Harvard Bioscience Inc (HBIO) 2003 Q1 法說會逐字稿

Good morning.

My name is Jamie and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Harvard Bioscience first quarter 2003 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 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 morning.

This is Sue Luscinski, CFO of Harvard Bioscience.

Thank you for joining us today to discuss our results for the first quarter of 2003.

Chane Garziano, our CEO, David Green, our President, and Jeff Williams the President of Genomic Solutions are also on the call today.

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

David Green will discuss the acquisitions of BTX and GeneMachines, as well as the business development of the company.

In our discussion today we may make statements about our future expectations, plans and prospects that constitute forward-looking statements under the Safe Habor provisions 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 annual report on Form 10K for the fiscal year ended December 31, 2002 filed with the SEC, and other public filings.

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

Further information regarding forward-looking statements and risk factors are included in the press release we issued yesterday reporting first quarter results.

Any material, financial and other statistical information presented on the call, which is not included in our earnings release, as well as our earnings release, is available and will be archived in the investor relations section of our website.

Click on the investor relations button and then click on the press release or webcast icon as appropriate.

A replay of this call will also be archived at the same location on our website.

Foreign exchange had a favorable affect of approximately 4.6% on revenues for the first quarter of 2003 when compared to the same quarter last year, due primarily to the strengthening of the British pound sterling and the Euro against the US dollar.

Cost of product sales for the quarter included the charge of $333,000 related to the orders that we sold during the first quarter since the date of the acquisitions of Genomic Solutions, BTX and GeneMachine for fair value adjustments made to the inventory and backlog acquired.

There remains on our balance sheet approximately an addition of $300,000 of fair value adjustments to inventory and backlog related to these three acquisitions.

Our gross margin of $9.838m for the first quarter was negatively impacted by this charge, thereby reducing our gross margin percent by approximately 2 percentage points.

Without this charge, at 52.2% for the quarter, our gross margin percent increased slightly from the first quarter of 2002, which was 51.9%.

An increase of practically 1.5% from the fourth quarter of 2002, which was 50.6%.

Again, after adjusting for the fair value adjustment related to the acquisition of Genomic Solutions in the fourth quarter.

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

Since Genomic Solutions sells primarily directly to end users, their gross margins are typically higher than sales to distributors.

SG&A spending at $6.4m is 33% of revenues for the quarter, compared to $3.4m or 28.3% of revenue for the first quarter of 2002.

This increase in Q1 spending year-to-year is due primarily to acquisitions. $2.6m of the increase relates to acquisitions made since the first quarter of 2002.

The absolute dollar spending increase also included approximately $157,000 due to the effective increase in foreign exchange rates.

Since Genomic Solutions uses primarily a direct sales force to sell their products, SG&A spending as a percentage of revenues is higher than the HBIO traditional spending rate for sales through a catalog or through distributors.

Additionally, while historically the HBIO revenue cycle has not been impacted by the cyclical nature of capital equipment markets, Genomic Solutions products do fall into that category.

And as such, revenues for the first quarter relative to the year are lighter than the average expected for the year.

The first quarter of 2003 also included some extra expenses related to transitioning the first two quarter acquisitions.

These extra expenses had approximately .5% impact.

We still expect the annual percentage rate of SG&A spending to revenues to be in the 29-31% range for the year.

Although quarterly percents will fluctuate.

R&D spending of $1.4m to 7.3% of revenues for the first quarter of 2003 compared to the first quarter of 2002 of $1m or 8.5% of revenues.

The $1.4m includes approximately $600,000 related to the acquisitions we made since the first quarter of 2002.

The combination of the timing of spending for R&D projects and the restructuring in the third quarter of 2002, in our Union Biometrica subsidiary account for the remaining net decrease of spending over 2002.

At 7.3% for the quarter, we are in the 7-8% range we would expect on the annual basis, though again, we would expect to see this fluctuate somewhat on a quarterly basis.

Stock compensation expense was approximately $147,000 for the quarter compared to $325,000 for the first quarter of 2002.

This expense is due mainly to options granted during 2000, pre IPO, which were [re-evaluated] for GAAP accounting to our expected initial public offering share price.

Other income for the quarter of $109,000 consisted of approximately $27,000 net interest income and a currency gain of approximately $114,000.

This compares to other income for the first quarter last year of $41,000 consisting primarily of $94,000 net interest income and a currency loss of approximately $43,000.

Lower available cash in 2003 was the main reason for this reduction in net interest income.

Available cash in 2003 was lower due primarily to cash being used for acquisitions since the first quarter of 2002.

The charge for amortization of intangibles for the first quarter of 2003 was $625,000 compared to $305,000 for the first quarter last year.

This increase is directly related to the acquisitions made since the first quarter of 2002.

We ended the quarter with cash and cash equivalents of $9.3m, a $6m decrease since December 31st.

Approximately $6m in cash was used to partially fund the acquisitions of BTX in January of 2003 and GeneMachines in March of 2003.

An additional $6m in proceeds from a bridge note entered into in March of 2003 was used to fund the remaining purchase price for the acquisition of GeneMachines.

This $6m bridge loan was entered into with Brown Brothers Harriman & Co., in anticipation of closing a $12m, which includes the amount of the bridge loan, revolving credit facility which will be available to fund future acquisitions or working capital.

Before turning the call over to Chane, let me say we believe it is useful to present both the pro forma results for the company, as well as the GAAP results for the company, as the pro forma results are how we measure the operating results of the company internally.

This is also how we have discussed the company externally since our IPO.

Historically, pro forma results exclude [acquired in-process] research and development expense, amortization of intangibles related to acquisition, fair value adjustments of inventory and backlog related to acquisition, one-time restructuring expenses and stock compensation expense, all net of tax.

A tabular reconciliation of the first quarter pro forma results and pro forma guidance to comparable GAAP measures is included in the press release issued last evening.

Chane'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 meaningful way to present our business results.

Chane?

Thank you Sue.

Good morning everyone and welcome to our call.

We are pleased with our first quarter 2003 results.

With revenues of over $19m, we achieved a 63% increase in revenues over last year.

Even deducting for the favorable impact that foreign exchange had on our numbers, we achieved 56% growth.

This achievement was only possible in a difficult economic environment because of our three-tiered strategy of growth through new product development, acquisitions and partnerships.

During the quarter, we saw a slowdown in some of our more mature products.

However, we did see an increase in our newer technology products resulting in an overall 3% organic growth rate.

Q1 revenues broke down into the same apportionment among our product lines as we discussed during our fourth quarter 2002 conference.

Genomic Solutions and their acquisition of GeneMachines is doing quite well.

Currently these acquisitions contributed significantly to our first quarter results, as we had expected.

Through these acquisitions we now have a broad, high quality product portfolio in genomics, proteomics and [high] screening areas.

During Q1 our Biochrom operations was somewhat negatively impacted by recent restructuring and organizational changes in Amersham Biosciences, its primary distributor.

However, they were favorably impacted by increases in some of our newer technology products such as plate readers, and also on a year-to-year basis by the impact of our direct sales of amino acid analyzers.

During the second quarter of last year, Biochrom began to create an infrastructure to support the direct distribution of several of their products, the amino acid analyzer being one of them.

The acquisition and transition of the BTX business from the West Coast to our Holliston Harvard Apparatus Facility was completed in March as expected, and went very smoothly.

The BTX acquisition is an example of one of our tuck under acquisitions where we fold the acquisition into, and leverage the infrastructure of, an existing subsidiary and take advantage of both the synergistic opportunities that already exist within the subsidiary, as well as the opportunity the acquisition target brings with it.

In the case of BTX, the synergies and opportunities that Harvard Apparatus brings to the table is completely self-supporting infrastructure with proven expertise, while BTX brings with it strong technology base, and a distribution channel network with major distributors such as VWR and [Fischer].

This is a very uncertain economic environment we're going through right now, and we are pleased that thus far, during the uncertainty, our three-tiered strategy for growth is affording us the ability to grow our top line, even if some areas of the business see a slowdown.

Given that our gross margins continue to be strong, our expenses continue to track as expected.

And as we continue to implement growth initiatives, we remain comfortable with our previous guidance of .26 cents pro forma EPS for 2003.

I will now turn the call over to David Green who will discuss the technology and strategy behind the acquisitions of BTX, GeneMachines and bring you up-to-date on some of our growth initiatives.

David?

Thank you, Chane, and good morning everyone.

Way back in 1997, Harvard Bioscience, which was at the time called Harvard Apparatus, finished the year with about $11.5m in revenues.

Then we had a catalog of approximately 1000 pages and roughly 16 pages devoted to cell biology.

That year, cell biology products contributed less than $10,000 in revenue.

In mid-1998 we made our first acquisition of a company called Medical Systems, a well-known leader in niches within the cell biology market.

That acquisition allowed us to expand our cell biology product offering, by including not only the proprietary Medical Systems product lines from our products from the Clarke Electromedical acquisition in 1999, and our proprietary [Naversite] Products acquired in late '99, but also other manufacturer's complimentary products.

In May 2001, we acquired Warner Instruments, another well-respected tool company in the cell biology, cell physiology market.

In 2002 Medical Systems products, along with [Naversite], Clark Electromedical and Warner products, represented approximately $5m in revenues without taking into account the ancillary products that compliment those proprietary products.

And now, in 2003, we've acquired BTX, a leading developer and manufacturer of electroporation products, a perfect compliment to our existing cell biology offerings.

As we have previously indicated, we expect that BTX itself will add approximately $3m to our 2003 revenues, bringing cell biology revenues to be in the range of 10% of our 2003 estimated revenues.

All combined, these leading players in the cell biology, cell physiology market provide an impressive and broad array of products to the researcher in the lab.

That researcher, or that lab, they can come to one place and find the product particular to their unique needs, as well as complimentary products.

As I just described, we look to acquire leading players in varying niche segments with a very broad life science market so that we can offer the broadest array of high-quality products to researchers all over the world.

These leaders easily have the leading-edge technology in their particular application, with a solid base of revenues to support the next generation of technology.

Each one of these builds upon the customer base of the others, providing a real opportunity for growth.

This illustrates the power of the three-part growth strategy that Chane outlined earlier.

A similar strategy drove our acquisition of GeneMachines.

While the acquisition of Genomic Solutions in October 2002, itself was our first significant entry into the niches of automated [sample prep prior to mass spec] [high speed][inaudible] prep prior to [inaudible] screening and high-fidelity micro-array preparation analysis.

The acquisition of GeneMachines furthered this strong market in technology position particularly in the genomics area with its offering of products for the front end of micro-array, but perfectly complimenting Genomic Solutions products in the back end of micro-array.

Finally, a little bit on the business development and growth initiatives of the company.

During the first quarter of 2003 we entered into two noteworthy OEM distributor reseller agreements.

One with [Perk and Alma] and one with [Rukadeltronics].

In both cases, each will be expanding our distribution channels for the Genomic Solutions products.

Through our agreement with [Park and Alma] Genomic Solutions will provide private label products excessively manufactured with [Perk and Alma] to round out [Perk and Alma]'s product lines for proteomics researchers.

These products include a proteomic scale cutting robot and a DNA hybridization work station.

In a reciprocal agreement, Genomic Solutions received the right to distribute [Prodiom 1D Analyser] software, the next generation software developed for [Perk and Alma].

With our agreement with [Rukadeltronics] Genomic Solutions will provide [Ruka] with its [profound] and sonar MSMS search engines, part of the investigative brand of Research Proteomic Tools to be incorporated in [Ruka]'s line of mass spec products.

Combined, the technology will streamline and improve the accuracy of [protein] identification by MALDI or MSMS.

We continue to seek leverage wherever we can, be it through agreements such as these or through synergistic acquisitions, or through partnerships.

Today we believe that all of these areas are still viable options to enhancing and growing HBIO and we believe there are still good opportunities available.

We'll now open up the call for questions.

Thank you.

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

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

Your first question comes from Paul Knight.

Good morning.

Good morning Paul.

Good morning.

On the 3% organic growth rate, could you talk about -- could you give a little color on-did you discontinue some operations that might make that seem a little lower?

And, it does seem to have been a tough Q1 for many participants in the pharmaceutical market.

Could you add some color there?

Just generally what you're seeing in Q1.

And then what you're now seeing in this quarter as we are now a month into orders.

Yes, Paul, this is David.

There were no discontinued operations that affected that revenue number.

But I can give you some color on the sector by sector organic growth rates.

Although I can only do this with respect to the US business, and in particular to the apparatus part of our business.

But, we did see a difference between the different sectors-academic, pharma, biotech and government.

And by far the weakest of those was the biotech area.

Pharma was a little bit weak, academic was actually fairly flat, and government spending was actually up.

I was wondering -- I know you haven't really discontinued [ops], but I think there are [ops] that aren't a focus of growth.

Would that be fair to say?

Well, I think it's fair to say that we try to get growth wherever we can.

And, we've certainly been able to get growth out of even some rather old product lines, as applications have shifted.

I think the amino acid product is a very good example of that.

Three or four years ago that was seen as a dying product line.

And yet we've been able to get quite significant growth.

What do you think organic growth will be the rest of the year?

Well, Paul, this is Chane.

Last year our organic growth was in the 13-14% range.

And traditionally it's been in that 10-15% range.

But on a quarter-by-quarter basis there have been shifts.

We had a quarter last year where our organic growth was 9%, we had one where it was 21%.

And because we have a broad range of products, we do see fluctuations quarter-to-quarter.

We do see the softness today in the marketplace in general.

And the thing that is driving our growth are some of the newer products that we have introduced.

Mini-ventilator, for instance, is up 30-35%.

But some of the more mature things, like our traditional pump business, is down maybe [6-7%].

So, that's the nature of the dynamics that are going on.

And I think it's not one product, per se, it's kind of broad based-so it looks like it's more of a market condition.

Yes.

And I think because we have a broad range of products, and we have new products in the bag, we'll continue to see organic growth increase, and I would hope that this quarter is low, but you don't know because of the economic conditions.

Can you speak to the tone of April's business level -- and I'm done with that.

April was, in the US, was up significantly on a year-to-year basis.

So, April is off to a very good start for us.

The instrument side of the business in April is not as strong as the catalog business.

But, by-and-large, it looks like the catalog business is back to normal spending rates.

Thank you.

Thank you.

Again, if you would like to ask a question, please press star one on your telephone keypad.

And you do have a follow-up question from Paul Knight.

David, can you -- you gave cell biology as 10% of the firm.

How would you break out, today, with all the additional businesses -- how would you break out the rest of Harvard today?

We actually gave a breakdown for that on the last conference call, and it's very consistent with that.

It hasn't really changed much since that last call.

Okay.

And what's your goal on the EBITA margin chain for the rest of '03?

I'd calculate --I think it was at 11.9 in Q1, and that's 200 -- almost 300 basis points higher than Q4.

So, what's the trend line look like to you?

Well, the trend line looks-on an annual basis-our forecast is higher than that, Paul.

We're driving to 15%, is what the budget looks like at this stage.

And in the first quarter we achieved our budget.

So, if we continue to achieve our budget throughout the year, I would expect the EBIT line to go up.

And what should I assume on tax rate for '03 modeling purposes?

Somewhere in --I know your model needs specifics-but somewhere in the 35.5 to 37 range.

Okay, thank you.

Operator.

Thank you, your next question comes from John Sullivan.

Hey guys.

Just wanted to understand a little bit better-you mentioned Biochrom, had a little hiccup regarding changes in Amersham, and then went on to talk about seeking to distribute directly some of their products-could you just be a little more specific regarding that?

And what percentage of Biochrom products do you suppose will be directly distributed at some reasonable point in the future?

Well, Amersham is still the major distributor of the product, but when we acquired Biochrom --95% of revenues went through Amersham.

And today it's probably more like 70%.

We have started to -- we've introduced the line of [spectrotometers] and plate readers that we sell through alternative distribution channels, mainly distributors around the world.

And, in amino acid system, which is a system that sells roughly $100,000, in the US we're selling that now through Genomic Solutions.

And in Europe we're selling it on a direct basis through direct sales channels.

And in the rest of the rest of the world we continue to sell it through Amersham.

Okay, so, 70% is the neighborhood today, you feel -- I get the sense that you're saying you feel like it can go a little bit lower regarding specific products, but it will remain well over 50% of Biochrom revenues coming through Amersham.

I believe so, because we will continue to introduce new products to Amersham, we talked about the growth in plate readers-and we also talked about the [spectrotometer] business thing a little slow through Amersham.

But, Amersham has been going through some restructuring, so that's had some negative impact.

On the other side of the coin, some of the growth at Amersham has come out of the new plate reader.

So as we put more products through Amersham, and they're interested in continuing to take new products from us, I would expect them to continue to be over 50% of Biochrom's revenues.

Okay, Thanks very much.

Could you just break down the percentage of your overall business that comes from major customer classes?

Only very roughly, John.

It is roughly, roughly 50% pharmaceutical and biotech, and 50% government and academic.

Remember, we do sell quite a bit through distributors of one kind or another.

Amersham being the most significant.

And so, we don't get to see directly which class of end user customers those go to.

Understood.

But, that estimate is based on what we do know, plus what Amersham tells us.

Terrific.

Anything by way of new products developed within the company in the in vitro assay side of the business for us to look forward to this year?

In vitro assay.

Well, I think that really depends how you define in vitro assay.

I think we've got some very interesting new product development stuff going on at the moment, which I probably can't disclose right now.

But you'll probably hear about it later on in the year, which does deal -- actually no -- I have to correct that -- it's not an in vitro assay, it's a system set up to do in vivo assays.

Okay, so the rest of my question is -- if investors are looking for a counterbalance to some of the instrument business that you've added over the last several months, is there a counterbalance out of products that you're developing yourselves that we can look for?

Do you mean for the growth initiative, is that what you're asking about, John?

Right, regarding more expendable and consumable products specifically.

I see.

Well, I can tell you one of the areas that has seen good growth in the last year or two has been the sample preparation products.

Particularly for both [azmat] testing and for protein purification prior to mass spec which are the protein purification [test strips] which we're now selling in conjunction with the Genomic Solutions protein purification workstation.

But the one of those that is specifically used for [azmat] testing is actually an in vitro assay, just as you just asked, and both of those product lines are showing good growth this year over last year.

Okay, terrific.

Thank you very much.

Thank you.

At this time there are no further questions.

If there are no further questions, thank everybody for joining us this morning, and we'll talk to you next quarter.

Thank You.

Thanks, goodbye.

Thank you.

This concludes today's conference.

You may now disconnect.