting System, or DTS laser. Cash generated by financing activities was $400,000 for the year, where the new $3 million term loan utilized to partially finance the Planer acquisition offset existing scheduled term debt and lease payments. Stock options and warrant exercises also added $700,000 in financing activities for the year.

Our final 2019 cash position of $12.8 million is actually $873,000 less than the prior year, with the $6.4 million generated from operations being utilized for the Planer acquisition, research development, reduction of our revolving line of credit and our scheduled debt service. In addition, we have $3 million of availability in our acquisition line of credit, which is an important resource for our ability to complete acquisitions at a relatively lower cost of capital.

Finally, at December 31, we had an increased availability of $3.7 million in our $4.5 million overall revolving line of credit. We renewed our bank lending facility on September 2019, extending to July 2021. The increase in the revolver from -- also increased the revolver from $2.5 million to $4.5 million.

In Q1, we drew down $3.5 million of this credit facility to enhance our cash position in light of the developing uncertainty due to the COVID-19 pandemic. We are well positioned to support our operations in the coming months, including continuing our acquisition program and financing further growth as the business climate improves.

Now thank you for your attention, and let me turn the call back over to David to comment on the HTL outlook.

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [4]

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Thank you, Michael. So the recent outbreak of the coronavirus or COVID-19 certainly has added substantial uncertainty to the short- and mid-term outlook for our company and many companies. Many of the, if not all, of the countries where we have significant operations have required entities to limit or suspend business operations and have also implemented travel restrictions and quarantine measures, which affect our business and those of our customers.

I will say that the company's operations are deemed to be part of the essential medical infrastructure in most places where we have personnel, and we have implemented robust business continuity plans, including safety measures for those reporting to our facilities and work-from-home programs for those who do not in order to maintain operations.

I'd like to call your attention to the risk factor in our most recent management discussion and analysis regarding COVID-19. Summarizing it, while it is not possible to estimate at this time the impact that COVID-19 could have in the company, the continued spread of COVID-19 and measures taken by governments of countries affected has and is expected to continue to affect the demand for certain of our products and services and could disrupt the supply chain and manufacture or shipment of products, product inventories and adversely affect our business, financial condition and results of operations. In addition, the COVID-19 outbreak and mitigation measures may also have an adverse effect on the global economic conditions, which could have an adverse effect on our business and financial condition. The extent to which the COVID-19 outbreak impacts the company's results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions taken to contain its impact.

To add some context, I'd like to talk a little bit about first quarter results and some of what we've seen following that. So in the first quarter of 2020, we started out very strong. Our preliminary estimated results for Q1 were approximately $10.2 million in sales, which is over 30% year-over-year growth and approximately 10% organic growth. That's 12% in constant currency. We did, however, see reduced demand for some of our products and services in certain territories as the quarter developed and as many IVF clinics reduced their activities in response to scientific guidance from ESHRE and ASRM as well as government reg requirements. The reduction in demand has continued into the second quarter, but we have also seen demand for some of our products return in some territories, notably China, which had been severely impacted in Q1. These fluctuations in demand for many of our products and services will last for a period of time that is difficult to determine. We are also impacted unevenly as parts of our business are largely unaffected. For example, our toxicology testing service business continues more or less on track with the prior quarters, while others have had more significant impacts.

Balancing the uncertainties and in order to improve our financial results, we've taken several actions to reduce our expenses, including eliminating nonessential expenses such as travel, trade shows and marketing; defer -- and defer capital expenditures and new hire. Earlier -- we do, however, continue to invest in the business. Early in the first quarter, we brought on 2 new sales personnel in Europe to launch a direct sales and support presence in France, where we have historically had a strong installed base of equipment. Given the intervening events, the timing was not perfect. However, while it may take longer than we had anticipated to get to breakeven and, of course, begin to show profitability, we are committed to the French market and believe we will have long-term success there. We've also added additional sales resources -- our direct sales resources in the U.S. early in the quarter, and again, we're committed to that path.

On the other hand, to save on expenses, we have deferred additional hiring of some direct sales personnel in the U.K. until the picture in the U.K. is clearer. Overall, given the changes we've made, we're looking at cost savings of approximately $400,000 in Q2. Thus far, we've avoided large-scale furloughs or layoffs as we believe it is important to maintain the specialized skills and knowledge of our workforce. We have taken certain measures to conserve cash and reduce personnel expenses by, for example, reducing working hours, compensation in certain locations for all employees, including senior management. We have also applied for payroll protection program loans for our U.S. entities of approximately $1 million. We were shut out of the first round before the program ran out of money. But assuming there is additional funding and we are granted a loan, this will help us avoid further personnel cuts.

Regarding cash flow, Hamilton Thorne has generated cash from operations since 2013. And in normal circumstances, we expected to generate cash from operations in 2020. Given the uncertainties surrounding the COVID-19 outbreak, it's impossible to predict whether we will generate cash from operations this year. Regardless, the company maintains a strong balance sheet with cash on hand of approximately $15.1 million, net bank debt of approximately $10.1 million, so net cash of about $5 million following the company's recent drawdown under its line of credit.

And I'd like to add a few comments on our media business. In 2020, we achieved significant growth in the Gynemed-branded media mostly through increased sales and newer markets through distribution channels. Given the uncertainty in the market today and to reduce regulatory and marketing expenditures, we have decided to defer a large-scale rollout of our media products in the U.S. to the second half of the year with a possible further push down.

On the other hand, as I mentioned in our last call, as our media products as well as other Gynemed-branded consumables are CE marked, we are able to sell them immediately in the U.K., and we actually saw small but steady sales in Q1. Despite the uncertainty around the COVID-19 outbreak, we continue to work on our acquisition program with the goal of completing one or more meaningful acquisitions every 12 to 18 months. However, the effects of the COVID-19 outbreak could certainly affect this goal.

In closing, I'd like to add that the COVID-19 virus will eventually run its course, and we remain optimistic that once this happens, the strong macroeconomic and demographic tailwinds that have driven the growth of our business over the past few years will continue for the foreseeable future.

We will now open the line up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of David Martin from Bloom Burton.

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David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [2]

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A couple of questions. The first one, you mentioned that your operations are deemed to be part of the central medical infrastructure in most places. I'm wondering, what about your customers, the IVF clinics and labs themselves? Are they essential, deemed to be essential? And are they staying open even in regions that are enforcing shelter in place?

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [3]

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So thank you for the question. I think the answer varies to a certain extent by location and geography. I'll certainly be able to answer more clearly for U.S. and part of Europe. As I mentioned briefly in my prepared remarks, ASRM, which is the American Society for Reproductive Medicine, and ESHRE, which is the European Society of Human Reproduction and Embryology, have both issued guidelines recommending that clinics reduce in order to maintain health of their patients and reduce risk, curtail operations significantly, including suspending initiation of new treatments, considering canceling embryo transfers. They do, however, recommend continuing to care for patients who are in cycle and -- but suspending what would be considered maybe elective and nonurgent procedures.

The ASRM is a little stronger in this [matter], but both of these organizations clearly believe that assisted reproduction is not an elective procedure and, therefore, is a disease as determined by the WHO. And that, especially with the time clock ticking, not all procedures should be canceled, particularly those relating to, let's say, oncology or other very clear fertility preservation procedures. These guidelines for most jurisdictions do not have the force of law, so clinics have been generally free to determine what they think is right. Certainly, large -- many clinics, and I would say probably most clinics who are in hospital settings, have certainly reduced, if not eliminated, new procedures. While we see other clinics, more private clinics than the public clinics, staying open, some maybe because of financial motivations, and certainly, some because clearly, we're in a field where there's a level of mission-driven medicine. And people who feel that, as I mentioned earlier, that assisted reproduction is not an elective procedure and that they have an obligation to their patients as long as they can take mitigating safety measures to stay open.

So it's a -- I guess, in summary, it's a mixed bag. But we clearly are seeing continued business from clinics in Europe until -- where we have consumables, where again, people need their consumables on a daily basis and at a lower level, of course, than it had been in Q1. And we are seeing the beginnings of clinics and -- contacting us in, say, the U.S. and other areas out there planning to reopen and reinvigorate operations, and they need help from us to set up their equipment and calibrate it and inspect it, et cetera, et cetera.

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David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [4]

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Okay. Great. You mentioned that you're going to defer the formal launch of the Gynemed media in the U.S. until the second half, possibly longer. But I'm wondering the strength in media sales that you saw in Q4, I know you hadn't formally launched in the U.S., but was any of that strength some prelaunch sales of media in the U.S.?

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [5]

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Yes. So nothing in any way significant. So it was primarily continued strong growth in Europe where we always had a good franchise and growth in export markets in -- primarily in Southeast Asia.

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David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [6]

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And are those new markets for the Gynemed media? Or were you selling there before and you're just picking up sales there?

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [7]

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So I guess the question is when is before. So they're -- we've been continuing to put more effort into expanding sales into Asia since we acquired a company now, which is almost 3 years ago. The company had always had some sales in those markets but less of a focus on it. And we've agreed with -- to put more focus on and more resources on it, including hiring personnel to address those markets.

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David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [8]

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Okay. One more question, if I could, and then I'll get back in the queue. So with Planer, that business when you bought it, has typically lower margins than the rest of your business, but you have mentioned opportunities to increase the margins. Can you remind us what are those opportunities? And had you implemented any by the end of Q4 or have you implemented any in Q1?

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [9]

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So those opportunities are largely similar to the kinds of opportunities we have across our entire business by increasing more direct sales of the products, which have been previously under the Planer business sold almost exclusively through distribution. So we do have direct sales of Planer products and actually a fairly meaningful amount of direct sales of Planer products in Q4. We were sold in Germany and in U.S. and also to increase sales in the U.K. As I mentioned, though, we've deferred that. As a cost reduction method, we've deferred hiring those significant personnel to do that. There's also opportunity for margin enhancement due to scale. Planer's a relatively small manufacturing business, so combining both the -- some of the resources that we have in our other manufacturing operations, there's opportunities to increase margins. Again, we're talking, in some cases, basis points; in other cases, percentages. But if you do it over time and you're intentional about it, it does add up.

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Operator [10]

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Our next question comes from the line of Doug Cooper from Beacon.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [11]

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David, just getting back on the forecast -- or I guess, the preliminary results for Q1 of $10.2 million. You indicated, I think, as part of that, that China sales were down in Q1. What was the quantum that they were down in Q1, for example? And what typically does China represent of your total sales? Just remind us on that.

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [12]

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Yes. So we don't break out those numbers. But certainly, for some of our equipment sales, China was down significantly. We've looked at it more -- well, we have to granulate numbers, but we looked at it overall, and I can kind of give you just some sense that the combined business generally met our expectations, maybe a little bit short, as you can imagine, because we saw increase -- decrease in certain sales. Certain of our units and our operations, maybe when I think of it this way, overachieved. And -- but on the other hand, we've clearly quantified, I would call, the COVID headwinds, which you could look at where we were most affected, which is in China and in the U.S. equipment business, particularly in -- as Q1 got on is in the high -- mid- to high single digits. So kind of $0.5 million or more range.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [13]

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Okay. And as we progress through April here with 3 weeks through April, can you give us an idea of what the quantum is, decline in sales, 3 weeks in April versus 3 weeks in April last year?

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [14]

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Yes. So I think that's a little harder for me to do both for actually quantifying it and in terms of trying not to get down the slippery slope of providing too much forward-looking financial guidance. Let me talk instead about what we see as the trends, and then we can discuss them. As mentioned, we have different operations under the Hamilton Thorne umbrella. The toxicology testing business, which is not our largest business but it's a good-sized business, is continuing more or less unaffected by this. We primarily serve people who produce products as well as clinics who are -- want to test their materials. And as production continues, the -- we're seeing -- we're not seeing any real reduction in that business.

The capital equipment business, as I mentioned in -- talking about Q1, we saw some reductions of that. And that's sort of a -- our best guess, and this is our best estimate. This is just an estimate as that is likely to have sort of a U-shaped curve in terms of both how it winds down, how it comes back in the sense of a more parabolic curve. The sense that as people get more concerned about economics or -- and worried about the future, one of the first things that's easiest to decrease is capital expenditures. And one of the things that is easier, even as things start to emerge, to perhaps defer are capital equipment expenditures. But in the long run, if the equipment is actually needed to maintain operations, improve efficiency, meet demand, we believe that most of the capital equipment business that you might have think was lost is really more just deferred. How long it's deferred for and what period of time, that is a little harder to determine.

Consumables business, I would say, has more of a V-shaped curve, is -- while clinics are running great guns regardless of whether they are worried about the future, if you need consumables, you need consumables to do that next cycle, that next day and off you go. But on the other hand, if you decide to reduce or eliminate operations for whatever reason, your demand for consumables drops linearly and turn about. And conversely, when you reopen or when you start increasing activity, demand for consumables comes back up on a linear basis with activity. The big question, of course, is will activity return to pre-COVID-19 levels? And if so, how long will that take? That requires a level of crystal ball gazing that I'm not equipped to do.

So I hope that's -- gives you a little color on how we think about things without necessarily giving you a direct answer to the -- numerical answer to your question.

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Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [15]

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Okay. Just on the acquisition front, are you seeing -- assuming you guys are in a pretty good balance sheet position now that you've drawn down that facility, I think you said you have $15 million in cash, are you potentially seeing acquisitions that you had in your sights become cheaper, like some of the -- maybe private companies are more desperate to monetize their positions? Maybe just an update to what you're seeing or thinking there.

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [16]

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Yes. So I would say we're -- there's a little bit of cognitive dissonance in this in the sense that on the one hand, we are very clear that our strong cash position and availability of potentially more credit, should we need it, is what allows us to feel very confident about continuing to make investments, not having to thus far at least do significant personnel reductions or other -- reduce other -- we've done some around the edges but reduce other core investments for the future.

On the other hand, as you say, there well can be opportunities on the M&A side either because other companies just aren't as well prepared or, for whatever reason, they're at a point in their lives where they don't want to just put up with the difficulties that this is going to entail for some period of time. So we've actually increased our outreach efforts a little bit. And again, we're always careful about talking about exactly what the results of that outreach is, but we're mindful that there's an opportunity to do that. We, as you can imagine, are focusing in that case on somewhat smaller acquisition opportunities, not some million dollar acquisition opportunities, but not some of the very larger ones we're looking at. So I think, again, being a little cautious, now is not the time for us to look at doing some kind of transformational acquisition that could -- not only it could be very positive as things develop but possibly not as things develop in the wrong way and certainly would stress our balance sheet.

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Operator [17]

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Our next question comes from the line of Tania Gonsalves from Canaccord.

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Tania Rae Gonsalves, Canaccord Genuity Corp., Research Division - Analyst of Healthcare [18]

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So firstly, wondering, can you give us a more exact date of when you saw sales begin to slow in Q1? Was it simultaneous with the economy closing in, let's say, mid-March? Or did you see things start slowing before that in February?

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [19]

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Yes. So I'll talk about this, and then maybe I'll ask Michael to amplify if he would like. So we -- actually very interesting. We looked at -- in hindsight, it was a lot more clearer than in foresight because some of our businesses, as I mentioned and talked about the difference between the consumables business and the equipment business, also layered on the equipment side is at least certainly in certain areas where -- end of -- and you end up with end of budgets where people have to spend and you end up with situations where there were large capital equipment commitments made perhaps 6 months, a year or 2 years before, and people just fulfill those. So we had a couple of large capital equipment sales in a couple of units that sort of masked exactly what might have been going on under the surface in some ways. I will tell you that March was our strongest month of the quarter, which is, again, a little unusual. And February was our weakest month of the quarter. It was a -- it's a short month but with leap year this year, so maybe not quite as short.

So if you kind of look back and if we start digging in, it was clear that in February, we were starting to see some softness, particularly in China when China had closed, which we understood and anticipated, and maybe some softness in other areas. So it's -- again, we -- and we also, similar to what I described earlier, we have at least one of our businesses that was almost completely unaffected by this. So it's -- we clearly don't have that I can say as a sharp date. So on this date, this event occurred, and we saw a meaningful decline. Certainly, I would say the last week of March was not our strongest week by any stretch.

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Tania Rae Gonsalves, Canaccord Genuity Corp., Research Division - Analyst of Healthcare [20]

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Okay. Excellent. Were there -- speaking to that strength in March, were there any full lab installs done during the quarter?

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [21]

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Yes. There was one lab installed in Europe, one good-sized lab, kind of EUR 250,000-ish lab, [I think when it was established].

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Tania Rae Gonsalves, Canaccord Genuity Corp., Research Division - Analyst of Healthcare [22]

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Okay. And following along the lines of the last question about China sales, I'm wondering, since the economy reopened, would you agree that like based on your statements for the U-curve in equipment sales and V-curve in consumable sales, has the China like upticked since they've opened the economy matched those statements?

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [23]

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So we sell very little consumables in China. So unfortunately, I can't give you a comparative. But certainly, that's -- I guess I would say it's sort of a twofold. It matches our statements but on the equipment side, but it's also sort of the source of belief in that statement because we're watching what happens as you come out the other side.

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Tania Rae Gonsalves, Canaccord Genuity Corp., Research Division - Analyst of Healthcare [24]

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Perfect. Okay. And I'm not sure if you can answer this for me, but do you know what percent of clinics in the -- in your big markets, so let's say in the U.S. and EU, that maybe you're more familiar with? What percent of IVF clinics are in hospitals versus private?

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [25]

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So we actually looked at that in the U.S. and our understanding is about 75% in the U.S. are private versus in hospitals. Europe is, as you know, is not really one Europe. It's lots of different countries, and it varies where -- let's say, in Belgium, they're almost all in hospitals. And then in France, it's half and half. And in Germany, it's a little bit different. So I don't really have a number there beyond my gut sense, which I'm happy to share, but I don't -- I wouldn't say it's any way authoritative.

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Tania Rae Gonsalves, Canaccord Genuity Corp., Research Division - Analyst of Healthcare [26]

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Okay. Perfect. And then I'll ask one more here before I get back in the queue. But could you maybe provide us with some quantitative detail on how much of your operating expenses are flexible in nature and can be cut? I know you mentioned that $400,000 number in your prepared remarks. What does this include?

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [27]

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Yes. So if you look at our -- maybe I'll ask Michael to amplify, and maybe I'll filibuster for a minute while he pulls the numbers together. If you look at our financials, our biggest expenses are cost of goods. And obviously, cost of goods is variable pretty quickly. Second biggest expense by far is personnel, which is variable in the long run and not that much in the short run. And then marketing and sales costs, and then it becomes a lot of other things that are not very variable like rent, insurance and the like. So where we have focused is -- on the variable side is on marketing and sales costs. Some of these costs were, I would say, forced upon us in the sense that we spent a lot of money historically on going to a couple of large trade shows in the March and primarily April through July and August time -- July time frame, and all those have been either canceled or postponed. So there's a significant level of savings that comes from those. Again, some of that's in Q2. Some of that's in July. One, obviously, would end up in Q3. We also, similarly with travel, when you're unable to travel through either stay-at-home orders or just customers aren't interested in having a salesperson now visit them face to face, you save money on travel. So the area -- so those are -- and that's a fair piece of that savings. And then we also did some significant look on the cost side on the personnel side. As I mentioned, we're not getting into too much specifics. We did across-the-board compensation reductions, which includes senior management, including all the HTL senior management, to save some money, or at least through the end of June, I believe we've committed to. And I think that's -- those are the major components. I don't know if you have anything you'd like to add, Michael, or if I covered it all.

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Michael W. Bruns, Hamilton Thorne Ltd. - CFO [28]

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That's an excellent total coverage. I would reiterate that our cash balance doubly serves us well because total operating expenses in 2019 were just about 45% of revenue. And as we started to plan and do our planning for issues around COVID, as we knew from our planning and our construction, that there's not as much variable expenses in our current structure as perhaps other companies, other companies that I've been associated with. So it's a -- we have large investments in people and personnel and intelligent personnel in terms of R&D, sales. Our salespeople are quality people, quality scientists and embryologists, and those are not easily variable expenses to just look at and cut. Our production facilities include highly trained individuals. So there's much less variable expenses than one would think in looking at an enterprise such as ours. So we're managing that very carefully, looking at that very carefully and also trying to weigh the [relative] future timing of coming back out on the other side of this because we certainly want to remain poised and ready to capitalize, as we talked about earlier, not only on acquisition opportunities but also on the -- to the degree the V-shape curve helps us out and to the degree the U-shape curve begins to respond. We certainly don't want to cut out of variable and into fixed expenses and reduce our ability to respond. So a long way of saying not a lot of variable expenses, but we're managing those to the degree we can and taking some steps as required as this very unknown [crisis].

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Operator [29]

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Our next question comes from the line of Andrew Hood from M Partners.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [30]

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Great overview so far. I was just wondering first about the -- that payroll protection plan in the U.S. David, I think you said you were shut down in the first round, and you're applying for $1 million this round. Is that correct, $1 million?

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [31]

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Yes. The way it works is we applied for the first round, as I'm sure you've read probably less in the -- I mean it's very much a topic of discussion in U.S. papers, maybe less in Canada. The whole program was fraught with various, frankly, administrative problems in terms of the banks not exactly knowing what the rules were, the actual methods of application, the ability to -- these are all SBA ultimately backed loans, so the ability to enter the loans and then get them granted through the SBA. So when I say we were shut out, it wasn't a qualitative decision. It was more that just as we pulled our -- even though we applied the first day it was available to us, based on the demand, that we were too far down the queue, at least at our bank, to have kind of made the cut before the funds were exhausted. I heard today that the U.S. Senate has approved another roughly similar-sized amount of money. Again, it has to go through the House, which will have whatever political wrangling that involves. And ultimately, if it's enacted, we'll have another chance. We preserve our space in the queue, which we should be fairly well positioned. Again, we applied the first day it was opened for application, but it would be wild speculation to say whether we will or won't. We clearly qualify for the loan. So -- and my understanding is we ought to -- there shouldn't be any level of qualitative judgments about whether we do or don't get it based on -- it's really a timing question.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [32]

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Okay. So just as a follow-up to that, is there any other sort of grant programs or interest-free loans or stimulus globally that you could take advantage of aside from this?

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [33]

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So there are other programs in the U.S. that are smaller, but they still are meaningful that allow us to get reimbursement for people -- if somebody is off sick or somebody is off for extended child care, we have a couple of people in our company who have children. Because schools are closed, they have to stay home with their kids and they -- we pay them and the government effectively reimburses us for that. So there are those kinds of programs. But the major U.S. program is the PPP program. There's a few others around the edges, but those are the major ones.

In the U.K., which is the other area, we've had -- and in Germany, the other areas we've looked at, there are similar programs to the program I mentioned about covering costs for people who are off sick. It's frankly not quite as generous, but every little bit helps. And there is a loan program in the U.K. that, thus far, we've looked at it. It doesn't appear we qualify for, but there aren't a lot -- and then the grant programs are very minor. Most of the -- both U.K. and, frankly, Germany have been -- their programs are more about how do you pay the people.

In Germany, the program that would be most interesting to us if we decided to do this, again, we're trying to avoid this, would be a work share program that would allow us to reduce the work for most of our people and have, again, the government pay a portion of their compensation. So these are less programs that provide the company with loans or grants, more how do you -- which is similar to the PPP loan in some ways, how do you continue to pay the people.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [34]

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Okay. Okay. Sounds good. And then I just have one more question. Even going beyond COVID and if we see the global economy or certain economies going to recession, I know that the ART or IVF industry has changed quite a bit since 2008, but in a recessionary scenario, I was wondering if you had some commentary on how that impacts demand for IVF cycles.

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [35]

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Such data that we have is from -- that we've looked at carefully is from the 2007, 2010 time frame in the U.S. where the thinking is, since it's primarily a private pay, still even now there's more public pay available but still primarily private pay procedure, that it is more subject to economic downturns. And we saw a slight decline, single-digit -- low single-digit percentages in one of those years but generally flat during the downturn and then actually a real spike up in 2010.

The -- in Europe, we didn't actually look at the data, we probably should, but the recession wasn't quite as severe in some cases. But also since there's mostly public pay in a lot of places in Europe, the thinking is unless governments are bankrupting themselves through this whole COVID thing, that we'll see less of the recessionary -- less impact from any kind of recessionary forces because it's backstopped by, again, government grants, government payment or insurance.

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Andrew Hood, M Partners Inc., Research Division - Research Analyst [36]

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Okay. Because I was just wondering, in general, if people, let's say, would put off even having kids at all, let alone an IVF procedure, if they're economically not doing as well as a family. But it's hard to say, obviously.

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [37]

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Yes. I think those are demographic questions that I think we'll have to -- we'll know better in 2 years, I guess.

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Operator [38]

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Our next question comes from the line of [Chelsea Stelic] from iA Securities.

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Unidentified Analyst, [39]

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So I just have one question. Basically, I'm just trying to get to -- like I know you're in the process of getting Gynemed cell culture media FDA-approved in the U.S. and then you're moving into Asia. So I'm just trying to get a sense of what the current cell culture media market looks like in Asia. Like would you be playing up against some larger players? Or is Asia sort of lacking presence in this field?

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [40]

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Sure. So the cell culture media business is a large -- it's the largest single sector of the overall -- of all the products used in IVF labs. It's hundreds of millions of dollars. It's not the majority of what is sold into the IVF lab, but it's the largest plurality, I guess, of the products. It's also kind of an umbrella term for lots of different products. So cell culture media includes embryo culture media, which are used to treat embryos while they're in an incubator, media that is used for treating and washing sperm, media that's used for treating and washing oocytes, treating and using for cryopreservation. So it's a varied business. So it's -- I guess it's not a monolithic business. It's not really sort of a simplistic answer about the cell culture media in general behaves in this fashion. It varies a little bit on the application, and it certainly varies country by country. That being said, in nearly every country where we -- that I can -- I'm sorry, just every country I can think of are fairly very well served by existing vendors of cell culture media.

So when we expand our business in, let's say, Asia, where we've expanded, it's typically that we are offering a product through distribution channels that have maybe a trusted relationship with a clinic, and people are willing to give our media a shot. Our media is excellent media, so part of it is just giving it a shot and then -- and trying it out. We also are running some clinical trials in Asia of our new cell culture media, and that's allowed us to penetrate some of those. And these are typically larger, better clinics, some of these larger better clinics with our products. So I guess the kind of stepping back, the cell culture media is a big and important part of overall sales into the IVF lab. That's why we talk about it and we're willing to invest even though we've put off a little of this investment in the U.S. We're willing to invest the time and effort and money to penetrate against which is often large entrenched competition because the prize is worth it. But on the other hand, I just want to make it clear that, and I've said this in other calls, this is not a -- kind of a hockey stick function. Once you offer it, you see dramatic increases in sales. You would say you've got to win product by product, application by application, clinic by clinic. But the same reason it's hard to win the business, it also is very sticky once you have it. So once you have that business, it's got a long tail of continued recurring revenue. So again, that's the reason why we think it's working here. So that helps? Hopefully, that was responsive.

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Unidentified Analyst, [41]

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Yes. Yes, I was just sort of trying to understand if you'd be aiming or planning to be a market leader in Asia and sort of like there's a time line of the rollout to be fully integrated in Asia and then the rollout for the U.S. pending FDA approval. I think the time line for that.

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [42]

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Yes. So again, it varies country by country. So clearly, we'd love to be a market leader in every country that we're in. I think we have to be realistic that it's hard work to do that. But we would hope that through over a period of time, through a combination of quality products, quality service and support, excellent sales, our distribution depending upon where we go, that we can win our fair share of the business against, again, other frankly high-quality competitors.

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Operator [43]

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Your next question comes from David Martin.

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David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [44]

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A couple of follow-ups. You mentioned possible supply chain issues. I'm wondering, have you experienced any yet that have impacted your ability to deliver any of your major product lines? Or is it just something that could happen in the future?

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [45]

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So we -- when this first arose, the whole COVID-19 issue right around early February when we became aware of this and thinking about this, our biggest concern at that point was -- so I think a lot of people were -- when we thought it was going to be unfortunately, unfortunately relatively confined to China and East Asia, that we're worried mostly about our China supply chain. We don't generally get a lot of finished goods and other products from China, but we do have in our manufactured products, typically, electronic components and others that are sourced from China. As Michael mentioned in our -- in his remarks, our inventories grew pretty substantially last year, and that was, I'd like to say we were prescient and [softened] with COVID-19 crisis coming. But it was really -- we just thought it important to make sure that we had lots of both finished goods and for resale as well as the components and raw materials in stock.

So the long story is we did not see any meaningful supply chain disruptions from China or, frankly, elsewhere in the first quarter. And China has largely come back on track. So we're comfortable about that. We do now -- I guess over the month of March and into a little bit of April, we're frankly a little more worried about products that might be coming from Europe and the U.S., and thus far, again, we haven't had any real problems. Most of our manufacturers that we source products from other than the pure electronics manufacturers are medical device products companies. And similar to us, they have been able to maintain operations during this whole procedure for the most part with some exceptions, obviously. So we haven't yet seen dramatic supply chain problems. There's certainly some around the edges that are -- have caused a little bit of typically how do we backfill this product as more so than -- and that requires engineering validation and other work versus necessarily lost sales. But we have to be cognizant of the fact it could happen in the future or it could be brewing right now, and we're just not aware of them. So I would say that was not quite just a -- kind of a classic risk factor that we'd like to repeat. But I'm happy to say, at least thus far, it hasn't had a material impact on our business.

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David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [46]

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Okay. Next question. So the large lab build-out business, you mentioned you had one in Q1. Is that basically -- will that not occur going forward until everything comes back? Or are there markets where you see lab build-outs going ahead anyways? Have you had any that were planned or contracted already that are being canceled or delayed?

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [47]

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Yes. And by the way, I think I might have misspoke. I mentioned that it was in Germany. It was actually in Austria. But that's neither here nor there. So we again, we don't do a huge number of lab build-outs on an annual basis. It's single digits in the markets that we serve, which are primarily the German-speaking markets in Europe, Germany and Austria. We're launching in France, so hopefully, we'll have the opportunity there over some period of time, and the U.K. as that develops and then in the U.S. We saw a lot of activity last year in -- so I think we did 1 or 2 last year in the German-speaking markets, and we'll probably do a similar number this year. So I don't think we're going to see anything dramatically different. Last year, we had a lot of activity in the first half of the year, not so much in the second half. We are seeing -- as far as I know, we do not have -- we have a pipeline of opportunities, but we do not have any committed labs in the U.S. for the balance of the year so that have either been -- so without having "anything" committed, it's hard to say that we've seen anything that's been delayed. We do also, it tends to confuse the picture a little bit, do a lot of work with some of these clinics to do what would be on the bubble of whether it's truly a full lab where we might provide a major workstation, which is a microscope, laser, micromanipulators, an incubator and a couple of other things, and it becomes $150,000 sale as opposed to maybe a $300,000 or $400,000, $500,000 sale. But in fact, it's a lot of the major components that are used in the lab, so somehow, sometimes, it becomes a little bit of a semantic thing.

But in terms of the long-term macroeconomic question is, are people going to continue to invest in expanding and opening new clinics? I think that's, long term, absolutely. Again, how long people remain cautious about those sort of capital expenditures is why I think they've talked about it being more of a U-shape versus a V-shape curve. I think people will be cautious.

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David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [48]

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Okay. Great. And one last quick question. You mentioned your distributors in Asia are now selling the cell culture media. Did they sell other brands of cell culture media, too? Or would you be the only one they're carrying?

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [49]

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So again, I think it depends -- back to the question of that -- our cell culture media line includes lots of different products. So to be clear, I can't answer specifically for every different one, but I would imagine that in most of those markets, they might sell another cell culture media potentially in an application where as a market, they've either had a long-term relationship or there's a market leader that they sell their product and sell our product for other applications, and then I'm sure there are some of those that are completely standardized on our media and some that are just purely opportunistic. They'll sell whatever the customer wants.

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Operator [50]

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Your next question comes from [Kelly Brown].

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Unidentified Analyst, [51]

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My question actually follows on some of the discussion on the cell culture media. At the clinic level, is there any signs of spoilage actually becoming an issue with cell culture media that was on hand heading into some of the shutdowns? And if so, is that a potential opportunity for you and some of your media?

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [52]

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So that's a great question. So again, it's a little early to know the specific answer to that. But certainly, on a general level, cell culture media often has a very short shelf life, sometimes measured in weeks, usually in months, 1 or 2 months. Our cell culture media has been formulated to have a [longer] shelf life. Our shelf lives typically are 6 months from date of manufacture, so far longer. So I guess maybe it's a negative opportunity in the sense that our customers will be less likely to have spoiled media that they need to immediately order to replace, but it's also an opportunity for us to market and we've looked at that to market either offer to replace spoiled media from other manufacturers as a way to basically displace the incumbents. So that's just a great tactical marketing program. And then on a more strategic basis to be able to convince people that they haven't really thought as much about shelf life and that shelf life should be -- it may be potentially much more important part of their purchasing decision, so that's very much a kind of a day-to-day sales level that we're on top of.

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Unidentified Analyst, [53]

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Okay. And my second question is -- I believe there was a little bit of a sequential decline in the constant currency organic growth rate from Q4 to Q1, and I suppose that's somewhat as expected. Is it safe to say that, that decline is pretty well largely -- that sequential decline is pretty well largely due to some of the slowdown in Q1?

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [54]

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So I would say 2 things. One is more cautious, which is when we talked about Q3 and Q4, which were very strong organic growth periods and constant currency unit growth periods, they were far significantly higher than it had been, let's say, in the first half of the year. And I do believe, generally, in reversion to the mean, so I was not ready to say that, that was the new normal and that those obviously were good sales and we would love to continue to grow in those mid to high teens as opposed to the kind of the lowish teens where we've been in the first half of the year. So the fact that we're in the low teens, again, right around 12%, it would some way doesn't -- isn't that -- it wouldn't have been that surprising even had COVID not happened. That being said, absolutely, there's -- again, back to the -- what was the COVID headwind, it's some level of mid-single-digits headwind of sales from China and other specific areas that we could identify would have had our organic growth to be more in line to that second half of the year, whether it would have been exactly the same is a lot of speculation.

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Operator [55]

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There are no further questions at this time. I will now turn the call back over to the presenters.

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David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [56]

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All right. Thank you very much. Again, I'd like to thank everybody for participating in this call and asking some helpful questions. And I hope to see everybody right around this time next month when we put out our full first quarter results and look forward to, I think, another lively discussion. Thank you again.

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Operator [57]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.