Harvard Bioscience Inc (HBIO) 2003 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2003 Harvard Bioscience earnings conference call.

My name is Annemarie, and I will be your coordinator for today. (OPERATOR INSTRUCTIONS).

I would now like to turn the presentation over to Ms. Sue Luscinski.

Thank you.

Good morning.

This is Sue Luscinski, CFO of Harvard Bioscience.

Thank you for joining us today to discuss our results for the fourth quarter of 2003 and the year.

Chane Graziano, our CEO, and David Green, our President, are also on the call today.

After the Safe Harbor statement, Chane will present an overview of the quarter and the year and the outlook for 2004, and David will discuss business trends and growth initiatives.

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 31st, 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 as of any subsequent day.

Further information regarding forward-looking statements and risk factors is included in the press release we issued yesterday reporting fourth-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 under 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.

Before turning the call over to Chane, let me say that we believe it is useful to present the pro forma results of the Company as well as the GAAP results of the Company as the pro forma results, specifically the pro forma operating results, approximate 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 onetime nonrecurring charges, stock compensation expense, and charges related to acquisitions such as restructuring, required in process research and development expense, amortization of intangibles, fair value adjustments of inventory and backlog acquired all net of tax.

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

Due to the timing of the acquisitions of BioRobotics in September and Hoefer in November, a tabular reconciliation of pro forma guidance to comparable GAAP measures is not accessible as the purchase price allocations of these acquisitions has not been completed.

Therefore, we are not able to predict the impact of the associated acquisition-related expenses on any 2004 estimated GAAP earnings per share.

Chane's and David's comments today will be made in reference to the pro forma format issued in our earnings press release for the fourth quarter and the full year, as well as for 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. 2003 was a very good year for HPIO.

This good performance despite a difficult economic environment once again validates our strategy of internal development of new products and strategic alliances to drive organic growth, coupled with strategic acquisitions of complementary product lines to enable us to grow earnings and revenues much faster than the market.

Although organic growth was relatively flat for the year in 2003, we did see double-digit growth in our Harvard Apparatus ADMET business in Q4.

The other drivers of our growth in 2003 and in Q4 were the full-year impact of the Genomic Solutions acquisition, which we concluded in Q4 of 2002 and the acquisitions of GeneMachines, BTX, BioRobotics and Hoefer product lines throughout the year.

Q4 was also significantly impacted by the strong seasonality increase of the capital equipment market.

In 2003, despite the weak market conditions, good execution of our strategy enabled us to grow revenues by 52 percent, pro forma operating income by 60 percent, and pro forma earnings per share by 30 percent.

Since 1997 the first full year this team has managed its BIO, by implementing this strategy, we have grown revenues and performance EPS at a compounded annual rate of 40 percent and 24 percent respectively.

Our goal is to continue this trend in 2004.

The expected major drivers of our growth in 2004 will be the launch of the new Harvard Apparatus 1100 page catalog in March, the introduction of new BTX (inaudible) products, the launch of our new MIAS high-content screening product line, a stronger economic environment enabling an increase in organic growth in our core products, and full-year impact of acquisitions we made throughout 2003, and last but not least additional strategic acquisitions we expect to make in 2004.

Without any additional acquisitions, we expect 2004 revenue to be in the $105 to $110 million range and pro forma EPS in the 31 to 33 cents per share range.

Clearly we intend to make additional acquisitions, which gives us added confidence in achieving this forecast despite continued economic uncertainty.

In view of the strong seasonality of the capital equipment market and the impact of acquisitions, we expect our 2004 earnings to follow a similar pattern to 2003. 19 to 20 percent in Q1, 23 to 24 percent in Q2 and Q3 and 32 to 35 percent in Q4.

Although in Q1 of 2004, we expect revenues to be in the $21 to $22 million range, we are guiding pro forma EPS to be flat with last year due to onetime costs associated with several organizational changes around the world and the additional costs associated with Sarbanes-Oxley compliance efforts.

In order to maintain our strong operating metrics, we continually look at areas to improve, and in Q1, we have implemented several organizational changes to better leverage our infrastructure and distribution channels.

These organizational changes include consolidating some of the functions at our Warner operation in Connecticut into Holliston, Massachusetts facility, consolidating some job functions at our Biochrom, UK facility, and closing down the Genomic Solutions sales office in Japan and using the current distributor as the distribution channel instead.

These changes will result in one-off charges of severance and related costs, but will reduce our cost structure going forward.

These costs, along with the costs we are incurring for Sarbanes-Oxley compliance, will have approximately 1 cent per share negative impact in Q1 on pro forma EPS.

This is reflected in our full-year guidance above.

That concludes my comments this morning.

Now we will turn the call over to David Green.

In a moment, I will highlight some of the recent drivers of our growth, but first let me comment on some of the trends we saw in both Q4 and throughout 2003.

Throughout 2003, we saw signs of a modest recovery in demand for our products.

In particular, the Harvard Apparatus ADMET business had strong year-on-year growth with better than 18 percent growth in the fourth quarter over last year and ending the year 4 percent up overall.

The Biochrom molecular biology business primarily distributed to Amersham Biosciences showed about 10 percent growth over Q4 last year and about 3 percent after the year.

In addition, the Hoefer business, which I will describe in more detail in a moment, which we acquired in November, made a positive contribution to pro forma earnings in the quarter as we anticipated it would at the time of the acquisition.

The capital equipment business in Union Biometrica turned in modest growth.

It is not possible to give a meaningful assessment of growth at Genomic Solutions in Q4 as we acquired the business in the middle of Q4 2002.

However, for the year, revenue for Genomic Solutions, excluding the acquisitions we made during the year, were in line with our original expectations, and Genomic Solutions made a significant contribution to earnings per share.

In terms of end-user market, spending by pharmaceutical and academic customers was stable in Q4 with spending from biotech companies increased over Q3 levels.

Geographically our ADMET business showed the best strength in the U.S. and Canada with modest improvement in Europe.

Capital equipment was relatively strong in Europe.

Let me now turn to recent drivers of growth.

As Chane mentioned, it is our three-part grow strategy of innovation, acquisition and partnership that has driven both our revenue and earnings growth now for seven years.

We continue to invent new products, often in paid partnerships with major pharmaceutical companies.

We continue to acquire complementary products that leverage our existing brands and distribution channels, and we continue to partner with others for product and application development and additional distribution.

First, innovation.

In December, we delivered as expected the first unit of our MIAS microscope image automation system to the original major pharmaceutical company that we partnered with to develop it.

We are already developing further high-content screening applications on the MIAS platform for this customer.

In addition to delivering this first system, we have already taken orders of multiple service systems from other customers.

We believe that our MIAS platform is very well positioned to take advantage of the trend in high throughput screening to obtain more information and, in particular, more biologically relevant information in compound lively screens.

Only a few years ago, compound lively screens were primarily looking for simple chemical binding events such as the swing between a potential drug and its protein target with the protein isolated from the cell in which the protein naturally occurs.

More recently, screening has moved to looking for the binding event between the potential drug and the protein target with the proteins still in its natural cellular environment.

This is often called cell-based screening.

However, the assay was typically still weeding out whether or not the potential drug bound to the protein.

It does not tell you if the binding had any effect upon the cell.

In high-content screening, photographs of the cells were taken, and multiple data points such as sell size, shape, color, texture and the location and intensity of expression of specific genes or proteins are all collected simultaneously.

A major part of the MIAS product is the software algorithm that extracts the biologically relevant information from the raw images.

This information is typically what effect the drug had on the sale.

For example, did it prevent cell growth, rather than did the drug simply bind to its target?

We believe our MIAS product is well-positioned to take advantage of this trend of high-content screening.

However, investors should bear in mind that this system is very expensive -- up to $500,000 -- and is as yet unproven.

Therefore, revenues for the product line could vary substantially from quarter to quarter.

We have included only a small number of sales of these instruments in our revenue guidance.

Second, acquisitions.

In November, we completed the acquisition of the Hoefer one dimensional electro recess product line to Amersham Biosciences.

Hoefer is a very well-respected brand-name in electric recess that became redundant to Amersham as Amersham thought to apply the Amersham brand across all of its product.

We will continue to distribute these products through Amersham under the Amersham name, while simultaneously establishing a new catalog distribution channel directly to end-user scientists under the Hoefer name.

This process is already underway with the Hoefer product included in the new Harvard apparatus catalog being distributed this month and the launch of a new Hoefer catalog at the Pitcon (ph) Tradeshow also this month.

This rejuvenation strategy closely parallels the strategy we implemented with the Harvard Apparatus business when we acquired it in 1996.

In 1996, Harvard Apparatus had a run-rate of revenue of roughly 8 to 9 million, and in 2003, through the execution of our innovation, acquisition and partnership strategy, it did nearly 30 million in revenue.

The environment for acquisitions remains attractive, and we continue to evaluate several opportunities.

Third, partnerships.

We could not have made the Hoefer deal work if it were not for the long-term partnership we have built at Amersham Biosciences.

What started in 1999 with the acquisition of the Biochrom business and the distribution agreement has evolved to the point where we share intellectual property and jointly develop new products across a range of molecular biology applications.

Also on the partnership front, we are currently working with collaborators to develop new applications on our COPAS platform to use with stem cells and drug discovery research and pancreatic eyelid cells in the treatment of Type 1 diabetes.

That completes my comments on trends and growth drivers, and we will now open the call for any questions.

(OPERATOR INSTRUCTIONS).

Cynthia Davis.

Congratulations on a good quarter.

I actually just had a question, a little bit of housekeeping clarity on the breakout in the segment.

I know that year-over-year comparisons are difficult because you have been buying so many businesses, but I was wondering if you might be able to give a bit more of a breakdown by the end of the year, which were the areas that you had really been growing into or the relative share of your market and then perhaps an idea of margins in the different areas and then where you thought that was going in the future or as much of that question as you can possibly answer.

Well, that is a very long question, but let's see if we can touch on some of those pieces.

Both in the press release last night and what we just discussed we did touch on the organic growth rates for both the Harvard Apparatus business, around 18 percent in the fourth quarter, about 4 percent for the year; the Biochrom business, around 10 percent for the year, about 3 percent -- I am sorry, 7 percent for the quarter, around 3 percent for the year.

The Union Biometrica business was very modest growth overall and the one we really cannot give a number for that has any meaning to it is Genomic Solutions because we only owned it for part of the quarter.

And the growth I am talking about in Genomic Solutions is only the business we acquired.

We obviously added to that business throughout that year with the acquisitions of BioRobotics and GeneMachines.

Excluding those, the Genomic Solutions business for the year of 2004 came in very close to what our original expectations were for the business in terms of revenues, and it made a substantial contribution to our earnings per share in 2003.

So I think that answers a chunk of your question, but I think you were asking some other things on top.

What were those things?

More, I guess, of an estimated mix going forward.

So I see you are moving a little bit more away from the catalog being your primary sales generator to a lot of these other areas, and I was just wondering if you could talk a bit of the margins in the different areas and how you saw your product mix moving and maybe also if you could touch on it -- you know the areas that you were looking for acquisitions?

All right.

The mix going forward for 2004 roughly is about a third, a third and a third between the Harvard Apparatus business, which is primarily for ADMET application, which is primarily the catalog business.

About a third for the capital equipment business and about a third for the molecular biology business, which as I mentioned because we now have the Hoefer business under the molecular biology business, as well as the Biochrom business, within that group some of that business will start to shift toward the catalog distribution from primarily a distributor, a distributed product line, the major distributor there, of course, being Amersham.

Which would net you better revenues on that segment I would guess if you can do it through a catalog?

Certainly if you move one box from a distributor channel to an end-user, obviously you get a pickup in revenue.

But, of course, you are getting a pickup in sales and marketing expenses, too.

So the impact on gross margin is actually more significant than it is on operating margin.

So the operating margin across it -- the differences in operating margins across those businesses is a lot smaller than the differences in gross margin across those businesses.

So the mix between the businesses tends to affect gross margin a lot more than affect operating margins.

So I hope that addresses your margin question as well.

That does.

And in terms of acquisitions, we cannot talk about anything in particular, but we expect to continue doing acquisitions very similar to the kinds of acquisitions we have done in the past, which is largely the acquisition of product lines that are complementary to product lines that we are already selling.

That could be in the capital equipment area, it could be in the mid-price distributed products area, and it could be in the lower priced apparatus products as well.

Okay.

That is great.

Thank you very much.

Paul Knight.

Good morning.

Your internal growth seems to have improved in the fourth quarter.

Could you go over what you were seeing as the quarter wrapped up, and are you giving any color as to what you are seeing in Q1 versus are markets better than they were in the last year or two?

This is Chane.

I think that we did see a strengthening in the marketplace in Q4.

We saw some pickup in Q3.

Q4, though, I believe there was a lot of year-end spending on the capital side.

So it was more seasonal I think than a real vibrant market.

We are seeing a first quarter market with some strengthening, but not nearly as strong as the end of the year.

What will you have at Pitcon (ph) next week, David?

We will have -- this is Chane, again -- we will have -- Harvard will be better basically with the products that we distribute on an OEM basis.

We will also have -- Biochrom will have a booth there, and those will be the two main areas that we will be exhibiting.

Genomic Solutions will not be there.

Okay.

When does your Amersham distribution agreement need renewal?

There are actually two Amersham distribution agreements now.

There is one for the Hoefer 1B product.

There is one for the Biochrom spectrometer product.

The Hoefer one has a minimum period of five years, and it could go longer than that, substantially longer than that.

The Biochrom one is renewable every three years, although it extends automatically in that termination that it was given, which is an 18 month termination period.

And that was last renewed I think about 2002?

I think about the middle of that.

I am sorry.

When did the Hoefer agreement start, David?

With the acquisition, which is November of last year.

Okay.

Thank you.

Cynthia Davis.

I actually had just one quick follow-up question.

I was looking through the press release and I came to 12.7 million in debt around by the end of the year.

Is that both correct, or am I often like kind of adding?

Did I miss something?

That is correct.

Okay.

Great.

Thank you.

(OPERATOR INSTRUCTIONS).

John Sullivan.

Hey, guys.

Good morning.

I just wanted to understand a little bit better the type of capital equipment items that you were seeing better business flow in toward the end of the year.

Could you just give me a little more detail on that?

Specifically screening products or proteomic products or both?

Screening and genomics products really.

The proteomics market has continued to be a lager.

I think part of what we are seeing there on the proteomics side, John, is that, as you probably know, there was a substantial overbuilding of proteomic capacity over the last couple of years that people got a bit carried away with proteomics.

There is actually now a substantial number of high-end mass-spec units coming back onto the market as secondhand instruments.

I think what that has done it has sort of put off the need for a lot of the tools that we sell for proteomics, which are really productivity tools for mass-spec.

And so I think we started sort of disproportionally in the proteomics area.

As Chane mentioned, we have actually seen a lot of strength in the genomics products.

Does that include the arrayers?

Yes, it does.

Okay.

Terrific.

Thank you.

(OPERATOR INSTRUCTIONS).

No further questions?

I am not showing any other further questions.

Thanks everyone for attending our conference this morning.

Thanks, goodbye.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.