Harvard Bioscience Inc (HBIO) 2006 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to your first-quarter 2006 Harvard Bioscience, Inc. earnings conference call.

At this time, all participants are in a listen-only mode.

We will, however, be facilitating a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS).

I would now like to turn the call over to your host for today's presentation, Mr. Bryce Chicoyne.

Please go ahead.

Thank you.

Good afternoon.

This is Bryce Chicoyne, CFO of Harvard Bioscience.

Thank you for joining us today to discuss the results of the first quarter, ended March 31, 2006.

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, David will go into more details on our results, and I will present some additional financial highlights.

In our discussion today, we may make statements about 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, 2005, 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 our press release issued earlier this afternoon reporting the first-quarter results.

Please note that during this call, we may discuss non-GAAP financial measures.

For each non-GAAP financial measure discussed, a presentation of the most directly comparable GAAP financial measure and a reconciliation of the differences between the non-GAAP financial measure discussed and the most directly comparable GAAP financial measure is available on the investor relations section of our website, and is part of the press release.

Additionally, any material, financial or other statistical information presented on the call which is not included in our press release will be archived and available in the investor relations section of our website.

Look on the investor relations section and click on the investor presentations or website icon, as appropriate.

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

Lastly, all financial information presented on this call relates to our continuing operations, unless otherwise stated.

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

Thank you, Bryce.

During the first quarter of 2006, we achieved excellent financial results.

Continuing the momentum generated during the second half of 2005, we reported strong organic growth of approximately 12% and significantly improved non-GAAP adjusted operating income to 18% of revenue.

The primary driver of this performance was the strong demand for our Harvard Apparatus preclinical testing products.

Additionally, international sales continued to be strong, particularly in Asia Pacific.

As we look forward into the second quarter of 2006, we expect to generate revenues between 17 and 17.5 million, and report non-GAAP adjusted earnings per diluted share from continuing operations between $0.05 and $0.06.

In addition, we are confirming our revenue guidance for the full year of 2006, as we expect to generate revenue between 70 and 72 million, and are increasing our guidance for non-GAAP adjusted earnings per diluted share from continuing operations to $0.23.

This non-GAAP earnings per diluted share from continuing operations guidance excludes amortization of intangible assets, the impact of FAS 123(R) and the tax benefit of filing consolidated tax returns for the continuing and discontinued operations.

I will now hand the call over to David.

Thank you, Chane.

First-quarter results were very strong, with organic revenue growth of 12% versus Q1 last year.

Organic growth has steadily improved over the last few quarters.

From a low point in early 2005, we have seen organic revenue growth of 5% in Q3 2005, 7% in Q4 and 12% in Q1 2006.

These increases are the result of improved market demand and the result of sales and marketing investments we started making in the second half of last year.

These investments were primarily in the development of new and improved catalogs and websites, particularly for Hoefer and Harvard Apparatus, new or expanded distributors in the US, Europe and in developing countries and new product introductions, particularly in spectrophotometry.

Revenue from sales to biotech companies in the academic sector remains strong, and recently, pharmaceutical companies have shown a return to growth from declines in the past.

Gross margin has also improved significantly.

In Q1 last year, it was 47.5% of revenues.

In Q1 this year, 51.1%, a 360 basis point improvement.

Gross margin improvements were driven by an improved product mix at Harvard Apparatus, reduced factory overhead at Biochrom, and the introduction of new spectrophotometers at Biochrom with significantly higher gross margins than the products they replaced.

This combination of improved revenue growth and gross margin expansion of led to significant improvements in operating profit.

Non-GAAP adjusted operating profit in Q1 2006 was up 57% over Q1 2005.

Non-GAAP adjusted operating margin was 17.6% of revenue in Q1 2006 versus 12.0% of revenue in Q1 2005. 57% growth in non-GAAP adjusted operating profit, combined with reduced interest payments and an improved tax rate, drove the 74% increase in non-GAAP adjusted net income.

Although in our guidance we have not included the impact of any acquisitions, we continue to pursue the tuck-under part of our acquisition strategy, and the environment for these acquisitions remains favorable.

I also want to give a quick update on the divestiture of our capital equipment business.

This process is continuing, and we're in discussions with a number of potential acquirers of this business.

We are now managing this process directly, and are no longer relying on the investment bank we recently engaged to assist in this process.

We believe we will conclude this process in a timely fashion.

When we have reached definitive agreement, we will announce it in a press release.

I would now like to turn the call back over to Bryce to go over some additional financial highlights.

Thank you, David.

The Company continues to report a strong balance sheet.

Overall, during the quarter, cash increased $2.1 million as we held $11.9 million in cash, compared to $9.7 million at December 31, 2005. $9.8 million of the cash was held in our continuing businesses, and $2.1 million was held in our discontinued businesses.

The increase in cash was primarily due to our strong operating results reported during the quarter.

As of March 31, 2006, accounts receivable balances were $9.4 million, and the inventory balance was $9.6 million.

DSOs for the first quarter improved to 50 days from 57 days a year ago.

Inventory turns during the quarter were 3.6 times, up from 3.3 times in the same period last year.

The balance outstanding on our revolving credit facility at the end of the first quarter was $8.5 million, compared to $14.5 million outstanding on the line at the end of Q1 '05.

Cash flow improvements have allowed us to make repayments on our revolving credit facility, and has created a swing from a net debt position of $4.8 million at the end of Q1 2005 to a net cash position of $1.3 million today.

The amount outstanding under our revolving credit facility is reflected as a current liability as of March 31, 2006, because this facility expires on January 1, 2007.

However, the Company intends to enter into a new revolving credit facility prior to its expiration.

Finally, the tax rate we expect to apply to our non-GAAP adjusted pretax income from continuing operations, which excludes the tax benefits of filing consolidated tax returns for the continuing and discontinued businesses, to be between 34 and 37%.

The comparative periods exclude the capital equipment business, which is classified as discontinued operations unless it was specifically mentioned.

We would now like to open the call for any questions.

(OPERATOR INSTRUCTIONS).

Paul Knight, Thomas Weisel Partners.

Hello, this is Peter Lawson just in for Paul Knight.

I wonder if you could talk through the business plan during the quarter for pharma and biotech and CROs?

This quarter, for the first quarter in a long time, we actually saw some growth from pharmaceutical companies.

Probably for the last certainly year to two years now, we have seen declines from pharmaceutical companies rather than growth, has largely been offset by much higher percentage increases from the biotech companies, although, because they started from a lower base, the two have tended to pretty much cancel each other out.

In fact, nowadays in the US, at least, our sales to pharma companies and biotech companies are very similar in terms of dollar value.

And in terms of academic, that has been single-digit growth for quite a long time now, and that was pretty consistent in Q1 versus the last three or four quarters or so.

What is the rough breakout of biotech, pharma, academia, CRO for the revenue in the quarter?

We don't track CRO as a category, actually.

But among the other categories, academic and government combined is somewhere around [50]% of revenue.

Pharma, biotech combined is probably around 30%.

And then there's small other pieces from industrial companies, medical companies, OEMs, things like that.

And then, the other thing was your distribution channels.

Could you just talk through those, where -- what are you selling through, mostly?

Is it catalog or distributors?

How is that changing?

I think the overall mix hasn't changed very much.

For the Harvard Apparatus products and the Hoefer products, those are sold primarily through catalogs and distributors.

There's a mix of both there.

The Biochrom products are primarily sold through distributors.

I wonder if you could just give some guidance about operating margins going forward, where you are seeing those?

Well, we typically give guidance for revenue and earnings per share, and nothing in between.

But if you look at the trend of operating margin over the last four quarters or so, operating margin in Q1 last year, I think it was around 12%, I think, if I recall correctly.

And it was nearly 18% in Q1 this year, and there was a fairly steady improvement through last year from Q1 to Q4.

It was in the 16% in Q3 and Q4.

So you are seeing that trend continue?

Or do you think it's a bit capping?

I think, long-term, we believe and we have stated many times we believe we can get this business to 20% operating margin.

However, because of mix and the different margins in the different business, it depends.

I would expect the trend that we currently have to continue going forward.

If I can just add to that, I think the place where we have some significant leverage going forward is in our corporate costs, where it's a very large dollar value today.

And as we continue the growth strategy we have laid out before of organic growth plus tuck-under acquisitions, which we intend to execute, I think you'll see our revenues grow faster than our overall corporate cost.

That's an area where I think there is some leverage going forward.

(OPERATOR INSTRUCTIONS).

Are there any further questions?

If there are no further questions, we thank you for joining our first-quarter conference call today.

We are pleased with the results.

We are encouraged about the prospect for the balance of 2006.

Thank you and good evening.