Harvard Bioscience Inc (HBIO) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the second-quarter 2015 Harvard Bioscience earnings conference call. My name is Lorraine, and I will be your operator for today's call. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Ms. Cheryl Schneider of Dian Griesel International. Please go ahead.

Thank you, Lorraine, and good morning, everyone. Thanks for joining us for the Harvard Bioscience second-quarter 2015 earnings conference call. Leading the call today will be Jeffrey Duchemin, CEO and President; and Robert Gagnon, Chief Financial Officer of Harvard Bioscience.

But before I turn the call over to management, 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 and performance may differ materially from what has projected due to risks and uncertainties, including those detailed in its annual report on Form 10-K for the period ended December 31, 2014 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 date.

At this point, I'm really happy to turn the call over to Jeff Duchemin. Jeff, please go ahead.

Thank you, Cheryl. Good morning, everyone. Thank you for joining us for our second-quarter 2015 conference call. I am pleased to share Harvard Bioscience's successful second-quarter results.

As we mentioned last quarter, our team took several measures to stem the decline in revenue that was caused primarily by the larger-than-expected foreign-exchange headwinds, and those steps paid off. This quarter, we returned to growth, producing a 7% increase in sales compared with second quarter last year. On a constant-currency basis, sales would have increased 12%. Sequentially, sales increased 12% over first quarter 2015.

Non-GAAP net income this quarter was $1.6 million, or $0.05 per share, compared with $756,000, or $0.02 per share, during the first-quarter 2015. And $1.9 million, or $0.06 per share, during the 2014 second quarter. Rob will go into more details on our financial results a little later in the call.

As CEO, what I'm really proud of is how our management team and employees executed upon our strategy which we put in place just about 1.5 years ago, and how our global team performed to produce growth this quarter. This is not to say the quarter didn't have its challenges. It did. However, we are confident in our strategy, our people and our ability to perform for our customers and shareholders.

Foreign-exchange headwinds were still a factor this quarter. But after we made some adjustments, we minimized those effects, as our financial results show.

Top-line volume-restoring programs and operational execution were the two main drivers of our strong performance in Q2. We also benefited from cost-containment programs we initiated and the efficiencies that have been created, producing strong financial results.

With approximately 35% of our business in Europe, we executed our plan as the strengthened US dollar and the resulting impacted grants and budgets denominated in euros continue to be a factor this quarter.

The academic and government markets which make up the majority of our business were stable. We are optimistic that the back half of the year looks promising in these markets.

The three acquisitions we completed -- Triangle BioSystems, Multi Channel Systems and HEKA Electronik -- which have helped us become a market leader in electrophysiology contributed as expected to both top-line and bottom-line results. Our overall objective continues to be to deliver on each element for strategy, which is commercial excellence in organic growth, new product development, and business development and acquisitions and operational efficiencies. Let me take a moment to update you on all four phases of our strategy.

First, commercial excellence in organic growth. Organic growth is our number one priority. The funding environment in the academic space, as I stated earlier, has stabilized. Our sales and marketing teams are focused on and continue to implement global growth programs driving key initiatives. As mentioned in previous calls, we've put a great emphasis on building our commercial presence in China. As a result, sales in China grew 13% this quarter.

We have a full team of account managers on the ground, along with growing channel relationships. We feel confident that our growth in China will continue throughout this year and expect to take full advantage of opportunities to increase our sales in that country as well as other Asian markets.

Second, we continue to make progress in product development. We are excited about the pipeline and the number of projects in our portfolio. We expect our R&D process will deliver exciting opportunities through innovation and product line extensions over the current year.

The third element of our strategy involves business development and acquisitions. Acquisitions continue to be an integral part of our growth strategy. Our portfolio of potential acquisition targets continue to be robust. Between our pipeline and proven ability to integrate our recent acquisitions, we are confident that we will continue to drive top-line and bottom-line growth through acquisitions.

The fourth and final element of our strategy involves operational efficiencies. As discussed in previous calls, we are in the final stages of consolidating our Biochrom facility. We expect the Biochrom transfer to be completed in Q3. In addition, we are nearing completion of consolidating our Colborne instruments operation into our Holliston facility and the consolidation of our HEKA Canadian operations into our HEKA German facility. Both will be completed in Q3.

Our Denville scientific subsidiary remains a very important part of our strategy and a growth driver for Harvard Bioscience. As you may recall, we recently moved Denville from New Jersey and opened our new distribution center in Charlotte, North Carolina, where we expect to realize efficiencies and cost savings in future quarters, along with benefiting from expanded space and engineering advances in this new facility. We also are benefiting from our recent move of our customer service operation to Holliston, which has helped to streamline our business as well.

So to recap the elements of our strategy, we continue to focus on organic growth. Our product development process will deliver innovative products to our customers. We have a robust portfolio of acquisition targets and continue to streamline our global footprint.

With that said, let me sum up Q2. We are satisfied with our results this quarter. Our sales have rebounded in a very challenging environment. We have a solid backlog of business. We believe we have the right global strategy and feel confident with our worldwide team of talented, driven employees.

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

Thanks, Jeff. As in previous quarters, much of my focus will be on non-GAAP quarterly results, which we believe better represent the ongoing economics of the business, reflects how we set and measure 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. And a replay of this call will also be available for one week at the same location on our website at Harvardbioscience.com.

Revenues in the second quarter were $28.8 million, an increase of $1.8 million, or 7%, compared with revenues of $27 million in the second quarter of last year. The negative impact from currency translation was $1.3 million and was due mostly to the weakening euro relative to the US dollar. Revenues on a constant-currency basis would have been $30.1 million, an increase of $3.1 million, or 12%. Included in revenues this year are the three acquisitions made in October 2014 and January 2015.

Bookings in Q2 were $27.6 million, an increase of approximately $200,000 compared with bookings of $27.4 million in the second quarter of last year. And we finished Q2 with backlog of approximately $6.6 million, up 8% compared to backlog of $6 million at the end of Q2 last year.

Now turning to costs and expenses, cost of revenues in Q2 were $15.7 million, an increase of approximately $1 million compared to $14.7 million in Q2 last year. And as a result, our gross profit was $13.2 million this quarter, compared to $12.3 million for last year's second quarter. Our gross profit margin was 45.6% in Q2, slightly down from 45.7% in Q2 of last year.

Operating expenses for Q2 were $10.8 million, an increase of $1.4 million, compared to $9.4 million in Q2 of last year. Included in Q2 results this year are the operating expenses of the three acquisitions. Operating income in Q2 decreased to $2.3 million as compared to $2.9 million in Q2 of last year.

In this quarter, we continued the consolidation of our Biochrom manufacturing operation into our Holliston, Massachusetts, facility. The Biochrom manufacturing operation is our second largest manufacturing site within Harvard Bioscience. The cost benefits and margin expansion of this move, as well as the [Colborne] and HEKA facility consolidations that Jeff just highlighted, represent major steps forward in our plans to optimize our manufacturing footprint and reduce the number of sites and costs.

In Q2, we incurred approximately $400,000 in costs for these moves as well as the Denville move to North Carolina. These costs are reported within cost of revenues and in operating expenses. This is in addition to the $200,000 of costs incurred in Q1 of this year for these moves. As communicated on previous earnings calls, we plan to incur a total of between $750,000 to $1 million in costs this year to reduce our manufacturing footprint, and we still expect to realize savings of a similar amount annually beginning in 2016.

Our operating margin in Q2 was 8% on a non-GAAP basis, indicative of the investments we are making on the expense side. This compares to an operating margin in Q2 last year of 11% on a non-GAAP basis. While the costs incurred to optimize our footprint contributed to the decrease in operating margin, we continue to believe that the payoff of these investments will result in higher operating margins over the long run.

Our non-GAAP effective tax rate was approximately 20% in Q2, compared to 26.5% in Q2 last year. The decrease in effective tax rate was due to lower profit before tax and geographic mix. We currently forecast our effective tax rate to be in the range of 25% to 27% for this year. Our GAAP net income was $349,000 in Q2, or $0.01 per diluted share, compared with $1 million, or $0.03 per diluted share, for Q2 of last year.

Our non-GAAP net income for Q2 was $1.6 million, or $0.05 per diluted share, compared with $0.06 per diluted share in Q2 of last year. Our weighted average shares outstanding were $35 million in Q2, compared to $33 million in Q2 of last year.

I'll now turn to the balance sheet. We finished Q2 with approximately $7.4 million of cash and equivalents, a decrease of approximately $6.7 million, compared to $14.1 million from Q4 of last year. The decrease is primarily due to the acquisition of HEKA in Q1 as well as scheduled debt payments in the first six months of the year.

Accounts receivable as of Q2 were $18.5 million, compared to $16.1 million as of Q4 last year, an increase of $2.4 million. Receivables from the three acquisitions partially account for the increase as well as general timing of collections.

Inventory at the end of Q2 was $23.1 million, compared to $20.5 million at the end of Q4 last year. Inventory turns were 2.8 times, compared to 3.4 times for Q4 of last year. In addition to the inventory associated with the acquisitions, the increase relates to the temporary transitional inventory requirements needed to accommodate the consolidation of our Biochrom operations with our Holliston, Massachusetts, facility.

Capital expenditures were $600,000 for Q2, compared to $1 million in Q1 and approximately $800,000 for Q4 last year. As discussed on previous calls, we have experienced higher levels of capital expenditures related to the site consolidations and system investments. We expect capital expenditure levels will be lower and more comparable to historical levels while in completion of these programs.

Debt at the end of Q2 was $20.7 million, compared to $21.5 million at the end of Q4 of last year. The decrease was due to principal payments made during the first six months offset by net draws in our revolving credit facility to fund the temporary working capital needs to accommodate the site moves.

I'll now turn to annual guidance. Today we are affirming our financial guidance for the full year 2015. We still expect revenues of approximately $110 million to $112 million. We still expect reported revenues will be lower by $8 million to $10 million compared to prior year due to the impact of foreign currency. For non-GAAP EPS, we expect $0.21 to $0.23.

Also reflected in this guidance is cost we will occur in 2015 to relocate and consolidate the manufacturing distribution facilities of $750,000 to $1 million, or approximately $0.02 per diluted share. As mentioned on past calls, 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.

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

(Operator Instructions) Paul Knight, Janney.

On the organic, it looks like you kind of rolled in at around I guess 1%. But can you talk to why R&D was up a lot sequentially and also your comment on academic-looking promising? What's your feeling about markets and internal developments and organic growth potential here in the second half and forward?

Yes, Paul, let me start with the organic piece, and then Rob will jump in in a second with some of the other portions of your question.

Organic growth is the number one priority for this business. As I stated in my report, we're putting a lot of emphasis on our commercial teams -- our sales and marketing teams on a global basis to improve our organic growth where it is today and where it will be moving forward throughout the rest of the year. We've implemented programs which we started at the beginning of the year once January took off in a different direction, mostly driven by foreign currency.

We've implemented programs. The programs are starting to pay off. We expect the second half of the year to be better than the first half of the year from an organic standpoint.

What we're hearing and what we're seeing in our results from our academic accounts is that there's been somewhat of a stable academic environment for the first time in many years. We've seen a decrease over the last several years, but for the first time, we're actually starting to feel as though the market has stabilized. And what we're hearing is the second half of the year could be even better. So we're very optimistic on Q3 and Q4 from an academic standpoint and organic.

But R&D, Rob?

Yes, on R&D, Paul, I think when you look at the year-over-year, the increase is primarily driven by the three acquisitions. But in addition to that, I would say that the three acquisitions, especially the largest one, Multi Channel Systems -- the level of development work that's going on within that business on a percentage of sales basis is higher than Harvard Bio's historical average. That's because they have some interesting projects they are working on that down the road will lead to some potentially new products.

But I think over time you'll start to see that R&D investment number normalize back to where it was historically. It's just going to take a few quarters.

And then Rob, you had mentioned the $400,000 in manufacturing move costs. Is that taken out in the non-GAAP, or is the non-GAAP just severance?

No; I'm glad you mentioned that. It's not taken out of the non-GAAP, so it's reflected in those results. All that's taken out is the severance associated with those changes.

And that's really, I think, one of the key stories to the quarter. Jeff talked about in his prepared remarks the Colborne relocation as well as the HEKA Canada relocation. Those are in addition to the ones we had spoken about previously. So there's really four site consolidation moves that we've been working on over the past few months, and that's why you see that run-up in costs in Q2. We are through the majority of that. You'll start to see that decline in Q3, and I think we'll largely be through it by Q4.

Okay. And then that is new on the Colborne specifically. What is that facility? What does it make? Can you talk to that?

Yes, it's a facility in Pennsylvania. It's part of our animal physiology product family. And it just falls right into our strategy of reducing the size of our global footprint. We've been talking about this for close to two years now. The number of manufacturing sites on a global basis is just too much for the size of this business.

So Colborne is part of animal physiology. It will be consolidated into the Holliston, Massachusetts, facility, and it should be complete in Q3 of this year.

Okay. And then lastly, geographically US was how much? How much did US grow? And China up 13; how about rest of the world?

US continues to be about 50% of the overall business. The acquisitions are mostly in Germany. So to your point, the US markets were relatively flat. We talked about the 13% increase in China. Europe is about 35% of the overall business. That continues to be a challenging market because of the number of reasons. But that's how the breakdown works, Paul.

Okay. It's mostly China versus India, rest of Asia or South America?

Yes, mostly China, but we continue to build up our commercial capabilities, our distribution relationships throughout the region. Korea, Japan, Southeast Asia. You know, hopefully in the future it will be India; spend a little bit more time in India moving forward.

Okay. Thank you.

(Operator Instructions) Raymond Myers, Benchmark.

Before I get to the fundamentals of the business, I just wanted to touch on currency. It was such a big factor in the last two quarters. Can you dive into that a bit more and tell us where you stand on the currency transition? Do you really feel that the issue is behind you? And how did you make those adjustments?

Well, I'll start -- yes, let me start, and then Jeff can certainly jump in. But in terms of currency, I wouldn't say it's largely behind us. It continues to be a major headwind on the year-over-year comparisons. If you recall, the euro was at, I think, an average of $1.33, $1.34 last year. Now we're seeing it sort of stabilize around $1.10. So it's still a major headwind.

And when we set guidance back in Q1, we took that into consideration. I think the euro may have been $1.08, $1.09 at the time, so it really hasn't changed all that much. I think we've seen some stabilization, but that's (technical difficulty) we think about guidance. That impact really hasn't changed for us.

Yes, what it's done, Ray, is it's allowed our customers to get their feet back on the ground, especially in Europe. And their buying patterns and habits have come back to somewhat of a norm. Early in Q1, buying habits basically came to a halt, and that's why we had such a soft Q1. But we've seen a strong rebound literally ever since January. Bookings continue to increase, and it's, I think, due to the stabilization of the euro compared to where it was earlier in the year.

Thanks. That helps. And then my next interest was on the integration of the acquisitions. You made those three electrophysiology acquisitions recently. Could you give us some color on what accretion or benefits competitively, cost savings or in any regard that you have received so far from the acquisitions you made?

Let me start with the benefits, and I'll let Rob go into cost savings. So the benefit is, number one, we're going to streamline their operations; the three acquisitions, we're going to streamline their operations. Some of the acquisitions came with multiple sites. So by consolidating these sites such as HEKA Canada into the HEKA German facility will streamline manufacturing operations. Become much more efficient for us.

But really the upside of the integration of these acquisitions is the integration from a commercial standpoint. We created an electrophysiology dedicated sales organization. MCS is a prime example; they had a very strong presence in Europe when we acquired them. The US market is somewhat of an opportunity. And taking our existing sales and marketing teams in US and now driving MCS products through our existing sales, commercial relationships is allowing us to create these opportunities not only today but moving forward for MCS.

So the integration process is in every phase, every function of the business. But I think the opportunities really come from the commercial side more than just consolidating sites and cost savings. I think long-term, growth of this business from an organic standpoint will be driven by these -- this type of integration process.

And on the accretion cost savings, keep in mind that we're talking tuck-in acquisitions. One of them was less than $2 million; the larger one closer to $8 million. But it's sort of one plus one equals 2.1, 2.2. It's not like there's major, major cost synergies. But there are some cost synergies, and we've seen that specifically with HEKA and the Canadian operation and consolidation activities that have gone on there this quarter.

The benefits of that as well as the costs are reflected in the guidance that we said at the beginning of the year, the $750,000 to $1 million. But there's other areas we have to make investments, such as around systems and getting these tuck-in acquisitions ready to be part of a public company. But that's how we think about the accretion of cost savings for the acquisitions.

Thank you. And regarding those investments, you made an investment in the China direct sales force last year. That continues. And I think in the prepared remarks you said China grew 13% this last quarter. Can you give us a sense of how your direct sales investments in China has been paying off so far, and give us a better sense of 13% growth but from what base?

I think the reason we're seeing growth right now is, number one, we made the investment last year. We built a team of what we call channel managers in China. These individuals have basically build relationships with distribution networks. We have a very strong leader in China, and I think the team's doing a great job of executing our strategy. We are starting to see growth.

The China market is still a challenging market. There's still government-related issues. The economy, somewhat unstable right now. But I believe the fact that we have a talented organization, we've built these relationships, we've expanded our distribution network in China is really starting to pay off. And we're starting to see some excellent growth coming from some of our product family such as molecular analysis. And the future looks bright in China for us. So we're excited what we saw in Q2, and we're excited for the back half of the year.

Sounds good. Thank you. And also I want to now ask you about the manufacturing consolidation that you've been engaged in. You've talked about several of these sites you expected to be completely consolidated by the third quarter, or the current quarter. Have you started manufacturing in the Holliston facility, the products that used to be manufactured at the previous facilities? And have you shipped any of those to customers yet?

Yes, we've started to build in Holliston, Massachusetts. We've built rich inventory to cover us moving forward, and you can see that in the inventory numbers. But we have dedicated work cells here in Holliston building products for each of these transitional consolidations that are taking place right now.

Yes, we're still in the early stages. I think it's Q3 when you'll start to see the product made in Holliston shipped out to customers. And you actually see that reflected in our working capital. You see it in the inventory; the higher-than-normal balances there, they'll start to come back down to normal levels.

Did that also evidence in gross margin where you have duplicative manufacturing facilities?

Well, sure, like I was talking about with Paul's question, within the non-GAAP results there's $600,000 of consolidation costs that are flowing through the gross margin line. They also flow through some line items within operating expenses. So those investments once we're done will not repeat, and they'll be -- we'll be done with that work largely Q3. But that will really benefit us next year, as well as we'll also see the benefits of those segments next year. So it will have that double effect.

Sounds great. And will that start -- will we start to see that as soon as the fourth quarter?

We will start to see some of those benefits late in the year, so fourth quarter.

Okay. Great, great. And then maybe my final question is just about your general outlook on the business globally and the environment for acquisition pipeline.

What we're seeing globally is we're seeing a global market academically -- we'll speak specifically on the academic market because it's 70% of our business. It's somewhat stabilizing. It's nice to see, so we're optimistic in the back half of the year.

In regards to what was the second half of your question rate was?

The acquisition pipeline -- you made three small acquisitions so far. It sounds like it's going well so far. What --

We're excited with the three acquisitions. The pipeline is robust. We meet weekly and we review pipeline of potential targets. And the targets may be across multiple product families and core competencies that we currently have. There's no shortage of opportunities. As you know, valuations of these companies can somewhat be out of line, so it takes time and patience. And we have put strict dedication to making acquisitions; we have been clear about that. It's an important part of our strategy and will continue to be a growth driver for the business.

Thank you for the color, and look forward to future updates.

(Operator Instructions) Michael Needleman, Jay Stryker Asset Management.

Just in terms of the quarter, the sales, I wonder if you could talk a little bit about the linearity of the quarter from the standpoint of what you saw. And then after you do that, I wonder what you are currently seeing. Is business staying at the same pace? Have you noticed anything different?

Sales, actually up; increase versus Q1. I think there were two main factors. Number one, foreign currency stabilized, and the other factor was we put in very strict commercial programs in place early in Q1 that are starting to pay off for us.

So in terms of where sales are today, we are very happy, we are very pleased with the way Q2 progressed. Second half of the year, from what I said earlier around specifically the academic segment, we are feeling like the segment is stabilizing and we are starting to see results because of that. So we are very optimistic in the back half of the year from an academic standpoint.

Maybe I can ask it a different way. Was the growth of the quarter, was it fairly linear to the quarter, or was there somewhat of a more hockey-stick approach from the standpoint of your overall revenue?

Yes, it's Rob. We covered this little bit during the Q1 conference call when January, February hit. The immediate impact we saw -- and I think it was largely due to the shock in foreign currency. I think there were a lot of euro buyers that just paused. And we started to see an acceleration into March. And I think we've seen a rather straight or slightly positive incline to that throughout the second quarter.

And to Jeff's point, I think we feel confident in the back half of the year. We're sitting here now with $6.6 million of backlog. I just don't want to be overly optimistic because it has been a challenging year. It was a good Q2, but it has been a real challenge in Q1. And we certainly feel better sitting here today than we did three months ago.

That color is very helpful. And just in terms of the overall cost -- because you mentioned that -- so far, I think you said that there's over $600,000 that you've already done, and clearly that's weighing on the overall performance from the standpoint. Now, you will get the benefits of that. The total that you mentioned for this year, $750,000 to $1 million, I just want to be sure that I heard that correctly. You think that the majority of the remainder is going to be done in the third quarter. But will there be some of these costs still lingering in the fourth quarter?

Well, sure. You're right, (technical difficulty) million. We're $600,000 through the first half of the year. We'll largely be through that work by the third quarter into October. And then there tends to be a couple of months of additional cleanup that happens or working through working capital to get the inventory back to where it should be. So that's why say it's largely the end of the year in 2016 we'll start to see benefits of that. But we will actually be done with the move by mostly Q3, early Q4.

Okay. Thank you so much. Appreciate it, gentlemen.

Paul Knight, Janney.

Sorry, guys; I have one more question, and that is regarding the backlog. You talked about backlog of 8%. I'm sure that you have some acquisitions helped that number. Or how should we look at backlog in that 8% number? Is it kind of organic backlog of like revenue which was plus one-ish, or how should we think about backlog?

Hi, Paul, it's Rob. You're thinking about that exactly correct. So reflected in the backlog is the three acquisitions. It is extremely challenging to get at an organic number because of the system integration, the cross-selling and what's going on with these acquisitions. But it's reflected in the number, and it would account for the large portion of that increase.

Okay. Thank you.

(Operator Instructions) At this time, I'm showing no further questions. I would now turn the call over to Mr. Jeff Duchemin. Please go ahead.

Thank you, everyone, for calling in today. We appreciate it. We look forward to speaking to everyone after our Q3 quarter is complete. Thank you.

Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.