Harvard Bioscience Inc (HBIO) 2002 Q3 法說會逐字稿

Good afternoon. My name is Holly, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Harvard Bioscience third quarter earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer period. If you would like to ask a question during this time simply press star, then the number one on your telephone keypad. If you would like to withdraw your question press the pound key. Thank you.

Miss Luscinski, you may begin your conference.

Thank you. Good evening, and to those of you not on the East Coast, good afternoon. This is Sue Luscinski, CFO of Harvard Bioscience. Thank you for joining us today to discuss our results for the third quarter of 2002. Chane Graziano, our CEO, and David Green, our President, are also on the call today.

Today, after the Safe Harbor statement, I will take you through GAAP results for the quarter, then Chane will discuss the results from a pro forma operating perspective, and David will update you on the business developments activities of the company. After this we will open-up the call for questions.

In our discussion today we may make statements about our future expectations, plans and prospects that constitute forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Act of 1995. Our actual results may vary materially from those projected due to risks and uncertainties, including those detailed in our Registration Statement on Form S4 filed at the SEC in connection with the acquisition of Genomic Solutions. Any forward-looking statements represent our estimates as of today and should not be relied on as presenting our estimates of any subsequent day. Further, forward-looking statements and risk factors information is included in the press release we issued today reporting third quarter results.

Foreign exchange had a favorable affect of approximately 3.4 percent on revenues for the third quarter of 2002 when compared to the same quarter last year due primarily to the exchange rate change to the British pound sterling and the Euro. This favorable impact on revenues in Q3 brings the impact for the year to approximately a 1.4 percent favorable position. At 48.6 percent for the quarter our gross margin percent dropped by approximately three percentage points in the second quarter. Roughly two-thirds of this is due to the shift of revenues in Q3 from manufactured products sold direct to customers to manufactured products sold through distributors. The remaining change in margin percent is due to product mix.

On a year-to-date basis our gross product margin of 50.7 percent is up approximately a half point from last year at this time. SG&A spending decreased approximately $400,000 or 10 percent in the third quarter over the second quarter due mainly to lighter marketing and sales activities, such as travel and exhibitions in the summer months. As a percentage of revenue SG&A spending was down approximately one point from the second quarter, and down a percentage and a half from last year. R&D spending has remained constant since Q2 in terms of absolute dollars. The increase in both SG&A and R&D spending over last year is primarily due to the acquisitions made during 2001.

During the third quarter of this year we implemented a restructuring at Union Biometrica which resulted in a $144,000 one-time charge before tax. This restructuring charge consisted of personnel termination payments only and should result in annual savings of approximately $670,000 in personnel costs.

The restructuring plan consolidated most of the G&A activity into our Holliston, Mass. facility and refocused the R&D efforts. We are currently reviewing our options for SS lease space at Union Biometrica. At this time we estimate that we have approximately $400,000 in future lease commitments for unused space.

Also during the fourth quarter, as planned when we made the acquisition in July, we moved the operations of Walden Precision Apparatus, (WPA), into our Biochrom facility. As part of this consolidation we eliminated duplicative positions both in our Biochrom and WPA operations and reduced facility costs. This resulted in approximately a $490,000 before tax, one-time restructuring charge for the quarter, again consisting of personnel termination payments only. Since this consolidation was a planned event at the time of the acquisition, we incurred no lease termination costs.

Other income for the quarter of $172,000 consisted of approximately $103,000 net interest income and a currency gain of approximately $75,000. This compares to other income for the third quarter last year of $461,000, consisting primarily of $255,000 net interest income and a currency gain of approximately $180,000. On a year-to-date basis net interest income for 2002 is approximately $290,000, compared to 2001 of approximately $1.2 million. Significantly lower interest rates as well as lower cash balances being available in 2002 resulted in this reduction in net interest income. Available cash in 2002 was lower due to cash being used during 2001 and 2002 acquisitions.

The charge for amortization of goodwill and intangibles for 2002 exclude the amortization of goodwill and certain intangibles as a result of the company adopting the Statement of Financial Accounting Standards No. 142, Goodwill and Intangibles. This accounting rule requires that goodwill and certain intangibles be tested for impairment annually rather than being amortized monthly. Had this rule been adopted in 2001 the charge for amortization would have been approximately $259,000 for the quarter, compared to third quarter 2002 charge of $469,000.

We ended the quarter with approximately $26.5 million in cash and cash equivalents, approximately a $2.9 million decrease from the year-end. During the second quarter approximately $3.6 million in cash was used to pay off notes originating from the acquisition of [Cyplas] [ph], and during the third quarter approximately $550,000 was paid for professional, legal and audit related to our now complete acquisition of Genomic Solutions. At the end of September we had incurred and have reflected as other assets on our balance sheet approximately $900,000 in costs related to this acquisition.

Before turning the call over to Chane, let me say that we still feel it is important to discuss our results on a basis that excludes non-cash, non-operating and exceptional one-time items as we have done since our IPO. Accordingly, both Chane and David’s comments today will be made in reference to the pro forma format issued in our earnings press release. We feel this presentation is easy to understand and believe it is a more meaningful way to present our business results. The discussion will exclude charges for amortization of intangibles, stock compensation expense, restructuring, and acquired in-process R&D.

Chane.

Thank you, Sue. Good afternoon, everyone, and welcome to our call.

In the third quarter of 2002 revenues were up 21 percent including three percent favorable foreign exchange effect, and pro forma operating profits were up 33 percent versus 2001. Despite these results our performance was below our expectations. There were two reasons.

First, we continue to see slow development of the market for COPAS technology. Even so, we entered into the fourth quarter with our largest ever pipeline of prospects. We still believe there is a significant opportunity for this technology in the future. However, since the timing is unpredictable, we have restructured UBI so that expenses are in-line with the current run rate of revenues. We do not expect any of these changes to have a negative impact on future COPAS revenues.

Secondly, we experienced some softness in the Harvard Apparatus International business. Traditionally, July and August are light months for our international business with a pick-up in September. This year we did not see the pick-up. However, based on the strong start we have seen in the fourth quarter we believe that the softness in third quarter is not a trend. Additionally, for the fourth quarter we have the following major initiatives underway. The launch of the new Harvard Apparatus Catalogue, the new COPAS products launched at UBI, the new products launched by Biochrom to Amersham Biosciences.

Based on these initiatives the current trends of the business, and the completion of the acquisition of Genomic Solutions, we expect fourth quarter revenues to be in the $18.5 million to $20 million range giving us $57 million or $58 million for the year. We also estimate our pro forma EPS to be approximately five cents for the fourth quarter, giving us 20 cents for the year. These estimates include our expectations that Genomic Solutions will contribute approximately $5 million in revenues and be accretive to pro forma EPS, although minimally. With the acquisition of Genomic Solutions we acquired approximately $3 million in backlog, which provides us with good visibility for the fourth quarter. In 2003 we expect revenues to be in the $80 million range, an increase of 38 to 40 percent over 2002, and a pro forma EPS in the 26 cent range, an increase of 30 percent.

That concludes my remarks. Now I will turn it over to David Green.

Thank you Chane. Good evening, and welcome everyone. I would like to especially welcome all the former Genomic Solutions shareholders.

Harvard Bioscience has come a long way in the last seven years since the current management team took over, and in the last two years as a public company. Our mission, goals, and strategy have not changed in this time. With so many new shareholders on the call today I think it is worth taking a few minutes just to reemphasize who we are and what we do.

Our mission is to profitably accelerate drug discovery. Our goal is to become a major player in the tools for drug discovery industry and to drive high earnings per share growth. Our strategy is to have a broad range of specialized products, primarily scientific instruments, in strong positions in niche markets, focused on the bottlenecks in drug discovery research. That is quite a long sentence, so let me try to explain it.

By having a broad product line we believe we reduce the risk of being dependent on a single technology in an industry characterized by very rapid technological change. By having specialized products in niche markets we seek to avoid head-to-head competition with the major instrument companies. And by focusing on the bottlenecks we believe we position ourselves for above average revenue growth and above average margins.

Sometimes it is helpful to describe what you are by what you are not. We are a tool company. We are not trying to become a drug company. We believe it is hard enough to be a good tool company. It is also very hard to be a good drug company. To do both at the same time seems to us to be almost impossible. We sell our specialized products to researchers in pharmaceutical and biotechnology companies, universities, and government research institutes worldwide. We expect revenues in the $57 million to $58 million range in 2002, and in the $80 million range in 2003.

To keep driving this growth we need new products. Our new products are either invented by us or they are acquired from other companies. Acquisitions is a core part of our growth strategy. We use acquisitions to expand our product line because we believe we can use our well-established brands and distributions channels to accelerate the growth of these acquired products. We also believe that our expertise and operational management frequently allows us to improve profitability of acquired companies. The tools of the drug discovery industry is very fragmented, and thus, there are many small niche companies that make attractive acquisition candidates. These products are marketed and sold through one of our three well-established global distribution channels.

These are for products primarily under $10,000 the Harvard Operators Catalogue, a name respected for innovation and quality for over 100 years. For well-established products primarily in the $5,000 to $35,000 range, distribution relationships with major life science companies such as Amersham Biosciences and PerkinEl Marketing. For innovative products primarily over $25,000 our own global field sales force.

In addition to managing our business for growth, we drive our business units to high operating margins through improving growth margins and controlling expenses. Harvard Bioscience is almost unique in the tools for drug discovery industry in having had both high growth, and we have achieved a compounded annual growth rate of revenue of 38 percent over the last five years, and a business model that has generated high profits. Our operating margin has consistently been in the mid-teens. There are tools companies that have high growth. There are tools companies that have high margins. There are very few that have both, and there are quite a few that have neither.

I hope that has given you a good overview of who we are and what we do.

So, how did Genomic Solutions fit with this strategy? Genomic Solutions is a perfect fit for this strategy. Genomic Solutions has strong products and niche markets within the bottleneck fields of protein sample preparation for [mastechetometry] [ph], assay preparation for high throughput screening, and micro-ray processing. Over the next 12 to 18 months we expect to drive Genomic Solutions to higher margins and higher growth. To summarize, we have a broad range of specialized products, primarily scientific instruments, in strong positions in niche markets focused on the bottlenecks in drug discovery.

With that overview of our strategy and how Genomic Solutions fits, now I would like to provide an update on some of the important initiatives we have taken in the last quarter.

First, development of our COPAS product lines. As Chane mentioned, we have been disappointed with the slower than expected adoption of this technology. We believe the rate limiting stats in the adoption of our COPAS technology, and the high proof and high content screening of model organisms like worms, flies and fish, has not been the adoption of the technology but the adoption of model organisms themselves.

Some pharmaceutical companies have expressed a concern to us that there are not yet enough academic papers published on model organisms. In order to address this, we launched this month the new COPAS Embryo Express aimed at the academic market for bulk sorting of model organisms. We hope that the introduction of this product will encourage more publications by academic researchers.

In addition, with the launch of the COPAS biology on a [bee] [ph] system, we have expanded the market for COPAS to include more chemistry applications. This modified COPAS system can screen over one million compounds per day for pharmaceutical activity. This is approximately five to ten times faster than screening rates using current plate reader technology.

Second, in the Harvard Apparatus business this month we mailed the first drop of a new 450-page Harvard Apparatus catalogue of ADMET products to be distributed eventually to 60,000 researchers worldwide. The products from our IMS acquisition in the U.K. will be included in this catalogue for the first time.

Third, in our Biochrom subsidiary we have already begun and through the fourth quarter we will continue to introduce new plate readers and plate washers from our [ASYS] [ph] acquisition and use low cost spectrophotometers from our WPA acquisition through Amersham Biosciences.

In addition to these initiatives to drive growth we have also taken action to reduce expenses, such as consolidating the operations of our WPA acquisition into our Biochrom activity and eliminating redundant and overlapping expenses, and restructuring Union Biometrica to bring its expenses more in-line with its current rate of business.

That completes my overview of our strategy, the Genomic Solutions acquisition, and our recent initiatives. We will now open up the call for any questions.

At this time I would like to remind everyone in order to ask a question please press star, one on your telephone keypad.

Your first question comes from the line of Thomas Flaten with RBC Capital.

Good evening, guys. A couple of quick questions for you. Is it safe to assume that the Genomic Solutions contribution to 2003 revenues will still be approximately $20 million?

Probably the current run rate is about $23 million in orders, so that is what our estimate is at this time.

Okay, and how did they do in the third quarter?

Third quarter revenues – third quarter orders were in the $5 million range. Third quarter revenues were less than that, because they built approximately a $3 million backlog.

Okay. And then just going back to something Sue mentioned on the gross margins. Is there an ongoing decrease in gross margins we should expect there, given some of the revenue shift, or is that just a quarter-to-quarter fluctuation?

No. I do not believe that is a trend. I believe that what you did see is with the acquisition of WPA in the U.K. they had margins in the 35 percent range. And the shortfall that UBI of about $0.5 million, with 74 percent gross margin. That is really what you saw. So, I would expect that our margins would be back in the 50 percent range.

So based on the 2003 is something in the close to historical 51 to 52?

Yes. I believe it is 51, is currently what we are looking at.

Okay, great. Thank you.

The next question comes from the line of Alison [Centatel] [p h], Thomas Weisel Partners.

A quick question regarding your fourth quarter guidance. Can you just walk us through how you are coming to a nickel on the fourth quarter? What kind of affect is Genomic Solutions having on your margins, because it looks like it is going to be a significant sequential decline to go from 18 million on the top line and get a nickel on the bottom?

Genomic Solutions will have very, very little affect on the operating income in Q4. One thing you have got to recognize, that when we acquired the company we also diluted the number of shares out there. We added 3.2 million shares. So, on a fully diluted basis it’s in the five cent range is what we’ve seen in the fourth quarter being.

Okay. And then going forward, should we expect that you guys are going to break-out the Genomic Solutions on a separate revenue line or are you just going to aggregate that?

Well, I think that as we go forward breaking out detail on the instrument piece of our business, the direct sales part of our business, is something that certainly we’re considering doing. So, I would expect that we will do that after the first of the year. But we are in discussions at this stage.

Okay, great. Thanks.

Our next question comes from the line of Michael Martorelli, Investec.

Sue, you mentioned the restructurings that were mostly, if not exclusively, personnel terminations at both Union Biometrica and WPA. And I thought I heard you say what the impact of those would be going forward. How much annual expenses you were saving? Could you just remind us of that?

I mentioned the impact for the Union Biometrica restructuring would be approximately $670,000.

$670,000, okay. And a broader question, speaking of restructuring, for David and Chane, I know you haven’t really integrated acquisitions because the acquisitions kind of are independent subsidiaries still but coordinated in the marketing sense, and correct me if I have that wrong, David. But does what happened with COPAS suggest that you need to do any better acquisition or different kind of integration of the acquisitions? Or does it still make sense to kind of acquire them and let them do what they want to do as soon as you cross-market?

No. I believe that -- we just took a very hard look at Union Biometrica, for instance, and COPAS Technology. And because that is embryonic market and still market development phase I believe keeping the focus and the unit together makes all the sense in the world. And, as we go forward, I mean Union Biometrica has not lived up to our expectations this year, but I still expect them to grow, you know, 20 to 50 percent a year. And I think they can support their business on that basis as we go forward now that we have restructured the company.

So, fundamentally I think it is a lot easier to find people that are capable of running relatively small operations profitably, and provided they can meet our profit goals and our growth targets of a minimum of 20 percent using our strategy of acquisition, internal development and strategic alliances I have no problem with them remaining free-standing. If they cannot meet that then clearly we would look to consolidate. And we have consolidated those that we do not believe can meet those standards.

Just to give you a few examples of the acquisitions we have made, we have actually consolidated quite a few of the smaller ones. For instance Medical Systems, NaviCyte, Clark Electro-Medical, IMS, and WPA have all been consolidated into existing facilities. So, it is not like we always leave them free-standing. Really what we do is what Chane just described, if they are big enough to support their business on a free-standing basis and meet our financial goals then we keep them that way. But if they are really too small and really sub-scale then we will consolidate them in.

Okay. And then in your press release talking about closing Genomic Solutions it sounded like that unit had done the restructuring or the squeeze-bag they needed to do so they are kind of ready to be on their own for next year?

Yes. The date we signed the independent agreement, the following day they announced their restructuring.

Great, so that clears the decks, and they are ready to go for ’03?

Yes.

Great. Okay. Thanks a lot.

Our next question comes from the line of Thomas Hancock of U.S. Bancorp Piper Jaffrey.

Good evening, gentlemen. Just a quick question again on the expense side and on the margin side. It seems like SG&A did spike-up – I’m sorry, actually pulled-back a little bit in the third quarter. I was wondering if that is something that we could expect to continue?

No, we expect it to come up a bit. We have done restructuring, so it will be down somewhat from what we would normally see in fourth quarter. But it should come up.

Okay, thank you.

At this time, I would like to remind everyone in order to as a question please press star, one on your telephone keypad. You have a follow-up question from the line of Thomas Flaten with RBC Capital.

Just a couple more quick questions, if I could throw them out there. In terms of Genomic Solutions’ impact to 2003, will the bulk of that expense be on the R&D side? And I am assuming you are keeping a lot of the selling people, so is that going to split fairly evenly, or how should we think about that?

Actually their expenses on R&D are going to be in the 10 percent range, and going forward, so they have reduced the R&D Group significantly from where it was. That’s largely due to the fact that a lot of their investments that they had been making the products have been introduced. And they have consolidated, for instance, the software group that they acquired in Canada, which had a dozen people or so into Ann Arbor. So I don’t see the level of research projects that they had underway at one time continuing in the future, but I see the market opportunity for current products to be significant.

And on the SG&A side, what kind of percentage are they running there?

Well, the SG&A – well, the G&A for this year – for next year is – what is the percentage? Eight percent? I can tell you in a minute. It is about eight percent G&A, and sales and marketing will be the balance of that. And it’s, it is about 30 percent.

Great.

Sales and marketing is about 30 percent, G&A is about eight, and R&D is about eight.

Excellent. And then one more, if I might. If I look at the guidance you have provided it looks like your organic growth guidance for the business excluding Genomic Solutions is about 9.5 to 10 percent. Is that a reasonably organic growth guidance number to use going forward, or how should we think about that? Historically, I know it has been more, in the 13 to 15 percent range.

Yeah, and historically we’ve been in the 12 to 13 percent range. As we put this budget together and forecast for next year we are in about the eight to 8.5 percent range.

Okay, and is that something that you think will spike-up as you get Genomic Solutions up and running and COPAS up and running? Is that kind of the -- are those the two levers there that we should think about?

Yes, they certainly are.

Okay.

Well, you know, the ADMET business continues to be strong and has consistently grown faster than that, other than the small hiccup we had in the international business in third quarter which I really don’t think is a trend. But to put together a forecast we felt we could comfortably achieve next year based upon the economic environment, because although we haven’t seen much of it ourselves per se we -- you know, there is a softness in the marketplace. And so I think that the prudent thing to do was to put in a forecast that we felt we could make.

Great. Thanks, guys.

This does conclude the question-and-answer session of today’s calls. Miss Luscinski, please proceed with any closing remarks.

Thank you for joining us, and we look forward to Q4.

Thanks very much. Good night.

Thank you. This concludes today’s conference call. You may now disconnect. 1