Harvard Bioscience Inc (HBIO) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2004 Harvard Bioscience, Inc. earnings conference call.

My name is Bill and I will be your host for the call 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 this conference. (OPERATOR INSTRUCTIONS) I would now like to turn the presentation over to your host for today's call, Ms. Sue Luscinski, Chief Financial Officer.

Please precede, ma'am.

Thank you.

Good morning.

This is Sue Luscinski, CFO of Harvard Bioscience.

Thank you for joining us today to discuss our results for the second quarter of 2004.

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 balance of 2004 from a pro forma operating perspective.

David will then provide an update on the actual plan implemented at Genomic Solutions.

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, 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 last night reporting second-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 -- is available and will be archived on the investor relations section of our website.

Look on the investor relations spot and then click on the press release or website icon as appropriate.

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

Chane?

Good morning, everyone, and thank you for joining our call today.

Harvard Bioscience has a long track record of pro forma for profitability and growth.

The majority of our product lines continue to provide profitability and growth.

However, in the first half of this year our Genomic Solutions product lines produced disappointing results that have dragged down our overall growth and profitability so far this year.

We have made significant changes in managing this business that we believe address the root causes of the disappointing results, and which we believe will return this business to profitability and growth.

We believe this will enable Harvard Bioscience to return to its historical growth trend in pro forma EPS.

Although revenues of 44.6 million are up 7 percent for the six months ended June 30, 2004 versus the same period last year, pro forma operating income for the six months ended June 30, 2004 of 3.3 million is down 2.2 million versus last year.

And pro forma EPS for the six months ended June 30, 2004 of 6 cents is down 5 cents per share versus the same period last year.

The low growth in revenues and decline in pro forma operating income and pro forma EPS is primarily due to the weak performance of Genomic Solutions.

For the six-month period ending June 30, 2004, revenues for Genomic Solutions' products of 11.5 million are down 3.3 million, or 22 percent, versus the same period last year.

The pro forma operating loss from these products of 1.5 million for the six months ending June 30, 2004, versus the 2.2 million pro forma operating profit for the same period last year, translates to a $3.7 million negative change in pro forma operating profit on a year-to-year basis, resulting in a 7 cents negative impact on pro forma earnings per share.

In an effort to reverse this trend and get revenues, pro forma operating income and pro forma EPS in Genomic Solutions' product lines back on track to historical trends, we have implemented a significant restructuring and reorganization in the G&A, manufacturing, R&D and sales and marketing of these products.

Q2 was a transition quarter for us as we implemented these changes.

This restructuring will reduce operating costs by 3.6 million on an annualized basis, or approximately 77 cents per diluted share net of tax.

We believe this restructured reorganization will bring these product lines back to historical levels of profitability on the current run rate of revenues.

David will give further detail on this in a moment.

Although we won't get complete impact of these savings until Q1 2005, we expect the second half of 2004 to be significantly better than the first half.

Therefore, we are maintaining our HBIO pro forma earnings guidance of 22 to 24 cents per diluted share for 2004.

This pro forma EPS guidance includes approximately 500,000, or roughly 1 cent per diluted share net of tax, in restructuring costs.

We are expecting pro forma EPS to be in the range of 5 to 7 cents per diluted share for Q3 and in the range of 9 to 11 cents per diluted share for Q4.

Based on our current run rate of revenues in Genomic Solutions' product lines, we are reducing our revenue guidance for HBIO to 97 to 100 million for 2004.

In view of the actions taken to improve the performance of Genomic Solutions, coupled with the fact that the restructuring costs and transition costs incurred in 2004 results will not recur in 2005, we expect to achieve substantially improved pro forma net income per share in 2005 versus 2004.

David will now discuss the results of Genomic Solutions in the first half, and the changes we have implemented to address them.

David.

Thank you, Chane.

The disappointing results of Genomic Solutions were driven by lower-than-expected revenues, combined with lower-than-expected gross margins.

First, let me address the cause of the lower-than-expected revenues, the solutions we have implemented to get revenues growing again, and the already measurable results of these actions.

The revenues were lower than expected mainly, we believe, because we lacked focus on individual product lines in Genomic Solutions.

The lack of focus was caused by a matrix organization structure that had no clear personal responsibility to individual product lines.

This led to us not being able to sustain the revenues on the product lines we acquired from GeneMachines and BioRobotics, and furthermore defocused our sales and marketing organization from our Cartesian high throughput screening and investigative for the (indiscernible) product lines as well.

We believe we have addressed this problem by eliminating the matrix structure and replacing it with two business units -- one for the high throughput screening products and one for genomics and proteomics products.

These two business units, now operated under separate general managers, have full control over their own technologies and have dedicated sales, marketing, manufacturing and R&D resources.

In addition to the reorganization, we have added sales specialists to focus on our Cartesian high throughput screening product line and have added a U.S. manager to focus on our investigative proteomics products.

We're in the process of adding dedicated marketing resources to be responsible for each of the genomics and proteomics product lines.

These actions have already led to a significant strengthening or our order pipeline for Q3 and Q4.

Now, let me address the causes of the lower-than-expected gross margins, the solutions we have implemented to improve margins and the already measurable results of these actions.

The gross margins were lower than expected for two main reasons.

First, on the lowered level of revenues I just described, we had excess infrastructure, primarily in G&A and manufacturing.

This excess infrastructure led to unabsorbed factory overhead and lower-than-expected gross margins.

We believe we have addressed this problem by closing one of our three Genomic Solutions factories and reducing the number of employees by 24 percent.

Specifically, we will close our San Carlos, California production site, which produced GeneMachines' genomic products, and moved production to other locations, primarily Huntington (ph) in the UK, where we make similar products, including the BioRobotics' genomics products and the investigative proteomics products.

This transition is already underway, and we expect to see completed in Q4 when our San Carlos lease runs out.

This factor closing, together with other smaller work force reductions at our Irvine, California factory, which produces our Cartesian high throughput screening product, reduces the total number of employees at Genomic Solutions from 151 to 115.

Some of these employees are continuing for a transition period while we relocate production.

When fully implemented, this restructuring will save approximately $3.6 million per year, or approximately 7 cents per share net of tax.

The cost savings will result in improved gross margins and reduced operating expenses.

The second main reason for lower-than-expected gross margins in Q1 was the adverse geographic mix in Q1.

In Q1, we had weak orders in the U.S. and Japan, and relatively strong orders in Europe.

Historically, our highest gross margins have been in the U.S. and Japan; therefore, the weakness in revenues in the U.S. and Japan in Q1 had a significant adverse impact on Q1 gross margin.

The return to a more normal geographic mix in Q2 led to gross margins over 4 percentage points higher than in Q1.

In addition, we have repositioned some of the products, enabling us to increase average prices.

We expect gross margins to continue to improve due to continued improvement in pricing and significant cost savings from the restructuring.

Overall, we believe the restructuring, reorganization and refocusing at Genomic Solutions will return this business to growth in revenues and profitability.

With this restructuring completed, and signs of improving demand, we believe we have laid foundation for a return to our historical growth rate to pro forma earnings per share.

We will now open the call up for any questions.

Thank you very much sir. (OPERATOR INSTRUCTIONS) Stanley Stowav (ph) of Stowav Associates.

I notice you have reduced the number of employees, but you have not mentioned the total number of employees in the Corporation.

If you could answer that first question.

And as a second question, since the genomics industry and proteomics is beginning to mature, how do you add new products that will not compete with the other products that are on the market?

In other words, is there something unique about Harvard Bioscience's products that is not out there?

Let me answer both those questions.

The work force reduction at Genomic Solutions was from 151 employees to 115, or a reduction of 36.

As of the year end of 2003, we had about 454 employees worldwide, so that brings us down to about 430.

In terms of genomics and proteomics' markets maturing, I am not sure that is quite correct.

There are some applications within genomics, such as differential gene expression, that I think is maturing.

But on the proteomics side, I think those applications are really just starting to get going.

And in particular, one of the most promising areas of application for the GeneMachines and BioRobotics arraying products is the production of protein microarrays rather than DNA microarrays.

That is an area where I think we have substantial advantages to (ph) the Affymetrix platform, which is very strong in the DNA expression field, and an area where we expect to see significant growth going forward.

Are those unique products that cannot be in competition with other companies?

We don't have any patent protection on those particular products, but in the market for microarrayers, we believe we have by far the broadest product line of any competitor out there.

Most of our competitors in that field are significantly smaller than we are.

Okay.

Thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS) Matt Arens of Kopp Investment Advisors.

Two questions here.

First, let me ask -- thank you for going through the detail on the problems at Genomic Solutions.

And I know a hindsight is 20/20, but listening to the issues there, it just seems like maybe they could have been and should have been detected before it got to the point where they have disrupted results so much.

Can you speak a little bit to why these came as a surprise to you and have impacted the results the way that they have?

Sure.

Let me just talk about it.

If you go back and look at Q3, Q4 of last year, Genomic Solutions actually turned in very strong results in the fourth quarter of last year and substantial operating margin.

We actually increased backlog and we went into the first quarter with what looked like a very strong position.

When we finished the first quarter -- and the first thing we do is collect the revenues for the quarter, we actually were over the estimate for the street consensus and our own guidance.

So it was only after we got the gross margin results, which were a few days later from that, that we started to realize it was really a problem.

So, it would be nice to have 20/20 hindsight to say, yes, we could have seen all this coming.

But I think the reality is even after the quarter closed, it was some time before we realized the depth of the problem caused by what I have just laid out -- primarily the underabsorption of factory overhead and the adverse geographic mix in the first quarter.

Okay.

The other question that I had is, we're certainly seeing it at different rates and it is not without its exceptions, but there is a recovery going on in spending in the general area where you guys participate.

With these setbacks, it seems like maybe we are missing the first couple of innings of the game.

Do you feel that you can get these changes in place, and really make -- put the company in a position where you can take advantage of what hopefully will be a strong cyclical turn here?

I think so.

If you look at results elsewhere in the business during the quarter, our Union Biometrica product lines, which are primarily the other capital equipment product lines that we do sell, did very well in the quarter compared to Q2 prior-year.

So, I think we are already starting to see some improvement in demand, which has been widely reported elsewhere, although it is not uniform.

I am sure you know that some of the Mass (indiscernible) companies turned in very disappointing results in Q2.

So, it is certainly not as widespread as it was, say, three or four years ago, but there is no doubt that we are seeing the same kind of trends that other people have reported, which is overall strengthening in demand.

Last question for you.

While we have had parts of the business working here over the last couple of years, and we certainly have been through a more difficult environment, it seems that there is usually or always one area that is particularly struggling, and oftentimes that has come from recent acquisitions, whether it is the disappointments of COPAS, or now with Genomic Solutions.

Does this make you question the overall strategy of rolling these pieces up, with the concern now that it seems that you are firing on a couple of cylinders, a couple are misfiring because of having all of these different pieces hitting at the same time, it makes the business more difficult to predict rather than less difficult.

It seems that that has been the case here over the last couple of years.

I am wondering if that has made you question the strategy.

Well, I certainly think it is made us go and take a hard look at the strategy, but I think when you go and take a hard look at the strategy, you come away saying that it really is a very robust strategy for growth.

The combination of innovation, acquisition of partnership is what has driven our revenues to a compound annual growth rate of 40 percent up to the end of 2003, and earnings per share of 24 percent.

I think that is a record of which we're very justifiably proud.

I think the ones that have gone wrong, I think have gone wrong for very different reasons.

I think COPAS was we overestimated how quickly that product would be adopted inside the community.

But it is still a very strong product line.

As I mentioned, it showed very nice growth in Q2 versus last Q2.

It's definitely been slower to take off than we originally expected, but the new applications they have been focusing on their, outside model organisms, particularly stem-cell applications, are one of the main reasons why we are seeing a growing pipeline across that product line.

On Genomic Solutions, I think we described the events that led to the shortfall in Q1.

Yes, it took place at a company that we acquired.

But, I don't think it is because of the acquisition.

I don't think you can conclude from that that the overall acquisition strategy is bad.

I also think you have to look at the three main platforms you have in place today.

We have very liberally gone out there and put together an apparatus platform under the Harvard Apparatus name; primarily a distributor platform under the Biochrom and Hoefer names; and primarily a capital equipment platform under the Genomic Solutions and Union Biometrica names.

So we feel like we've got the three main platforms we need with the three main distribution channels we need to support our strategy of having a broad product line in life science tools.

Most of the recent acquisitions we have made have been what we call tuck-under acquisitions -- tuckundered into one of those three platforms.

All those tuck-under acquisitions that we have done over the last couple of years, I think literally every single one was immediately accretive to earnings per share.

So I think it's very important to dissect the overall acquisition strategy and take away what works and what doesn't work.

The fact is we've got three platforms we want now, and we haven't really talked about the acquisition environment on this call, but I can say that the environment for acquisitions remains as attractive as it always has been, particularly for these tuck-under type acquisitions.

Does that answer your question?

Yes, that's helpful.

I will drop off in case anyone else has any questions and then come back with a couple more.

Okay.

Daniel Gelevecan (ph) of Julius Baer.

Hello.

Can you give a bit more flesh on your biggest client, Amersham, especially, how it's going to develop in your view with the new ownership of General Electric?

Sure, I can make a couple of comments on that.

General Electric, when they first announced the acquisition of Amersham, stated they were very clearly committed to Amersham as a platform for growth, both on the clinical slide, where I think there are more synergies with GE's existing business, and on the bio-discovery side, which is the piece that we primarily have our relationship with.

They have made those statements a numbers of time before, during and after the acquisition.

Certainly, the activity that we've seen from them indicates that they really are planning on maintaining the bio-discovery business as a core engine of growth for the overall GE healthcare platform.

So there is no indication from what we have seen that they plan to change that strategy.

Okay.

Thank you.

Second question is can I get a bit more color on your development in your two -- in the capital equipment part of your business and more in the consumable part of your business?

We really don't have very much revenue from consumables.

On the capital equipment side, you always get some service revenue as the (indiscernible) and things like that.

But that can actually be quite a significant source of revenue and earnings in the capital equipment business.

But in terms of traditional, disposable-type consumables, that is a very small part of our revenues; it's probably under about 5 percent.

Does that answer your question?

Yes, thank you very much.

John Sullivan of Leerink Swann.

Good morning.

Could you talk about if there is a shift at the margin among perhaps pharmaceutical industry researchers, if there is a shift at the margin away from gene-based research and toward protein- or cell-based research, what are the product lines at Harvard that are likely to benefit by that shift?

I think firstly you are right, John.

I think there is a shift away from gene-based analysis towards protein- and cell-based analysis.

I think that shift has been going on for quite a long time now, certainly a year or two.

And the places where I think we stand to benefit from that shift are the microarraying platform I mentioned earlier, where I think the growth opportunities there are really more in protein microarrays rather than gene expression microarrays.

And in the protein field, I think the strength of the Affymetrix platform, which has become the dominant platform in the gene field, is rather ill suited to the protein microarray world.

If you want to, I can go into the technical reasons why that is, but it is quite complicated.

But it is far less suited to the protein world than the gene world.

And I think most of the early applications and scientific papers that have been published on protein microarrays have been published on pin-spotted microarrays, and a lot of them have been done using our equipment.

So I think that is one area where we stand to benefit from that overall shift from focus on genes to proteins.

And on the cell level, as I am sure you're aware, in the high throughput screening area, there has been a long-term trend away from biomolecular screening assays towards cell-based assays.

And within that, from fixed, or dead, cell assays to live cell assays.

And that is exactly where the MIAS product is positioned, as part of our Union Biometrica product group, and that is one of the products that did very well in the second quarter.

Also, COPAS is positioned to take advantage of that trend, not in terms of looking at tests or assays on single cells, but in terms of looking at tests or assays on cell clusters.

A nematode worm is essentially a cluster of 100 cells, and that is where COPAS began.

Today, the applications that are really driving the growth there are not so much the model organism-based assays, but the cluster of cells-based assays, including stem-cell clusters, which is a very hot area right now, and also something called pancreatic islet cells, which is actually a clinical application for the treatment of diabetes.

Terrific.

Thanks very much.

Adam Chazan of Pacific Growth Equities.

A quick question.

You haven't provided the granularity just on the three platforms;

I was hoping you could give us an idea as to what the segments each did in the quarter.

Then, I was hoping you might be able to comment on strength of certain end markets, in particular tox, which if you look at the service providers, that market is as good as it's ever been and continues to get better.

I was curious to learn how those trends might be impacting your business and what your impression of those trends might be?

Sure.

Let me comment on the first one about (indiscernible).

Obviously, the overall growth rate for the quarter was essentially negative in terms of organic growth, but there was an acquisition growth in there and overall we were flat.

Genomics Solutions is by far the biggest negative piece, as we have described in detail on the call.

In terms of the rest of the business, the Harvard Apparatus business did okay in the quarter, and that is against a very strong Q2 last year.

The Biochrom business was relatively weak in the quarter following a very strong first quarter.

And as I mentioned, the Union Biometrica business -- and for these purposes, I'm including both the COPAS and the MIAS product lines -- did very well in the quarter.

That's sort of an overview of it.

In terms of tox applications, the piece of our business that benefits primarily from that is the Harvard Apparatus business, and as I mentioned, that business did pretty well in the quarter, particularly when it was up against a very strong comparable quarter in the second quarter of last year.

Does that answer your questions?

Yes, I guess that is fine, David.

Thank you.

Matt Arens of Kopp Investment Advisors.

Kind of to pick up where I left off last time.

I wonder if you could help give us a little more clarity on what discussions are taking place at the management level and at the Board level about the strategy overall, because I know you can cite some different growth numbers of the business, which some of which I know look good.

But the bottom line is that the stock has certainly been a disappointment and that is in no small part to the misses that tend to take place on a somewhat regular basis.

And I'm just wondering if there is high-level discussion about strategy shift, or doing something different that may enable you guys to position the business better, and make your stock more attractive to investors by increasing predictability?

Fundamentally, I think our strategy has not changed.

The discussions that have been taking place is we've had a couple of surprises.

Both of them have been freestanding businesses.

One was when we bought COPAS, which is a freestanding business, and the other was Genomic Solutions.

The other acquisitions where we've made and we've tucked them into either Biochrom or into the Harvard business, they function very well and they have been strong contributors to our earnings going forward.

I think that we will continue to do acquisitions.

We are focused on driving organic growth in each of these businesses as well, and to get it back to the 10, 12 percent range that we originally had in the core business.

We believe that is achievable.

I think the issues that happened in the instrument side of the business is, quite frankly, it has been people-related rather than process-related.

And I think we depended very heavily on the management team and the structure that came with Genomic Solutions once it was restructured to take that business forward.

If you look at what has transpired in Harvard and in Biochrom, when we acquire businesses and tuck it under, we really have a process that we have implemented in order to do that.

There are two main issues when you make an acquisition.

One is you must sustain the revenues of the acquired businesses.

So therefore you cannot take risks to not sustain those.

The second thing is you must be able to make and support the products in the marketplace.

They have to be able to make quality products.

Because we have those processes fairly narrowed down and tightly managed in the Harvard and Biochrom business, the acquisitions there have worked very well.

The Genomic Solutions situation was more people-related, and our process was not as closely implemented as it should have been, quite frankly.

Your earlier question is should we have known that?

The truth is we should have.

We didn't.

We talked about how you would do these things, we worked out a strategy on how they were done.

And they way they were implemented wasn't always a way we agreed with.

Therefore, because the revenues last year continued to grow and we were having a successful year in 2003 and a very strong fourth quarter, we felt comfortable going into this year that it was working.

But as we dug into it, it really -- at the end of the day, when we were surprised in 1Q, it was a big surprise compared to what we thought.

And therefore, I think today we have the changes that we need to make.

And we're going to become more process-focused and apply our resources from a corporate level to make sure that the strategy that is implemented when we do make an acquisition is consistent with what we know works.

And not dependent on the people that are running it will ensure that they implement the process that we know has made the other acquisitions successful.

So the discussion has been at a Board level.

Let's make sure we got it right.

Okay?

But the long-term strategy is the same.

We are not going to go out tomorrow and make any acquisitions that we're going to plug into Genomic Solutions.

Would we make an acquisition to plug into Harvard or Biochrom, where we know how that process works?

Yes, if the opportunity presents itself.

But, we won't go do anything in Genomic Solutions until we are absolutely certain that the changes we have made are bringing us the kind of returns that we believe they will.

Does that help?

That is extremely helpful.

Thank you for that context.

That is really helpful.

One more question if I might.

David, with the stock at these depressed levels, any consideration given to terminating your 10b51 plan.

I think it sends the wrong message to the market having you be a seller at these very depressed levels?

Well, I'm sure you know, Matt, a 10b51 plan is like a fire into gas (ph) kind of strategy.

I have no control over the plan once it's been implemented.

And what is public is trades that are made are obviously reported, and I think if you look at the record, there have been no trades reported.

Okay.

But you do have the ability to terminate the plan?

I think that is right, yes.

I have noted that there haven't been any trades placed on that yet.

But again, with the concern being the stock at these levels, I just think that clearly sends the wrong message to allow trades to go off at these levels.

As I said, no trades have taken place.

Great.

Thank you very much.

(OPERATOR INSTRUCTIONS) Stanley Stowav of Stowav Associates.

Thank you.

I know during 1973 --- 2003, excuse me, there were outstanding loans to executive officers.

I have to assume that they were secured by shares that were HBIO shares, which are secured with shares now of lesser value.

I have two questions.

Are there loans still outstanding to executive officers secured by shares?

And are there any new lawsuits or old lawsuits that have not been settled?

There are no outstanding loans to any executives.

We had three loans, two of which were entered into prior to us going public, and one we acquired when we acquired Genomic Solutions.

All three of those loans have been paid off.

So there is no security -- HBIO stock security in any loans today.

There aren't any loans.

Okay.

Thank you.

That is good news.

Any new lawsuits or any ex-employees start any lawsuits or any other companies?

We regularly report on lawsuit activity, both if lawsuits come up and the status and progress of them, in our quarterly and annual filings.

So you can read all the detail about what is out there.

But there have been no new lawsuits recently.

That is also good news.

Lots of luck in the new quarter.

Thank you very much.

Thank you very much.

Ladies and gentlemen, at this time we have no further questions.

I would like to turn the call back over to the presenters of the call for closing remarks.

Please proceed.

Thank you very much for our second quarter call.

Thank you.

Bye-bye.

Thank you very much, ladies and gentlemen, for your participation in today's call.

This ends the presentation.

You may now disconnect.

Have a good day.