Harvard Bioscience Inc (HBIO) 2002 Q4 法說會逐字稿

Good morning.

I will be your conference facilitator today.

At this time, I would like to welcome everyone to the fourth quarter 2002 earnings 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 and the number 1 on your telephone keypad.

If you would like to withdraw the question, press the pound key.

Thank you.

Miss Luscinski, you may begin.

Thank you.

Good morning, this is Sue Luscinski, CFO of Harvard Bioscience.

Thank you for joining us today to discuss results for fourth quarter of 2002 and the year.

Chane Graziano, our CEO and Jeff Williams, President of Genomics Solutions are also on the call today.

After the Safe Harbor statement, I will take you through the results of the quarter, primarily in GAAP format and Chane will present an overview of the year in 2003 from a pro forma operating perspective.

We will discuss the acquisition of BTX(ph) and the pending acquisition of GeneMachines.

After this, we will open up for questions.

In our discussion today, we may make statements about our future expectations, plans and prospects that are forward-looking statements under the Safe Harbor language of the Private Securities Litigation Reform Act of 1995.

Our actual results may differ materially from those projected due to risks and uncertainties, including those detailed in our registration statement on form S-4 filed with the SEC in connection with acquisition of Genomic Solutions and other public filings.

Any forward-looking statements represent our estimates as of today and should not be relied upon as representing our estimates of any subsequent day.

Furthermore, our forward-looking statements and risk factor information is included in the press release we issued last night reporting fourth quarter results.

Foreign exchange had a favorable effect of approximately 3.65% of revenue on fourth quarter of 2002 when compared to the same quarter last year, due to exchange rate change of the British pound Sterling and the euro.

This impact on revenue in Q4 brings impact for the year to approximately 2.1% favorable position.

Cost of product sales for the quarter included a charge of approximately $514,000 related to orders shipped since the acquisition of Genomic Solutions for fair value adjustments made to the inventory and backlog required from Genomic Solutions.

It remains on the December balance sheet, additional $186,000 of fair value adjustment to inventory and backlog related to the acquisition of Genomic Solutions.

For the fourth quarter, this charge had approximately 2% negative impact on gross margins.

Without this charge, 50.6% for the quarter, our gross margin percent increased by approximately 2% from the third quarter.

This is due mainly to product and customer mix in the Genomic Solutions revenue.

Our 2002 gross margin of 50.6% is basically unchanged from that in 2001.

SG&A spending at $6.7m is 35.8% of revenue for the quarter, and at $17.6m is 31% of revenue for the year.

This increase in Q4 spending, both in absolute dollars and as a percentage to revenues, is due to a variety of factors, including the addition of Genomic Solutions into fourth quarter results, heavier sales and marketing efforts in the fourth quarter compared to the average for the year, and the accrual of bonuses for achievements reached in the fourth quarter.

The annual percentage rate of 31% to revenue is in range of 29% to 31%, which is where we expect to see SG&A spending going forward.

R&D spending was $1.1m at 5.8% of revenue for the fourth quarter is lower than we normally expect due to timing of project spending.

In line with our expectation that R&D spending would be in 7% to 8% range, the 2% -- I'm sorry, 2002 R&D spend of $4.4m was approximately 7.2% of revenues.

The increase in both SG&A and R&D spending over last year is primarily due to acquisitions made during 2001 and 2002.

In process, R&D expense for the quarter and year was approximately $1.6m, related to acquisition of Genomic Solutions.

During the third quarter this year we implemented a restructuring of Union BioMetrica, which resulted in $144,000 one-time charge before tax.

This restructuring charge consisted of personnel termination payments, only.

The restructuring plan consolidated most year-end activity into the Holliston, Massachusetts facility and refocused R&D efforts.

During the fourth quarter, we completed this restructuring by consolidated the remaining Union BioMetrica staff into one facility and negotiated a lease buy-out of our excess lease space, resulting in restructuring charge of the fourth quarter results.

Stock compensation expense was approximately $299,000 for the quarter and approximately $1.3m for the year.

This expense is due mainly to auctions granted during 2000 before IPO, which will revalue for GAAP accounting to our expected initial public offering share price.

The amount left to be expensed by the end of 2003 is approximately $550,000.

Other income for the quarter of $261,000 consisted of approximately $62,000 net interest income and currency gain of approximately $198,000.

This compares to other income for the fourth quarter last year of $62,000 consisting of $148,000 of net interest income and currency loss of approximately $45,000.

On year to date basis, net interest income for 2002 is approximately $341,000, compared to 2001 of approximately $1.4m.

Significantly lower interest rates, as well as lower cash balance being available in 2002 resulted in this reduction of net interest income.

Available cash in 2002 was lower primarily to cash being used in 2001 and 2002 for acquisitions.

The charge for amortization of goodwill intangibles for 2002 excludes amortization of goodwill and certain intangibles as a result of the company adopting SFAS 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 $310,000 for the quarter, compared to fourth quarter 2002 charge of $462.

We ended the quarter with $15.3m in cash and cash equivalents, approximately a $14.1m decrease from year-end 2001.

During the second quarter, $3.6m was used to pay off notes originating from the acquisition of [inaudible].

During the third and fourth quarter approximately, $1.5m was paid for professional, legal and audit fees related to acquisition of Genomic Solutions.

In fourth quarter, approximately $9m was paid out to former shareholders of Genomic Solutions and approximately $3m was used to pay down liability to service the acquisition of Genomic Solutions.

Before turning the call over to Chane, let me say, we 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, Chane's comments will be made in reference to pro forma format issued in our earnings press release.

This presentation is easy to understand and believe it is more meaningful way to present business results.

His discussion will exclude charges for amortization of intangibles, stock option expense, restructuring, acquired and processed R&D and fair value adjustments on acquired inventory and backlog.

Chane.

Thank you, Sue.

Good morning, everyone, and welcome to our earnings call.

As we stated in our press release, revenue is 53% in fourth quarter, excluding 6% favorable impact of foreign exchange and 37% for the year, excluding 3% favorable foreign exchange.

Pro forma EPS was up 23%.

This was in line with the guidance we provided on our third quarter earnings conference call.

As forecasted, the acquisition of Genomic Solutions contributed significantly to our revenue growth in fourth quarter of 2002.

In 2002, one-third of our growth came from core business and growth in the product lines we acquired as we leveraged our distribution channel and two-thirds was due to the acquisition. 2002 was a year of many facets at Harvard Bioscience.

In order to give you a clear understanding of the dynamics of our business, I will discuss each major product line separately.

My first discussion point is Harvard Apparatus.

This is our catalog business, primarily focused on ADMET [inaudible] testing market.

In 2002, this product line represented approximately 45% of our revenue.

In the first half of 2002, we saw very strong growth in this product line on a worldwide basis.

In 3 Q, the international business was soft.

However, in 4 Q it recovered to normal levels and through the first two months of this year, we are seeing normal trends, as well.

In fourth quarter, we saw softness for these products in the US market, primarily big pharma delaying purchases.

Again in the first two months of this year, we are back to normal trend.

Including full-year impact of the Warner acquisition, which was concluded in April of 2001, orders grew by 12% in 2002, versus 2001.

My second point of discussion is our Biochrom products.

These are primarily molecular biology products sold to distributors around the world.

The major distributor for these products is Amersham Biosciences(ph), which is responsible for approximately 50% of Biochrom's revenue.

In 2002, traditional life science spectrometer orders were soft through the Amersham distribution channel.

However, this was largely offset by an increase in revenues of the ASYS plate readers through the same channel.

We also saw significant strength in the U.S. market for Biochrom amino analysis acid system.

Additionally, we have full-year impact of acquisition of Cyplaque and ASYS which will close in Q4 of 2001.

Biochrom orders grew by 40% in 2002, versus 2001.

In 2002, Biochrom products accounted for approximately 37% of our revenue.

My third discussion point is our COPAS product line. 2002 was a very disappointing year for this product line.

Our major issue is that big pharma did not adopt the use of [inaudible]worms, crysafulus(ph) flies and zebra fish for high content screening as rapidly as we expected.

Therefore, we found it necessary as we went through the year to restructure the company in order to break even on its run rate of business.

This product reduced our expected pro forma net income by approximately 4 cents for the year.

We still believe this product line has significant potential and we do not believe we compromised the technology, market development or customer support in our restructuring.

In 2002, this product line represented approximately 8% of revenue.

My fourth discussion point is acquisition of Genomic Solutions. .

Genomic Solutions fit our strategy perfectly.

A strong brand name, leading edge technology focused on high growth market niches.

The only problem was they were $20m business structured to do $50m.

Therefore, prior to our closing the Genomic Solutions acquisition, management restructured the company to profitability on run rate of revenue.

In Q4, as expected, Genomic Solutions made significant impact on our revenue.

They also had strong orders in Q4 of $6.4m and therefore, finished the year at $22.8m in orders.

This business was strong for us across all current product lines and across all geographical markets, except Japan.

Japan was noticeably weak.

In 2002, Genomic Solutions represented approximately 10% of our revenue.

In summary, it is clear 2002 was excellent year for most of our product lines.

Despite weak economy and slowing market conditions, we are able to continue to grow revenue at a 40% rate.

Our strategy of internal development of new products, strategic alliances and acquisitions, continued to protect our growth rate even in tough economic conditions.

Today we are high growth, profitable company that has broad range of specialty products focused on specific niches, sold through multiple distribution channels and each market niche and distribution channel is managed by an experienced management team.

Each of these management teams share the responsibility and reward for achieving corporate goals of growing revenue and profit by 30% to 35% on annual basis and driving operating margin to 20%.

We believe in 2002 we have made great strides in building HBIO into a major provider of research tools used in the drug discovery process.

As you may be aware, recently we announced acquisition of BTX and the pending acquisition of GeneMachines.

I would like to make comments on both.

BTX is a strong brand name, leading-edge technology and market leadership position in the field of electroforation.

This product range will strengthen Harvard Apparatus’s position in cell biology.

This product line was acquired on February 1.

We are in the process of relocating to Holliston, Massachusetts.

We will be in production in Holliston this month.

In 2002, BTX revenues were $3.6m.

We believe in 2003, BTX could add $3m in revenue and be accretive to performing EPS.

With the introduction of the BTX new [inaudible] product line, we would expect significant growth in 2004.

GeneMachines is also a strong brand name with technology leadership position in the market.

This pending acquisition will strengthen Genomic Solutions direct sales distribution channel and its product offering.

GeneMachines will continue to operate manufacturing and development out of their current location in San Carlos, California.

Sales and marketing will be integrated into Genomic Solutions.

We expect GeneMachines could add $6m in revenue to Genomic Solutions in 2003 and be accretive to performance EPS.

Now, for guidance for 2003.

Our guidance for 2003, which was provided on our Q3 conference call was $80m in revenue and 26 cents in pro forma EPS.

Although there is potential upside of $3m to $9m in revenue and 1 to 2 cents in pro forma EPS with acquisition of BTX and the pending acquisition of GeneMachines, we believe it is prudent to maintain our original guidance in view of the uncertain economic environment.

That concludes my comments.

Now, we will open up for questions.

At this time, I would like to remind everyone in order to ask a question, please press and the number 1 on your telephone keypad.

We will pause for just a moment to compile the Q and A roster.

Your next question comes from Paul Knight.

It is Allison for Paul.

I just had a quick question for the quarter.

Are you guys going to break out your revenues by Genomic Solutions, how much was Genomics and how much was Harvard?

We have not done that in the past.

What I’ll try to do is give you a flavor for it by talking product lines but, I don't think today we will do segment reporting.

Okay.

What was organic growth for the quarter?

Organic growth for the quarter.

Roughly.

I can tell you. 14%.

14.

Great.

Your next question comes from Gregory Macosco.

Thank you.

You mentioned the goals, I believe you said, 30% to 35% profit growth.

Could you just go through those again so I understand those?

Yeah, I think the corporate goal, as we stated last year, our goal is to grow both revenues and operating income by 30% to 35% on an annual basis.

To drive all of the operating divisions to 20% operating margin.

Okay.

And could you talk about the -- I wasn't quite sure in terms of pro forma right now, where you stood with regard to Harvard Apparatus, the Biometric percent and Gene Solutions, etcetera.

I mean, you said 45% of '02 and for Harvard Apparatus.

Do you have anything that is where you stand right now in terms of Genomic Solutions?

Look at us on annual basis and if you included the GeneMachines, which is a pending acquisition, BTX, what you will see is about 35% of our business will come out of Harvard, about 35% will come out of Genomic Solutions, and 5% will be out of COPAS and the balance coming out of Bioform.

So, 25% Biochrom?

Yes, approximately.

Approximately.

I see.

If I looked at those pieces in terms of sort of the organic growth of Harvard Genomic, COPAS and Biochrom, what would you say on an organic -- I realize you are going to do acquisitions.

If you look at organic growth of those four difference pieces?

Well, it's traditionally our organic growth was about -- it was made up of two pieces.

One is pure growth as underlying business that we didn't have at the beginning of the year.

Then, growth in the businesses that we acquire as we leverage it through our infrastructure.

Traditionally, about two-thirds of our growth, historically, has come from that definition of organic growth.

And about a third has come from acquired growth.

That changed in 2002.

In 2002 it reversed itself about two-thirds of our growth came from acquisitions and one-third came from what we characterize as organic growth.

In '03, you are going to flip it back is the objective there?

Clearly, driving organic growth is one of the key objectives of the company.

That is done by new product introductions and expansion of the product offering.

In the -- in 2002, it was tough market conditions and it was across the board.

First half of the year we were very strong.

In the Harvard Apparatus in the second half, it was relatively weak, for different reasons.

In the third quarter, it was weak because of international business.

In the fourth quarter it was weak because of U.S. business and the international came back to normal standards.

So, clearly, it is we are at the mercy of the market today.

We have expanded the product offering and we continue to do that and we will continue to introduce new catalogs to drive that segment of the business.

In the case of the Biochrom business, it's in the past it has been largely dependent on success of Amersham Biosciences.

As we know the sequencer market and the high-end market for life science instruments has been slow this year and our products kind of piggy-back on those revenues.

Therefore, the traditional products have been relatively soft.

On the other side of the coin, new products made up for the short fall as they sold more plate readers and low-end spectrotometers that in the past they didn't sell many of.

So, it balanced out.

Again, that was the economic environment that we were in during the past year.

Historically, the Harvard Apparatus business has grown in the 10% to 12% range.

The Biochrom business would grow more in the 5% to 6 % range.

Genomic Solutions we are looking for significant growth out of.

We believe the new products that were introduced this past year, they have spent several years developing.

In many cases, they are unique and have significant upside potential.

Thank you.

Your next question comes from John Sullivan.

Hi, guys, how are you?

Couple of quick ones.

Can you first of all, Chane, in your last answer, you talked about expected composition of revenue in 2003.

I missed the first couple of components.

Harvard Apparatus, did that include BTX as you were thinking for '03?

What percentage of total revenues was that in your mind?

Yes, about 35% and 35% for Genomic Solutions, which would include GT machines.

Right. 5% of the COPAS and the rest out of Biochrom.

Can we talk about as you look toward 2003, are there drivers that are in your control that you think can drive that business and can drive the interest of pharmaceutical companies in the product or do you think it is more of evolutionary thing where the pharma industry has to come to high content screening of live model organisms in their own pace, how will that evolve in the near term?

I think one of the things we have seen, it has been difficult to drive that market.

And the pharmaceutical industry is slow to adopt new technology.

On the other side of the coin, the one thing we have found is that with -- as we restructure the company, one thing we have done is brought in new specialists and they have had an impact on filling the pipeline with new prospects.

So, I think it is still one of the development, market development sales and therefore, having technical people out presenting seminars and workshops is the key to driving in the marketplace.

Okay.

At one point and maybe to this day, you guys were relying on the addition of the Genomic Solutions sales force as being able to really help with the COPAS sale, is that still your opinion?

Well, where we are with Genomic Solutions at this stage as far as COPAS is concerned is to help us identify opportunities in the high [inaudible] and the high content screening area, but not per se, selling the product.

I still believe it takes a specialist at this point in time, to drive the marketplace.

Terrific.

Can you just talk, Sue, did you talk about the tax rate and what we should thinking about '03 regarding the tax rate?

I didn't talk about the tax rate.

We are probably looking at the 35 and-a-half to 37 range.

Okay.

The Q4 the effective tax rate was light due to truing-up estimates through the year and also about half and half truing up estimates and half adjustments from last year's tax return.

Okay.

Terrific.

I wanted to make sure I didn’t forget that.

The last thing I want.

I appreciate your time.

Chane, can you talk about is there somebody from GeneMachines there that can chat about the position of the arraying products in the market?

I know that some of the preprinted array products are gaining in popularity, specifically the Efimetric product.

Should we think about that as part of the same market or do the GeneMachines customers separate and distinct from the Efimetric customers?

Jeff do you want to handle that?

Sure.

We really see them as two separate products.

The Efimetrics chips, the gene chips are a great product if you are a customer who can use a relatively short nucleotide and looking to do several hundred or several thousand chips.

The GeneMachines products and the Genomic Solutions microwave products really target the market that is often referred to as the "spotted" market.

You are spotting down either a CDNA typically in today's environment, some customers may spot down nucleotides, as well.

You are looking to spot down a small number to high number of genes.

You may not even know all of the genes.

The Efimetrics chip, you really have to know ahead of time what you are looking at and what you are going after.

They serve two different markets, segments and purposes.

We see both markets as continuing to be good markets.

The growth is clearly slower than it was in 2000.

But, both remain very viable markets in a market we are excited about, combining Genomic Solutions expertise in hype stations and scanners with the GeneMachines expertise in the spotters.

Is your typical customer a Genome sequences project leader or is your typical customer more of a basic biology researcher?

I would say the typical customer is more an applied researcher, often in a university or academic setting or government laboratory, that is working with a fairly small set of genes and they know what they are going after.

Maybe, they are targeting breast cancer or targeting liver enzymes.

Some researchers do use it for basic research to look at the entire human genome and get information about glean expression.

I think it is turned over in the past couple of years to a more of a targeted approach to identifying handful or not more than a few hundred genes and looking at those in a certain disease state.

Thanks very much.

Thanks for your time and congratulations on a good quarter.

Thank you.

Once again, I would like to remind everyone in order to ask a question, please press and then the number 1 on your telephone keypad.

Your next question comes from Gregory Macosco.

Thank you, one more.

If you could talk about the pro forma earnings that you have been reporting.

When might we expect the stock compensation, the amortization of intangibles, the related restructuring charges etc., on an ongoing basis?

I realize if you make acquisitions, the pro forma reporting will change.

But, could you talk about when we might see these pro forma charges to tail off?

Well, you hit that one on the nail.

It depends on acquisitions we are doing.

The amortization of intangibles that we run through our GAAP accounting probably runs 7 to 15 years in varying degrees based on the acquisitions we have made.

Stock compensation expense will be done according to current rules in 2003.

In process R&D expense relates strictly to acquisitions, current acquisitions we make and depends on how much is in the pipeline for new product development for acquisition targets.

Restructuring, don't plan on those.

They happen.

The ones we have had over this year were related to acquisitions in 2001 and 2002.

With regard to R&D, is there more coming in the current quarter, second, third quarter at this point?

I mean, obviously I am excluding any acquisitions, I am just --

No, the interactive R&D expense is specifically for acquisitions.

So, there will be no more if you don't make any more acquisitions?

Right.

It is acquired in process R&D expense.

It is a valuation assigned during the purchase price allocation of the acquisition.

Okay.

And the restructuring, we are done with those charges?

Again, unless we make another acquisition?

Yeah.

Greg, where we are on restructuring is all the restructuring we have done in the company have been due to we acquire a company and we have to go fix it.

With the exception of the COPAS technology and that was really a technology play that we thought was going to penetrate the market much faster than we did.

Therefore, it was structured to be a much bigger business than it currently is.

And we had to bring it in line.

We have brought it in line today.

So, we do not see additional restructuring of the current businesses in order to meet our financial objective.

And then, the stock compensation you are saying that is done in '03?

What kind of charges are we expecting on an ongoing basis, first, second, third and in '03?

For the year, we are expecting $550,000 spread evenly.

Okay.

Evenly spread.

I guess the real thing is the amortization of intangibles.

Those -- that is you are saying 7 to 15 years, is that right?

Yeah, it depends on the intangibles being valued.

Okay.

But, I guess it is a fair question to say isn't that an ongoing expense is should that not be considered a pro forma expense?

It is related to acquisitions we have made.

It is not an operational expense.

I understand, but, in other words, we should expect that break-out to be considered pro forma for another 7 to 15 years?

If we are continuing to exclude amortization of intangibles, yes.

I don't hear David Green on the call, is there some reason?

He is not with us today.

He had a personal accident in the family and couldn't be here.

I’m sorry to hear that.

Thank you very much.

At this time, there are no further questions.

Thank you, everyone.

Thanks.

This concludes today's fourth quarter 2002 earnings conference call.

You may now disconnect. (Normal Termination.) The call ended at 10:34. --- 0