Harvard Bioscience Inc (HBIO) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the second-quarter 2013 Harvard Bioscience earning conference call. At this time, all participants in a listen-only mode. Later, we will 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, you please may begin.

Thank you, Charlotte, and good morning, everyone. Thank you for joining us to discuss our second results for the second quarter of 2013. David Greene, our President and Interim CEO, is also on the call with me today.

After the Safe Harbor statement, I will turn the call over to David, who will present comments on the Company's second-quarter business performance. Following those comments, we will open the call for any questions.

In our discussions today, we may make statements that constitute forward-looking statements. Our actual results may differ materially from those projected due to risks and uncertainties, including those detailed in our quarterly report on Form 10-Q for the quarter ended March 31, 2013, and our other public filings.

Any forward-looking statements, including those related to our future results and activities, represent our estimates as of today, and should not be relied upon as representing our estimates as of any subsequent day.

Please note that, during this call, we will discuss non-GAAP financial measures because we believe those measures provide an enhanced understanding of how our businesses are performing. 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 of 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.

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

I'll now turn the call over to David. David.

Thank you, Tom. Good morning, everyone. On this call, I will first discuss the performance of our core Life Science Research Tools, or LSRT, business, and then separately discuss the progress in our Harvard Apparatus Regenerative Technology business, or HART.

As I am sure you are aware, we are currently in the process of spinning off the HART business as a separately traded public company. I will also update you on our plans for hiring a new CEO for the LSRT business.

First, the LSRT business. In Q2, in the LSRT business, revenues and non-GAAP EPS from the core business, excluding expenses related to the HART spinoff and one-off search costs for a new CEO, were flat with Q1. These one-off costs totaled approximately $0.01 per share.

Compared to Q2 last year, both revenues and profits in the second quarter were disappointing, primarily because we saw a sharp decline in revenue to General Electric Healthcare. Revenues were down 8% in the second quarter, compared with the second quarter of 2012, with GE accounting for almost half the decline in revenue.

Part of the decline is also due to reporting against an exceptionally strong quarter last year. Q2 last year was a record for a Q2 for us, for both revenue and non-GAAP EPS, and was the last quarter before we saw substantial impact from the threat of sequestration in the US.

GE's impact on the quarter in both revenue and operating profit was significant. However, GE now only accounts for approximately 4% of our total revenue. We expect revenue from GE will likely remain at this lower level throughout the second half of the year. Because of this, we expect overall revenue to be down approximately 4% versus last year. We have already implemented cost-cutting initiatives to partly mitigate the impact of the decline in revenue on operating profit during the second half of this year.

Outside the GE decline, we saw growth in both revenue and operating profit at our Denville business, and significant growth in our new BioDrop spectrophotometer product line, which is sold outside GE.

I am also very pleased to announce that the integration of AHN into the Denville supply chain should start to have a positive impact on margins in the second half of the year, and should have a substantial positive impact on 2014 operating profits.

Now let me update you on the spinoff of our HART business. I am pleased to inform you that we have received a private letter ruling from the IRS that the spinoff will qualify for tax-free treatment. This is one of the two major hurdles we need to overcome to complete the spinoff.

The other is approval of our Form 10 from the SEC. The filing of the Form 10 took place last night.

Let me review again the reason for spinning off the HART business. We believe that the Harvard Bioscience shareholders will benefit from owning shares in the two separate companies by having the continued earnings and cash flow of the core LSRT business reflected in one security, the common stock of Harvard Bioscience, and the longer-term future potential of the Regenerative Medicine business reflected in another security, the common stock of HART.

The immediate listing of 100% of the shares of HART will remove the overhang of the distribution of shares held by Harvard Bioscience that was an adverse factor in the previously planned IPO.

The spinoff will remove the HART operating losses, which were approximately $6.3 million in 2012, from the Harvard Bioscience income statement, making the profits of the Harvard Bioscience business much more visible.

The spinoff will give Harvard Bioscience a greater borrowing capacity, and will allow Harvard Bioscience to focus more aggressively on our core businesses acquisition strategy after the spinoff.

Our recently expanded credit facility will give Harvard Bioscience the ability to fund this acquisition strategy.

Finally, Harvard Bioscience will retain the tax laws carry-forwards generated by the historical investment of approximately $15 million in HART, which will reduce income tax payments in the few years after the separation and will improve Harvard Bioscience cash flows even more than just removing the operating losses.

Let me now discuss clinical progress within the HART business. I'm very pleased to report that an eighth successful regenerated tracheal transplant surgery has taken place. The surgery took place in July at the Karolinska Hospital in Sweden, and was performed by Dr. Macchiarini. This is the second surgery to use a scaffold manufactured by us.

I am also pleased to report that the six-month follow-up on the two Russian patients who began a clinical trial last summer has been presented at the conference of the European Society of Thoracic Surgeons. Overall, we are very pleased with the progress of the patients, as the patient who received the world's first regenerated tracheal transplant recently passed the five-year survival point. The patient who received the world's first regenerated trachea transplant using a synthetic scaffold recently passed the two-year survival point. And the two Russian patients recently passed the one-year survival point.

In total, of the seven patients treated so far, five are still alive. The two that have not survived died of complications of their underlying medical conditions, and there is no evidence that the scaffold or the bioreactor was the cause of death in either case.

All the surgeons involved in these surgeries intend to continue treating patients, and we expect further surgeries using our InBreath scaffold and bioreactor system to take place later this year.

At this point, the technique is still experimental and can only be used on humans when investigational device regulations have been followed.

Finally, let me update you on the search for a new CEO for the LSRT business. We have engaged a search consulting firm and have interviewed several promising candidates. It will likely take us a few more weeks to conclude this process.

We will now open up the call for any questions.

(Operator Instructions). Prasad Phatak, Tappan Street Partners.

Thanks for taking the question. Can you just talk a little bit more about the situation with GE Healthcare? I guess why are they ordering fewer products? Is this just an attempt -- are they just exiting the business? Or how should we think about that in the context of the rest of the business and ensuring that something like this doesn't happen with the other 96% of sales? Thanks.

We have no indication that GE is exiting the business of either of the product lines that we currently sell to them, which is the spectrophotometer product line and the electrophoresis product line. What GE has told us is that their inventory levels, both their own inventory levels plus the inventory levels at one of their major customers, were high. And so this is more of a pipeline issue rather than -- or an inventory stocking issue rather than end-user demand issue.

So I think that those circumstances are really unique to our relationship with GE and really don't apply to the other 96% of our revenue.

Okay.

(multiple speakers) question, Prasad?

Yes, that's great. And then maybe sort of an unrelated follow-up. But can you give us any more clarity on the timing of the spinoff? And I know you're just waiting for the SEC to approve the Form 10, but just sort of do you have a rough timeline for when that might be?

Yes, we are dependent on the SEC's review, and obviously we can't predict that. But if the previous process with the S1 is any guide, we had relatively light comments from the SEC, and we were able to get through those fairly expeditiously. So I think if everything goes smoothly, we might be in a place to set the record date for the distribution probably towards the end of September, which would lead to a final distribution and complete separation of the Company sometime in the middle of October.

Okay, perfect. And then, just lastly, maybe you could comment on the pipeline for the LSRT business and acquisitions. What are you seeing now, especially in light of the environment with NIH funding? Have there been more people that are up for sale, given maybe some of these mom-and-pop guys are struggling? Or how do you really think about that? Thanks.

You are probably familiar with the types of businesses we have been acquiring over the last 15 or 16 years. They tend to be relatively small businesses. They're often owned by the founder. They're often family businesses. And, as such, they don't really trade in a liquid market for acquisitions.

So what we found over the years is that the prices we pay for those acquisitions have been fairly consistent at around six times operating profit throughout the booms and the busts.

What's happening in the public markets really tends to be very distant from what's happening in the market for private company acquisitions. So we found there really doesn't tend to be much impact either during the boom time or the bust times. The one thing that does tend to take place is during periods of greater uncertainty, like now, in terms of NIH funding. Then companies that might have been outside of our price range might come into our price range. And we did see that, for instance, when we acquired Denville back in 2009. That was obviously after the financial crisis hit. And I think that business, had it been sold during the better times in 2006, 2007, probably would have gone for a high EBITDA multiple than what we paid for it.

But, other than that, I don't really see much change. I don't really anticipate any change to the number for the pricing of acquisition candidates because of sequestration.

And is it fair to say that you -- are you continuing to work on the acquisition pipeline before the spinoff of HART? Or has it been you are at a standstill, and you're not really evaluating things until after the spinoff and, obviously, you have increased capacity to do that once the losses from HART are gone? But just kind of curious if there should be a -- sort of a ramp period after the spin or if there are a bunch of things that, obviously, you have been looking at for a while; you just can't proceed until after the spinoff?

We do have a pipeline. We have continued to work the pipeline of candidates for acquisitions. The constraint on us in the last couple of years has really been more making US acquisitions, rather than making acquisitions in total. And so if you look at the acquisitions we have made in the last couple of years, AHN and CMA, they were both European companies. AHN is in Germany, and CMA is in Sweden.

So that part has not been particularly constrained, but, for larger acquisitions, it would require us to draw down on the credit facility or US-based acquisitions. We have not been able to pursue those as aggressively as we would have liked. And I think you will see us pick up the acquisition pipeline once the spin is completed. I also expect that that strategy will be implemented by a new CEO. I am pretty sure that by then we will have a new CEO in place.

So that's really what I think will happen in the acquisition side.

Okay, great. Thanks for taking the questions.

(Operator Instructions). And at this time I am not showing any further questions.

Okay. Well, thank you, everyone, for joining us on the call this morning. We are very pleased to be progressing with the separation of Harvard Bioscience and HART, and we are optimistic about the future of both businesses. Thank you.

Thank you, ladies and gentlemen, for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone have a great day.