Harvard Bioscience Inc (HBIO) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the third-quarter 2011 Harvard Bioscience earnings conference call. At this time all participants are in a listen-only mode. Later we'll conduct a question-and-answer session and instructions will be given at that time. As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Tom McNaughton, CFO. Sir, please begin.

Thank you, Sayed, and good morning, everyone. Thank you for joining us to discuss the results of the third quarter 2011. Chane Graziano, our CEO, and David Green, our President, are also on the call today.

After the Safe Harbor statement I'll turn the call over to Chane and David who will present comments on the Company's third-quarter core business performance, on the status of our new Regenerative Medicine device business, and our outlook for the fourth quarter and this year. Following those comments we will open the call for any questions.

In our discussion today we will 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, 2010 and our 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 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.

We do note that during this call we will use non-GAAP financial measures because (inaudible) those measures provide an enhanced understanding of how our businesses are performing. These non-GAAP measures approximate information used by our management to internally evaluate the operating results of the Company.

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 our Investor Relations section of our website. Look on the Investor Relations section of our website and then click on the Investor Presentation or website icon as appropriate.

A replay of the 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'll now turn the call over to Chane.

Thank you, Tom. Good morning, everyone. Clearly our financial results for the third quarter 2011 were very disappointing, driven mostly by the current economic environment effects on research spending in some of our key markets. We expect the economic weakness to continue into the fourth quarter; however, even with the current situation, we believe that 2012 will be a much stronger year.

Let me first review the situation in 2011 so far. In 2011 so far we've had three major issues -- uncertainty over the NIH budget in the USA; a $3 million decline in GE Nanovue sales due to GE overstocking the product at the end of 2010; and fewer salespeople at Denville than we had planned. Let me address each of these in turn.

The academic and government research funding in the US and the economic weakness in Europe has adversely affected revenues particularly in our Harvard Apparatus business. Since we do not have a major presence in BRIC nations we have not had strength of these markets to offset the weakness in the USA.

However, this weakness was largely offset by the effect of acquisitions of Coulbourn and CMA and the introduction of the Cytopulse product in our electroporation product line. For the full year we expect Harvard Apparatus revenue to be up approximately 4% compared to 2010, but down approximately $3.5 million from our original plan.

For GE Nanovue spectrophotometer, last year GE took extra deliveries from us in order to meet a minimum contractual commitment. This left them with excess inventory at the end of 2010 and hence they have purchased very little of this product from us in 2011. For the full year this will be almost a $4 million decline from 2010 revenues. This alone is equivalent to minus 4 percentage points on organic growth.

Due to unexpectedly high turnover in the Denville field salesforce, Denville has been down approximately five salespeople versus our plan year to date. This has led to a shortfall of approximately $3 million versus our original annual plan. Denville is now back on plan and has 32 field sales reps, up 23% from the 26 in Q1.

As we look into 2012 we are very optimistic about the outlook for organic growth, despite a weak economic environment for the following reasons -- number one, GE buying Nanovues at a normal rate would add approximately $2.5 million of organic growth, GE has already started buying Nanovues from us again; number two, the impact of the full staffing of the field salesforce at Denville, which is already in place; and three, the full year impact of our new Cytopulse productline in our electroporation business.

In addition to these drivers of organic growth we will have full-year impact of the CMA acquisition which we expect will likely add approximately $2 million incrementally to revenue in 2012.

In addition to these growth drivers in the core business, we are making significant progress in our Regenerative Medicine Device business. We have completed the construction of our clean room in our Holliston facility which will be used for the production of both bioreactors and stem cell therapy injectors. We have also begun production of research grade InBreath bioreactors in Holliston. We anticipate launching our first clinical product in the first half of 2012.

As a result of the economic weakness in the third quarter, which we see continuing into the current quarter, we're revising our core Life Science Research Tools business revenue and earnings guidance for 2011. For the fourth quarter, we expect our revenues to be in the $27.5 million to $28.5 million range and non-GAAP adjusted diluted earnings per share for the core Life Science Research Tools business to be in the $0.09 to $0.10 range.

For the year, we expect revenues to be in the $107.5 million to $108.5 million range and non-GAAP adjusted diluted earnings per share for the core Life Science Research Tools business to be in the $0.34 to $0.35 range.

We will continue our investment in the Regenerative Medicine Device initiative and expect to spend in line with our operating budget. We expect our investment to be approximately $0.02 for the fourth quarter of 2011 and approximately $0.06 to $0.07 for the full year. The $0.01 increase from our previous guidance represents the cost associated with our review of strategic alternatives for maximizing the value of the Regenerative Medicine Device business for our stockholders.

Therefore, we expect our overall non-GAAP adjusted earnings per share, combining the earnings of the core Life Science Research Tools business and the investment in the Regenerative Medicine business, to be in the $0.07 to $0.08 range for the fourth quarter and $0.27 to $0.28 range for the year. Our guidance does not include the impact of any future acquisitions. I will now turn the call over to David.

Thank you, Chane, and good morning, everyone. Despite the weakness in NIH funding in the US there were significant sources of strength that bode well for the future. Denville, for instance, has grown 3% organically year to date, even in the face of the NIH uncertainties and it's [short stopping]. This illustrates well the strength of the underlying business model, that it can grow despite the NIH uncertainty and being short six salespeople.

While the NIH uncertainty is likely to continue at least through the fourth quarter, we've already hired all the salespeople needed to get us back to full strength. In addition, our Biochrom business outside GE has grown 10% organically year to date driven by new products such as our advanced Libra spectrophotometers.

Within our Harvard business, the new Cytopulse technology we acquired in December last year helped our electroporation business grow 19% organically in the quarter. Hence we have significant drivers of organic growth that will help us to grow in 2012.

In addition to the above, in 2012 we will no longer have the approximately $4 million decline in revenue which is approximately minus 4 percentage points of organic growth that we've had in 2011 due to GE overstocking the Nanovue product at the end of 2010. GE had already started to purchase Nanovues from us again and we expect this effect alone will add approximately $2.5 million or 2.5 percentage points to organic growth in 2012.

We believe that the combination of GE's return to buying Nanovues, over 20% more salespeople at Denville, our new Cytopulse electroporation products, and continued growth of the new Libra spectrophotometers will give us a strong basis for organic growth in 2012 even if there is continued uncertainty over NIH funding in the US.

I'm also pleased to report that the integration of the CMA acquisition is going well with the [intimate] pieces of business already relocated to our Holliston, Massachusetts facility. CMA is the market leader in the field of research micro dialysis with a well recognized brand and strong technology base.

The CMA productline is mostly consumables and hence it increases the percentage of our overall revenue that comes from consumables. With the addition of CMA over 30% of our total revenue now comes from consumable products. Consumables tend to be the least volatile, most predictable and most recession proof revenue stream in the Life Science market. Because we bought CMA at the beginning of July we will get the full-year impact in 2012 and we expect that this alone will add approximately $2 million to revenue in 2012.

Let me now turn to progress in our Regenerative Medicine business. In our Regenerative Medicine business we're very pleased to report that Mr. Beyene, a patient we helped to treat of tracheal cancer in June, is alive and well four months after the surgery. Every day he's alive and well adds to the credibility of the safety and efficacy of the procedure and the likelihood that eventually the technique will be in wider acceptance.

We're also pleased to report that the work has been submitted to a major academic medical journal for review. Publication in a peer-reviewed journal would also add significantly to the credibility of the procedure.

We're also pleased to report that Professor Macchiarini who performed the surgery on Mr. Beyene is working with at least two major hospitals in the US to prepare filings with the FDA so that US patients can be treated with the regenerated tracheas. Establishing the procedure in the US is important in that it's the largest market for tracheal cancer procedures.

In addition to the clinical progress, we've established manufacturing of (inaudible) design which was first made in our (inaudible) subsidiary in Germany in our Holliston, Massachusetts facility. We are currently doing this in the audit process to establish the Holliston facility as a clinical manufacturing site. We think this will be important in establishing the technique in the USA.

In order to treat patients in the US, the FDA will need to approve each patient's treatment individually. At least two major hospitals in the US are currently preparing to submit patient applications to the FDA. At this point the technique is still experimental and can be only used on humans when proper investigation on device regulations have been followed.

In addition to the progress on our bioreactor business we've also made progress on our clinical stem cell therapy injector. On our stem cell therapy injector we've completed construction of a clean room manufacturing facility within our Holliston, Mass site and we've begun the audit process with an independent third party that we expect will lead to the specification of our facility to GMP standards in early 2012.

As a result, we are on track to generate our first revenue for a true clinical product in 2012. We anticipate we will likely get revenue in the EU in the first half of 2012 and revenue in the US in the second half.

As we previously stated, we're reviewing our strategic alternatives for maximizing the value we can create for our stockholders in our Regenerative Medicine business.

Based on the feedback we received from potential investors after the announcement of Mr. Beyene's surgery, we feel that both the publication of the results in a journal and the first surgery in the USA can be important steps in the near term and could create value for our stockholders. Hence we are pursuing these goals while we continue discussions regarding separate financing for the Regenerative Medicine Device business.

We're seeking additional financing for the Regenerative Medicine business because we believe there may be opportunities to significantly increase the addressable market size in the Regenerative Medicine field. If a significant event such as an investment or a partnering agreement is reached we will announce it in a press release. We'll now open the call up for any questions.

(Operator Instructions). John [Massey], [Redden] Capital.

Good morning. Can you give some more detail as to the reasons for the high turnover at Denville's salesforce? And then also, what level of productivity are you looking from the new hires? Basically the annual run rate is about $3 million; about how much of that do you expect to recoup next year? And is there any aging in the salesforce? And then I have a follow-up.

Sure, let me take the first one first. The issue we really had is the Denville model for hiring salespeople is we pay a little base, base salary, and then a high commission based on the gross margin of the products sold by that salesperson in a territory.

What we found was in a couple of territories, particularly on the West Coast, especially San Francisco, our base salaries were really too low given the cost of living in those areas, and so we suffered high turnover in those areas.

Since then we've addressed that and we've raised the base salaries in those areas, allowing us to be competitive while still maintaining the fundamental model of a low base salary and high commission. So that was the main reason why we got behind in the hiring plan.

Your second question was about productivity of the salesforce. Obviously new people tend to be less productive than people who are experienced. The average across all of our salespeople is around $800,000 per year. And people in the first six to 12 months tend to be much lower than that.

Okay, thank you. And can you comment on the margin -- the gross margin difference in the GE business, the Nanovue? Is that significantly higher gross margin than average?

The Nanovue product is a high gross margin product. For those of you who don't know, the Nanovue spectrophotometer allows you to perform spectrophotometry or the analysis of TNM proteins in a single droplet, whereas the traditional technique is using a standard cuvette.

And so, the micro volumes based spectrophotometers sell at almost twice the price of a traditional spectrophotometer. So that is a high-margin product and one of the reasons why our gross margin was down a little bit in the third quarter is because of the absence of the Nanovue revenue.

Great, thank you. That helps a lot. That's it.

(Operator Instructions). I'm showing no one else in queue. I'd like to hand the conference back over to Mr. Chane Graziano.

I'd like to thank everyone for joining our call today. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.