Harvard Bioscience Inc (HBIO) 2012 Q4 法說會逐字稿

Welcome to the fourth quarter 2012 Harvard Bioscience Earnings Conference Call. (Operator Instructions). I would now like to introduce your host for today, Mr. Tom McNaughton, CFO. Sir, please begin.

Thank you, Ben, and good morning, everyone. Thank you for joining us to discuss our results for the fourth quarter of 2012. 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 fourth quarter and 2012 full-year business performance. 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 forward Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual actions and 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, 2011in the form S-1 registration statement filed by the SEC by Harvard Apparatus Regenerative Technologies, Inc. and in our other public filings.

Any Forward-looking statements including, among other things, those related to our future results or actions, the initial public offering and contemplated subsequent spin-off of Harvard Apparatus Regenerative Technologies, Inc. and with respect to the spin-off, our ability to obtain a private letter ruling from the Internal Revenue Service regarding distribution of tax retreatment represent our estimates and expectations as of today and should not be relied upon as representing our estimates of any subsequent day. For further information regarding Forward-looking statements and risk factors as included in the press release issued earlier reporting our fourth quarter results.

Harvard Bioscience expressly disclaims any obligation or undertaking to release publicly any updates or revisions to such statements to reflect any change in expectations with regard thereto and any changes in the events, conditions, or circumstances under which any such statement is based. Please note that during this call, we'll discuss non-GAAP financial measures because we believe those measures provide enhanced understanding of our how our businesses are performing. These non-GAAP measures approximate information by management to internally evaluate the operating results of the Company. For each non-GAAP financial measure discussed, we've made available as part of our press release or in the investor 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 the press release will be archived and available in the Investor Relations section of our website. Look under the Investor Relations section of our website and then click on the Investor Presentations on website icon as appropriate. A replay of this call will also be archived at the same location on our website. Our web site is located at www.harvardbioscience.com

Lastly, all financial information presented in 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. Despite the difficult economic environment and political uncertainty during 2012, we made significant progress at HBIO toward achieving our long-term goals of providing the best products and services for our customers and maximizing shareholder value. In our Harvard Apparatus Regenerative Technology business which we now refer to as HART, we achieved several major milestones in 2012, including beginning a clinical trial in Russia with two trachea transplant patients treated using our bioreactors.

The first clinical trial was filmed and being broadcast on European television today and billed as the Miracle of KrasnodarThe US FDA approved the first trachea transplant surgery in the US. We established our own trachea scaffold production facility in Holliston, Massachusetts, and last but not least, filing an S-1 registration statement with the SEC in December to begin an IPO and separate HART from HBIO.

While a significant amount of our attention was on the HART business, we also took steps to improve the operations of our core Life Science Research Tools businessand to position us once again to become active in acquiring new product lines or companies that strengthen our position in the research market. Some of the actions we took during 2012 included hiring a new general manager for Denville business and restructured its sales team to more effectively train new sales reps to ensure better productivity. In February, we acquired Age and Biotechnology, a German manufacturer of (inaudible)

We restructured the company, repositioned its products to increase gross margins and we expanded sales and marketing efforts. Next, we took steps to increase our gross margins and reduce expenses in our Hoefer Electrophoresis business. We reorganized and reduced expenses in our Spanish subsidiary.

We launched a new novel patented pending microvolume Cuvette that can turn a spectrophotometer into a microvolume unit. We launched a new microvolume spectrophotometer in 2012, and will launch an additional one in mid 2013. We developed a new family of products for our BTX electrophoresis brand that will enable us to compete in the larger segment of that market.

Due to the fact that we have filed a registration statement with the SEC for an IPO of HART, in connection with the separation of HART from HBIO, we will not be providing guidance for 2013 for either business. However, based on the progress we have made in both our LSRT business and HART businesses, we're excited about the future growth opportunities for both of these companies. I will now turn the call over to David.

Thank you, Chane. Good morning, everyone. In HART, we're pleased to report continued clinical progress.

Our current patients continue to do well. Mr.Beyene is alive at 20 months post-surgery. He was given only two weeks to live prior to that surgery.

The two Russian patients who were the first to enroll in the clinical trial are also alive at 8 months post-surgery. Those two patients were treated as part of a clinical trial funded under a $5 million megagrant from the Russian government and it is taking place in Krasnodar in Russia. The Krasnodar hospital is one of Russia's top hospitals having performed over 200 organ transplants in the last two years.

We expect further trachea transplant surgeries to take place in Krasnodar in the future. In addition to the Russian clinical trial, a European clinical trial in trachea cancer patients which is expected to enroll approximately 25 patients is expected to start next year. Before this formal trial begins, individual patients will continue to be treated on a compassionate case-by-case basis in the same way that Mr. Beyene was treated.

The project is a consortium of European companies, hospitals, companies and universities led by Professor Macchiarini I'm also pleased to report that a sixth patient has been treated. The patient isalive at six months, but has yet to be released from the hospital.

The patient was in very serious condition and was treated on an emergency basis as a last-resort attempt to save the patient's life. The patient's current condition has not been disclosed by the hospital. We expect the seventh patient, a young girl born without a trachea to be treated in the next month or two.

We also expect additional surgeries this year. At this point, the technique is still experimental and can only be used on humans when investigational device regulations have been followed. In December, HART filed a registration statement with the SEC for an initial public offering of shares of HART.

We believe that completing an IPO in HART and separating the HART business from the Harvard Bioscience business for a spin-off of shares will maximize value for Harvard Bioscience shareholders for the following reasons. The IPO will provide capital for HART's business development. The IPO will put a clear value on HART and thus will put a clear value on Harvard Bioscience post-IPO 80% interest in HART.

The spin-off will remove HART's operating losses which were approximately $6 million in 2012.From the Harvard Bioscience income statement making the profits of the Harvard Bioscience business much more visible.

We believe the Harvard Bioscience shareholders will benefit from owning shares in the two separate companies by having the continued earnings and cash flow generation of the Core Life Science Research Tools business reflected in one security, the common stock of Harvard Bioscience and the longer term future potential of the Regenerative Medicine Device business reflected in another of the common stock of HART. The spin-off will give Harvard Bioscience greater borrowing capacity and will allow Harvard Bioscience to focus more aggressively on our core businesses acquisition strategy after the spin-off. To that end, we're currently working with our bank group to expand the Harvard Bioscience credit facility.

The spin-off will allow each business to focus exclusively on being successful in its own marketswithout the management team being split between the two businesses. HART will continue to provide Harvard Bioscience with an organic growth opportunity even after the spin-off.

As HART will grant Harvard Bioscience a license to exploit HART developments in the research market as HART will focus on providing devices for clinical use. Feeding the research markets HART Technologies sold via Harvard Bioscience will also benefit HART in the long run as it will establish a broad base of researchers already using HART technology as a transition from research to clinical applications.

Finally, Harvard Bioscience will retain the tax loss carry forwards generated by the historic investment of approximately $12 million in HART which will reduce income tax payments in a few years after the separation which will improve Harvard Bioscience's cash flow even more than just removing the HART operating losses. Our plan is to separate our regenerative medicine devices into HART Inc. by firstly, contributing our regenerative medicine device business assets including our bioreactors, scaffolds and clinical pumps to it. Secondly, contributing $10 million in cash to partially fund its operations. Third, raising external capital via the IPO as a new incremental shares of HART, and fourth, spinning off Harvard Bioscience remaining shares in HART to the Harvard Bioscience shareholders, tax-free, approximately four months following the IPO.

I would like to be clear, this IPO is not an offering of shares in Harvard Bioscience, and we will not be selling any shares in Harvard Bioscience. It is purely an offering of shares in Harvard Bioscience's HART subsidiary. After the HART IPO, Harvard Bioscience will own approximately 80% of the HART shares.

After a 120-day waiting period post the IPO, Harvard Bioscience will distribute all of its shares of HART to the Harvard Bioscience shareholders. We expect this distribution be tax-free to both Harvard Bioscience and to its stockholders. We filed a private letter ruling request to the IRS for that effect.

After this distribution, every shareholder of Harvard Bioscience will receive via a dividend, shares in HART, proratio to their share ownership in Harvard Bioscience. Following the distribution of shares, HART and Harvard Bioscience will be separate, publicly-traded companies. Harvard Bioscience's ticker symbol will continue to be HBIO and HART's ticker simple will be HART. We've made considerable progress in the IPO process and have responded to several rounds of comments from both the SEC and I.R.S.

However, the SEC has not yet declared the prospectives effective and the I.R.S. has not delivered a private letter ruling. Assuming we receive the approvals in the next few weeks, we expect to begin the IPO marketing process in late March or early April.

This would put the dividend distribution some time in July or August. However, this process is highly dependent on factors beyond our control including required responses from the I.R.S. and SEC and market conditions and there can be no assurance we'll be able to obtain a private letter ruling or requisite SEC approvals.

Please review HART's form S-1 filings and its amendments available on the SEC's website. HART has established its own Board of Directors, and I'm very pleased to announce that Tom Robinson, the Healthcare Executive Search Company Robinson Butler and former executive of Boston Scientific, and Jim McGory who led Genzyme's Oncology business are now directors at HART. Both have deep experience in leading and building medical device businesses, and we look forward to working with them in realizing HART's full potential for both patients and our stockholders. We will now open up the call to any questions.

(Operator Instructions). Our first question comes from the line of [Chris Higgins] from Harbor Capital. Your line is open. Please go ahead.

Hello, Chane and David. How are you?

Good, thanks.

So, very much appreciate the update on the businesses and I know a question on the LSRT business, I know there have been a number of moving pieces over the last few years. Given the investments you guys have been doing with HART. But I was doing some sort of rough back of the envelope math based on the management and set up targets you guys have filed in your 2011 proxy for the 2010 fiscal year.

I know sort of these soft-making exercises are always fraught with risk, but it looked like then you were targeting roughly at 16.5%to 17.5%non-GAAP operating income margin for the LSRT business. And I know, especially with the last two years, given the budget pressures and also just your guy's on-going investment in HART. I'm trying to figure out sort of what is the -- what is your guy's target for the long-term margin for that LSRT business?

Yeah. I mean I think that over the past couple of years, in the economic environment, it has been less than we would expect it to be. I believe this year, we're around 15%.

As we look forward, I believe we have taken steps and some of the steps we outlined that we started to take place in 2012. That will take about a million and a half dollars worth of expenses out also margin improvement. But my goal is that I believe we can run this business in the 18% operating margin range. And that's my target.

Okay. That's really helpful. And staying on the LSRT business, you mention that you were planning on expanding the capacity for the credit facility and just given your strong cash flow, especially post spin of HART. You have it at 20 today. Are you planning on doubling that?

We negotiated a new facility of $50 million.

Got it. Okay. Very helpful. And especially given the budget pressures and -- for some of the smaller acquisitions you guys might be targeting, are you guys seeing more and more opportunities out there to do sort of these tuck-in deals?

We have several that we're looking at at this time. We've become a little more active over the last few months to fill the pipeline. Over the last year or so. we've had opportunities, but most of the tuck unders that we do typically aren't competitive in the market place. They are things that we seek out, and we approach the sellers or potential sellers. I don't believe there's any shortage of opportunity.

Okay. That's helpful. That's all I had today. Thanks very much, guys.

Thanks.

Thank you. (Operator Instructions). We have a question from Kelly Carwdell from Central Square. Your line is open. Please go ahead.

Hello, guys, how you doing?

Great, Kelly, how you doing?

Great. Thanks. Just following on to the last question on acquisitions. I think historically, you guys had talked about being able to pick these companies up for something like four to six times EBITDA. Just remind me, is that right?

That's correct.

Are those opportunities still available?

Yes, that's correct. That's still our target, yes.

Okay. Sounds good.

The smaller acquisitions, we've been able to do in that range. You get the larger acquisitions, where there may be some competitive pressure, it may be seven times. But we have not stretched to that kind of pricing at this stage.

Great. Thank you.

Thank you. (Operator Instructions). And I'm showing no additional questions in queue. I would like to turn the conference back to Chane Graziano, Chairman and Chief Executive Officer for closing remarks.

Thanks, Ben. Despite the current economic environment, we're very optimistic about the future success of both HBIO and HART businesses. The significant increase in our stock price since we announced the separation into two businesses, I believe validates our excitement about the future growth opportunities of these businesses. I would like to thank everybody for attending our call today. Thank you.

Ladies and gentlemen, thank you for your attendance in today's conference. This will conclude the program and you may all disconnect. Have a great rest of the day.