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Good morning, everyone. And welcome to the Hamilton Thorne Limited Fourth Quarter and Year End 2022 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, and use of non-IFRS measures. Certain information presented or otherwise discussed on this call may contain forward-looking statements. These statements may involve, but are not limited to, comments related 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 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 filings by the company with the Canadian Securities Regulators, including without limitation, the company's management discussion and analysis for the quarter ended September 30, 2022, which filings are available under the company's profile at www.sedar.com.
During this call, the company may reference adjusted EBITDA, constant currency and organic growth as non-IFRS measures, which are used by management as measures of financial performance. Please see these sections entitled Use of Non-IFRS Measures and Results of Operations in the company's management discussion and analysis for the periods covered for further information and reconciliation of adjusted EBITDA to net income.
Now, let me turn the call over to Hamilton Thorne's CEO, David Wolf.
Thank you very much. Good morning, all and welcome to the Hamilton Thorne Limited fourth quarter and year end 2022 earnings conference call. In addition to my participation, I'd like to introduce Francesco Fragasso, our CFO, who is also on the call with me. This 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. Francesco 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'll then return for a few minutes to provide some information on our outlook for 2023. We will then open the line for questions. I would again remind all participants that we do not provide financial guidance, so I'd ask you to limit your questions to either historical periods or general trends in the business.
I'll begin with our sales results. 2022 was another successful year for Hamilton Thorne, with well above market average organic growth of 11% for the year and the quarter, we continue to gain market share. Reported sales of $58.2 million for the year and $16.4 for the quarter continue to be negatively impacted by exchange rate fluctuations at our European and UK operations. As we have discussed in prior calls, these currency fluctuations in translating financial statements into the presentation currency of US Dollars has a substantial impact for the year, reducing reported revenues by approximately 9% for the quarter and 7% for the year. Fortunately, these headwinds are easing somewhat. I'm also happy to report that supply chain issues continue to improve, leading to fewer delays in production and shipping.
Let me give some of the highlights of our performance. 2022 sales increased 11% to a record $58.2 million and up 19% on a constant currency basis. Fourth quarter sales increased 5% to $16.4 million, up 14% on constant currency basis. 2022 adjusted EBITDA increased 3% to a record $10.1 million and approximately 12% on a constant currency basis. Fourth quarter adjusted EBITDA increased 2% to $3 million. That would be approximately 11% on a constant currency basis.
Organic growth, as I mentioned, was 11% for both the quarter and the 12-month period. Gross profit margins were 52.5% for the quarter and approximately 50% for the year. Net income decreased somewhat to $1.9 million for the year, but increased to just under $ million for the quarter. Sales were up across all of our product categories, with equipment sales leading the way with strong organic growth augmented by the addition of IVFtech sales for the full year. We also completed a significant expansion of our product line geographic coverage of scale when we acquired Microptic at the end of November, expanding our product lines and establishing a direct sales footprint in Spain. I was particularly pleased to see our gross profit margins improving to the 52.5% I mentioned for the quarter. Primarily, this was primarily due to economies of scale, product mix and increased direct sales of our own products, augmented by the addition of higher margin and Microptic sales for the one month that we owned them.
We also grew adjusted EBITDA to record levels even as we navigated supply chain and inflation issues, and continued to invest in sales and resources, R&D and enhancing our operations. Our operating expenses were generally in line with expectations, with travel and trade shows increasing substantially as they return to historical levels, as well as increased costs associated with maintaining investments in R&D and investments in sales and other personnel to support growth.
We expect these numbers to level up in the future.
I will now turn the call over to Francesco to provide more detailed discussion on the numbers.
Thank you, David. Good morning, everyone. This is Francesco Fragasso, CFO at Hamilton Thorne. I will briefly highlight the fourth quarter and the ‘22 financial results. David already provided an update on sales and gross profit, so I will focus on the other elements of the income statement as well as the cash flow and liquidity of the company. Operating expenses increased 16% to $7.7 million for the quarter and 20% to $26.8 million for the full year. Expenses increase was mainly due to the addition of IVFtech expenses for the full year and increased cost associated with investment in sales and other personnel to support growth. The return to pre Covid level for sales and marketing activities is also a factor for expenses increase. Overall increases in operating expenses were in line with our expectations.
Net interest expense in 2022 increased by 20% to $433,000 due to additional term debt incurred to finance IVFtech acquisition in July 2021 and Microptic acquisition in November 2022 and higher use of a bank line of credit to fund working capital. This is partially offset by the repayment of outstanding principal on term loans. Income tax expense decreased to $89,000 from a $1.8 million in 2021. This is due primarily to the reduction in income before taxes and to deferred income tax recovery of $640,000 in the year, compared to a deferred income tax expense of $1.2 million in 2021. The change relates to the temporary differences between income tax value and the carrying value of assets and liabilities. The company consolidated effective tax rate in 2022 was approximately 4.4%. Net income for the year was $1.9 million, compared to $2.4 million in the prior year. This is primarily due to increased operating expenses, partially offset by a decrease in income taxes. Adjusted EBITDA, which we consider an important metric of our financial performance, increased by 2% to $3 million for the quarter and increased 3% to $10.1 million for the year. This was primarily due to revenue and gross profit growth, offset by the negative impact of rate currency exchange headwinds, as well as planned increases in operating expenses. As a reminder, adjusted EBITDA is a non-IFRS measure, so please see the reconciliation of adjusted EBITDA to net income for the quarter and for the year in our management discussion and analysis report filed today on both SEDAR and on our website.
Turning now to the company cash flow and balance sheet. The company's cash balance at the end of the year was $16.7 million, compared to $17.9 million at the end of 2021, a decrease of $1.3 million. The decrease in cash balances was primarily due to about $1.9 million reduction in US dollar of cash account maintained in European currencies due to significant fluctuation in exchange rate, investment in working capital to support expected growth and mitigate potential supply chain issue, and investment in product development and expanding our manufacturing capacity. The company generated cash from operation of $1.8 million in the year after having invested in inventory about $2 million.
Cash used in investing activities was $10.3 million, including $7.5 million related to assets acquired with Microptic. The remaining $2.8 million is related to the normal expenditures for ongoing investments in capitalizing tangible of product development activities and these are all improvement related to the expansion of manufacturing capacity in some of our operating business units. Cash generated in financing activity was $7.2 million in 2022. This is the result of $9.6 million proceeds related to $8 million for term loan to fund Microptic acquisition and the use of $1.6 million of the working capital line of credit, net of payment to term loan and lease obligation.
Note payables and term loans outstanding at the end of the year total $12.6 million equal to 1.3x our adjusted EBITDA. At the end of 2022, the company continues to have a strong liquidity position of $28.2 million, including $16.7 million in available cash and $11.5 million in unused borrowing capacity, which include $8 million line of credit for M&A under renewal.
This liquidity availability makes us well positioned to support our acquisition program and finance the expected growth.
I will now turn the call back to David to comment on Hamilton Thorne outlook.
Yes. Thank you, Francesco. Looking forward into 2023, we continue to feel that our company is in extremely strong position. We expect solid sales growth based on positive trends in our field, and this demand and growth in local currencies clearly have returned to pre-pandemic levels in nearly every market that we serve. Q1 sales thus far have been very strong, and supply chain issues, as I mentioned earlier, appear to have lessened in recent months, which should again lead to organic growth that is well above markets growth. As Francesco mentioned, based on our year-to- date trends and exchange rates, we see foreign currency headwinds in Q1 easing somewhat. Actually probably between 4% and 5% of impact on reported results versus the approximately 9% in Q4. And if this trend continues, it should provide some tailwinds in the second half of the year.
Regarding our M&A activities, we have an extensive pipeline and are actively working on multiple acquisition opportunities with significant cash on hand, as well as our unused credit lines and debt capacity. We're well positioned to continue to execute on our acquisition program.
In summary, despite the various issues that we and every company face on a day-to-day basis, we feel extremely positive about our market position and confident in our team's ability to execute on our strategy of driving long term growth and EBITDA expansion by investing in our organic growth while building scale, enhancing our product offerings and expanding our geographic and direct sales footprint through acquisitions. We'll now open the line for questions. Operator, could you please present the first call from the queue?
[Operator Instructions]
Our first question today comes from David Martin from Bloom Burton.
Good morning. First question is you mentioned supply chain issues are improving. I'm wondering, does that include both the timing of getting the goods in and pricing, or is it just the timing is improving?
Yes, great question. So, yes, I would say it's both to varying degrees. Clearly focused more on the timing in the sense that we're seeing less issues with availability of specific components or specific parts that, as we know, has does tie into pricing to a certain extent, because in the past, when we've had to essentially scramble to fill those holes, we end up paying a little bit more. We're also seeing certainly some very generally some cost, certain stabilization, if not cost decreases in freight very much stabilized. Certain commodity products that are used in our certainly things like large incubators like steel and aluminum prices have stabilized and that come down somewhat. So we're seeing pricing improving as well. We're obviously cautious and note that this is all happening in the background of an inflationary economy. So I think overall we're not looking to, expecting to see significant cost improvements as much as on balance cost stabilization.
Okay, next question. And then I have a related question to it. What was industry growth in ‘22 and fourth quarter?
So it's always hard to know exactly, but we've estimated the industry growth to be about 7% based on our best estimates and increases in what we see increases in reported cycles. Our peers who and publicly traded peers who do announce or use a broader range of 5% to 10%. So it's certainly our company estimate, as opposed to, I would say, an absolutely verifiable number.
Okay, so the related question to that is most or all of your acquisitions come with potential for synergy. Do you think that's reflected in your 11% organic growth rate, or are there opportunities to increase beyond that 11% organic growth?
So we had organic growth in the past since we've been reporting it, which is well over, I believe, over five years. I believe every quarter saved perhaps one. It's been above 10%, and occasionally in the mid-teens and even the high teens. So clearly, that's a combination of growth of the field. We participate in the growth of the field. I believe our ability to execute in some cases and expanding our sales forces and all those kinds of things, as well as some of those synergies. So we're clearly recognizing some sales and marketing synergies that's embedded in our organic growth. We remain positive that can continue and perhaps improve in the future. But certainly our goal is to keep our organic growth above 10% or above range and get well above industry averages.
Okay, and my last question before I jump in the queue. You mentioned the factors that improved the margins this quarter and adding Microptic in December. They have a higher EBITDA margin than the rest of your business. Do you expect the gross margin to continue to increase or is it kind of peaked at this point?
So that's a hard one, as we know, because as we talked about earlier, clearly, our margins are very sensitive to a multiple number of factors. Scale is obviously one of them. So we get [inaudible] because certain of our cost of goods and the same costs embedded in our cost of goods and labor are somewhat fixed in the short term so scale improves it, mix matters. So again, both mix of both the products that we sell and mix of how we sell them. Selling direct is more profitable to us generally, especially for our own products and selling through distribution. So I would say that we are certainly optimistic and hopeful that margins are going to continue to have stabilized and will continue to rise, at least certainly versus our full year margins. I'm not quite ready to go out on a limit and say that we are 52.5% territory for the entire year.
Our next question comes from Michael Freeman from Raymond James.
Good morning, David and Francesco. Thanks very much for taking our questions and congratulations on the strong year. I wonder if I noticed that in fourth quarter during the last couple of years, it's been the year's strongest quarter. And I wonder if you could speak to seasonality that occurs in this business and this is something we should expect to see years ahead.
Yes, that's a good question. So the seasonality in our business well, maybe I'll step back and say, as you probably know, we have three broad product and service offerings that we report at least on a sales number, which are the precision instruments and other capital equipment that we sell, which have one kind of sales cycle and cost level. The consumables that we sell, which are used on a daily basis in the labs and then the services to support the labs, services and consumables tend not to have as much seasonality as capital equipment, as I'll describe in a second, though, there is some that some are tends to be a little bit slower and then the last couple of weeks of the year tend to be a little bit slower because generally speaking, people aren't starting IVF cycles in the last week of December.
On the other hand, capital equipment, for a number of reasons, tend to peak in Q4. And that's certainly the case this year. As we said, Q4 was very, very strong in capital equipment and that's a combination of variety of factors budgets expiring, certainly at a lot of public and private institutions, tax incentives that typically are tied to the calendar year. And just, I would say a general compensation programs for our people who clearly have annual goals, hopefully our compensation programs are effective. You would expect that to have some effect. And I think the general bias towards, let's finish off the year and let's get everything done that we wanted to get done, so, yes, and I would see that continuing in the future again in the capital equipment part of our business. That being said, the capital equipment part of our business, which is now in around 40, mid-40s, peaked a little bit last year in part because of IVFtech has historically been diminishing a little bit year by year versus our consumables business, which has historically grown faster.
Okay, thank you very much for all those insights. I appreciate that. Another question here is you talk about a very active, full M&A pipeline. I wonder if you could give us some details on the profile of that M&A pipeline, perhaps the value of the deals that are being contemplated either in aggregates versus the average size of individual deals. And also if this M&A is focused toward taking on products add to the portfolio offered by Hamilton Thorne or more geography weighted seeking to access new geographies.
Okay, so I'll preface this by saying that we're very cautious about being too specific about what goes on in our acquisition program, in part because we certainly don't want to signal to the market that anything is imminent and inadvertently provide, I guess in this call it would be public information, but not so we are very cautious about not providing nonpublic information in terms of and also, most of the transactions that lead into the size that we're working on, they tend to be relatively smaller transactions with relatively smaller companies and entrepreneurial or founder owned that often have a cadence that is harder to predict. So in terms, maybe I'll start with goals and then move to size. So in terms of our goals, our acquisition strategy is built really on three premises. One is we want to increase overall the size and scale of our business. As I mentioned earlier, scale absolutely matters. I think in general, as a business, we're still a little bit subscale and that there could be some meaningful, certainly useful, if not meaningful, operating leverage as we grow. We are looking to add products to our product, to our portfolio because our goal is to be able to provide a full suite of the high value products that are used in the laboratory. And while we still have some gaps in our product line so we certainly are looking at those kinds of things and potentially over time even look to expand the addressable market.
And lastly to at least maintain if not improve what I would call the quality of revenues which gets to on geographic side because the more direct sales we have, I would say direct sales generally would have higher quality revenues and more recurring revenue we have would have more value. So we focus on those. That being said, there are certainly round numbers, about 200 potential targets of which about half we have at least four now disqualified for one reason or another. They may be too small or not profitable or just not interested. So our universe is big enough that we can feel confident that there are deals to be done, but not so big that we can just focus on, let's say geographic expansion or a particular product line. So we work a broad range of potential transactions, trying to keep them all moving along at a pace that makes sense and then assuming things percolate to the top, we are able to make decisions about which ones really make sense for us.
So in term and then I should mention again, in terms of size, it's in fact two function of our available universe. Most of the companies that are in our field that are acquirable are relatively small founder owned businesses. So in the sense, in terms of size, we'd love to look at larger businesses and we do. There just aren't really all that many of them. So I would expect if you think about what you might see going forward, you've seen a cadence of transactions that we've done. We would expect to do similar cadence. Maybe a little bit faster, if we can. We certainly now have more organizational capacity to absorb a little bit faster cadence. But I think in terms of size, scope, geography and valuation we will be pretty similar to what you've seen in the past.
Our next question comes from Julian Hung from Stifel.
Hi. This is Julian stepping in for Justin today. My first question is there were price increases implemented last year. Are there any price increases expected for this year?
Thank you. Yes. So, yes, we have implemented price increases for this year. I would say they are a little less extreme might not be the right word, but a little smaller in scope and a little more selective than they were last year. Certainly, last year's price increases were substantial and across the board. This year we've reverted back more to some of our past practices with consumables having, for the most part, consistent price increases relatively lower single digits to mid to mid-ish single digits and only certain of our capital equipment having price increases this year. And again our goal both last year and this year on price increases is really to maintain margin not to, we love to enhance margin, obviously, as you can, but we want to be respectful of our customers and not be looking to increase prices so significantly.
Okay. And on the sales and R&D side, the company has been increasing its investments on these. Can you provide some insights on how big your direct sales team is right now and if there's any further plans to expand it in ‘23?
Yes. So our direct sales team right now is in the range of about 20 people, in some ways relatively small direct sales team considering about 60% of our sales are direct, I think that's a reasonable number. We did expand, how you think about it, we did expand in the end of ‘22 with when we bought Microptic with the direct sales team. That the sales team that we picked up there, which will be focused on in large part upon direct sales in Spain and some adjacent countries. So obviously that expense certainly wasn't part of, most of 11-months out of 12-months of 2022. So you'll see that increase in 2023. We're also expanding selectively in other markets where it makes sense for us because of the size of the markets and the capacity we have to increase our direct sales teams. We have no plans at this point to do what I would call complete greenfield major expansion, opening substantial new territories. But you may see us place a person here or there to start that process.
Generally speaking, as you well know, we have been trying to balance costs and profitability and reach sort of an optimum approach and not get overweighted in investing huge numbers in growing sales teams, which certainly would pay off and it could pay off in growth in the long term, but could have a substantial impact on profitability in the short term.
Okay. And on the topic of expansion with the declining population in China and Japan, can you maybe allude to the business' long term views and goals in this region?
Yes. So both of those markets have been and would continue to be very important to us. I think the trends of declining population is one of the major macro drivers that is increasing need for IVF and assist reproductive technology services. Japan clearly recognized that. We're now just about a year into it, but about a year ago, they dramatically expanded funding for IVF, which has increased the market as you can imagine, there's obviously the lag for that. But that’s going to and Japan has always been a pretty good market in terms of per capita use of IVF.
China, similarly, again is looking and at least announced as national policy that they are going to start funding IVF. Not 100% clear how and when it's going to be implemented, but that will clearly help improve availability and utilization in China, which is obviously a huge country and has very high numbers in gross numbers of IVF usage, but on a per capita basis is still well below the average of countries that have good funding and have more mature markets. So we see significant growth there, and we see that as some an area that we will continue to invest in.
Our next question is a follow up from David Martin from Bloom Burton.
Thanks for taking the follow up. When you go to direct sales from distributors and regions, you're capturing 100% of the sales. So that's on the upside, are you typically reducing or increasing the number of reps selling the product, and do you see increases or decreases typically in unit sales?
All right, so I think there's two or three questions in there. So, yes, obviously one of the things the reason to go direct is you pick up the margin you formally, essentially have paid to a distributor. But there's also a more subtle saddle improvement, which is you end up with much greater customer intimacy, greater knowledge of the underlying trends in the market, demand growth, who are the important clinics and the KOL. So there's an intangible element to direct sale that's hard like a lot of things that are sort of marketing oriented, hard to measure, but still extremely valuable. As you alluded to, I think that comes with cost. We have to either again, if we bought a business, it comes with people who are fortunately embedded in having a book of business, and then we would look to increase it, or we end up hiring and/or we end up hiring people. And the day they start, as you can imagine, they're not necessarily all that productive, and then their productivity increases over time. So they become perhaps overburdened, and then you hire another person, split the territories. And that's sort of the nature of how you grow a direct sales team.
So and clearly, we expect to see not only a pickup in, the math of picking up the margin from the distributor, but we do believe that our own people should be and can be more effective in selling our products than distributors who are pulled in a variety of different directions. And we would expect to see and hope to see unit growth increase as well over time. I think kind of cover all of your questions.
Yes. You did my last question is, you mentioned several times coming out of COVID but what about the economic uncertainty these days? Is that playing into the business of your clients or their openness to spend on capital?
Yes, so that's a good question. I think at some point I'm curious, maybe listen to a couple more conference calls and see if people have finally said, COVID is largely in the rear view mirror and maybe we should stop talking about it. But clearly it still sort of lingers out there, as well as the after effects of COVID which may be some of the economic uncertainty, and some of it is unrelated to that, of course. So I would say we're very mindful of the overall economic effect, overall economic situation. Thus far, we have not seen any, that we've been able to measure a reduction in demand at the end user level, which is basically at the clinic level. Nor a meaningful reduction obviously certain clinics have their ups and downs, but across the board and because of either cost, which could be inflation cost to the extent you have to borrow to pay for IVF in a private payer market with interest rates or economic uncertainty relating to session and job losses and those kinds of things. It's something that we're mindful of, but it's something we have not meaningfully seen thus far.
What about same store sales of consumables? Are they trending up or stable or down?
So generally speaking, we're seeing more activity at the clinic level, again, it is sort of two things that's certainly a leading indicator of what's going on so in most markets we're certainly still seeing growth it's again moderating in some markets and accelerating in other markets. There's a lot of variety going on but if you look at something where we have consistently provided a certain number, certain kind of product to number of clinics, we're generally still seeing growth. Just a reminder that majority of the world, at least in terms of the number of cycles that are being done and certainly the majority of our business is in countries where there is pretty strong social support, meaning government pay directly or indirectly for IVF. So I think those areas tend to be a little less sensitive to these kinds of moderate macroeconomic trends. I think, again, there's a really significant shock to the economic system then that's a different story.
And, ladies and gentlemen, at this time we've reached the end of today's question-and-answer session. I'd like to turn the floor back over to David Wolf for any closing remarks.
All right, well, thank you very much. I would like to thank everybody for their questions. I know our first quarter call tends to be a little quiet because we preannounced our numbers for the most part and then there's been a lot of absorption of what we're doing. But we look forward to our next conference call, which will be in May on the first quarter, which, as I indicated, looks like it's going to be a very solid quarter for us. And I guess I would just like to reiterate, as I've done in some past calls, that my thanks to our employees for the great work that they do and their dedication to our business and to our customers and to all of our business partners and the shareholders for the support they've shown our company. I encourage everybody who's interested to go to our website, which again, the corporate kind of investor website is www.hamiltonthorne.ltd for more information on our products initiatives and certainly further investor information. So with that, I'll wrap up and thank you very much.
Thank you.
And with that, we'll conclude today's conference call. We thank you for joining today's presentation. You may now disconnect your lines.