Harvard Bioscience Inc (HBIO) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to the third quarter 2008 Harvard Bioscience, Incorporated earnings conference call.

My name is Melanie, and I'll be your coordinator for today.

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

We will conduct a question-and-answer session at the end of today's conference.

(OPERATOR INSTRUCTIONS).

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

Sue Luscinski, Chief Operating Officer.

Please proceed.

Good afternoon.

This is Sue Luscinski, Chief Operating Officer of Harvard Bioscience.

Thank you for joining us to discuss our results of the third quarter of 2008.

Chane Graziano, our CEO and David Green, our President are also on the call today.

After the Safe Harbor statement I will turn the call over to Chane and David who will present an overview of the quarter.

We will then open up the call for any questions.

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, 2007 and other public filings.

Any forward-looking statements including those related to our future results represent our estimates as of today and should not be relied upon as representing our estimates at 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 will 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 for 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 investors presentation or website icon as appropriate.

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

Our location 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 Chane.

Chane.

Thank you, sue, and good evening, everyone.

Although revenues were below or expectations, orders were strong for the third quarter of 2008.

This order strength was across all of our major product lines.

Panlab behavior products were up 33% in local currency compared to Q3 2007, which was prior to our ownership.

Harvard Apparatus US catalog products were up 7% for the quarter and 11% since February 2008 catalog mailing.

Hoefer electrophoresis products outside GE Health Care were up 25% for the quarter and 10% year-to-date.

The Biochrom spectrophotometer outside GE Health Care were up 30% for the quarter and 41% year-to-date.

Despite strong orders for the quarter, sales were negatively impacted by the strengthening of the US dollar and our inability to ramp up production to meet demand primarily at Panlab.

As a result, orders exceeded revenue by 1.9 million in the third quarter.

This resulted in non-GAAP adjusted EPS of $0.06 per share for the third quarter of 2008, $0.01 less than guidance due to the negative impact of foreign exchange.

As we look forward to the balance of the year, based on current trends, we expect orders to continue to be strong.

However, we do not expect to be able to increase manufacturing capacity fast enough at Panlab to meet fourth quarter 2008 demand and ship their backlog.

Therefore, at July 31, 2008 exchange rate, the basis on which we last gave our 2008 guidance, in August of 2008 we would have expected orders for the year to be in the 93 to $94 million range.

Revenues to be in the 91 to $92 million range and non-GAAP adjusted EPS to be in the $0.32 to $0.33 range.

Furthermore, if the US dollar remains at October 31, 2008 exchange rate, it will cost us approximately $0.02 per share in the fourth quarter versus our August guidance.

Therefore, using October 31, 2008 exchange rates for the fourth quarter, we expect fourth quarter revenues to be in the 22 to $23 million range and non-GAAP adjusted EPS to be in the $0.08 to $0.09 per share range.

Giving us 87 to $88 million in revenues for 2008 and non-GAAP adjusted EPS in the $0.30 to $0.31 per share range for the year.

I will now turn the call over to David, who will give you more detail on third quarter performance and our current situation.

Thank you, Chane.

Revenue and EPS are somewhat disappointing for the quarter; however, the underlying order rate of the business remain very strong for the quarter with orders exceeding revenue by $1.9 million.

The July foreign exchange rate orders for $22.6 million or 13% growth.

At the high end of our guidance range of 21 to $23 million.

Reported orders at actual foreign exchange rates were $21.8 million or 10% growth, still very healthy despite the sharp strengthening of the dollar.

Almost all of this growth came from Panlab, which we recorded acquisition growth even though Panlab's organic growth was 33% in the quarter.

Organic growth in orders for Harvard Bioscience in total was Panlab in Q3 last year would have been 3%.

Q3 revenue is severely impacted by the unprecedented strengthening of the dollar against the pound.

Note our Q3 guidance we have given July exchange rate, since then the dollar has risen 25% against the pound and 20% against the Euro.

Approximately 55% of our revenue and 50% of operating profit is in pounds or Euros.

The strengthening of the dollar has effectively shrunk half our income statement by approximately 20%.

Our 3% reported revenue growth for Q3 2008 would have been 7% at Q3 '07 exchange rates.

In addition to foreign exchange, revenue was also held back by manufacturing capacity constraints at Panlab, and (inaudible) expense start up of this product line which were recently relocated from Austria to the UK.

Let me go into more detail by major product line.

At Harvard Apparatus orders grew 29% over Q3 last year and revenue grew 15%.

As already mentioned, order growth is particularly strong at Panlab which was 33% organically over Q3 last year.

Notice the way that we report Panlab revenue for GAAP reporting purposes is a growth count of acquisition growth and not an organic growth.

If we calculate growth at Harvard Apparatus, assuming that owned Panlab in Q3 last year, we would of recorded orders growth of approximately 9% in Q3 showing the underlying strength of the business.

From Q4 this year, we will be reporting growth at Panlab at organic growth as we own Panlab in Q4 last year.

We are expecting the strong performance from Panlab in Q4.

The Harvard Apparatus catalog business in the US grew orders 7% organically driven largely by the mailing of the new catalog early this year.

Orders for the Harvard Apparatus catalog business are up 11%, since the launch of the catalog in February this year.

Outside the US the Harvard Apparatus business is fairly flat compared to last year.

We recently printed 50,000 copies of a new Warner catalog and 20,000 copies of a new Panlab catalog that we expect will drive growth next year.

We continue to see good growth in academic customers with continued weakness at Big Pharma and at least in the quarter from Biotech 2 although the long-term trend at Biotech has been up.

In the Hoefer electrophoresis business, that Chane already mentioned, orders for the Hoefer electrophoresis product outside GE Health Care grew 25% in the quarter.

For the Hoefer division as a whole orders grew 10% in dollars and 13% organically driven by strong demand for AAA products in the US and strong demand for electrophoresis products outside GE.

This strong growth is despite GE orders for electrophoresis products being down 35% compared to Q3 last year.

Outside GE total orders increased 34%.

In the Biochrom Asys business, again Chane mentioned, orders for spectrophotometer outside GE Health Care grew 30% in the quarter and 41% year-to-date.

The Biochrom Asys division as a whole, orders were down about 7% in pounds but because of the strengthening of the dollar this translates into a 16% decline in dollars.

Growth outside GE was more than offset by a 30% decline in GE orders for spectrophotometer in the quarter.

As you can see outside GE our business is growing very strongly.

Harvard Apparatus grew orders 29% and 9% is what done in Panlab in Q3 last year, Hoefer grew orders outside GE 34% and Biochrom Asys grew orders outside GE 7%.

Total revenue at GE in Q3 fell 35% or over $1 million versus Q3 last year.

This represents approximately a 5 percentage point drag on our overall organic growth rate.

In other words, if you take the growth in order to the business assuming we owned Panlab in Q3 last year, the exiting the drag caused by GE our overall organic growth rate was around 8%.

Recently worth pointing out, we think the decline in GE may finally be over and it's possible that next year we will actually see some growth from GE.

The GE spectrophotometer business we believe is unlikely to slip the decline further because part of what cause the decline in 2008 was GE reducing inventory level at its warehouses we think it is unlikely to be repeated in 2009.

Also in 2009, the minimum purchase commitment GE needs to make to retain exclusivity on our microliter spectrophotometer increases significantly.

In addition, the full spectrophotometer product line is included in the new GE catalog.

Part of the issue this year is that GE focused its marketing on exclusively on the new microliter spectrophotometer and neglected other products such as our popular Gene Microanalysis product.

We expect more balance in the marketing going forward and a renewed emphasis on marketing that microliter spectrophotometer in Q1 2009.

On the electrophoresis business orders from GE have picked up in October and the full product line is in the new GE catalog so expect it is likely to continue at the current rate rather than decline further.

As a result of the strong orders growth and capacity constraints in manufacturing at both Panlab and Biochrom Asys orders exceeded revenue by $1.9 million in Q3.

We have made several investments to increased manufacturing capacity and expect shipments of Panlab products to approximately double in Q4 versus Q3.

We also expect shipments of Asys products to increase substantially in Q4 versus Q3.

Because we expect strong orders in Q4 even with this increasing manufacturing capacity we will not be able to ship the backlogs that were created in Q3 and therefore we expect to finish the year with orders exceeding revenue by about $2 million.

The strong underlying performance of the business outside GE has been achieved despite the current credit crisis.

You're probably wondering how the credit crisis would affect us and how the upcoming recession will affect us too.

First, let me discuss the credit crisis.

The Company is in excellent financial shape.

We have cash of approximately 12 million and only 2 million in debt.

We have always maintained a conservative approach to managing and financing the business.

As a result, this has little direct effect of the credit crisis on our balance sheet.

On our revenues with an average purchase order of around $1000 our customers are not generally depend on financing to purchase our products and instead purchase our products out of grant funding or operating budgets rather than capital expenditure budget.

Thus we think there will be little direct impact to the credit crisis on our ability to generate orders from our customers.

In fact, we think that relative to other companies in general and other companies in the life science space in particular we are well positioned to weather the credit crisis.

Beyond our current balance sheet and current income statement our principal use of credit is to make acquisitions, which we intend to continue to do using our cash balances, cash flow and our $20 million credit facility.

Both our banks, Bank of America and Brown Brothers Harriman are well capitalized and despite the unprecedented credit squeeze have offered to extend our credit facilities in both time and dollar amount.

The willingness of our banks to increase our credit lines is a vote of confidence in the profitability and durability of our business and the strength of our growth model.

In short we do not expect a credit crisis to have any direct effect on either our current operations or long-term growth strategy.

While there's been no direct effect of the credit crisis on our business operations or growth strategy, the credit crisis has had a large indirect effect on our financial results as you can see from our Q3 results due to the unprecedented strengthening of the dollar against the pound and the Euro.

Let me now to the effect of what we are expecting to be a recession.

In the 12 years since management buyout that created Harvard Bioscience in 1996 we have been through two recessions.

The general recession of 2001 and the pharmaceutical company recession of 2003, 2004.

We grew both revenue and operating profit through both these recessions.

In fact, in the last 12 years we have never had a down year for revenue and have had only one down year for operating income and that was in 2005 due to the full implementation of SOX.

Not something we ever expected to repeat.

Even with the unprecedented foreign exchange headwind, the 25% drop in the dollar value of our UK businesses we still expect to finish the year with increases in both revenue and operating profit.

There are three reasons why we have had such consistent growth in both revenues and profits even during recessions.

The first is our growth strategy of combining organic growth to tuck under acquisitions that gives us good revenue growth even in periods of low industry growth as an example the acquisition of Panlab has added significant retail growth this year.

The second is our focus on relatively inexpensive products we call apparatus which tend to be more recession proof than capital equipment.

Having now divested completely of our capital equipment businesses we are a pure-play life science apparatus company.

Third is our focus on primarily products sold to academic researchers rather than to pharmaceutical or Biotech companies as government funded grout are very stable compared to revenue funded pharmaceutical companies and capital funded by tech companies.

For instance our end user sales in the Harvard Apparatus business in the US, approximately 62% of our revenue is from academic, governmental clinical customers nearly 14% coming from pharma and biotech combined.

That is why we can not avoid completely the fact of the worldwide economic slowdown, we are pleased that our business will perform relatively well during this recession.

Even with the dollar at its current strength versus the pound we expect to deliver $14 million of operating profit in 2008 and $15 million in EBITDA.

Now that the capital equivalent businesses are fully divested we anticipate being able to utilize the very substantial NOL carry forwards to shelter US income tax over the next few years.

Our the growth deferred tax assets are over $16 million of which approximately $14 million is reserved.

We expect to utilize most of the reserved deferred tax assets over the next three years, which will increase cash flow by approximately $14 million over what we would have if we did not have these reserved deferred tax assets.

But our current market capitalization approximately $93 million, with 10 million in net cash and placing no value on the deferred tax assets and no value on any income we might receive from the royalties we are owed from the divested capital equipment business our enterprise value of 82 million represents a multiple of 5.5 times 2008 EBITDA.

We believe this valuation is extraordinary low and we purchased approximately 300,000 shares under our previously announced stock purchase program.

As we look forward we will be focusing on areas we believe can still grow during a possibly prolonged economic downturn including growth opportunities in Federal Government spending and also growth opportunities in emerging markets where growth is likely to remain stronger than the US.

In summary, we expect to continue the strategy of organic growth plus tuck under acquisitions plus operational improvement but with a great emphasis on academic customers and emerging markets.

We expect to continue to take advantage of the (inaudible) through further share repurchases.

Finally I'm going to discuss our acquisition strategy.

Despite the current credit crisis we fully intend to continue making acquisitions as we historically have.

We are pursuing a pipeline of acquisitions and we expect to add approximately 10 to 15% to our revenue each year through acquisitions.

On our last call we mentioned we had several near-term opportunities.

We have hoped to be able to close at least one in Q3.

Unfortunately, the due diligence and negotiation process are taking far longer than we expected.

While we are continuing these negotiations we are also reviewing new opportunities as well and maintain our long-term guidance for acquisition growth of 10 to 15% of revenue per year.

We will now open the call to any questions.

(OPERATOR INSTRUCTIONS).

And our first question comes from the line of Forrest Sinclair with Paribas, go ahead.

Hello.

Hi, Chane, and David, I appreciate you taking my call.

Can you just talk about the price negotiation on the acquisition fund given the relatively low multiple on the core business today and how you prioritize buying back stock versus acquisitions because clearly there's an opportunity to do both and how are you thinking about the balance?

Yes, Forest, this is David.

Well, you're absolutely right there's an opportunity to do both.

The pricing in the marketplace for acquisitions that we have been looking at really hasn't changed much from our historic range which is in the four to six times operating margin range, and we started the share repurchases beginning early in the third quarter and obviously we are limited in that.

There are (inaudible) restrictions on what you can repurchase as a company, but we certainly think that our current valuation is extraordinary attractive and we have put our money where our mouth is on that.

Great.

Glad to hear that.

And as it relates to GE, what does he represent as a percentage of sales today and as it relates to your confidence in the ability for that business to stop being a drag on overall organic growth, kind of where does that stand?

Roughly, GE is up 10% of our overall revenue split between the spectrophotometer business and the electrophoresis business.

And your confidence as it relates to that -- that business, growing from here?

Yes.

As far as David said in his -- in his call and the spectrophotometer side of the business we are pretty comfortable based on the minimums that they have to buy on the nano liter spectrophotometer.

And my guess is that business has an opportunity to grow significantly next year.

In the electrophoresis business it is a small portion of the total business, about $3 million, and I think at the current run rate it looks like it has stabilized.

There's no assurances that that won't deteriorate further but that's the total exposure.

Got it.

Thank you.

(OPERATOR INSTRUCTIONS).

And our next question comes from the line of Kerry Nelson with Skystone Capital.

Go ahead.

Hi.

Good evening.

Chane, could you give us some more color on the GE, your confidence and why we have hit bottom?

I just need a little bit more color on this.

So on the electrophoresis side, why in your view, why is it that the business had been declining and what gives you the confidence that it appears that it's stabilizing?

Well, the run rate is pretty much stabilized over the last four quarters.

That's the reason I believe it's pretty much stabilized and it's a very important technique for General Electric since western block is a very important technology for protein analysis, and as long as General Electric wants to remain in the 1D electrophoresis business, we are the only company they can buy those products from so we see very little risk there on that side of the business.

And on that, just one follow-up on that.

So you're saying the dollar revenue run rate is now flat sequentially for the last four quarters?

Exactly?

Okay.

Exactly.

And so the Spectro side, yes, can you help us understand how much, I guess now you're saying is -- how much is the minimum on the new product, how much of the risk or future risk does that offset and what sort of visibility do you have for sell-in versus sell-through?

The sellout rate for General Electric is very strong.

In fact, it's much higher than the buy-in rate as they have reported to us.

Although today they do not give us written reports, I really can't put a number out there, but what they have told us is the number is in the high double-digits, so their sellout rate is very strong.

The nano liter view product line, the nano liter spectrophotometer line has -- they have exceeded their expectations and they are very comfortable that they can meet orr achieve those numbers next year.

The balance of the business has deteriorated much ever than we anticipated and they have kind of neglected it as well and they have a renewed focus on it because they recognize what did happen.

But if you just take this year's business and you add the supplies and the accessories and the nano view product and the -- and the large increase that they are committed to next year, which is over 30% increase next year over this year.

That will offset any risk we might have in the spectrophotometer business.

I'm comfortable with that.

In that stage, what is the run rate for the nano view?

I can't -- that's confidential by the contract, Kerry.

The total business of General Electric as we said, it's about 10% of the business and 3 million is one and 7 million spectra.

That's about as general as I can tell you.

Right.

Okay.

Okay.

Thank you.

Welcome.

(OPERATOR INSTRUCTIONS).

And I show no further questions at this time.

I'd like to turn the call back over to Mr.

Graziano.

Please proceed.

I'd like to thank all of you for joining our conference call today after 12 consecutive quarters of meeting or exceeding guidance, it is very disappointing for me to deliver results below expectation.

However, our fundamental business remains strong, is in excellent financial health and we remain committed to delivering strong revenue and profit growth in the future.

Thank you again, have a great evening.

Ladies and gentlemen, thank you for your participation in today's conference.

That does conclude the presentation.

You may disconnect.

Have a wonderful day.