Harvard Bioscience Inc (HBIO) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q2 2006 Harvard Bioscience Inc. earnings conference call.

My name is [Shiniqua] and I will be your coordinator for today.

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

We will conduct 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, Mr. Bryce Chicoyne, Chief Financial Officer.

Please proceed, sir.

Thank you.

Good afternoon.

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

Thank you for joining us today to discuss the results for the second quarter ended June 30th, 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 detail 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 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, 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 integration regarding forward-looking statements and risk factors is included in the press release issued earlier this afternoon reporting the second 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, which is located at HarvardBioscience.com, or as part of our 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 then click on the "Investor Presentations" or "website" icon as appropriate.

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

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

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

Thank you, Bryce.

The second quarter of 2006 was a record quarter in orders, revenues, and profits from continuing operations for Harvard Bioscience.

Continued strong demand for our core products was a major contributor to our results.

Infusion pumps and amino acid analyzers were particularly strong this quarter.

I would also like to call your attention to specific financial highlights in the quarter.

Organic growth was 11.2%.

Non-GAAP adjusted operating income increased 40% compared to Q2, 2005.

Non-GAAP adjusted operating margin was [AUDIO CUT OUT] and non-GAAP adjusted earnings per diluted share was $0.07.

As we look forward to the third quarter of 2006, we expect to generate revenues in the 18 to $19 million range and non-GAAP adjusted earnings per diluted share in the $0.06 to $0.07 range.

Additionally, in view of the strong market demand and the acquisition of the Anthos product lines, we're increasing our revenue guidance for the full year 2006 from $70-72 million to $72-73 million.

Also, we are increasing our guidance for non-GAAP adjusted earnings per diluted share from continuing operations from $0.23 to a range of $0.24 to $0.25.

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

I will now turn the call over to David.

Thank you, Chane.

As Chane mentioned, second quarter results were very strong.

Organic revenue growth [was] 11% versus Q2 last year.

We've had double-digit organic revenue growth for the second quarter in a row.

During the last six quarters, organic growth has been 0%, 4%, 5%, 7%, 12%, and 11%.

This increase in organic growth is a 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, including a new Warner catalog for our cell physiology products, new or expanded distributed in the U.S., Europe on and in developing countries, and new product introductions, particularly in spectrophotometry.

In the U.S., growth from biotech companies was strong in the quarter and pharmaceutical companies have shown a return to growth from decline in the past.

Geographically, demand was strong across all major markets, including the U.S., Europe and Asia.

Gross margin has also improved significantly.

In Q2 last year, it was 49.1% of revenue.

In Q2 this year, 50.8%, a 170-basis-point improvement.

The increase in gross margin was mainly due to increased sales volumes, improved product mix, and higher margins on certain new product introductions.

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

Non-GAAP adjusted operating income in Q2 2006 was up 40% over Q2 2005.

Non-GAAP adjusted operating income was 17.2% of revenue in Q2 2006 versus 14.0% of revenue in Q2 2005.

The 40% growth in non-GAAP adjusted operating income, combined with reduced interest payments and an improved tax rate, drove the 65.4% increase in non-GAAP adjusted net income and a 75% increase in non-GAAP adjusted earnings per diluted share.

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

Finally, 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.

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

I'd now like to turn the call over to Bryce to go over some additional financial highlights.

Thank you, David.

The Company continues to report a strong balance sheet.

As of June 30th, 2006, we held cash and cash equivalents of $9.8 million. $8.2 million of the cash was held by our continuing businesses, and $1.6 million was held in our discontinued businesses.

During the second quarter, we repaid $2 million on our [revolving] line of credit and paid approximately $1 million for the acquisition of certain assets available to us.

As of June 30th, 2006, accounts receivable balances were $11.1 million and the inventory balance was $10.6 million.

DSOs during the second quarter were 57 days, up from 51 days a year ago.

The increase in DSOs is primarily due to the increase in accounts receivable balances with GE Healthcare.

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

The balance outstanding on our revolving credit facility at the end of the second quarter was 6.5 million, compared to 15.2 million outstanding on the line at the end of Q2 '05.

Cash flow improvements have allowed us to make repayments on our revolving credit facility and have created a swing from a net debt position of $2 million at the end of Q2 '05 to a net cash position of $3.3 million today.

For these purposes, we calculate our net debt, or cash, position by subtracting the total debt from our cash and cash equivalents at the end of the respective period.

The amount outstanding under our revolving credit facility is reflected as a current liability as of June 30th, 2006, because the facility expires on January 1st, 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 pre-tax income from continuing operations, which excludes the tax benefits of filing consolidated tax returns for the continuing or discontinued businesses, to be between 34% and 37%.

The comparative period excludes 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.

Thank you. [ OPERATOR INSTRUCTIONS ] I have a question from the line of Paul Knight of Thomas Weisel.

Please proceed.

Hi, Chane, can you talk about your statement in the press release regarding your orders in the quarter?

You said, I guess, strong or improving.

What more color can you add on that?

Normally we really don't report on orders, but this was -- we normally don't make comments on that, Paul, as you know.

It was -- we did build backlog, I guess I can say that, in the quarter.

Normally in the catalog business, you don't build much backlog.

You usually ship, but through strong demand at the end of the quarter, we did build some backlog.

What's driving this order tone?

Is it pharma?

Is it preclinical?

And also, more specifically, you mentioned amino acid analyzers.

What's the dynamic in that particular product line and why did you mention it?

Hi, Paul, it's David here.

There's several things that were influencing it.

Biotech companies were particularly strong in the quarter.

That's been a trend for quite a while now.

It has been a consistent trend for least two or three years now.

Pharmaceutical companies, over the past few years, you probably know, have had a bit of a dip, but in the last few quarters have come back and we've seen growth there over the last few quarters.

Geographically around the world, like other people have recorded, we've seen strong growth in Asia, particularly India and China, and some of our product lines in Japan, as well.

For the rest of the world -- I mean the rest of the world like U.S. and Europe -- was pretty strong, too.

So I think all those things really combined.

And finally our own sales and marketing activities, particularly the issuance of the new cell physiology catalog under the Warner brand name, that drove revenues in the second quarter.

And new products we introduced -- particularly the spectrophotometry products, which replaced previous products which were not as good -- had much more gross margins.

All of those things combined are really what drove orders and revenues in the quarter.

Your comment about amino acid analyzers, the reason I mentioned it is the traditional ninhydrin-based amino acid is a product line that we haven't talked about much in the past.

It's a product line of biochrom.

They were one of the first in the business, along with Beckman.

Beckman has discontinued their 6300 and the support of the 6300.

And it's a reasonable strong replacement market because those customers do not wish to move to an HPLC-based product.

Most of the applications are more on the clinical side of the business.

Therefore that business has been quite strong for us.

And then you went to 17.2% operating margin.

Is this -- what's the normalized range and what's the goal we should expect?

For your guidance, I guess, on goal and guidance on the range we should have?

Well, I think that where we have been in the last two quarters was in the 17% range and as we go forward, our objective is to drive this business to 20%.

We won't get there this year and I think the 17% target is probably the right kind of target for 2006.

OK, thank you.

[ OPERATOR INSTRUCTIONS ] We have a question from the line of Kerry Nelson of Skystone Capital Management.

Please proceed.

Hi, Chane and David.

Nice to see -- first of all, nice quarter and on the inventory turns, nice to see the improvement there.

Where do thing you can take that over time?

Hi, Kerry, it's David.

The inventory turns improvement has been largely because we've really been implementing a lean manufacturing program over the last six to 12 months.

So that's come down [INDISCERNIBLE] have gone out inventory balances have come down, so I think there's still some room to go there.

I don't think it's going to get dramatically better than it is, but I think it's going to have a modest effect going forward.

OK, and then could you also give us an update on your acquisition pipeline?

Sure, Kerry.

This is Chane.

We have about a dozen companies that have expressed some interest in talking to us.

We have three or four that are relatively serious, but that's consistent with what we've been doing over the last year.

That's probably as much color as I can say, other than the acquisitions we're currently looking at are more on the Harvard Apparatus side, that are more complementary to Harvard products than they are the biochrom products.

The ones we're specifically looking at are more of a tuck-under nature and they're in the three to five-million-dollar range.

And has there been any movement on expectations in terms of multiples?

No, there has not.

Great.

I mean, I think that the companies that we're currently looking at are relatively small and therefore -- and they're specialty products and there's not a lot of competition for them.

We're the most likely exit for them.

And therefore, there really isn't a whole lot of competitive pressure on pricing.

Kerry, this is David.

I know you haven't been a stockholder for that long so you probably didn't follow a lot of the history of the company sort of from, say, two or three years ago back to 10 years ago, but what we've been doing with these tuck-under acquisitions now is exactly what we were doing during that earlier period.

And the only reason we ever even paused in doing it was because we had to do Sarbanes-Oxley and that was very difficult to do while we're doing acquisitions simultaneously.

So from the first quarter of 2004 to this acquisition of Anthos, we really didn't do any of these tuck-under acquisitions.

I think, as Chane said, we've really got this back to where we always had it, which is having a pipeline of half a dozen to a dozen or so that we felt were good quality tuck-under candidates.

So if the pipeline, in terms of the number of candidates, is kind back to where you were -- meaning you've reloaded the pipeline -- what should we think about?

If the size is the same and the multiples are roughly the same -- meaning the size of the average company, the multiples are roughly the same -- and then the number of companies in the pipeline are roughly the same, what would you take us back to, the kind of revenues on an annual basis we might be thinking about on a go-forward basis?

Well, if you go back to that earlier period, Kerry, and look at the breakdown -- we've actually given this in some of our Investor Relations presentations -- we talk about sort of a long-term growth model going forward.

And we build it up from organic growth, which we've got in the model at 4% to 6%, and then tuck-under acquisition growth at 10% to 15%, giving us about a 20% overall growth rate for revenues about the same operating margin, perhaps even slightly better because I think there's some fixed-cost leverage in our corporate costs, which I don't think we scale with revenues.

And then spending [INDISCERNIBLE] tax rate and interest, etc. you're probably looking at at least the same for earnings per share growth.

Obviously for the last couple of quarters, we've significantly exceeded that organic growth assumption.

But on the acquisition piece, I guess part I'm wondering about is when you stopped looking at acquisitions aggressively because of the focus on Sarbanes-Oxley and some other things, it took awhile -- I guess I'm assuming it took awhile to rebuild the pipeline and then maybe given that these are single operators and sometimes takes them awhile to get over the hump, takes a while for that engine to get working again.

Is that a fair assessment, meaning that at some point here, we'll start to see more acquisitions similar to your long-term track record historically?

Yes, if I could meet my objective as we go forward, we'd like to make three of four of these acquisitions a year.

If we could do one a quarter, that would be ideal.

I think two a year is very doable.

To get to for may be a bit more difficult for us at this point.

OK, that's great.

Thanks very much.

Your next question comes from the line of Matt Arens of Kopp Investment Advisors.

Please proceed.

Great.

Can you guys hear me OK?

Sure.

Great.

Well, it seems to me that the last couple of quarters, there's been kind of a dual benefit of you guys reporting the quarter.

One, the results have been consistently good and two, it also puts items on the business wire, other than David's sales.

So it's good to have items there other than the kind of 4,000, 10,000, 15,000 shares that we've seen -- to consistently see driveling out.

And it creates an environment where I think people are encouraged with the status of the business, and yet a little bit concerned at the activity that we're seeing from the President of the organization.

And knowing that there's quite a bit behind it there, as David, you continue to be a significant owner.

Can we get a little bit of insight as to when or if we're likely to see the consistent selling dry up a little bit or what we're likely to see on that front?

Sure, Matt.

This is David.

As I'm sure you know, the sales I make are under a 10b5-1 plan that was put in place -- it was earlier this year.

I think it was around March of this year.

The terms of that plan are for three years and there's a maximum number of shares to be sold under it.

I forget exactly now what the number of shares is.

I think it's around 900,000 if I remember correctly.

If all of the options that I own today -- not counting any future option issuances -- [were exercised] during that period, I would end up with about the same number of shares that I started with.

So you know, that's the fact of the matter of that share sales program.

And as I'm sure you know, the whole purpose of those programs that sort of fire-and-forget-plan -- you put the plan in place, there's an algorithm, I have no influence over it once it's in place, and it just continues.

So once a share that's sold under that plan is sold, then obviously that plan terminates.

I probably should know the answer to this, but is that public information?

The size of the plan, the timeframe of the plan, any of that information?

Sure, it was all issues in a press release when the plan was announced.

Do you know it offhand?

Can you refresh my memory?

It was three years and I forget the exact number of shares, but it was around 900,000.

OK.

All right, thanks for taking the question.

[ OPERATOR INSTRUCTIONS ] Your next question comes from the line of [Steve McCann] of Courtside Capital.

Please proceed.

Hi, guys.

Congrats on a great quarter.

My question regarding your acquisition pipeline was actually answered.

Just an update, if you could, on the relationship with GE.

I think you guys mentioned the receivables picked up there.

Just hoping you could address what the current status of that relationship is.

Yes, we have a contract with them that is in renegotiation.

It's been extended for 45 days, as it was to expire in August.

We're in the process of negotiation.

There are some products they would like us to have exclusivity on, so we're continuing to go down that road.

If you look at our DSO, one of the issues we have is General Electric pays typically in 45 days and Amersham, prior to the acquisition by GE, paid in an unusually short period of time, typically 25 to 30 days.

So that's why the shift in the DSO.

OK.

And regarding the Capital Equipment Business, just some general information.

Can you remind me what the book value, at this point, of that business is.

And secondly, what your tax shield, if any, there is for any gain above book value?

The current book value is about $15.9 million.

OK, and the historical book value or the tax cost of that business?

Do you mean the tax basis?

Yes.

The tax base I think is somewhat in the 40 million range.

Wow.

OK.

So if you were to receive cash under 40 million, it would be tax-free.

That's correct.

We actually have a project that's going on to get down into the nitty-gritty of the tax base. it actually gets to be a complicated calculation.

We haven't officially completed the entire project yet, but it will be announced when we close the deal.

And without giving anything away that you can't, can you give any color on timing or potential pricing of the transaction, relative to that $15 million book value?

Well, as I said, we're in discussions with the number of potential acquirers of the business.

I don't think it would be in our best interest to disclose an expected price.

I think would hamper the negotiations.

And that's why we've not ever given a guidance for the expected price range.

But in terms of timing, we said we expected it in a timely fashion.

I feel pretty comfortable with where we are right now.

Maybe another way to ask that first question is what is the current -- you guys restructured that business or at least are in the process of it, perhaps, as of the last quarter -- what is the current run rate of profitability and revenue of that business to a potential acquirer?

Well, the business actually is being relocated as we speak to the Holliston facility, where we are today from the Huntington U.K. facility, which is where the bulk of the manufacturing was prior to this move.

Once that is completed and there's been a modest amount of pruning of the product line as we do that, the business will be about an $18 million revenue business, making about $2 million of EBITDA.

Annually?

Correct.

Thank you.

There are no further questions in the queue.

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

Please proceed.

We appreciate all of you joining us for our second quarter conference call today.

We're pleased with the results.

We're encouraged about the prospects for the balance of the year.

I want to thank all of you and good evening.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.