Harvard Bioscience Inc (HBIO) 2006 Q3 法說會逐字稿

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

My name is Nicole 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 toward 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.

Thank you.

Good morning.

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

Thank you for joining us this morning to discuss our results for the third quarter ended September 30, 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 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 details in our annual report on form 10-K for the fiscal year ended December 31, 2005 and any other public filing.

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 issued last evening reporting our third quarter results.

Please note that during the 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 and the most directly comparable GAAP financial measure is available on the Investor Relations section of our website which is located at www.harvardbioscience.com as part of our press release.

Additionally, any materials, 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 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.

Good morning.

During the third quarter of 2006, we again set records in orders and revenues for the continuing operations of Harvard Bioscience.

Although organic growth was up only 4% for the quarter, it was compared to a strong third quarter in 2005.

This organic growth plus the revenues from our recent acquisition of Anthos product line drove total revenues excluding impact of foreign exchange fluctuations up over 7%, confirming our strategy of combining organic growth with acquisitions to enable us to achieve our long term revenue and profit goals.

Details on specific highlights in the quarter include overall revenue growth was 10.3%. 3.7% was organic revenue growth. 3.6% was from acquisition of Anthos, and 3% from fluctuations in foreign exchange rate.

Non-GAAP adjusted operating margin was 14.8% of revenue after accruing performance-based bonuses of $700,000 or 4% of revenue.

The accrual is based on us obtaining our guidance for non-GAAP adjusted earnings per share of $0.24 to $0.25 after bonus in 2006.

This would represent an increase of 26% to 31% over our non-GAAP adjusted earnings per diluted share in 2005 of $0.19.

Non-GAAP adjusted earnings per diluted share was $0.06 for the quarter.

As we look forward to fourth quarter 2006, we expect to generate revenues between $18.5 and $19.5 million and report non-GAAP adjusted earnings per diluted share from continuing operations between $0.06 and $0.07.

Plus we are increasing our revenue guidance for the full year 2006 from between $72 and $73 million in revenues to $73 to $74 million.

Lastly, we are reiterating our guidance for non-GAAP adjusted earnings per diluted share from continuing operations to be in the range of $0.24 to $0.25.

This non-GAAP earnings per diluted share from continuing operations guidance excludes amortization of intangible assets, any additional acquisitions in 2006, the impact of FAS123R and tax benefits from filing consolidated tax returns for the continuing and discontinued businesses.

I will now turn the call over to David Green.

Thank you, Chane, and good morning, everyone.

Chane mentioned third quarter results were strong with overall revenue growth at 10.3% versus a strong Q3 last year.

This revenue growth is a result of continuing strong demand for core products such as infusion pumps for preclinical testing, electrophoresis products, and new product introductions in spectrophotometry.

In additional international demands remain strong all year.

Gross margin was comparable to a year ago.

We expect this margin to improve as we fully integrate the Anthos product lines into our Asys production facility.

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

Finally, I'd like to update you on the divesture of our capital equipment business.

This quarter, we've made progress towards the divesture of our capital equipment business.

To date, we've received non-binding, written offers from multiple parties and we've invited a small number of these to investigate the business in greater depth.

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

I'd 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.

As of September 30, 2006, we held cash and cash equivalents of $8.6 million. $7 million of the cash was held by our continuing businesses and $1.6 million was held by our discontinued businesses.

During the third quarter, we repaid $3.5 million on a revolving line of credit.

As of September 30, 2006, accounts receivable balances were $11.3 million and the inventory balance was $11 million.

DSOs in the third quarter were 56 days, up from 54 days a year ago.

Inventory turns during both the third quarters of 2005 and 2006 was 3.5 turns.

The balance on our outstanding revolving credit facility at the end of the third quarter was $3 million, compared to $14.5 million outstanding on the line at the end of Q3 2005.

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 $2.6 million at the end of Q3 2005 to a net cash position of $5.6 million today.

For these purposes, we calculate our net debt forecast position by subtracting our total debt from our cash and cash equivalents at the end of the respective period and include both the continuing and discontinued businesses.

The Company has been actively pursuing the amendment of its credit facility and we have signed a nonbinding term sheet with the existing parties of the facility.

We intend to enter into a new revolving credit facility prior to the expiration of the current facility.

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 and discontinued businesses to be between 34% and 36%.

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

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

[OPERATOR INSTRUCTIONS] Your first question is going to come from the line of Paul Knight with Thomas Weisel Partners.

Please proceed.

Bryce, what did you say the tax rate was?

We expect it to be between 34% and 36%.

For 2007?

The same.

Okay.

And then, David, regarding organic growth, a year ago comp, what was happening a year ago?

Can you quantify at all what happened last year in Q3?

Sure.

The biggest swing from Q3 last year to Q3 this year was in the Biochrom business.

The Harvard businesses had very good organic growth this year, high single digit range.

Biochrom had a very strong Q3.

GE in particular was very strong in Q3 last year.

Q3 this year, GE was not as strong as it was last year.

We didn't have much organic growth in the Biochrom part of the business.

And the overall average was about 4% between the two divisions.

And – okay.

Because usually I know in your business, wouldn't you be more kind of flat sequentially?

In your Q3?

There's really not a lot of seasonality in the business through any of the quarters actually, Paul.

Sometimes we get a little bit of a pick up in Q4 but even that, it doesn't happen every year.

It's really a lot smoother than the capital equipment business for instance or really any other company in the industry that has the high ticket prices.

Actually, Paul, one of the issues is that as GE acquired Amersham, there was some softness in the first half of last year.

So in third quarter they made up some of that softness in the first half of last year.

Okay.

That's the comparison we're going up against.

Okay.

What do you think your normalized organic growth rate could or should be?

This is David, Paul.

We've put out an overall growth model for the Company that gives us something probably over 20% in terms of earnings per share growth.

Our combined strategy of acquisition growth and organic growth and in that model, we assume about 15% of overall revenue growth coming from acquisitions and about 5% something probably between 4% and 6% coming from organic growth.

As I think you know, for the last two quarters, we did – sorry, first quarter and second quarter this year, we did 12% and 11% organic growth respectively.

The average was 4% in the third quarter.

As we mentioned, that was really an average of high single digits in the Harvard business and close to zero for the Biochrom business.

So I think at this point we're still pretty comfortable with that overall growth model.

That's not intended to be guidance for any one quarter.

It's not intended to be guidance for 2007.

It's intended to be a long term growth model that is sustainable.

If we get higher organic growth than that, and that's certainly what we're aiming for, we think we'll turn in better overall results.

But we think that growth model is pretty robust.

And then on the operating margin, isn't that a 14.8% EBIT or operating margin if you exclude this bonus accrual.

Actually, Paul, it would be 18.8%.

It was 18.8% and that excludes amortization and the bonus accrual?

Is that right?

Yes.

Actually it would be 18.4% like you said, Paul.

18.4%?

Yeah. 18.4%.

18.4%.

Okay.

Why did you take it in this quarter?

I mean, why not accrue it in Q1, Q2?

Why the hit here?

Our normal way of accruing the bonus because it's based on – it's actually based upon achieving a growth strategy.

And this year, until we got to $0.22, until we were sure we'd get above $0.22, we didn't accrue.

In the past, however, if you look at the last two or three years, we really didn't earn any bonus based on the performance as a Company.

The other part of that too, Paul, is that we didn't have Company approval on the corporate bonus plan until the third quarter which was filed with the SEC.

Okay.

Alright.

What's your fastest running product right now, David?

Well, in absolute terms, it's probably some of our spectrophotometry products, particularly the new ones we launched – they're called the Biowave and the Lightwave.

They use the low cost bioderived spectrophotometry technology.

They were launched at the end of last year and they've grown very, very nicely this year.

Then lastly, pharma has been a – you know, I think, in the industry viewed as kind of tepid all year.

What's your read on pharma?

Is it the same or better or what?

I think it's exactly the same, Paul.

I think we've seen pharmaceutical demand not just this year but you can go back several years now and it's been weak across the board, internationally and domestically.

Going against that, we've seen very good demand from biotech companies which have continued to grow throughout that period.

The academic market remains pretty good but it's not – it's growing in the single digit range.

It's not growing double digits.

And then around the periphery in industrial and flight markets, we've seen pretty good growth.

And then if you chop it the other way and there's more biogeography, Europe has been very strong for us.

I think other companies are reporting very similarly over the last few days.

We've seen very strong growth in places like China, Japan, Pakistan, India, places like that.

I think a lot of companies are seeing a similar pattern right now.

Okay.

Thank you.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of [Forest St. Claire] with [Sky Stone].

Please proceed.

Hi, good morning.

Chane, could you give us your thoughts on what the acquisition pipeline looks like?

I know it's been somewhat worn down over the last couple years because of Sarb-Ox, et cetera.

Can you give us the outlook and probability of trying to get some more deals in the pipeline?

Yes, as David said, the opportunity out there is really quite significant.

We've been pursuing it much more aggressively.

At any point in time, we're probably talking to 10 or 12 companies.

I think we have some much closer in our headlights than we had in the past and our goal, as David said, is to add 15% growth on an annual basis through acquisitions and I think we can do that based on the pipeline we currently have.

Are you seeing any creep up in multiples in the marketplace or competition for these deals?

Not really in the niches we are.

It really depends on size and profitability but we're still looking at the same kind of four to six times operating income.

Great.

Thank you very much.

[OPERATOR INSTRUCTIONS] And you have a follow-up question from the line of Paul Knight with Thomas Weisel Partners.

Please proceed.

Chane, can you talk about the deal you did in Vienna?

It seems like that should've been a little additive in the quarter.

Was it?

And where are we with that particular transaction?

That was a good acquisition.

It gave us strength in our position primarily in third world countries and specifically in China where we really didn't have a very strong presence.

It added about $500,000 in revenues in the quarter.

We have a good pipeline of business there and we actually have built some backlog in the product line.

I think one of the most significant things that will help us going into next year is the consolidation of that with our plate reader business that we had in Austria, together it'll have a significant impact on margins because we did buy some lower cost technology that we'll integrate into the Asys product line.

So next year we did have a significant improvement in margins because of that.

Were you incurring any costs from that deal in the September quarter?

No.

Alright.

Thanks.

There were no transaction costs if that's what you're asking.

Operational costs are in the income statement but there were no transaction costs in the quarter.

Right.

Okay.

You didn't see dilution or negative earnings impact from it, did you?

Absolutely not.

Okay.

It was positive actually.

Okay.

Thanks.

Your next question comes from the line of [Dave Mackamee] with [Courtside Capital].

Please proceed.

Hi, guys.

Congrats on a good quarter.

Just to follow up on Paul's previous question, what should the range of gross margin be over time?

With that specific thing you were talking about, Chane, as well as just in general for the overall Company.

Where do you see it going over the next year?

It's really a mix issue depending on the fastest growing segment of the business.

The fastest growing segment of the business appears to be the preclinical business.

They're much smaller markets and the gross margins on those products will be higher.

So the Harvard Apparatus business in general because we sell through catalogue and mainly direct to customers will have higher margins.

The thing is that we sell through molecular biology, electrophoresis and spectrophotometers are much more mature product lines.

Therefore the organic growth probably won't be as significant as the Harvard Apparatus.

The margins will also be a little lower because we sell through distributions.

So if you compare the two, you have a 55% or 65% margin in Harvard Apparatus range.

Typically in the stuff that's flow through distribution it's more in the 40% to 45% range.

It's really a mix issue.

I think long term we're up 50% to 52% gross profit margin business.

So with this quarter being a little bit lower than the last couple, is that because of mix or is that because that integration issue that you mentioned?

It's a mix issue because of – part of it is the integration of Anthos.

We have not realized the improvement in the gross margins yet and that is a lower margin business as we acquired it.

And as you do future acquisitions, do you see the gross margin model even for a short period of time changing meaningfully?

The acquisitions you're doing are fairly small relatively.

I – you know, it really depends again where you acquire it.

The stuff that we've acquired in Harvard Apparatus traditionally have held margins a little bit because the margins are higher.

So – but on an acquisition basis, I do not see significant changes based upon the things we're looking at.

Got you.

And a question for Bryce.

If I think about the bonus, roughly $700,000, was that for the full year 2006 or just the first nine months?

That was for the first nine months.

First nine months.

So there will be another –

And for the whole Company, by the way.

It wasn't just a corporate bonus for the year.

Out of either $0.24 of $0.25, the bonus that will be paid through to all the different subsidiaries as well to corporate management.

It will be in the $1.2 million range.

Okay.

Got you.

So there will be another, call it $500,000 or so in the fourth quarter?

Some of that's already been accrued from Q1 and Q2.

Small amounts.

So it's probably more in the $300,000 range.

Probably around $300,000.

So if I look at the SG&A for the quarter, excuse me, it took a bit of a jump.

Was most of that due to the bonus accrual?

Yes.

Looking at it sequentially?

If you look at it – we have stock comp in there for 123R that we didn't have.

I took that out.

I've taken that out from last quarter as well.

And then we had about a $400,000 change over last year in the bonus accrual.

I guess I'm asking about sequentially what caused the jump from call it $3.5 million or so last quarter?

Primarily the bonus.

The bonus.

Okay.

So next quarter, should it come down, because you have less bonus accrual?

Yes.

Yes.

And as far as next year regarding the bonus.

The bonus this year was dependent on meeting the earnings goals you mentioned.

Is there a similar plan in place for next year?

And will you disclose what the earnings goal is?

Yes.

One of the things we'll do is we'll put a similar plan in and again, you know, if there's no growth in our business next year, if there were no revenue growth next year, obviously there would be no bonus accrual and therefore that $1.2 million would convert to EPS as well as operating margin improvement.

When is that bonus plan decided upon for next year?

In first quarter, based upon what we present to our board by the end of first quarter there will be a bonus plan put in place for all the subsidiaries as well as senior management.

This year's plan didn't get approve until the third quarter.

Right.

It took until the beginning of third quarter.

And, David, it sounds like you – at least from your last conference call, you've made some good progress on the divestiture side.

Can you - I know you can't provide too much color, but do you have any sense of timeline that you could talk about or any more detail you could provide?

I don't want to give a specific date because you never want to paint yourself into a corner but I think we're on track to get this done.

It could be done by the year end but I'm not particularly bothered whether it's one side of the year end or the other side of the year end.

I think the most important thing for us is to make sure that we get the maximum value for stockholders out of the business.

Okay.

Great.

And what was the cash flow of the discontinued operations?

I know it's been running around cash flow break even.

Actually, we don't report that until we issue our file.

Okay.

That's fine.

Terrific.

And just a big picture question, Chane.

It sounds like the markets are pretty stable that you're operating in if not – some have talked about the drug companies picking back up.

That's more speculation than reality at this point.

But what's your sense of your ability to sustain strong organic growth over the next several quarters or at least as far as you can see?

I think that the issue you have – if you're talking about the pharmaceutical industry, it really has been – one quarter is a little soft, one quarter is a little strong.

That sort of thing.

So it's – the predictability going forward, you really – you really can't tell.

I think the only thing I can give you some color on is the year has been a good year.

Fourth quarter already is off to a good start.

So our anticipation is that – I don't see over the next six to nine months significant changes based upon the trends that we see.

I think the preclinical testing stuff will continue to be reasonably strong and I think the more mature products such as electrophoresis and spectrophotometry products will be – won't have quite the same growth rate as the Harvard Apparatus does.

Are you referring to the pharmaceutical market or the business as a whole?

I'm talking about in general.

I think the pharmaceutical industry is – in both businesses, represents – in the molecular biology business, it probably represents a bigger percentage than the preclinical business.

But the broad marketplace, if you really look at what's been driving the growth not only for us but a lot of the people in this space, it's really been outside of the United States and it's been – Europe is a lot stronger.

U.K. is stronger.

Germany is stronger.

France is stronger.

And Asia-Pacific has been very, very strong over the last year.

And everything I've seen on the reports says that that would continue to be strong in the short run over the next year or so.

Great.

Great.

One last question, guys.

I know Thomas Weisel's done a great job of following the Company and helping us understand you guys better, but over time is there any more of an investor relations effort that you can update us on either in terms of new analyst coverage or you guys getting out there a little bit more?

Yes.

This is David.

Yes.

We're actively pursuing adding analysts to cover us.

Okay.

Great.

And in terms of just getting out there we'll see you eventually too?

You will.

Yes.

Okay.

Great.

Thank you very much for your time and again, congrats.

Thank you.

[OPERATOR INSTRUCTIONS] And there are no further questions at this time.

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

Thank you all.

We appreciate you joining our third quarter conference call.

We're encouraged about the prospects for the balance of 2006.

Thank you all and have a very good day.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.