Harvard Bioscience Inc (HBIO) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the second quarter 2014 Harvard Bioscience earnings conference call. (Operator Instructions). I would now like to introduce your host for this conference, Cheryl Schneider of Dian Griesel International. Cheryl Schneider?

Thank you, Latoya, and good morning, everyone. Thank you for joining us for the Harvard Bioscience second quarter 2014 financial results conference call. Leading the call to date will be Jeffrey Duchemin, CEO and President, and Robert Gagnon, Chief Financial Officer of Harvard Bioscience. But before I turn the call over to them, I will read Harvard Bioscience's Safe Harbor statement.

In its discussion today the Company may make statements that constitute forward-looking statements. The company's actual results performance may differ materially from what it has projected due to risks and uncertainties, including those detailed in its Annual Report on Form 10-K for the periods ended December 31, 2013, and its other public filings. Any forward-looking statements, including those related to the Company's future results and activities, represent its estimates as of today, and should not be relied upon as representing its estimates as of any subsequent day.

At this point I would like to turn the call over to Jeffrey Duchemin. Jeff, please go ahead.

Thank you, Cheryl. Good morning, everyone, and welcome to our Q2 earnings call. I am pleased to report that we had a very good second quarter as revenues increased by more than 3% or 0.7% excluding the impact of currency translation. Backlog and bookings are growing and we are on track to achieve the goals that we set out at the beginning of the year. I am proud of what our team has accomplished in a relatively short amount of time.

Our revenues stabilized earlier than we anticipated. As you might recall, our goal was to stabilize our business and reverse the sales declines by the end of the year. But the fact that it happened during Q2 makes us even more excited about our strategic initiatives that have led us to this point.

Our results were fueled by the organizational changes that we instituted at the end of 2013 and the implementation of our global growth strategy. This strategy is in place and working. We have made great progress in creating commercial excellence, geographic expansion and business development opportunities. Importantly, this was the first quarter in seven consecutive quarters where our revenues increased.

While Rob will go into details about our financial results, I did want to provide some highlights. Revenues for the quarter increased 3% to $27 million from $26 million in last year's second quarter. And non-GAAP income from continuing operations for the second quarter was comparable to last year's second quarter at $1.9 million, or $0.06 per diluted share.

However, even more reflective of our strategy, we believe, is a sequential quarterly growth in revenues, excluding the impact of currency translation this quarter. Without that impact, revenues increased approximately 4% compared with the first quarter of 2014. That, in my view, is great progress.

As many of us have been reading about increased NIH funding, we have been asked if Harvard Bioscience has experienced any benefits yet. While we cannot at this time point to any direct results from that funding, this is not to say that we did not benefit from it this quarter. It is just that it is difficult to attribute this directly to any change in our business. What we do know, however, is that our functionally aligned organization is executing to our plan.

We are on track to realize the benefits from our organizational realignment that was implemented during the fourth quarter of 2013 which positioned us for growth. For example, as part of the realignment, we completed the consolidation of two facilities in the UK this quarter, which has helped to eliminate redundancies and capture operational savings.

As we strive towards operational excellence, our new Vice President of Global Operations and Quality has identified, evaluated, and instituted areas for improvement that are already helping to drive efficiencies. And we have even more reason to believe our strategy is working. For instance, we reported our fourth consecutive quarter of increases in backlog. The backlog at the end of the quarter increased 58% compared with last year at this time and almost 9% compared with our first quarter, while bookings increased 6% over last year's second quarter and 4% over our first quarter 2014.

Although we are proud of these results, we know there is a lot of work ahead of us as we implement our growth strategy. Some of our best performing product lines this quarter were lab consumables and molecular analysis products. These products accounted for approximately 51% of our revenue. Our China Asia team is fully in place, and we are very pleased with the work they are doing. We are on the ground running and have implemented our commercial strategy. As others in the industry have reported, the China market was a bit sluggish this quarter but we remain optimistic about our new team that is working there and our expectations for the remainder of the year and beyond.

Our growth in the US and Europe offsets the softer sales in China. As you might recall, the stabilization of sales in the US and Europe was the critical component of our strategy that we announced at the end of last year. We are excited to report that our commercial teams are executing our plans which resulted in US and European growth in Q2. We have direct field sales teams in the United States, Canada, the United Kingdom, Germany, France, Spain, and China. Our increases in both backlog and bookings are some of the benefits we are realizing from our new functionally aligned organization and increased performance.

We appeared at two different investor conferences this quarter, continued investor outreach, and also met with some and spoke with current and potential shareholders as we continue to increase our visibility in the investment community. We gained further investment community recognition with the initiation of research by Janney Montgomery Scott last month and by Alere just last week. We were also interviewed by TheStreet.com, and all of this combined helped us gain visibility in the investment community.

As of today we have realigned our operations, created efficiencies, reallocated resources, and stand here with a much stronger and agile Company than we were even six month ago. We will look forward to the challenges and the opportunities that lie ahead of us with an eye toward achieving all of our objectives.

At this point I will turn the discussion over to Rob Gagnon, our CFO, who will provide more insight into our financials. Rob?

Thank you, Jeff. Consistent with previous quarters, much of my focus will be on the non-GAAP quarterly results, which we believe better represent the ongoing economics of the business, reflects how we set and measure our incentive compensation plans, and how we manage the business internally. However, I will briefly review the GAAP results, the differences of which are outlined in the earnings release we issued today, which can be found on our website under press releases.

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.

Now, beginning with the top line, we are pleased to report revenues of $27 million for the second quarter, an increase of 3.3% compared with revenues of $26.1 million in Q2 last year and 4.1% compared with revenues of $25.9 million in Q1 of this year. Currency translation resulted in a 2.6% positive impact because of a weaker US dollar compared to the British pound sterling and the euro on a year over year basis. Excluding currency translation, revenues increased 0.7% compared to Q2 last year and 3.7% compared to Q1 of this year.

Our bookings were $27.4 million in Q2, up 6.2% compared to bookings of $25.8 million in Q2 last year. Excluding currency translation, bookings growth was 3.5% compared to Q2 last year. Our order backlog at the end of Q2 was approximately $6 million, up 57.9% compared to backlog of $3.8 million in Q2 last year. Excluding currency translation, backlog growth was 54.3% compared to Q2 last year. As discussed previously, we include in bookings and backlog only those orders for which we have received a customer purchase order. Our bookings and backlog are good indicators of future revenues and business activity levels.

Overall, we are very pleased with the top line performance of the business this quarter. Q2 marks the first quarter of revenue growth after seven consecutive quarterly declines. The key hires and commercial initiatives put into place late last year and early this year, as highlighted by Jeff and our previous conference calls, are beginning to take hold on business performance.

I will now turn the call to costs and expenses. Cost of revenues for Q2 were $14.6 million compared to $14 million in Q2 last year. Our gross profit for Q2 was $12.3 million compared with $12.1 million in Q2 last year. Gross margin for Q2 was 45.7% compared with 46.5%. Operating expenses for Q2 were $9.4 million, an increase of $233,000 compared to Q2 last year.

I would like to highlight two items that impacted our second quarter costs and expenses. First, we incurred approximately $0.25 million in unexpected consulting cost to resolve an operations issue that was first identified by our new VP of Global Operations and Quality this quarter.

Second, although we benefited from foreign currency translation on the top line, the same currency translation effect had a negative impact of approximately $600,000 on our costs and expenses when compared to exchange rates last year. This is due to the fact that we manufacture product in the UK, Spain, and Germany, and as mentioned earlier the US dollar weakened against the British pound sterling and euro on a year-over-year basis. The overall impact of currency translation on the bottom line was negligible because of this natural hedge in our income statement.

Operating income was essentially flat, coming in at $2.9 million in Q2 with $3 million last year, and operating margin was 11%, unchanged year over year on a restated basis. Our tax rate was 26.5% in Q2 compared to 28.7% in Q2 last year. The improvement is due to lower tax rates in the UK, as well as favorable currency translation.

Net income on a GAAP a basis was $1 million compared with $186,000 net loss for Q2 last year. Our GAAP income from continuing operations was also $1 million, or $0.03 per diluted share, compared with $97,000, or $0.00 per diluted share for Q2 last year on a restated basis. And non-GAAP income from continuing operations for Q2 was $1.9 million, or $0.06 per diluted share, which was the same as Q2 last year. Our weighted average shares outstanding was 32.9 million in Q2 compared to 31.7 million in Q2 last year. The higher shares are the result of the additional equity awards issued at the time of the HART spinoff.

I will now turn to the balance sheet. We finished Q2 with $26.4 million of cash, an increase of $600,000 compared to $25.8 million from Q4 last year. Accounts receivable as of Q2 were $14.7 million compared to $14.3 million as of Q4 last year. DSO or days sales outstanding was 49 days at the end of Q2 compared to 48 days as of Q4 last year. And inventory as of Q2 was $17.2 million compared to $15.8 million as of Q4 last year. Inventory turns were 3.6 times compared to 3.7 times in Q4 last year.

Our capital expenditures were $744,000 for the six months ended June 30, 2014, compared to $584,000 for the same period last year. The increase in capital expenditures this year compared to last year was due to the timing of normal spending on maintenance capital. Debt as of Q2 was $22.3 million compared to $24.8 million as of Q4 last year. The decrease was due to scheduled principle payments made during the year.

I will now turn to annual guidance. Today we are reaffirming our 2014 guidance, which is revenue of $105 million and approximately 20% bottom-line growth for our non-GAAP EPS from continuing operations. Although we are very pleased with the performance in Q2 and encouraged by a number of factors, including bookings and backlog levels, one quarter doesn't make a trend, especially after seven consecutive quarterly declines and the significant impact of currency translation. And therefore at this point we are leaving our revenue guidance unchanged for 2014.

Also, I would like to remind everyone that there is some level of seasonality in the business. Our revenues in the third quarter are usually down from the second quarter primarily because there are a large number of holidays and vacations during the quarter. Our fourth-quarter revenues and earnings are often the highest in any fiscal year compared to the other three quarters primarily because of the budget cycle.

As mentioned, the differences between our GAAP and non-GAAP financial guidance, including EPS and reconciliations, are outlined in the earnings release we issued today which can be found on our website under press releases. Consistent with our previous guidance, these figures exclude the impact of any potential future acquisitions.

We will now open the call to questions from participants. Operator?

(Operator Instructions). Paul Knight, Janney Capital.

Hi, Jeff, congratulations on the quarter. Can you talk to the initiatives that you have made since your not-very-long-ago arrival? You are head of -- you are change in sales, change in the modifications with distributors, all of those actions in sales, what do you believe your growth rate would be even if a market was not really growing? And also where are you and kind of where do you want to be in your sales reorg?

Yes, so going back to last year when I joined the Company, last August, the first thing that we did was we took a look at the organization, the way it was structured, and we knew that we wanted to approach it from a more functional standpoint. So we created functional leadership roles. One of those was the Vice President of Global Sales, a position the Company never had in the past.

And we knew, really, to strength to strengthen the Harvard Bioscience name in the industry, the brands, the portfolio of products we had, we had to align our sales teams on a global basis. We have done that. We are executing to the plan that we have in place for 2014, and we are starting to see the results of this functional alignment. In regards to sales growth, whether the market is flat, moving forward or not, just the initiatives that we have in place, the way we are communicating, the marketing plans that we've implemented, we believe that growth can be somewhere in the 4% to 5% range.

And where you think market growth is going to end up normally for Harvard Bioscience?

You know, it is tough to really pinpoint that at this point in time. What we are seeing and what we have read from some of the analyst reports that have come out, research -- our products are highly academic. The good news is we are starting to see an uptick in our performance in the US and Europe. But on a global basis what we're saying is 1% to 2% growth in the segment. We think we can outperform the segment growth and we are very bullish on the remainder of the year.

And could you highlight any product line that you feel like is extremely well-positioned, Jeff? I mean, you mentioned lab products, but what has the most growth outlook in your view?

Yes, so there is a couple product categories that we are seeing increased business orders, the backlog is increasing. Lab products is one of those areas, with our Denville Scientific business in the US, our distributor business. Our molecular analysis business is doing quite well right now. We launched a new product called OxyletPro. It measures respiratory and metabolism, animal activities, and food intake. And what we're seeing is, we are seeing an increased presence of that product. The remainder of the year looks very strong for that. So, I would say our lab products and our molecular analysis products are two product categories that are leading the way for us right now.

And then my last question is to Rob, and that is the facility closure in the UK or the combination, does that change your view on where operating margins should be? Where do you want operating margins this year. And then last, that $250,000 cost, did that come out of your non-GAAP number?

Thanks, Paul. Yes, so let me start. The $250,000 cost did not come out of our non-GAAP number. So it is very much in those numbers. In terms of the facility consolidation that we completed in the UK this quarter, that was contemplated in the restructuring plan that we announced back in December. It is really sort of the last step that we had to complete under that restructuring. Overall, that component of it, it has an annual savings in the range of about $300,000 or $400,000 for us, but again it was part of that component of that overall restructuring.

Okay, thank you very much.

Raymond Myers, Alere Financial Partners.

Great, thank you for taking the questions. I first wanted to just pickup from where we just left off. The $250,000 of the consulting expense, what line item does that appear in the income statement?

Ray, it is Rob. It mostly appears on the cost of sales line, but there are some components that show up in operating expenses.

Okay. Sounds good. And then R&D was picked up a little bit in the quarter, are you working on any new projects? What is the reason for that?

I would say it is really because of a couple reasons. First off, as I mentioned in prepared remarks, foreign currency would have a negative impact or would show an increasing trend there. But also it is just the timing of personnel working on various projects. There is nothing unique going on there.

Okay. Thanks. Back to the $250,000 cost, if that is largely in gross margin, the margin actually increased just slightly sequentially. It would have been a lot higher if not for this expense. Do you expect this $250,000 to be a recurring issue or is that it?

Well, the issue that was discovered was discovered in the quarter by our new Head of Ops. You know he's been going around, going out to all of our manufacturing sites doing his due diligence. So as it relates to that particular site and this issue, it is resolved and it's behind us at this point. I do not perceive this coming up again, but of course as he goes out and learns the business, there certainly could be things that come up from time to time. But certainly this issue is behind us and not expecting it to happen going forward.

Sounds good. Let me ask about your sales force realignment a little bit. Can you describe some of the specific actions you have taken and what opportunities you see to make the sales force more effective?

Yes so the sales force realignment, the biggest thing is we have multiple businesses that have made up Harvard Bioscience over the years. That led to multiple sales organizations, customer service departments, tech support. What we have done is we have aligned all of these functional operations into one organization. The line of communication is much better today than it was a year ago.

The type of training we give our salespeople is completely -- has been revamped from where we were a year ago. Our compensation plans, the way we compensate our salespeople, the change in behavior, the types of products that they are focused on, it's a complete restructure of our sales organization and our sales process.

The other impact to the business and where we think we will see growth coming forward is, is on a geographic basis. Some of things that we are doing in emerging markets. Last year we had one salesperson in China; today we have a team of five. As we move forward we hope to continue to create sales and marketing positions in Asia in 2015. So we are in the beginning stages of revamping our global commercial organization. But that is where we are today.

How soon do you think that that increase in China sales force can start to have some positive contribution?

Well, I think we already seeing it. As I stated in my write up, Q1 and Q2 were a little bit sluggish in China. I think everyone in the industry is seeing that right now. But, the way our channel managers are approaching new distribution partners. Our reach into southeast Asia, Korea, Japan, places like that, we are already starting to see stronger relationships being built, our backlog is increasing. And that is why we believe Q3 and Q4 will be strong for us.

Okay, that sounds good. I want to ask you about bookings trend a little bit. Bookings were up a little over 6% in the second quarter. There seems to be a nice trend. Revenue growth was 3%. Why wouldn't we expect revenue growth to trend toward bookings growth?

I think it is a great question. And bookings typically lead to revenue growth. The one thing with bookings, you know the backlog, it is a timing -- kind of a timing situation where some of the orders will come in Q3, some will come in Q4, or some could even come into 2015. But what we believe is, as the year progresses, our growth versus prior year will continue to increase and the goal is that 4% to 5% range that I had mentioned earlier in Paul's question.

Nice, okay, good. It is a little early in the quarter to ask you this, but we are about a month into the quarter so I will give it a shot. What kind of look do you have so far visibility to growth in the current quarter?

That is a tough question to answer, as you know, Ray. All I can say is we had a great Q2. The teams are in place, the teams are executing, and we feel confident that Q3 and Q4 are going to be strong for Harvard Bioscience.

Nice. So I have one housekeeping question. What was the total long- and short-term debt at the end of the second quarter?

Ray, the short-term debt is about $5 million. The total debt is $22 million. About $20 million of it is the term loan; $2 million of it is the credit line.

Looks like then you have paid down the short-term debt a little bit since the first quarter?

Yes, it is a five-year term loan, so there is quarterly payments. There has been two payments made year to date.

Okay. Very good. Thank you for taking the questions.

Thanks, Ray.

Thanks, Ray.

(Operator Instructions). Bryan Kipp, Janney Capital.

Hey, guys, just had a couple of follow-ups. Thanks for taking the time.

Hey, Bryan.

Sure, Bryan. How are you?

Good, and you guys? Congrats again. I am reiterating what everybody else has said. So I just had a couple of other ones. So top line, I mean how did it track through Q2? Did you see some more support in the back half versus the front half of the quarter? And just kind of get an understanding there.

No, it has been a steady increase. There has been no front end of the quarter, back end of the quarter. But as you can remember from our last earnings call, the backlog activity has been increasing. It has increased once again. And that is really translating into the improvement in our top-line growth.

Okay. I just wanted to parlay into this too -- in light of -- I think it was kind of alluded to previously, but you do see FX right now. There is some support there. I think we have it right now at about a 2.1% benefit in the quarter because of strong pound again, and euro is moderating a little bit. We still see support there. In light of that and the strong bookings and the strong book to bill, I understand organic growth there could be some volatility naturally in the business, but in light of the, say, 2% support we are seeing so far, how come you haven't adjusted or why did you decide not to adjust your top-line estimates for the full year?

Bryan, it is Rob. I appreciate that. I think what we have is average, an average rate for the pound sterling at $1.54 last year. It was $1.68 in the quarter, the second quarter, and I think it may have gone up a bit more in the third quarter. But look, it only amounts to about $600,000 to $700,000. It is a fairly de minimis amount. And overall, we are focused on organic growth in the business. We are not as focused on the FX trends from one quarter to the next. But clearly, $600,000 could reverse rather quickly in just a couple of days over a period of time. So we just didn't feel comfortable at this point trying to predict where that would go in terms of FX.

Completely understand. Just wanted to see how you guys looked at it. And I guess in addition, I think you guys alluded to additional global operations. You announced $2 million in cost reductions in the past. Anything else, anything incremental above the $2 million you think you can pull through?

Well, one of the things we just announced today was the restructuring of a facility -- two facilities that we had in the UK. So we have been working on that. Our new Vice President of Global Ops was -- or has been looking at our manufacturing sites on a global basis. And at this point in time, nothing to announce further than what we (multiple speakers).

Okay, but those two facilities were consolidated in that $2 million estimate you guys had previously, or no?

Yes, yes, Bryan, just to be clear there, that UK facility consolidation, that was the last remaining item as part of that restructuring that was announced in December.

Okay. And then the $1 million you guys had mentioned in the past about putting back into the business. Have you allocated that yet?

Yes, that was part of the global commercial changes to the organization, sales and marketing position, the head count in Asia, things like that.

All right. And China, similar mix product wise? I know you guys have five people on the ground; just commentary around that. If it is more focused in an area versus another on the product category?

Yes, all of the product except the laboratory products. The laboratory products are primarily the Denville Scientific plastic lines of products, which are typically distributed in the US. So the majority of the products are the four other product categories that we have, which is fluidics, molecular analysis, cell analysis, and animal behavior products.

Okay. And I mean the last one, you guys have talked about it. Potential acquisition pipeline, how is that tracking right now? Is there anything that you guys are interested in, anything on the horizon? Or just thoughts around that would be great.

Yes, it is clearly an important part of our strategy. We have communicated that over and over again. And we spend a lot of time looking and evaluating companies. There is nothing to announce today but it remains a very important part of our strategy moving forward.

That is it for me. Thank you.

(Operator Instructions). Paul Knight, Janney Capital.

The last question on the Janney side is your 52% backlog increase. I know that is part of your sales work, but what were the extraordinary events behind that type of large, year-over-year change?

I would just attribute it to the sales and marketing activities of the organization, the realignment. There is nothing specific other than the fact that we've hired some very talented people. We have an aligned organization. I think we have a very good plan in place and we're executing to it.

Thank you very much, Jeff.

Thanks, Paul.

(Operator Instructions). And at this time there are no further questions in the queue. I would like to turn the call back over to Mr. Duchemin for closing remarks.

As I stated at the beginning of our call today, I am very proud of our company's achievements. We have essentially rebuilt the Harvard Bioscience team in well under a year. Our team has made great progress in implementing our global growth strategy, including creating commercial excellence and organic growth, reinvigorating product development, and seeking business development and acquisition opportunities. I am optimistic about our company's future outlook and I thank you, our shareholders, for your continued support and look forward to what we expect will be a fruitful year for all of us. Thank you for calling in. Talk to next quarter. Thank you.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.