Harvard Bioscience Inc (HBIO) 2004 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2004 Harvard Bioscience Incorporated earnings conference call.

[OPERATOR INSTSRUCTIONS].

I would now like to introduce your host for today's call, Mr. Bryce Chicoyne, CFO.

Mr. Chicoyne, you may begin sir.

Thank you.

Good morning.

This is Bryce Chicoyne, Chief Financial Officer of Harvard Bioscience.

Thank you for joining us today to discuss our third quarter and year-to-date 2004 financial results.

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 an adjusted perspective.

David will then discuss process at Genomic Solutions, and some growth drivers in our business units.

In our discussion today, we may make statements about our future expectations, plans, and prospects that constitute forward-looking statements under the Safe Harbor provision 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, our quarterly report on Form 10-Q for the quarters ended March 31 and June 30 2004 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 estimates of any subsequent day.

Further information regarding forward-looking statements and risk factors, included in this press release we issued last night reporting our third quarter results.

Our earning release and any material, financial, statistical information presented on the call, which is not included in our earnings release is available and will be archived and can be accessed on our web site by clicking the press release button.

A replay of this call will also be archived on our web site by clicking the earnings call icon.

I would now like to turn the call over to Chane.

Thank you, Bryce.

Good morning, everyone.

Although revenues and earnings per share for the third quarter of 2004 were considerably better than first and second quarters, 2004 has been a very disappointing year thus far.

However, I'm still very optimistic about our future for the following reason.

The Life Science market continues to strengthen.

We are seeing strong growth in some of our core product lines, such as animal physiology products, cell biology products, and plate readers.

We're seeing excellent results from the three of our recent acquisitions, BTX, Hoefer and KD Scientific.

And we believe we have taken the necessary steps to return Genomic Solutions subsidiary to profitability on its current run rate of revenue.

We've reduced the cost structure at Genomics Solutions by 3.6 million on an annualized basis.

Adjusted gross profit margin has improved from 43.6%, in the first quarter of 2004, to 50.5% in the third quarter of 2004, with further improvements expected in the fourth quarter and in 2005 as we get the full year impact of the changes we are making.

We have strengthened the HBIO management structure by promoting Sue Luscinski, our former CFO, to a newly created corporate position, as Chief Operating Officer, to improve our visibility into the day-to-day operations of each of our subsidiaries, and to focus on operational improvements, and lead financial and operational due diligence in future acquisition.

All of these facts combined, create an expectation of improved revenues and profitability going forward.

However, the revenue trend, at Genomic Solutions continues to track lower than we expected.

In addition, costs for complying with Sarbanes-Oxley regulations are much higher than we originally expected.

The costs could exceed $1 million this year, or roughly $0.02 a share.

Because of the revenue uncertainty at Genomic Solutions and these adjusted costs, our guidance for the fourth quarter of 2004 is now 24 to 27 million in revenues, and adjusted earnings of $0.06 to $0.09 per diluted share.

We'll be providing guidance for fiscal 2005 after we complete our internal budgeting process.

I will now turn the call over to David, who will go into more detail on Genomic Solutions and review some of the growth drivers by business unit.

David?

Thank you, Chan and good morning, everyone.

In the first quarter of this year we had very disappointing results, primarily because of the shortfall in revenues and gross margins at our Genomic Solutions subsidiary.

Today, Genomic Solutions accounts for approximately one quarter of our revenues.

In the second quarter we implemented a major restructuring and reorganization of our Genomic Solutions business.

We announced the closure of one factory out of three, and laid off 36 employees, 24% of the Genomics Solutions workforce, giving us annualized cost savings $3.6 million or approximately $0.07 per share.

In the third quarter we began to see the effects of the restructuring.

As Chane mentioned, adjusted gross margin at Genomic Solutions have improved considerably.

The adjusted gross margin in Q1 2004 was 43.6%, in Q2, it was 47.8%.

In Q3, it was 50.5%.

Despite a 29% decline in revenues, for Genomic Solutions as of Q3 last year, the Q3 2004 adjusted gross margin percentage at Genomic Solutions exceeded that in Q3 last year.

Since we have not yet realized the full benefits of the restructuring, we expect to see gross margins improve still further in Q4.

We believe it will be Q1 2005 before we realize the complete impact of the cost reductions.

While gross margins have gone up, expenses have gone down.

Q3 2004 operating expenses, excluding the amortization of intangibles at Genomic Solutions were the lowest they've ever been for a full quarter since we acquired the business.

We believe this restructuring will be sufficient to return Genomic Solutions to profitability on its current run rate of revenues.

While Genomic Solutions is not yet meeting our goals, it is clear that good progress has been made in returning Genomic Solutions to profitability.

The key to restructuring the Genomic Solutions is not just about cutting costs.

We also reorganized Genomic Solutions creating two vertical business units from the previous matrix organizational structure.

We believe this business unit structure is a necessary precondition to returning Genomic Solutions to growth.

In the third quarter, we began to hire the additional sales and marketing specialists, we believe we need to drive revenue growth in the future.

It will probably be 2005 before we realize the impact of these initiatives.

Outside Genomic Solutions, most of the rest of our business continued to show strength.

Growth outside Genomic Solutions is 29% versus Q3 last year, and 5% excluding acquisition.

Core product lines, such as animal physiology, cell biology, electrophoresis, and amino acid analyzers did well in the quarter.

New products such as our COPAS, large bore flow cytometer, and MIAS automated microscope system also did well in the quarter.

These strengths are partially offset by weak sales, especially of cytometers to GE Healthcare formerly known as Amersham Biosciences, and the discontinuation of several non-core product lines.

In the fourth quarter, and into next year, we expect to drive revenue growth through the launch of several new major products, and by expanding our distribution channels.

New products, we have either recently launched or expect to launch shortly include, our technology leading BTX 96-Well Electroporation System, our technology leading 96-Well dialysis plates, sample preparation, the only way to do equilibrium dialysis in high throughput, two new spectrophotometers for distribution through GE Health -- both through GE Healthcare, and under our own brand names.

Our flex-stent and micro (inaudible) dispenser, and six new applications to run on our MIAS automated microscope system, including automated cell culture applications developed in conjunction with Taft, our OEM partner, and genetic toxicity and neuroregeneration applications, developed in conjunction with a major pharmaceutical company.

In addition to these new products, all of which have been developed internally, we are aggressively expanding our distribution channels.

For the Hoefer electrophoresis products, which they are primarily distributed through the AB/GE Healthcare distribution channel, we've added new distributors outside GE in 23 countries, and expect to have more.

Many of these distributors would distribute Hoefer products before AB -- Amersham Biosciences acquired Hoefer.

In Q3, we launched Hoefer's e-commerce web site, so we can take orders directly from end user scientists.

In 2005, we expect to launch Hoefer's first major catalog to drive sales directly to end user scientists without a need for intermediary distributors.

We expect these changes to have a beneficial effect on both revenues and gross margin.

With the launch of our flex-stent and microliter dispenser, which was developed in conjunction with a major pharmaceutical company, and is priced in the $10,000 to $15,000 range, we expect to add sales people to sell directly to end user scientists.

We expect to use this product as a lead product in building a direct sales force for Biochrom that will eventually sell dispensers, plate readers and spectrophotometers.

We believe that these kinds of actions will lead to an increase in our organic growth rate for these products.

We'll now open the call for any questions.

[OPERATOR INSTRUCTIONS].

The first question is from Adam Chazan with Pacific Growth Equities.

Please go ahead.

Good morning guys.

A couple of quick questions, if you don't mind.

First, starting with Genomic Solutions.

David, can you remind us kind of the measures beyond adding sales people that were being taken to improve the topline growth there?

And then, also, can you talk a little bit about the potential impact of the closure of the Japanese sales office, and perhaps any seasonality witnessed over the summer?

Sure.

On the question of driving sales versus Genomic Solutions, I think there are three things that we have really done to try to accelerate the topline.

The first one was the reorganization.

Not the restructuring, which is in the cost structure, but the reorganization, splitting into two vertical business units, providing that focus on the different product lines, and different end users markets, for instance genomics and proteomics product, primarily sold to academic institutions, whereas the Cartesian dispensing products tend to be sold more to pharmaceutical companies.

So, providing that product line and end user focus, I think was an essential part of the restructuring and reorganization of Genomic Solutions.

The second thing is, adding product specialists into that new two vertical business unit structure.

I think part of what caused the problem with Genomic Solutions is we had sales people who are specialists in one of those product lines, being asked to sell a very, very broad line of products across many different applications.

So what we've done is, we've started rehiring people with those specialist skills into that two business unit structure.

And then, the third thing is the kind of applications that we are promoting.

We've started to focus our marketing efforts on what we think are the higher growth application segments such as protein micro rays, rather than what we think are the more mature applications these days, such as DNA micro rays.

Those will be the three things we've done at Genomic Solutions to try to drive revenue growth there.

The second thing you mentioned was the closure of the Japan subsidiary.

That took place in the fourth quarter of last year.

There was probably some transitional impact in the first quarter, but since then I don't think there's really been any real impact of that.

And the last thing you talked about was seasonality.

There is typically a very significant seasonality in the capital equipment business, typically Q4 is much stronger than Q3.

Q3 is typically the weakest quarter of the year from a seasonal point of view.

And, I would be surprised if we didn't see that kind of pattern repeating itself this year in the fourth quarter versus the third quarter.

That's helpful.

On Sarbanes-Oxley, what was your original estimate of the costs, and how did you get there?

And are we in good shape, I guess, going in, and have all the systems been tested and validated?

Let me answer the first part of that, and then I'll ask Bryce to comment on the second part of that.

In terms of the original estimate, our original estimate was about half of what they currently are.

The process of the coming compliance of Sarbanes-Oxley is something like hitting a moving goal post.

At the start of the year, we didn't really know where the goal posts were.

We have a much better sense now of where they are, but there's a lot more work involved in getting there than we originally contemplated.

And I'll ask Bryce to comment on the kind of things that we've been doing in order to get us compliance with Sarbanes-Oxley.

Bryce?

Yes.

Basically, we've been through one initial round during process of going through our own internal processing and documentation process.

And we're continuing on track with a plan to be compliant by the end of the year.

And then, David, just on kind of future acquisitions and use of cash, I mean, are you still considering acquisitions or, are you waiting to kind of get Genomic Solutions back in decent shape before prosecuting any of those?

Well, at any point in time we're always looking at acquisitions.

Acquisition has always been a core part of our growth strategy.

We built this company on a combination of organic growth and acquisition growth, both as sources of driving earning per share growth.

So, that's really what we've always been focused on is how do we drive earnings per share growth as fast as we relatively believe we can.

And as Chane mentioned in the introduction, several of our recent acquisitions including BTX, KD Scientific, and Hoefer have really gone, very, very well.

And I think it's essential that we continue to pursue acquisitions.

I think we've learned some lessons from the way that the acquisitions have made Genomic Solutions, but we don't intend to change that overall strategy.

One of the reasons why we changed the organizational structure at Harvard Bioscience and made Susan Luscinski the Chief Operating Officer, in addition to bringing Bryce in as CFO, is so that we can provide a higher level of scrutiny on acquisitions, while simultaneously pursuing all the things we need to do in terms of things like SOX compliance.

That was really what was behind that organizational move.

So, there's really no change to the strategy.

However, I think we are proceeding more carefully, and more thoroughly than we have done in the past.

[OPERATOR INSRUCTIONS].

We have a question from Paul Knight with Tom Weisel.

Please go ahead.

Chane, are you done with the sales force reorganization now with Genomic Solutions?

We're done, Paul.

However, we're still trying to hire a few people.

So we're in process.

We probably are short three or four people from where we would like to be in order to get revenues back on track.

And then on the ad matter, I guess, the Harvard -- core Harvard Bioscience business, what was happening in that market for you?

Actually, as I stated in my statement, you know, animal physiology piece was very strong, and also the cell biology.

And it's been strengthening throughout the year, but third quarter was very strong in both those products, particularly in government, and in the academic environment.

And David, can you talk about how the rollout or the rebranding, I guess, or product additions of Hoefer is going?

Sure.

I think it's actually going very well.

We acquired the Hoefer business in Q4 last year, and at the time all of Hoefer's revenues were going directly through Amersham Biosciences or GE Healthcare.

Part of the strategy which was very explicit on our part and Amersham part in that acquisition, was that we would own the Hoefer brand name, free and clear of any restrictions, and we would use that brand name to build a direct to end user distribution channel, for not only the Hoefer products, but other molecular biology products as well.

We started that in, really, the second quarter for this year when we started to add distributors -- add distributors outside of Amersham.

So, the Hoefer branded products, the products that we make Amersham are branded either Amersham or GE, whichever they prefer.

The product that we are selling through the other distributors are branded Hoefer.

That began in the second quarter.

We already have 23 countries covered under the Hoefer brand, and we expect to add more in the fourth quarter.

At the end of the third quarter, we launched the e-commerce web site for Hoefer, so we can take orders directly from end user scientists, and we'll be promoting that in the fourth quarter.

And we expect to build a web catalog distribution channel under the Hoefer name in very much the same way we built the web catalog distribution channels with the Harvard apparatus business, which again is a very brand name oriented, relatively low purchase price, broad product line, type of business.

So we really expect to build on the Hoefer brand name, a distribution channel that's very similar to the Harvard apparatus distribution channel, but in addition to the continuing distributor relationships that we have with these 23 countries who signed up, plus Amersham which will be a very important distributor for us for a very long time to come, we hope forever.

And then the final part is for the -- not so much for Hoefer, but within the Biochrom Group of Companies, with launch of our flex stem dispenser, which is about a 10,000 to $15,000 product, and capable of being sold through a field sales force.

We expect to use that as a lead product to build a sales force, which will eventually sell all of those mid-ranged instrument products like our plate readers, like our dispensers, and our spectrophotometers direct to end user scientists.

Some of those products may end up being under the Hoefer name as well.

OK.

Did that answer your question Paul?

Yes.

It did.

Thanks.

Those are all the questions I have at this time.

I'll turn the call back over to you, sir.

In closing, I would just like to say, we're very disappointed with where we are thus far this year.

However, we are very optimistic, we believe about our future, we believe the worst is behind us.

I'd like to thank everyone for participating in our conference call.

Thank you.

Ladies and gentlemen, this concludes your conference.

You may now disconnect.

Good day.