Harvard Bioscience Inc (HBIO) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the third-quarter 2013 Harvard Bioscience earnings conference call. At this time, all participants are 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. Robert Gagnon, Executive Vice President, Finance. Please go ahead.

Thank you, Pablo, and good morning, everyone. Thank you for joining us to discuss our results for the third quarter of 2013. With me on the call today are Jeff Duchemin, our CEO; David Green, our President; and Tom McNaughton, our CFO.

Before we begin, I just wanted to remind everyone that effective tomorrow, November 1, in conjunction with the pending HART spinoff, I will be assuming the role of CFO of Harvard Bioscience and Tom will move to HART. I just wanted to add that I am thrilled to be part of the Harvard Bioscience family and look forward to working with Jeff and the new management team.

After the Safe Harbor statement, I will turn the call over to David, who will present comments on the Company's third-quarter business performance and the pending spinoff of HART, our regenerative medicine subsidiary. Jeff, who joined the Company 10 weeks ago as CEO, will then discuss his activities to date, significant observations made during this time, and some key hires he has made for the Company's new leadership team. Following Jeff's comments, we will open up the call for any questions.

In our discussion today, we may make statements that constitute forward-looking statements. Our actual results may differ materially from those projected, due to risk 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 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 the investor relations section of our website. A replay of this call will also be archived at the same location on our website at www.harvardbioscience.com.

I will now turn the call over to David.

Thank you, Rob, and good morning, everyone.

As I am sure you all know, we're in the final stage of spinning off our Harvard Apparatus Regenerative Technology subsidiary to the stockholders of Harvard Bioscience. The spinoff will be effective tomorrow, November 1.

As part of the spinoff, I will be resigning my position as President of Harvard Bioscience, and therefore this will be the last time I will participate in the quarterly earnings calls of HBIO. This is actually my 50th earnings call for HBIO.

I'm very excited about becoming CEO of HART and bringing our trachea transplant product to the patients who need it.

Despite some sadness of leaving HBIO after all these years, I can say I'm equally excited about Jeff Duchemin as the new CEO of Harvard Bioscience. Jeff has already started to bring new focus to organic growth at HBIO with the new team he has put in place, and Jeff will have more to say about this later in the call.

Although I am resigning as President of Harvard Bioscience, I'm not leaving the Company. I will remain on the Board of HBIO, and I will also remain as one of its largest stockholders. I look forward to working with Jeff and his team in growing HBIO and creating value for all of the stockholders.

On this call, I will first discuss the performance of the core LSRT business of HBIO and then separately discuss the progress in HART.

First, the LSRT business. In Q3 in the LSRT business, revenue was down approximately $1 million, or about 4%, from both Q3 last year and sequentially from Q2 this year. This decline was due in part to poor performance from GE Healthcare, an issue we anticipated in last quarter's call, as well as continued softness in certain European markets and the effect in the US of sequestration.

However, despite the overall weak economic environment, we saw modest growth in our Denville and Harvard Apparatus businesses in the North American markets and we are encouraged by the market penetration rate of our new BioDrop microvolume spectrophotometer product line.

Overall, EPS was down $0.03 from last year, with the unfavorable revenue comparison costing us approximately $0.01 in earnings per share. We also had one-off expenses related to the hiring of our CEO and CFO, which also cost approximately $0.01 per share versus last Q3. The final 0.01 was a combination of higher tax rate, higher interest cost, and a slightly adverse product mix.

We expect full-year 2013 revenue to be down approximately 6% 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 balance of the year.

Now let me update you on the spinoff of our HART business. We have cleared all necessary approvals of the spinoff and tomorrow the spinoff will be completed. For every four shares you now own of HBIO, tomorrow you will still own those four shares, but in addition, you will get one share of HART. From then on, HBIO will be a pure-play life science research tools business and HART will be a pure-play biotechnology company focused on creating regenerated organs for transplant.

Let me now discuss clinical progress within the HART business. I'm very pleased to report that since our last earnings calls, the ninth and 10th successful regenerated trachea transplant surgeries have taken place. These surgeries both took place at the Krasnodar Hospital in Russia, and were performed by Dr. Macchiarini.

One of these was a re-transplant. This was an unusual procedure, as the patient had received a regenerated trachea transplant back in June 2012. This patient had the original scaffold, which was not manufactured by us, removed and a new scaffold manufactured by us implanted to replace the ex-planted one. This is the third surgery to use a scaffold manufactured by us. The re-transplant was required due to the partial collapse of the previous scaffold.

The 10th surgery was performed on a new patient who is suffering from tracheal stenosis. Looking forward, we anticipate that two additional surgeries will take place in this Russian clinical trial later this year.

In addition to the new patients who have been treated, we have important news on the patient who received the world's first regenerated trachea transplant. Many of you will already have seen our press release of last week on the five-year follow-up on this patient. This patient is alive, well, and free of complications at over five years post the transplant.

This type of long-term follow-up is important in establishing the safety of the regeneration and transplant technique. This follow-up is published in The Lancet, one of the world's top medical journals.

In addition to the clinical progress, we have also made regulatory progress. In August this year, we received written confirmation from the FDA that the InBreath Airway Transplant System will be regulated by the Center for Biologics Evaluation and Research, or CBER, and is a combination product biologic under the BLA pathway. This removes any uncertainty over the regulatory pathway in the USA.

Furthermore, it confirms that the InBreath system is eligible for designation as an orphan product biologic. If we receive this designation, the InBreath system will be granted a seven-year exclusivity for marketing in the USA, once the BLA is approved.

Of course, there can be no assurance that we will receive BLA approval, as that is dependent on successfully completing clinical trials. We have already begun the process of agreeing the design of the preclinical and clinical work that will be needed to bring the InBreath system to market in the US, and we have submitted our request for a pre-IND meeting to the FDA. We expect that meeting to occur during this quarter.

So in conclusion, let me return to the spinoff of HART. Tomorrow, every shareholder of Harvard Bioscience will also become a shareholder of HART. It is not only a turning point in the history of our 112-year-old company, but also, I believe, an inflection point in the creation of value for all our stockholders.

Since we announced the spinoff of HART, the Harvard Bioscience stock price is already up over 50%. As two separate companies, I believe each will be better able to focus on success in its own business.

Harvard Bioscience has a great new leadership team that I believe will transform the Company. In the short time Jeff has been CEO, he has already made a positive impact on the business, and I'm confident of his ability to grow the revenue and profits of Harvard Bioscience.

HART, by making regenerated organ transplants real, has an opportunity not just to transform the lives of patients with life-threatening conditions, but also just might help transform the practice of medicine.

Let me now introduce Jeff and hand the call over to him. Jeff?

Thank you, David; thank you, Rob. Good morning, everyone.

First, I would like to start by thanking both David and Tom for their years of service and leadership of Harvard Bioscience. They have built a great organization and are leaving me with a strong foundation to build upon as I lad this organization into the future.

I would especially like to congratulate David for building up the world-class reputation of Harvard Bioscience since his arrival here in 1996. I can truly say that without his vision and insight, the Company would not have achieved the success it has witnessed, both in its traditional avenues, as well as in the regenerative medicine advances that have led to the spinoff of HART. He has been and will continue to serve as an inspiration for all of us as we move forward.

I would like to now update you all on my first 10 weeks on the job. As David stated, our performance was soft in Q3 as our customers continued to feel the effects of government austerity and US sequestration, especially in the academic and government markets. Due to these events, we will continue to face headwinds through Q4.

My activities during the first 10 weeks have been divided into several areas. First, I have undertaken a complete review of the Company's operations. I have consulted with the current management team and I'm listening closely to them as they suggest initiatives that can bring us forward. This is an ongoing task, and I welcome the feedback that I've been gathering and continue to gather.

Secondly, I have traveled to many of our subsidiaries, including Harvard Apparatus US, Hoefer, Biochrom, Harvard Apparatus UK, Panlab, AHN, and Denville Scientific. This has provided me a chance to speak with most of our employees and many of our customers around the world and given me a first view -- a first-hand view of our current operations. I have also met with our -- with GE, which is one of our strategic partners.

My takeaway is as follows. As we are fortunate to have skilled employees, a strong culture, and great brands, I do see the need for increased support in sales and marketing efforts.

One key step in our success moving forward will be a strengthened emphasis on global expansion. We are seeking a truly global footprint for the Company, especially in China, which we believe presents an extraordinary rich opportunity for our services and products.

Also, I see a need for us to reinvigorate our new product development process to meet changing market needs. We will do this through increased strategic marketing competencies.

My third major activity has been choosing a new management team. Building a strong management team will assist me in developing both short- and long-term strategic goals for Harvard Bioscience. This will include backfilling Tom McNaughton's position as CFO, along with building a management team focused on global commercial excellence, operational effectiveness, and improved financial performance.

Over the last two months, I've been successful in attracting and hiring three key individuals who will help lead us into the future. These new hires are an important component on our path forward to driving growth.

First is the hiring of our new CFO, Robert Gagnon. Rob brings tremendous amount of high-level financial experience from his 10 years at Biogen Idec and Clean Harbors. I believe Rob's experience heading global finance operations, along with his successful completion of acquisitions and his overall business acumen, will be a great asset to us as we lead this Company forward.

The second individual is Yong Sun. Yong's position is new to Harvard Bioscience. Yong will be the Vice President of Global Strategic Marketing and Business Development. Yong will guide us in developing a strategic path forward for Harvard Bioscience.

I am honored that Yong Sun, a native of Beijing, China, with more than 25 years experience working for leading US companies, has accepted this role. I have worked with Yong in the past and can say with the highest level of confidence that he is the right person for this new position. His impressive career experience in marketing and sales in the life science sector make him especially qualified to guide us in our move into emerging markets.

Both Rob and Yong hold MBAs from MIT's Sloan School of Management.

The third individual is Yoav Sibony. Yoav's position is new to Harvard Bioscience. Yoav has joined the organization as the Vice President, Global Sales. As we continue to drive global expansion, it is vital that we implement a far-reaching global sales strategy, tying in our customers to our overall portfolio of products and services.

Having worked with Yoav in the past and knowing firsthand of his long and impressive track record of sales management and sales operation experience, I am confident that he will help Harvard Bioscience attain the next level of growth. I'm excited and look forward to collaborating with him as the Company expands its global footprint. Yoav holds an MBA from Pacific Lutheran University.

I want to assure all listeners that Rob, Yong, Yoav, and myself, along with the rest of the management team, share a strong sense of urgency with regard to strengthening and streamlining the performance of Harvard Bioscience. We are dedicating ourselves thoroughly, analyzing the Company's operations and sales initiatives as they stand today. Following this, we will immediately unroll new initiatives aimed at improving our performance. We will, of course, keep all of you up to date with news of these initiatives as we put them into place.

To summarize, our key initiatives in 2014 will include organic growth throughout the Company, accelerating growth in China, building strong channel capabilities, and pursuing a prudent set of strategic acquisitions. As we build our strategy for 2014, I look forward to sharing updates with each of you along the way.

Our vision is clear. We would like to become a world-class life science research company providing solutions to scientists. As an organization, we will focus on alignment and execution. Most importantly, we will build an organization that meets and exceeds the demands of science today and into the future. Thank you.

I would now like to open up the call for questions.

(Operator Instructions). [Jennifer Lean], [Webster Court].

It sounds like things are moving along very nicely over at Harvard Bioscience. Jeff, I was wondering, you have been there about 10 weeks now, if you could, number one, give us your overall impression of the business, and secondly, tell us, please, what gets you excited about the future prospects of your business?

Thanks, Jennifer, for the question. First, the thing that's most impressed me in my first 10 weeks is the amount of talent within the organization. As I stated in my comments, I have traveled around the world, I have been to many of our subsidiaries, and I'm very excited with the talent that exists here today at Harvard Bioscience.

The next thing that really excites me is the brand recognition of our products, the innovation, and really our ability to channel. I think the combination of these three will guide us and build a strong foundation for us for the future of the business as we build a strategic path forward.

And I think the third thing that has really excited me is my ability to come in and build my own management team. It's a very unique opportunity that I have with the spinoff of HART to be able to come in and bring in a new CFO, a Vice President of Marketing, and a Vice President of Sales. So I am very excited about this and I think this is part of the uniqueness of this opportunity.

In regards to the future prospects of the business, I think with the new management team we have in place, I am really looking forward to building both our short- and long-term strategies for the business. I would say that's the first thing that is a great prospect.

I think the second thing is geographic expansion. How do we expand, specifically in China, in India, in 2014? I think there is a great opportunity there for us as we move forward.

And the last is really our acquisition strategy. I look forward to working with Rob and the management team to look at strategic acquisitions for the business in 2014. Thanks for the question, Jennifer.

Thank you.

(Operator Instructions). Jack Wallace, Sidoti & Company.

You talked on the call, in the prepared remarks here, about cost cutting. Can you talk to me a little bit more about that? Should I read into this as being better integration of some of the acquired companies, maybe some product-line divestments? Give me a little bit more color there.

Jack, thanks for the question. I think right now -- we met Monday this week for the first time with our new management team and we're taking a look at the entire business operation.

I think over the next several weeks, we'll start to determine really what 2014 looks like for us in terms of everything -- how we are going to achieve topline revenue growth and how we're going to improve profitability for the business. And I think at this point in time, it would be a little early to comment on that, but over the next several weeks, the management team will be putting together a plan for 2014.

Great, thanks. And then, you talked about -- I think this was you, Jeff -- supporting the sales and marketing efforts. You have gone ahead and added another senior position, which didn't exist before. When I am thinking about this on a net basis in terms of cost cuts and then increased support in sales and marketing, should I think of this going forward as a net out, as maybe a net cost reduction, net cost decrease? How should I think about that?

Yes, I think if you take a look at the business the way it stands today, you have David leaving the organization to go off with HART and the Chief Operating Officer position here has been eliminated, so just with those two changes, there is -- I would say we're actually -- there is a cost savings moving forward.

Great, thank you. And can you maybe just talk a little bit more about, I guess, some of the efforts to go ahead and support the sales and marketing efforts, particularly in the existing markets where Harvard Bioscience sells its products?

Yes, I am really excited about this. Both Yong and Yoav -- Yong started Monday; Yoav started a week ago, they are both actively speaking with really everyone in the organization that is customer facing.

I think there's a lot of opportunity for us in Asia with Yong's background and his experience. I am looking forward to building our Asia-Pac strategy for 2014.

But really, it's going to be a strong emphasis in terms of how we brand our products, our overall marketing strategy moving forward, integrating the acquisitions that have been made over the years, creating maybe better synergies in terms of how we utilize relationships in the field. Taking all of this into consideration, this will be part of the basis for our 2014 sales and marketing strategy.

Okay, thank you, and then you also talked about some new product development, possibly maybe a pickup in R&D, but the history of the Company has been fairly active on the M&A front. Will you be looking for R&D to lead the way with new products, or vice versa there with you going ahead and acquiring smaller companies to fit, maybe, needs or holes in the product portfolio you guys have?

Yes, I think moving forward, the approach will be more of a balanced approach where we will have some internal R&D projects in place.

Talking about the new product development process that I mentioned in my comments, we are looking to enhance that, along with acquisitions to fill any gaps in our portfolio of products. So it will be a balanced approach moving forward.

Great, thank you, and then just thinking about Q4. Obviously, this year has been tough for a number of reasons, macro, as well as specifically with one of the suppliers. Can you give me just an idea for what may be some reasonable expectations are for Q4, maybe from a sequential basis and a year-over-year comparison?

Jack, it is Rob Gagnon. Thanks for that question. Yes, I think -- David touched on this a little bit in the prepared remarks. We talked about in terms of the year-over-year performance, topline performance, we see it being down approximately about 6%.

So if you back-solve for that, that would be about $27 million, $28 million topline revenue for Q4 or about $104 million for the full year. So I think that's what we are thinking in terms of the fourth quarter for guidance.

Great, thank you so much. I will take my other questions offline.

(Operator Instructions). [Chai Dardashdi], [DCM].

I'm curious to understand what revenue per employee had been at previous companies that the new CEO has been involved with, and if this revenue per employee metric might be relative for Harvard Bioscience going forward? Thank you.

So you are asking me the question of revenue per employee at previous companies that I have worked for? This is Jeff.

Correct. I mean, I am trying to understand in this industry, is there a sense of one employee could do X dollars of sales, and if this observation at previous companies might be applicable for Harvard Bioscience one day?

I don't think we have approached it that way in the past, and really the conversations that we have had internally, that hasn't been the way I think we'll approach it in the future.

It's more in regards to what we do today. Are we built to grow the business in the direction we think we're going to take it? Where are the gaps in skill sets in the organization? And so, those are some of the things that we are focused on today -- really sales, marketing, internal R&D, new product development. Really haven't got to the point yet where we are breaking it down to revenue per employee.

Okay, and I have read the proxy filing with your bonus compensation structure and I think it's absolutely phenomenal, so thank you for such a shareholder-driven compensation package. I am curious if the hurdles are publicly disclosed, so what the hurdle rate would be to get to you the bonus.

That hasn't been established yet. I think the Board, the way they look at this, it's really -- for the entire management team, it's going to be a performance-based structure moving forward.

As we build our 2014 budget, those hurdles will be identified to the Board and accepted along the way, I believe. That's the process right now.

And I just wanted to add, we're just very much -- that process is in the works right now. We are right in the middle of our planning process for 2014, and that will come together over the next couple of months, and Jeff and I would come back to you with more information around our plans for 2014 when we meet to discuss the fourth-quarter results.

And I believe there was a comment a couple quarters ago with an EBITDA percent in the past. Is that comment no longer applicable, given the new situation?

This is David. Let me just answer that. We certainly have used EBITDA, or operating margin, which personally I tend to prefer versus EBITDA because I always feel if you use EBITDA, you need to add back in CapEx and CapEx in this business tends to equal depreciation, so you're right back at operating margin, anyway.

But I do think operating margin is an important metric. In the past, we are aiming to get that up to 20%. We are nowhere near 20% right now, but I think that's part of Jeff and Rob's challenge going forward is to improve the financial performance of the business, as he said, streamline some of the systems and operations we have been using in the past, and build the Company from here.

So I think really it is going to be up to Jeff and Rob to decide what the critical metrics are that they want to be judged by going forward, that the Board obviously is going to buy into. And I think if that continues to be one of the important metrics, then I am sure you will be hearing from them about reporting against that metric going forward.

This is my final question. Could you comment what the operating margins tend to be of your closest peers, who you think are most relevant to your operations?

This is David again. Within the life science research tools industry, you can find operating margins run from mid-teens to a high of about 30%. The companies that are as high as 30% tend to be more consumables oriented, whereas we are sort of a mix of consumables and equipment. But that's probably the range, and I certainly think there's an opportunity for us to improve from where we are today.

Okay, thank you very much. Good luck.

Thank you. With that, I am showing no further questions in queue. I would like to turn it back to Mr. Jeff Duchemin, CEO, for further comments.

Thank you, everyone, for calling in today. We appreciate it. We look forward to keeping everyone up to date and talking to you for our Q4 earnings in February of 2014. So thank you. Appreciate it; have a good day.

Thank you. Once again, thank you, ladies and gentlemen, for joining today's conference. You may now disconnect. Have a great day.