Harvard Bioscience Inc (HBIO) 2003 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the third quarter 2003 Harvard Bioscience Earnings Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode with a question and answer session to follow. My name is Brian and I will be your coordinator today. If at any time during the call you do require assistance, please press star zero and a coordinator will be happy to assist you. Now I will turn the program over to your host for today's call, Ms. Susan Luscinski. Please proceed Ma'am.

Thank you. Good Morning, this is Sue Luscinski, CFO of Harvard Bioscience. Thank you for joining us today to discuss our results of the third quarter 2003. Chane Graziano, our CEO, and David Green, our President, are also on the call today. After the Safe Harbor Statement, Chane present an overview of the quarter and the outlook for 2003 and 2004, and David will discuss our growth initiative.

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 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 10-K 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 upon as representing our estimates of any subsequent days. Further information regarding forward-looking statements and risk factors are included in the press release we issued yesterday reporting third quarter results. Any material, financial or other statistical information presented on the call which is not included in our earnings release as well as our earnings release itself is available and will be archived on the Investor Relations section of our web site. Click on the investor relations button and then click on the press release or web cast icon as appropriate. A replay of this call will also be archived at the same location on the website. Before turning the call over to Chane let me say that we believe that it is useful to present both the pro forma results of the company as well as the GAAP results for the company. As the pro forma results specifically the pro forma operating results approximate how we measure our operating results for the company internally. This is also how we have discussed the company externally since our IPO. Historically pro forma results exclude one time non recurring charges, stock compensation expense and charges relating to acquisitions such as restructuring, a quiet in process research and development expense, amortization of intangibles, sale value with reference to inventory and backlog acquired on net of tax. A tabular reconciliation of third quarter pro forma results to comparable to GAAP measures is included in the press release, issued last evening. Due to the timing of the acquisition of BioRobotics in September a tabular reconciliation of pro forma guidance to comparable GAAP measures is not accessible as the purchase price allocation of this acquisition has not been completed. Therefore, we are not able to predict the impact to the associated acquisition related expenses on 2003 or 2004 estimated GAAP earnings per share. Chane's comments today will be made in reference to the pro forma format issued in our earnings press release for the third quarter in year-to-date as well as pro forma guidance. 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 very pleased with our third quarter results. Despite continued weak spending by pharmaceutical and bio tech companies and the traditional weak third quarter in capital equipment purchasing, we achieved 65% revenue growth, 51% pro forma operating income growth and 50% growth in pro forma earnings per share versus the third quarter 2002. This is our best Q3 ever in terms of revenues and pro forma earnings per share. While spending by pharmaceutical and biotech companies remain soft, we have seen some encouraging signs of improvement. Our ADMET business showed good organic growth for the quarter, up approximately 6.5% worldwide and approximately 12% in the US in the third quarter of 2002. This trend coupled with both a significant increase in our pipeline of prospects in the fourth quarter for the capital equipment product lines at Genomic Solutions and Union Biometrica and the normal seasonal increase in capital equipment purchases in fourth quarter, leaves us remain comfortable with our previous issued guidance of 26 cents pro forma EPS and 83 to $88m in revenues for the year. We expect revenues to be in the higher end of this range. For 2004 we expect to continue to drive growth in revenues and pro forma EPS through our three parts growth strategy of new product development acquisitions and strategic partnerships. In the seven years since we have been running Harvard BioScience this strategy has delivered a compounded annual growth rate of revenues of approximately 40% and a pro forma EPS of approximately 24%. It is worth noting that we have achieved this both in good times such as the Genomic boom of 99 and 2000 and bad times such as the Pharma Biotech recession of 2002 and 2003. Therefore by continuing a strategy, we expect in 2004 to continue our historical trend of growing revenues in the 40% range and pro forma EPS in the 24% range.

That concludes my comments this morning I will now turn the call over to David Green. David?

Thank you Chane. In the last year our business has evolved substantially, in one year we have gone from having approximately 5% of our revenues derived from capital equipment to approximately 40%. Our Genomic Solutions and Union Biometrica product lines are primarily capital equipment. Outside capital equipment our quarter-to-quarter seasonality is limited. However, in capital equipment there is traditionally a significant quarter-to-quarter seasonality. It's not unusual in capital equipment to see annual revenue divided roughly 20 to 22 percent in Q1, 25-26 percent in Q2, 20 to 22 percent in Q3 and 30 to 33 percent in Q4. We achieved our record results in Q3 this year despite the seasonal decline in our capital equipment business.

While our product lines have evolved, our strategy of innovation, acquisition and partnership has not. We continue to invent new products, often in paid partnerships with major pharmaceutical companies. We continue to acquire complimentary products that leverage our existing brands and distribution channels. And we continue to partner with others for products and applications development and addition distribution.

Let me highlight some recent developments in all three categories. Innovation, this quarter we expect to deliver our first MIAS that's the Microscope Image Automation System to the original major pharmaceutical company that we partnered with to develop it. We're now working with a second partner to develop dermatology related applications on the same platform. We've also received positive first reviews for a government funded consortium project for the next generation of Nematodes research on this platform.

Acquisition, the acquisition of GeneMachines and BioRobotics are good examples of the acquisition of complimentary product lines that strengthen an existing platform, in this case Genomic Solutions. We now have the broadest product lines of Microrane (ph) of any supplier.

Partnership, we're particularly pleased, this quarter saw the first paper on our co-path (ph) technology, for high (indiscernible) research on worms, flies and fish, published in the peer review journal. This paper was written by researchers at the Buck Institute in California on high (indiscernible) for life extension and Nematodes. Co-path was an essential part of their experiment.

We're also working with collaborators at major universities on applications such as sourcing embryonic stem cells and purifying pancreatic eyelid cells as a potential treatment for juvenile diabetes.

As we look ahead into 2004 we expect growth to come from the continued integration of the product lines acquired in 2003 into our existing distribution channels. In particular, we expect the BioRobotics and GeneMachines product lines to grow with in the Genomic Solutions platform. In Q1 we expect to launch a major new catalog for our Harvard apparatus products, which for the first time would include all the BTX products acquired earlier this year and the new high proof -96 world plate electrogration (ph) system. At our Bio-Pearl molecular biology, business we're expecting to produce new products based on the bioderay (ph) technology acquired with WPA. The new products I mentioned earlier such as NEA (ph), are expected to contribute to revenue growth, however the absolute dollar amounts are still quite small.

Finally, we believe the environment for acquisitions remains attractive and we continue to evaluate several opportunities. We'll now open the call for any questions.

Ladies and gentlemen, at this time if you wish to ask a question please key star then one from our touch-tone. If you would like to remove your question, please key star, then two. Again, to ask a question, key star then one from your touch-tone phone. Take just a moment for those queues to queue up, one moment.

And your first question comes from Cynthia Davis, Caris & Company. Please proceed.

Hello and congratulations on a good quarter. I just actually had a few questions regarding, first I guess inventory increased this quarter. I was wondering whether or not that was planned I guess in response to expected growing demand next quarter, or whether or not that was just a result of weaker maybe than expected performance this quarter?

Just two things. It is gearing up for the fourth quarter and it's also because of the acquisition of BioRobotics.

How much would you say that BioRobotics added to that inventory?

There was a bit over $2m in the BioRobotics acquisition.

Okay. And I was also wondering about this 2004 guidance, how you plan to get there in terms of percentage of organic growth verses acquisition growth? I don't know if you can break that out at all?

Hi this is David. Yeah we've given guidance for 2004 at the revenue level and the pro forma earnings per share level. And we've not broken out what percentage we expect to come from organic growth or from acquisitions. Because acquisitions are inherently uncertain in terms of their timing, we really can't predict that. We have or we feel very confident that the overall growth we've been able to achieve over the last six or seven years at 40% on the top line and 24% of Pro forma earnings per share level is quite sustainable going into next year and with environment for acquisitions as we see it and the prospects of the business as we described, we feel fairly confident with that overall guidance for next year.

Okay and I actually just had one final question, which is also somewhat on the inventory. I guess in your press release you say that the sales then to OEMs and distributors were up a bit over previous, and I was wondering if you had any information from them on how much of that was inventory building and how much of that was actually sold to whether or not their inventory positions have increased?

This is David again. I don't think we have that level of intelligence on what those distributors actually did with those orders, but typically for capital equipment and most of the - most of the effect here was due to - was from the capital equipment businesses. Typically those distributors would not order product without themselves having an order from and end user.

Okay that's great thank you.

And your next question comes from Greg McCosco of Lord Abbot. Please proceed.

Hi. Could you talk a little bit about organic growth in some of the businesses? You mentioned one I believed there in the release, but could you talk about organic growth in the various segments?

This is David again. Overall organic growth for the quarter was approximately zero and some products lines are up as you mentioned. The ADMET product in particular showed good organic growth for the first time this year and the U.S was particularly strong at about 12% growth over Q2, I am sorry, Q3 last year. In addition, we also mentioned that we saw a seasonal decline in the capital equipment business, which is very normal in the capital equipment business. And those two pretty much offset each other to give the net result for the quarter.

Okay and could you also talk a bit about the GE acquisition or possible acquisition of the Amersham and what you might---any impact you might expect, they have talk about that being a new platform for them.

Yeah when GE announced the acquisition of Amersham, I honestly half expected them to announce that they would be divesting the bioscience side of Amersham. About 2/3 of Amersham's revenue is not from the bio science side it's from the medical side where they make the diagnostic product to go with MRI scanners and CAT scanners and things like that. But I'm sure that was GE primary interest, because GE makes the machines and Amersham makes the (inaudible). So it' quite a nice fit strategically for them. But I also said I half expected them to be announcing the divestiture of the bio science side but in fact they came out exactly the opposite saying that they're very committed to the bio science side of Amersham and saw the Genomic and corrodium as technology, which really are the strengths of that business, as being key platforms for growth generally. And also continuing the strategy which Amersham has pursued for years which is develop products on the bioscience side and then feed them through into the clinical side.

So other than I was actually quite pleased to see the GE really took that perspective and they've made strong public statement supporting that side of the business. So, I expect that we'll continue in relationship with Amersham bio sciences as part of GE, much of it has been in past with Amersham as an independent company.

Great Thanks. Could you expand in any way-- the relationship?

I don't see much opportunity for expansions to be honest, I think the bio science side of Amersham is ---has very little synergy with any other GE business I can think of and if they plan on doing, you know, shows on NBC or something. So, I don't see there's much potential up side from us with GE acquisition of Amersham.

And then finally, you made positive comments about the acquisition environment at this point. How many candidates or companies might you be looking at? And give us a little more color there?

At any point in time we're always looking at between half a dozen and a dozen candidates at various stages of discussion from first conversation, through to closure like we recently close the acquisition of BioRobotics. But at any point in time there's quite a few but we can't comment on any specific transaction.

Thank you, thank you.

Your next question comes from John Sullivan of Steven Inc. Please proceed.

Hey guys, I was just wondering I wanted to peel the onion a little bit more regarding the Co-path system, you talked about some new applications that seem like they may be emerging regarding the Co-path system. Can we just chat a little bit more about that, are there any, away from the original three applications, the original three classes of organisms, its sounds like you have some other applications emerging can you just talk a little bit more about those?

Sure that's true. The original applications were really worms, flies, fish and then we started that adding B-base application as well. The new ones that we're working on in partnership with largely academic institutions are for sorting small aggregations of cells. So for instance, stem cells tend to lump together in small clusters and pancreatic islet cells also tend to cluster together in groups of perhaps a 100 cells. And therefore it's very appropriate to really hit the sweet pot of what Co path is capable of doing verses traditional flow (indiscernible), which would be sorting cell by cell. And maintaining the integrity of these clustered cells, both in the islet cells and embryonic stem cells is essential to maintaining their viability. So those are the two examples of areas where we've taken that Co path technology.

Thanks very much.

Again ladies and gentlemen for any questions or comments please key star, then one from your touch-tone phone. And there is a follow up question from Cynthia Davis of Caris & Company.

Hello I just had to ask one more question regarding Q4 forecast. I guess if you're expecting a pick up in capital expenditures side of the business, I was wondering how that might affect your margins in the different areas as of I suppose those products have a little bit of a different profile than the other products that you have and what you see going forward next quarter?

Yeah, this is Chane Graziano,actually the margins on capital equipment are the highest of any of our product lines and since our pipeline are prospects in both Co-path product which has margin in the 70% range. And you know the solutions which are in the 60% range should have a positive impact on the quarter.

And in terms of selling and marketing I suppose those expenses are somewhat more for those products, so that pretty much even out to what your other products are or is it still a bit higher for the quarter?

Well we, it will be traditional spending in both sales and marketing, clearly on the capital side it is a much more expensive operation to run because you have service sales and applications people that drive that part of the business. But it should not be any significant difference in the historical trend.

Okay thank you.

And your next question comes from Paul Knight of Thomas Weisel please proceed.

Hi guys this is actually Ross Knight speaking for Paul Knight. Just want to start with a quick housekeeping note, if you could just walk through the net sales by your four major segments that would be helpful? I know you mentioned that organic growth was zero I just want to have a better understanding of where the revenues fall out?

Sure this is David. We typically do not provide that kind of break down by bi-product line. We give guidance for revenues overall and for gRoss Knight from earnings per share and when we can we give the guidance for GAAP earnings per share as well but we do not give guidance by bi-product line.

Okay, on the acquisition front what have you guys seen in terms of public and private market valuations? I know you said that you were still looking at 20 or so acquisition candidates on a regular basis, but I was just curious as to what you're seeing in terms of market values? Have you seen them creep up or are there still attractive values available in certain companies or are they still available?

Well if you looked at what we've done this year the three acquisitions we've done this year, BTX earlier in the year, GeneMachines and BioRobotics those were all price at roughly one time revenues on a trailing basis and it was rather harder to express that as a multi-operating margin because a lot of these businesses require significant restructuring. But certainly we felt that we could force integration, make these business accretedto our earnings per share and when we announced each of those acquisitions we announced that we expected them to be accreted to our earnings per share. And in fact they were accreted to our earnings per share. So I think that gives you some sense as to what the pricing based off earnings was and based off revenue. It's been roughly around one time revenue. And for smaller companies like that that's been fairly consistent for us over the last five years or so. We typically pay between 0.5 and 1.5 times revenue for smaller companies. It's very unprofitable.

Great thanks.

And we have another follow up question from John Sullivan of Stevens Inc. Please proceed.

Hi guys in your comments you refer to the micro arraying product line and yours being the broadest in the industry. Can you give a little bit more background regarding the micro arraying business? And how you think that investors ought to think about the arraying instrument business?

Sure it - have we gone through the question John - I'm not quite sure what you're getting at?

I just wanted to understand a little bit better maybe the size of that particular opportunity and why a broad product line might work better than a single product to a couple of products.

Okay alright, micro arraying is a relatively new technique, it's say 5, tops 10 years old. And like most technique in the industry it evolved out of academic lab. BioRobotics evolved out of, either out of Cambridge in England and GeneMachine evolved out of Stanford University here. And that's very typical. Specifically what happens is the first generation products are not particularly high quality and it's usually a single product.

But to actually process the micro array there are many steps in the process. And so over time, those other chosen techniques have to be invented too. And we've really packaged together partly through acquisition and partly through product development a complete product line so you can go from start to finish with products from Genomic Solution. And that goes from making the DNA in the first place, purifying the DNA, spotting the DNA down unto the slides, reading the slides and the software to further analyze it.

I'm sorry I missed out the hybridization stuff as well. So there is probably at least 5 and it could be as many as 10 different pieces of equipment you'll need to actually go from start to finishing processing micro array.

And I think it is important to have all of those available from one supplier. Because the early - the earlier adopted, the technology will tolerate faults and quirks in the product line. But as it starts to use more into main steam usage customers tend to want a much more reliable product, a much better integrated product, with a much broader service and support network. So I think that as the product line is evolved it becomes more and more important to have that broad product line to be a one-stop shop to solve the customer's problems in micro arrays rather than beginning when it is providing a new technology. Does that answer your question John?

Yes thanks very much.

We have another follow up question from Greg McCosco of Lord Abbot, please proceed.

Yes with regard to the - in Europe gene solutions I believe -- Genomic Solutions I believe has - is represented by I believe PKI and I wondered how that was going over there? And what your expectation are there with respect to Genomic Solutions?

Actually that situation changed at the beginning of the year. PKI does not - is not the exclusive distributors of product. We do make product for PKI under their brand name, which they sell. But we have reestablished our own distribution subsidiary in Cambridge that sell direct to end-users today.

Okay and what is Europe looking like with regard to those and other product lines?

Well Europe in general is still soft but it is starting to show signs of life. Again as we looked to fourth quarter on the capital side the prospect in Europe are much stronger than they have been all year.

And I know that when the Genomic Solutions was acquired and you know merged etc, you expected it to be around 4 to 6 cents accretive in '03, kind of within that range has it kind of been better than that? Worst than that - how has that gone as you look back now?

It's met our expectations.

So it's --.

So it's in that range.

Within that range. Okay good thank you.

At this time ladies and gentlemen for any questions or comments please key star then one.

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Thank you very much for attending our conference.

Ladies and gentlemen this concludes today's conference call. You may now disconnect your lines and have a great day.