Harvard Bioscience Inc (HBIO) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Harvard Bioscience Inc. earnings conference call. My name is Betsy, and I will be your coordinator for today. At this time all participants are in listen-only mode. We will 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 call, Mr. Bryce Chicoyne, Chief Financial Officer. Please proceed, sir.

Thank you, Betsy. Good afternoon. This is Bryce Chicoyne, Chief Financial Officer of Harvard Bioscience. Thank you for joining us to discuss the results of our fourth quarter and full year-ended 2007. Chane Graziano, our CEO, and David Green, our President, are on the call today. After the Safe Harbor statement, I'll turn the call to Chane and David, who will present an overview of the quarter and introduce our 2008 initiatives. Lastly, I'll present some additional financial highlights related to our balance sheet, then I'll open the call for any questions.

In our discussion today, we may make statements that institute 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 10K for the fiscal year-ended December 31st, 2006, and other public filings. Any forward-looking statements, including those related to our future results represent our estimates as of today and shouldn't 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 fourth quarter results.

Please note that during this call we'll discuss nonGAAP financial measures. For each nonGAAP 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 this 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 then click on the investor presentation 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 continuing operations unless otherwise stated. I'd now like to turn the call over to Chane.

Thank you, Bryce. Good evening, everyone, and welcome to our earnings release call. Overall, 2007 was a successful year for Harvard Bioscience. Our continuing operations grew over 9% and grew nonGAAP adjusted earnings per diluted share of 19% to record levels of $83.4 million and $0.31. Major accomplishments during the year included the completion of our acquisition Panlab, the launch of our microliter spectrophotometer through GE Healthcare and the divestiture of a significant portion of our capital equipment business.

Looking forward, we have outlined five major initiatives that we expect will have significant impact on our performance in 2008 and beyond. The initiatives include: the launch of a major new Harvard Apparatus catalog this month, the launch of Panlab products in the U.S. markets, the signing of a new contract with General Electric and a full launch of the new microliter spectrophotometer, the launch of new 2-D Electrophoresis product through our Hoefer subsidiary and the consolidation of business functions to reduce operating expenses. We believe that with these initiatives, we'll generate revenues between $94 million and $96 million and adjusted nonGAAP earnings per diluted share between $0.36 and $0.38 in 2008. For the first quarter of 2008 we expect to report revenues of approximately $23 million in adjusted nonGAAP earnings per diluted share of approximately $0.08. These revenues and nonGAAP earnings per diluted share forecast are at December 31st, 2007, exchange rate and exclude the impact of any future acquisitions.

However we want to emphasize our renewed focus on making acquisitions as part of our overall growth strategy. Building on our 2008 initiatives, and our renewed focus on our long-term growth through tuck-under acquisitions, internal development of new products and strengthening of direct marketing, we're raising outlook on three-to-five year growth models for adjusted nonGAAP earnings per diluted share from an average of 15% to 20% to 20% to 25% per year. The nonGAAP adjusted earnings per diluted share from continuing operations guidance excludes amortization of intangible assets, the impact of future acquisitions in 2008, the impact of stock-based compensation expense, restructuring costs and the impact of tax benefits associated with filing consolidated tax returns from continued and discontinued operations. I will now turn the call to David Green. David?

Thank you, Chane, and good evening, everyone. We believe that this quarter marks a step forward in the history of Harvard Bioscience. We've now invested the majority of our investment capital equipment business which allowed us to refocus on growing the core business. Fundamentally we grow EPS in our business by a combination of organic growth, acquisition growth and operational improvement. Let me address the outlook for each one of these in 2008. First organic growth. In 2008 we have a major growth driver of each of our biggest product lines. In the Harvard Apparatus business, we've already mailed the first wave of our new 900-page catalog, there will be further mailings in 2008. Based on past experience, we expect this will have a positive effect on Harvard Apparatus organic growth in 2008 and beyond. It's important to note that all the Panlab products included in this catalog and the Panlab products will be available through our own subsidiaries in the U.S., the U.K., France, Germany and Canada. Previously Panlab was not strong in these countries as it used third-party distributors rather than owned subsidiaries.

In the newly reorganized Biochrom business, which I'll come back to in a moment, we've already launched our new microliter spectrophotometer through our partnership with GE. This product ended the fastest growing segment, the spectrophotometer market with the advantages of GE's strong brand name and global distribution. This segment is currently around $50 million in revenue and growing around 20% per year. The initial uptick through GE has been very encouraging and we expect this product to be a strong contributor to organic growth in 2008. In the (inaudible) Electrophoresis division, which includes our Hoefer and Scie-Plas brands, we've launched the hope of two dimensional Electrophoresis products to compliment our one-dimensional product. 2-D is a major segment of the Electrophoresis market and the Hoefer brand name is well recognized there. We expect this to be a significant growth driver for the Electrophoresis product line in 2008 and beyond.

The second driver of revenue growth is tuck-under acquisitions. In October 2007 we acquired the stock of Panlab. Panlab manufactured neuroscience research products in Spain and is also a distributor for other lifescience products into the Spanish market. These neuroscience products are complimentary to our existing Harvard Apparatus products. And the Panlab products will now be sold through all our subsidiaries. Panlab has also become the distributor for the Harvard Apparatus product lines in Spain. Panlab performed well in Q4 2007 and we expect it to contribute strongly to both acquisition growth and organic growth in 2008 as Panlab products are now included in the Harvard Apparatus catalog. We intend to renew the focus on the acquisition component of our growth strategy and expect to add approximately 10% to 15% revenue growth each year through these tuck-under acquisitions.

The third driver of EPS growth is operational improvement. Our nonGAAP adjusted operating income as a percentage of revenue increased from 14.6% in 2005 to 16.5% in 2007, and we believe we can increase it still further as we leverage fixed costs in our corporate cost structure particularly auditing and public company costs and consolidated size to reduce costs. Our goal is to get nonGAAP adjusted operating income to 20% of revenue. A good example of this focus on operational improvement is how we recently split our Electrophoresis business from our spectrophotometer and plate reader business. Previously these were both managed in our Biochrom subsidiary based in Cambridge U.K. From this one division we've created two new divisions.

We've hired a new general manager to run the Electrophoresis business, and a new general manager to run our spectrophotometer and plate reader business. This will provided a much sharper focus on profit improvement as well as organic growth. As part of this plan we've already initiated the consolidation of the Hoefer Electrophoresis administrative and marketing operations from San Francisco, California, to the Harvard Apparatus HQ in Holliston, Massachusetts. Consolidating these other functions is likely to add approximately $0.01 to our nonGAAP adjusted EPS during the second half of 2008. The annualized impact is likely to be approximately $0.02. The impact on 2008 is included in our guidance discussed earlier. This consolidation is -- a cost reduction exercise. Bringing Hoefer marketing into the Harvard Apparatus headquarters allows for direct company expertise of the Harvard catalog and web business to be utilized to grow the direct business at Hoefer. As we expect this consolidation will both increase operating margins and increase organic growth.

The launch of the microliter spectrophotometer Biochrom and the launch of the 2-D product at Hoefer are both good examples of how we drive organic growth through new product development. The new Harvard catalog including the Panlab products is a good example of how we use direct marketing to drive organic growth. We believe these initiatives will impact our growth rate well beyond 2008. As a result we're increasing our long-term outlook from organic growth from our previous forecast of 5% to between 5% and 10%. This in turn raises our outlook for our long term growth in adjusted EPS which includes the effect of both acquisitions and operational improvements to an average of 15% to 20% per year to 20% to 25% per year. We believe with the distraction of the divestiture (inaudible) behind us, these organic growth drivers in place, the impact of continuing our successful tuck-under acquisition program and continuing operational improvements, the outlook for the company is very bright. I will now turn the call over to Bryce to go through some additional highlights on the quarter.

Thank you, David. As of December 31st, we held cash and cash equivalents of $18 million compared to 9 -- sorry, $18.2 million compared to $9.8 million at December 31, 2006. $17.9 million of the cash was held in our continuing businesses and $300,000 was held in our discontinued businesses. The balance outstanding on our revolving credit facility at the end of the fourth quarter was $5.5 million compared to $3 million outstanding December 31, 2006. In addition we assume notes payable of approximately $2.3 million in our acquisition of Panlab. Today the balance on our credit facility is down to about $1 million.

During 2007 we had strong operating cash flow. As a result we ended 2007 with a net cash position of $10.5 million, an increase of $3.7 million from $6.8 million at December 31, 2006. I just want to point out that our December 31st net cash position included debt assumed in and used to fund our acquisition of Panlab. For these purposes we calculate our net cash position by subtracting our total debt and our notes payable from our cash and cash equivalents at the end of the respective period. Trade receivables were $14.8 million and inventories were $15 million at December 31, 2007. DSOs were 57 days for the three months ended December 31, 2007, and 2006. Inventory turns were 3.6 times for the three months ended December 31, 2007, compared to 4.1 times for the same period in 2006. Inventory turns are down primarily due to the building of inventories in anticipation of a new product launch as we previously mentioned. In addition, both our accounts receivable and inventory balances increased due to the acquisition of Panlab in October 2007.

Finally the tax rate we expect to apply to our nonGAAP adjusted pretax income from continuing operations, which excludes the tax benefits of filing consolidated tax returns for continuing and discontinued businesses is expected to be between 31% and 33% in 2008. The comparative periods just discussed exclude the capital equipment business which is classified as discontinued operations unless it was specifically mentioned. We'd now like to open the call for any questions.

(OPERATOR INSTRUCTIONS) All questions must be submitted at this time in order for them to be registered. (OPERATOR INSTRUCTIONS) And please hold while we compile a list. Your first question comes from Jonathan Palmer from Thomas Weisel Partners. Please proceed.

Good evening, gentlemen. David or Chane, wondering if you could talk through the growth in the quarter by geography?

Are you talking about overall growth? Because the big contributor to growth in the fourth quarter was the acquisition of Panlab? So that's obviously Spain and Europe being geographically the biggest bones of the growth.

Okay, and then I'm just curious if you could qualitatively say what you saw in North America and Asia as well.

U.S. growth for the Harvard business was up in fourth quarter in the 2% to 3% range on a year-to-year basis, organic basis without acquisitions or foreign exchange. Asia was -- had a unique situation because in the fourth quarter 2006 we had a significant order, a one-time order from China, which was a tender offer which was about $1.2 million. And that's one of the issues that impacted organic growth in the quarter and through the year. As a matter of fact if you look at the -- at our business over the last two years, organic growth was in the 4% to 5% range each year, if you adjust for these one-off orders that were received in the second half of 2006.

Okay, that's very helpful, thank you. And then what do you see as organic growth rates for each region in 2008?

Well, it isn't as simple as region. It's probably easier to talk about business units. If you look at the Biochrom business, the major driver of the organic growth obviously would be the new microliter spectrophotometer and we're anticipating organic growth in that case to be in the 6% to 8% range. As well as if you look at the Harvard business, the Harvard business was the introduction of the new catalog as well as the introduction of Panlab products in the United States probably also enables us to achieve 6% to 8% organic growth in that business as well.

Great, that was very helpful.

And those are both global numbers by the way.

Yes. And when do you really see this growth, I guess, reaccelerating? Is it more of a 2Q event from these initiatives or more second half?

Traditionally, the catalog hit the streets this week, actually. We received our first call this week from the catalog from customers. So, traditionally, it takes about 30 day to really see some impact. Historically, a catalog like this would generate $1 million to $2 million of incremental revenues over the next 12 to 18 months. The launch of the spectrophotometers, there was a soft launch done by General Electric in the second half of last year, and we -- the initial take-up of the product looks very promising and should meet our expectations for the year. So we should see that throughout the year.

Thank you. On the catalog, is it also available in the Chinese language version as well?

Not at this time, no.

Okay. And then I guess moving to the P&L, you mentioned in the press release that gross margins were impacted due to the acquisition of Panlab. Is this level of gross margins what we should see going forward or will they improve more to the historical level?

Today -- Panlab is an exceptional type of acquisition that is not traditional in that it had a significant portion of its business as a distribution business in Spain, because it's one of the best companies in Spain, in this industry, so therefore they have a lot of requests to distribute products in Spain. Therefore, the distributive products have relatively low margins, in some cases, 25%, 30%. Therefore it does impact that part of the business. The improvement in gross margins in the Biochrom business with the new spectrophotometers will offset that, and therefore for the year, I would expect gross margins to to be in the 49% range. I think this year we finished in about 48% range. So I still expect a little pick-up there this year, and going forward I believe we'll drive this business above 50% gross margins as we introduce more new products.

Jonathan, it's also worth pointing out that the Panlab business has an average gross margin lower than our historical gross margin. The operating margins on that business are very strong. And so Panlab has been a strong contributor to operating margin in both dollars and percentage terms in the fourth quarter and we expect it to continue to be so in 2008.

Thank you for that. What's your outlook right now on I guess, biopharma demand? Do you see it as pretty stable at present?

Yes, I think if we look particularly at the U.S. business, we've seen the biopharma segment of the business recover really well over the last couple years. If you go back far enough, it was really in decline. We've really seen that come back and that's despite us not having a major new catalog. So my guess is, with the launch of this major new catalog, we'll see a pick-up in the pharm biotech demand. I think we'll also see a pick-up in academic demand, particularly in the U.S.

Last question. Can you give us an update on what you're doing with the Flow Cytometry business that's still in disconts, where that stands?

Yes, that business is for sale. We've hired an investment bank to represent us in that divestiture. And we're in the early stages of that divestiture process.

Great. Thank you very much for taking my questions.

(OPERATOR INSTRUCTIONS) Your next question comes from [Forrest St. Claire] from Skystone. Please proceed.

Good evening, Chane and David, thanks for taking the question. On organic growth, definitely excited to see the higher guidance for 2008. Can you flesh out what the implied organic growth, I think you mentioned that Harvard you expected to grow 6% to 8% in Biochrom similarly in the $94 million to $96 million revenue guidance for the year. Is that the kind of implicit guidance in organic?

Yes, organic would be 6% at the $94 million and 8% at the $96 million.

And the rest of the delta would be Panlab?

Yes.

Terrific. And in terms of synergies, Panlab, where's that stand?

As far as integration, we're going to leave it free standing, because it becomes our sub in Spain. We'll sell all the Harvard products we manufacturer in Germany, U.S., U.K. in that subsidiary. The real leverage comes from taking those products into the U.S. market is probably the most significant opportunity. That could -- traditionally I'd say it'd bring $1 million for us in the first year. But based upon the current trends, we already have $400,000, $500,000 worth of quotes outstanding. So that could be $1 million or $2 million.

Hold onto the catalog, because those were all generated before the catalog was distributed.

Based on the original press releases of the acquisition.

Great. Great. So if nothing less between the catalog and Panlab, we're looking at $2 million to $4 million of incremental revenue in '08. So that's 5% right there.

Right.

Turning to the Biochrom, the microliter launch, what's the expected impact from that in terms of your expectations from GE?

I believe the guidance that I've given in the past was $3 million to $6 million, and I think we're pretty comfortable on the low end of that number, and if they if they achieve the market penetration we'd like to get to, it should be higher than that.

And you said that the uptake looked pretty strong, can you disclose what kind of orders you're seeing already?

Well, actually, according to the contract we cannot disclose the specifics of the contract. We'll file it once it is signed. It's been -- the contract has been agreed to. We have signed it. It's back to them to be signed and returned to us. And once it's returned, we'll file it and that's the only way you can have access to the information.

Okay, great, but it sounds like you're, you're highly confident in at least the low end of that $3 million to $6 million.

Yes, absolutely.

And the Electrophoresis product? What's the expected impact?

If you look at the Electrophoresis marketplace, today for new systems, the market's probably $150 million for instrumentation, the boxes and power supplies and the software to go with them. The segment of the business that we don't compete in today, we don't have a product to compete in is 2-D Electrophoresis, which is approximately a $50 million marketplace. So it will give us an entry in there and I would anticipate that we could, the first year, you're probably looking at $.5 million impact.

Great. Great. So just by my math, if I kind of take the low end, you've got at least $5 million incremental revenue from what we talked about, and at the high end, potentially up to $10 million, $11 million, which would be north of 10% organic growth next year. Is that -- does that math hold?

Yes. The math holds together. I think that our guidance is based upon trying to give a forecast that we think is conservative based upon where we are. I think we have a lot of initiatives, a lot of actions in place and our goal clearly is to over achieve those.

Terrific, terrific. And on the acquisition front, what's -- what does the outlook look like, now that you've got nice net cash position?

Yes, David Green is -- with the divestiture, most of the capital equipment business, David Green has been focusing on that. And I'll let him comment.

Sure. As we said many times, it's an active part of our growth strategy, and at any point in time, we're talking between half a dozen and a dozen suitable candidates. And I think from where we are right now, I think we feel we have a good shot of doing two acquisitions this year. If you look at our history, in the 12 years since the original [MBO] back in 1996, we've done 19 acquisitions in the continuing ops part of the business. So roughly one, one and half a year. I think we feel that we can probably accomplish two a year, that sort of pace of acquisitions that typically are going to look something like the Panlab acquisitions. $3 million to $8 million in revenues is really our sweet spot. And those are the kind of acquisitions we're pursuing right now.

Excellent. And that -- the traditional flow through on those acquisitions is what?

What do you mean by flow through?

In terms of -- on the operating line. So for every $1 million of -- or $10 million of acquired revenue, you think you can bring what to the operating line?

They're typically in the 20% operating margin range.

If they're free standing for us, we normally, when we acquire them, try to get them structured. So coming in the door they would generate 20% to the bottom line. If the consolidated in, if at the product line, it would consolidate into one of our operations, it could be 30%, 35%.

Excellent, excellent. And that's on -- that's -- to be clear, your revenue guidance doesn't include incremental acquisitions?

No, it does not. That's correct.

Terrific. Terrific. And generally your confidence level in achieving the guidance that you guys have outlined here?

Well if you added up your numbers --

Yes, the numbers add up to a very healthy number and it certainly looks very comfortable relative to the guidance you gave.

Correct. Terrific, terrific, thanks very much.

And look forward to seeing the numbers coming through.

Thank you.

Your next question comes from Vishal Saluja from Seligman. Please proceed.

Hi. This is Vishal Saluja from Seligman. Can you clarify for us what the applied free cash flow is for '08 in your guidance? And then I have a follow-up.

Hi, Vishal, this is David. We don't give guidance for free cash flow. We only give guidance for only two numbers, the top line and the earnings per share. We don't really give guidance for that. But a number that will probably be helpful to you, which we'll disclose shortly in the 10K, is the -- I'm sorry, the depreciation for the business which was, from continuing ops around $1.5 million. And you can back it into an EBITDA kind of number from that.

Okay. Any thoughts on what CapEx might look like this year?

Typically around about the same. It's typically around about $1 million to $1.5 million.

Okay, got it. And I think last quarter you announced your buy back, and I'm just curious, have you built in any level of share buy back into the current guidance?

The share count we projected, it's pretty much what we got at the start of the year, plus what we'd expect to have from any option issuances during the year. So it doesn't really include the effect of any share buy back, because you take it out of cash and you take it out of the share count. So although it's slightly accretive to earnings per share, it's not hugely accretive to earnings per share.

I would think given the low interest rate environment it would be -- and your low PE it would actually be very accretive.

Well, it is accretive. There's no doubt about it, but it's not hugely accretive in the first year. I think it's more of a long-term financing strategy, rather than a short-term one.

Fair enough. And the long-term guidance that you took up from -- by about 10%. Can you just share with us what gives you the increased level of confidence in the business that enabled you to do that?

Yes. This is David again We actually took it up by five percentage points, Vishal, not by 10 percentage points. We took it up from 15% to 20% to 20% to 25%, and the reason for that is that we still think we can achieve the same level of acquisition growth at 10% to 15% that hasn't changed from prior guidance. The change is the increase is the organic growth rate. Excuse me. In prior guidance we talked about 5%, is what we thought the long-term organic growth in the business would be. Excuse me. It's very similar to the historical actual growth rate, but we now think given the initiatives we've talked about, I want to point out, that the initiatives we talked about are examples only of the things that we intend to do. We intend to continue developing new products, like the 2-D products at Hoefer, like the microliter spectrophotometer, and we intend to continue doing the direct marketing with catalogs and websites in the Harvard business. We intend to roll those techniques out through, particularly, the Hoefer business. But that's really what's given us the confidence to increase our view of organic growth in 2008 and beyond.

Okay, that's really helpful. Thanks a lot.

There are no questions in queue. I would now like to turn the call over to Mr. Chane Graziano for closing remarks.

If there are no more questions, I'd like to say we appreciate you joining our conference call today. As we pointed out 2008 will be a very exciting year for Harvard Bioscience. We're very energized by the prospects, and look forward to another strong year of revenue and earnings growth. Thank you, and have a good evening.

Thank you for your participation in today's conference. This concludes the presentation. And you may now disconnect, and have a wonderful day.