Harvard Bioscience Inc (HBIO) 2004 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Harvard Bioscience Inc., Q1 2004 earnings conference call. My name is Rachel and I'll be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question and answer session towards the end of today's conference. If at any time during the call you do require assistance, please key star followed by zero and a coordinator will be happy to assist you. As a reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Miss Susan Luscinski, Chief Financial Officer. Please proceed ma'am.

Thank you and good evening. Thank you for joining us today to discuss our results for the first quarter of 2004. Chane Graziano our CEO and David Green our President are also on the call today. For those of you who haven't yet received our earnings release, it crossed the wires a bit late at 5:54 due to a logistical problem at the wire service. After the Safe Harbor statement Chane will present an overview of the quarter and the balance of 2004, from a pro forma operating perspective. David will then provide an update on the business developments and growth initiatives of the company.

In our discussion today we may make statements about our future expectations, plans and prospects to constitute forward-looking statements under the Safe Harbor provisions of the Private securities Litigation Reform Act of 1995. Our actual results may vary 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, 2003 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 day. Further information regarding forward-looking statements and risk factors is included in the press release we issued earlier 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 on 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. Chane?

Thank you Sue. Good evening everyone and thank you for joining our call tonight. We are extremely disappointed with our Q1 2004 results. Most of our product lines did well, or even exceeded expectations for the quarter, however, our genomics, proteomics and high throughput screening products delivered far less operating margin than we had expected. We are in the process of defining the actions necessary to enable these product lines to meet our growth and profitability objectives going forward. We expect to implement this action plan in 2nd quarter.

In contrast to our genomics, proteomics and high throughput screening products, our ADMET and molecular biology products delivered strong results for the quarter. Revenues for our ADMET product lines primarily sold through the Harvard Apparatus catalogue grew by 15% year-on-year with improved operating metrics driven by improved gross margins and reduced expenses as a percent of revenue.

Of the 15% revenue growth, approximately 9% was from the impact of acquisitions and 6% was organic. Revenues for our molecular biology product lines primarily sold through the distributors like Amersham Biosciences, grew by 46% year-over-year with strong operating metrics.

The growth in revenues was primarily driven by the acquisition of the Hoefer Electrophoresis products in Q4 2003. Excluding the acquisition of Hoefer, organic growth was approximately 5%. Revenues and margins for our genomics, proteomics and high throughput screening products primarily sold through our Genomics Solutions distribution channel were a major disappointment. Revenues in these products were down $600,000 on a year-to-year basis, and approximately 2m from expectations. This shortfall in sales volume was compounded by a geographical mix, customer mix, and product mix, that had significant adverse impact on gross margins in the quarter.

As a result, operating margins on these products was down significantly on a year-over-year basis. The overall market for genomics and proteomics products appears soft with orders for these products particularly weak in the US and Japan. We did not experience any significant loss of potential orders due to competition, however we did experience some delays in spending. These delays in spending were in part caused by the late implementation of the NIH budget in the USA, the change in funding arrangements for Japanese universities and certain pharmaceutical companies delaying capital spending in the first quarter.

Going forward we believe that it is essential to build our plan on current order rates, and therefore we believe we will need to take additional actions to improve operating margins on these product lines. We are currently developing this action plan and expect to implement the necessary changes in Q2. Our goal is to get these product lines back to contributing 10%-12% pro forma operating margins in Q3 and Q4. Long-term we expect these product lines to deliver 15%-20% pro forma operating margins. Any costs associated with this action plan will likely have an impact on Q2 earnings.

With reduced revenue expectations for these product lines, we are now expecting our total revenues without further acquisitions to be in the range of 100 - $105m. While we expect to return the genomics, proteomics and high throughput screening products to profitability in Q3 and Q4, the operating loss from first quarter and possible loss for the second quarter will create a substantial drag on earnings for the year. We now expect pro forma earnings per share for 2004 to be in the range of $0.22 - $0.24.

That concludes my comments. Now I'll turn it over to David.

Thank you Chane. We're clearly disappointed with our Q1 results. This is a setback for us, but we believe it is a recoverable situation. In a way it actually illustrates the robust nature of our strategy to pursue the broad product line that does not focus on a single technology. Despite this setback, we're still profitable and in fact more profitable than many other [inaudible] drug discovery companies, even some that are considerably larger than us. Our three-part strategy of innovation, acquisition and partnerships that we've been pursuing now for 8 years, has been the key to our success. 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' products and applications, development and additional distribution.

Let me highlight some recent developments in all three categories. First innovation. This quarter we began shipments of our 25-well place, high throughput electroporation systems. This summer we expect to launch the 96-well version of this instrument. This product has been very well received by the beta test users. This quote from one of the early customers at a major biotech company gives you a sense of the enthusiasm for this new product. "I think the new system is absolutely wonderful. After getting through the learning curve of using it, which was a very shallow one, I've gotten consistent results every time I've used it. The time it saves me is invaluable. It cuts the time of a 48-well single [cubit] experiment at least in half. The system is also very easy to use. I really cannot thank you enough for seeing this project through to where it is now. I had so many electroporation experiments on my slate in the last month or so, I would have really been struggling to complete them without the new system."

Acquisition. In March we completed the acquisition of KD Scientific. KDS makes syringe pumps that complement the pumps sold under the Harvard Apparatus name. The KDS business has been consolidated into our Holliston, Massachusetts facility. This consolidation has gone well, and we were taking orders, manufacturing and shipping the KDS products within days of the close of the transaction. When we announced the transaction we said we believed it would be immediately accretive to pro forma Earnings Per Share and indeed it was. The environment for acquisitions remains attractive, and we continue to evaluate several opportunities.

Partnerships. Earlier this week we announced the successful conclusion of our partnership with the automation partnership, or TAP [ph], for the integration of our breakthrough MIAS automated microscopy platform, is the taps innovative Cello System for fully automated cell culture. As high throughput screening has moved from molecular based tests to tests on living cells, cell culture has become a major bottleneck. Cello addresses this new bottleneck by completely automating the cell culture and clone selection process. Cello can culture multiple cell lines in parallel throughout all stages of their life cycle from seeding, through expansion and sub-cloning. TAP [ph] is a world leading supplier of high end automation systems for pharmaceutical applications. After a thorough market analysis, TAP [ph] shows the MIAS platform as a reader for the Cello System. The MIAS platform is the only one able to provide the optimum combination of flexibility, system availability and imaging and analysis quality to meet TAP's [ph] demanding specifications.

TAP's adoption of the MIAS platform is another endorsement of the strength of this technology. MIAS was originally developed in a funded partnership between us and Johnson and Johnson. We continue to develop applications on the MIAS platform with J&J. We are developing further applications in funded partnerships with a public biotech company and a consortium of European researchers. We believe the future is very bright for integrated solutions like Cello and for high content screening using the MIAS platform.

The guidance that Chane gave earlier excludes the impact of any further acquisitions and assumes only a very modest contribution to 2004 from both the high throughput electroporation product and the MIAS automated microscopy platform I just referred to. That concludes my remarks and I'll now open the call for any questions.

Thank you. Ladies and gentlemen, if you do wish to ask a question at this time please key star followed by one on your touchtone telephone. If your question has been answered or you do wish to withdraw your question, please press start followed by two. Questions will be taken in the order received. Please press star one to begin. We'll hold for a moment while we collect these questions. Your first question comes from Paul Knight of Thomas Weisel.

A couple of questions. Chane, your guidance is 21 - 24.

Twenty-two to twenty-four I believe.

Does that include amortization, is that your pro forma guidance?

That's pro forma guidance, yes.

The other question is on kind of whatever, page 3 on your press release. You're talking about for -- included in the first quarter of '04 were charges of approximately 360,000 for Genomic Solutions restructuring.

Right.

What is that in cents per share, was that in the results you put out tonight, does your pro forma $0.03 exclude that charge?

No, it does not.

Okay. What's your normalized -- what was your tax rate in the quarter?

Somewhere in the 35% - 36% range.

Are you done with charges? Are you going to see more charges in the second quarter?

I believe there will be some charges, Paul, because one of the issues that we need to resolve is some of the margin surprise that showed up and therefore we may end up doing some consolidation which, in that case we would take an additional hit.

Okay.

This is David. Let me just make sure we're clear about something. The $360,000 charge in Q1 was primarily related to closing down the Genomics Solutions KK, which was the Japanese wholly owned subsidiary which we replaced with a distributor in Japan. So, that charge is for actions that have already been taken. What Chane was referring to as a possible charge in the second quarter is related to dealing with the issues of having this surprising very low gross margin in the first quarter in Genomic Solutions. So there are really two separate things.

COPAS-COPAS was put into what business?

COPAS is still part of the instrument business.

Is it part of ADMET, Molecular Biology or Genomics?

It's Genomics. Part of the Genomics.

What's happening in COPAS?

Pretty steady as it has been in the past. As you know we structured this thing to break even, and it's in that vicinity. It is continuing to gain some traction in the marketplace, and there are more and more publications, it's just a very, very slow process.

Now, do you think the genomics, proteomics and high throughput screening area is being negatively impacted by-put it this way-your micro array business, how was that in the quarter?

Well, within the three product lines of genomics, proteomics and high throughput screening, it was all weaker than we expected. However, within there, the brighter spots were actually within the high throughput screening area and the weaker spots were in the micro arraying area.

Do you think people are moving from cell spotting into maybe having firms like ABI, Agilent take, using that product instead of cell spotting?

We've not seen any customers identifying that as an issue. As we mentioned earlier, we've not seen losses of orders to competition. What we have seen and what we did see in the first quarter was orders that were delayed that we were expecting to pick up in the first quarter that we did not get in the first quarter. And that was a major impact on those product lines for Q1.

What's your revenue guidance for Q2?

We didn't give any guidance in our press release.

Okay, thanks.

Thank you sir. Ladies and gentlemen again it is star one to ask a question. We'll pause for just a moment to see if there are any more questions. We have a follow-up question from Paul Knight.

Okay, I'll take it over again. Can we talk, could you go through again genomics, proteomics, high throughput screening, what happened. You had a 9.6m Q4, that rolled into 5.9 in well, 5.9 in Q1. Why -- can you go over that drop again, Chane?

Well, there's a couple of things. First of all, seasonalization [sic] Paul. We would expect about 20% of the revenues to come in the first quarter and 30% to come in the fourth quarter. So that is a significant piece of it. I think that one of the major issues that happened to us is, as we made the acquisition of GeneMachines and BioRobotics, one of the things we did is we cannibalized one business from another and we didn't sustain the revenues that were there. It didn't go to anybody, to be honest with you. The university market continues to do their own spotting. The pharmaceutical traditionally has not, so that's the dynamic that's going on. To be honest with you we saw a lot of delays, and if you look at April, particularly in the US which was very soft, and in Japan, we're off to a good start. So, we're maybe being over cautious but fundamentally we believe in running a very profitable business. Last year Genomic Solutions contributed significant to our profits, maybe 30%, and the first quarter was a huge surprise, and we're going to fix it, so we don't have any more surprises to unfold. And I think that's the fundamentals. I don't think there's a market issue per se. There were some delays. Our biggest, a couple of our biggest territories in the US for instance last year, were very, very soft in 1Q, but in the second quarter some of the orders that they expected to come in 1Q have already come in in April. So, I'm optimistic, but cautious.

The currency, was that a cash hit on the income statement, the currency hit?

I'm sorry, I'm not sure what you mean by-

You mentioned in your press release you had $143,000 of currency expense in the first quarter of '04.

That is primarily because of the debt among our subsidiaries. So, it really isn't a cash hit.

It's not like it's interest, Paul if that's what you're getting at. It's not like we're paying money to a bank.

So it's a non-cash, non-taxed hit.

That's correct.

Okay, thanks.

Again ladies and gentlemen if you do have any further questions at this time please key star one on your touchtone telephone. Ladies and gentlemen there are no further questions. I'd like to turn it back to you for any closing remarks.

Thanks everybody for joining us tonight. Again, we're not very proud of the results but we're very confident that things will be back on track in the second half of the year. Thank you.

Ladies and gentlemen this does conclude your presentation, thank you for your participation in today's conference. You may now disconnect your lines.