Harvard Bioscience Inc (HBIO) 2007 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Q3 2007 Harvard Bioscience earnings conference call.

My name is Mike, and I will be your operator today.

At this time, all participants are in a listen-only mode, and we will be taking questions at the conclusion of today's presentation.

(OPERATOR INSTRUCTIONS).

As a reminder, ladies and gentlemen, this conference is being recorded.

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

Sir, please proceed.

Thank you.

Good afternoon.

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

Thank you for joining us today to discuss the results of the third quarter of 2007.

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.

Then, David will discuss some business trends and give an update on the divestiture of the capital equipment business, and, lastly, I will present some additional financial highlights.

In our discussion today, we may make statements 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, 2006, and other public filings.

Any forward-looking statements, including those related to the divestiture of our capital equipment business, represent our estimate 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 earlier today reporting our third quarter results.

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

For each non-GAAP financial measure discussed, we have made available as part of our press release, or on our website in the Investor Relations section, a reconciliation to the most directly comparable GAAP financial measure.

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 archived at the same location on our website.

Our website is located at www.harvardbioscience.com.

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 afternoon, everyone.

During the third quarter of 2007, non-GAAP adjusted income from continuing operations grew 23% and non-GAAP adjusted earnings per diluted share grew 17%, compared to the same period a year ago.

Also, during the quarter, we launched our patented microliter spectrophotometer through our strategic partnership with GE Healthcare.

We estimate the microliter spectrophotometer market to be approximately $50 million and growing 20% per year.

We believe the combination of our high performance products and GE Healthcare's excellent name recognition in spectroscopy, as well as global distribution, will be a formula that will drive significant organic growth in 2008.

Shortly after the end of the quarter, we finalized the acquisition of Panlab, which we expect to be accretive to non-GAAP earnings per diluted share in the fourth quarter and to add between $0.03 and $0.04 per share in 2008.

The Panlab acquisition expands our presence in the estimated $35 to $70 million behavior segment of the neuroscience research market and gives us expanded distribution in Spain for our existing Harvard Apparatus products.

Although our overall organic growth rate was down for the quarter, most of our core product lines, a major geographic, showed good organic growth.

Harvard Apparatus in the U.S.

and U.K.

showed double-digit organic growth, primarily driven by a new cell biology catalog in the U.S.

and additional sales person in the U.K.

Spectrophotometer sales through GE Healthcare were also strong, up 12% from a year ago, driven by the launch of the microliter spectrophotometer.

This strong performance was offset by a decrease in sales in Japan, France, and China due to unusually large shipments in the third quarter of last year.

The decline in sales in China was primarily due a large tender order for our Anthos plate reader product line in the third quarter 2006, which was not repeated in 2007.

In addition, sales during the third quarter of our electrophoresis products, distributed through GE Healthcare, declined compared to third quarter 2006.

We believe we can reinvigorate the GE Healthcare electrophoresis business, the same way we currently are reinvigorating the spectrophotometry business, primarily by launching new products.

We already have new products in the pipeline, and to accelerate this process, at the beginning of October we hired a new general manager to run this business.

We expect that a renewed and dedicated focus on the electrophoresis business will both return into growth and improve its profitability, which was significantly down in the quarter due to the under-absorption of manufacturing costs on lower than expected volumes.

Looking forward to fourth quarter 2007, we expect the launch of our microliter spectrophotometry through GE Healthcare to continue to drive organic growth in our spectrophotometry business.

However, due to the lack of a large tender order for plate readers to China in 2007, we expect the overall organic growth would be minimal in the fourth quarter as well.

For the fourth quarter of 2007, we expect to report revenue between $23 million and $24 million and adjusted non-GAAP earnings per diluted share between and $0.08 and $0.09.

The non-GAAP adjusted earnings per diluted share from continuing operations guidance excludes amortization of intangible assets, the impact of future acquisitions in 2007, the impact of stock-based compensation expense, and the impact of tax benefits associated with filing consolidated tax returns for continuing and discontinuing businesses.

I will now turn the call over to David Green.

Thank you, Chane, and good evening everyone.

As Chane mentioned, Q3 was a good quarter for Harvard Bioscience with strong net income and earnings per share growth, even without organic growth.

We don't expect the low organic growth to persist and, in fact, as we look into 2008, we're very optimistic about returning the Company to a relatively strong organic growth rate.

We expect to combine this organic growth with additional tuck-under acquisitions to drive significant earnings per share growth in 2008.

We expect to see several drivers of revenue growth next year.

First, we expect to see revenue, growth both acquisition and organic, from the full year impact of the acquisition of Panlab.

Second, we expect to see revenue growth from the launch of new products and, third, we expect to see revenue growth from the launch of a new Harvard Apparatus catalog.

These growth initiatives will be a lot more visible in 2008, as they will occur against significant year-to-year comparable periods for organic growth.

2007 was relatively weak for organic growth, not because our end market's suffering or our products are out of date, but simply because we saw a significant number of large [inaudible] orders in 2006 that did not repeat in 2007.

The biggest of these was a China tender order [inaudible], but we also saw a similarly large [one up] orders from other countries in 2006.

Let me address each of these three revenues drivers in a little more detail.

First, Panlab.

We expect Panlab to add between 8 to 10 million in revenue in 2008.

This is essentially the run rate of the business as we acquired it.

We expect to increase this revenue because, although Panlab's product had a strong franchise in Southern Europe, they have been held back by limited distribution elsewhere, particularly in the U.S.A.

While we will continue to work with the existing Panlab distributors, we intend to use our strengths in sales and marketing to promote the Panlab products outside Spain.

In addition, we intend to use Panlab's sale force in Spain to expand distribution of Harvard Apparatus products into Spain.

This was precisely the impact that we achieved when we acquired Hugo Sachs in Germany.

Second, we expect to see revenue growth from the launch of new products.

We believe the most important of these is likely to be the launch through GE of our microliter spectrophotometer.

We estimate microliter segment of the spectrophotometer market is today roughly 10% of the overall $500 million per year spectrophotometer market and is growing approximately 20% per year.

We think our product has significant competitive advantages in ease of use and reliability.

Unlike the major competitor, which requires a personal computer to be attached to the spectrophotometer, on the freestanding unit it does not require a separate personal computer.

Ours also does not require repeated factory calibration.

We think that our superior product, combined with GE's well-recognized brand name and global distribution channel, is a winning combination and one of the few high growth markets in life science research today.

We expect this product line to be a major driver of our overall organic growth in 2008 and beyond.

However, our microliter spectrophotometer is not the only new product that we expect to drive organic growth next year.

We also plan to launch several new products in our core product franchises in electrophoresis and in syringe pumps.

Third, we expect to see revenue growth from the launch of a new Harvard Apparatus catalog.

Our last major Harvard Apparatus catalog was in 2004.

With increased use of the web and e-mail, we thought that, perhaps, print catalogs would have a reduced role in the future.

However, in 2007, we see significant revenue growth from our Warner Cell Biology catalog and, thus, we believe, a new Harvard Apparatus catalog, which will also include the Panlab product, will add to our organic growth in 2008.

In addition to these organic growth initiatives, we continue to pursue the acquisition part of our growth strategy and the environment for these acquisitions remain favorable.

Finally, I would like to update you on the divestiture of our capital equipment business.

On our last conference call, we anticipated that we would close the transaction during Q3.

That estimate proves a little bit optimistic, but we are still working to close this transaction, and we hope to be able to announce the transaction shortly.

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

Thank you, David.

As of September 30, 2007, we held cash and cash equivalents of $15.1 million compared to 9.8 million at December 31, 2006.

$13.8 million of the cash was held by our continued businesses and $1.3 million was held by our discontinued businesses.

The balance outstanding on our revolving credit facility at the end of the third quarter was $2.8 million compared to $3 million outstanding at the end of December of 2006.

Operating cash flows have allowed us to make repayment on our revolving credit facility.

Our net cash position at September 30, 2007, including our discontinued businesses, was $12.3 million, an increase of $5.5 million from $6.8 million at December 31, 2006.

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

Trade receivables were $13 million, and inventories were $13.3 million as of September 30, 2007.

Outstanding days of sales were 62 days for the three months ended September 30, 2007, compared to 56 days for the same period in 2006.

Outstanding days of sales increased primarily due to an increase in international customers who generally paid slower and a change in the payment pattern of GE Healthcare.

Inventory turns were 3.1 times for the three months ended September 30, 2007, compared to 3.5 times for the same period in 2006.

Inventory turns are primarily down to the building of inventory in anticipation of certain new product launches.

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, is expected to be between 32% and 35%.

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.

Hi, Chane.

When do the comps on France and Germany get easier?

Paul, I can't hear you.

When do the comparisons get easier on those year ago items you had mentioned?

In both, Japan and France and China, we had significant orders totalling probably in the range of $2 million in 2006, which were the beginning of a couple of new CROs staffing up to buy pumps and a large tender in China and those orders did not repeat in 2007.

We did not anticipate they would repeat in 2007, and that's why we gave the guidance we gave for third quarter.

And then -- in the press release you talk about just slightly -- I think larger impairment charge on the assets, [inaudible] thousand dollars.

It was only $18,000, Paul.

Does this reflect a -- you know, a revalid, I guess, was done, what, in the third quarter?

That's correct.

What are you valuing those assets now?

The net book value I think is around $7.5 million.

Okay.

And this electrophoresis products, what's the expected launch on that, Chane?

We will launch some in fourth quarter, and then we'll launch additional products in first quarter.

All right.

Thank you.

(OPERATOR INSTRUCTIONS).

Forrest St.

Clair, Skystone.

Thanks for taking my call.

Chane or David, can you quantify the product opportunity with the new spectrophotometer with GE?

I'm certainly excited to hear you talk about good things for 2008, but if you could put a little more color on that that would be terrific.

Sure, Forrest, this is David.

Let's just start with the overall market size.

The overall spectrophotometer market is about 500, perhaps a little higher, $500 million a year, and it's probably growing in the mid single-digit range, as most mature technologies in the industry are.

Within that, the microliter spectrophotometer market has grown from nothing about five years ago to about 40 to $50 million today, and we think it's still growing in the 20 to 25% range.

We have -- the product we are launching through GE is I think the best product that we have.

It's actually not the only product we have that participates in that fast growing segment of the market.

We have other OEM products, as well, that use the same core spectrophotometer engine, but have a different sample handling mechanism.

So, we feel very good about the launch of this product line.

As I said earlier on the call, I think we've got a better product than the other products that are out there in the marketplace.

GE's brand name is very well recognized.

I know, perhaps, the people who are not familiar with GE Healthcare, they think of GE as being refrigerators and things like that, but when they acquired the Amersham and the Pharmacy of brand names, those brand names are very, very well known in Life Sciences and GE's brand recognition is really very good in spectrophotometry and better than the other brand names that are now being applied to alternative products in the space.

So, we feel very good about putting that brand name onto a superior product that we manufacture, and GE, of course, has terrific global distribution, particularly, -- well, really all around the world -- in the U.S., in Europe, and the Far East, as well.

So, we think that's really a winning combination that will certainly drive organic growth for us in 2008.

As I mentioned earlier on the call, that's not the only thing that we're launching.

As Chane mentioned just a minute ago, we've got other electrophoresis products coming this year and next year, so we think that there is a real opportunity here.

It's a fast growing market.

It's a decent size, and it's big enough to move the needle for us.

That order of magnitude is that a million dollars?

Is it $10 million?

Is it somewhere in between?

What size -- what are your expectations for the product?

Well, the unit of volume today is probably around 5,000 units.

Total market today is around 5,000 units a year.

So, it's hard to estimate what kind of market share we'll get, but as I said, I think we feel like we have a real winning combination with the strength of the product combined with the brand name of the distribution channel, so I think we feel pretty optimistic about it.

Forrest, this is Chane.

I think we're probably looking at numbers somewhere between $3 and $6 million bucks.

Okay.

Great.

As it relates to revenue synergies with Panlab by cross-selling the products, kind of in the U.S., what kind of dollars are we talking about?

Well, one of the things, to give an example, and David presented what happened when we bought Hugo Sachs, when we acquired Hugo Sachs and they brought their products to the U.S, they were doing about 100,000 in the U.S., and we very quickly took that to a million dollars.

So, it had a significant impact.

The product line that we have acquired from Panlab is much broader so -- but I would expect the same kind of impact.

They have very little presence in the U.S.

today, probably in the $100,000 range and, therefore, our impact on their business here should be significant.

You're talking a couple million bucks or less than that?

I'd say it's a million dollars, probably the first year, but it will grow from there.

Great.

It's a fairly large market segment, which today we have a minimal presence in.

Terrific.

And last question as it relates to the divestiture.

What's the best guess of the timing?

I know this has been something that's dragged on for longer than expected, but how close are we to signing this business off?

Well, I think shortly is the right description.

I mean we really had hoped that we would have this concluded by the end of the third quarter, you know, and the final stage is doing negotiation and things can slip a little bit and that's exactly what's happened.

So, I think shortly is the right characterization of where we are.

Okay.

Thanks very much.

(OPERATOR INSTRUCTIONS).

[Kelly Barthow, Central Square Capital].

Just a quick question on the tax rate -- the 32 to 35%, is that a non-GAAP tax rate?

That is a non-GAAP tax rate.

And what is the comparable in 2007?

The GAAP rate?

No.

The comparable non-GAAP tax rate.

Right now we're at 32% to 33%.

Okay.

So, it's going to stay the same.

Got it.

Thanks.

And at this time there are no other questions.

I would like to turn it back to management for closing remarks.

I'd like to thank everyone for joining our conference call today.

We remain very encouraged about the prospects for the balance of 2007, and especially of 2008, and again, I'd like to thank you and have a great evening.

Ladies and gentlemen, this does conclude the presentation.

You may now disconnect.