Harvard Bioscience Inc (HBIO) 2015 Q4 法說會逐字稿

Welcome to the first-quarter 2016 Harvard Bioscience Incorporated earnings conference call. My name is Ellen and I will be operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. I will now turn the call over to Corey Manchester, Director of Finance and Investor Relations. Mr. Manchester, you may begin.

Thank you Ellen, and good morning everyone. Thank you for joining us for the Harvard Bioscience first-quarter 2016 earnings conference call. Leading the call today will be Jeffrey Duchemin, President and Chief Executive Officer; and Robert Gagnon, Chief Financial Officer of Harvard Bioscience.

Before I turn the call over to Jeff, I will read our Safe Harbor statement. In our discussion today we may make statements that constitute forward-looking statements. Our actual results and performance may differ materially from what we have projected due to risks and uncertainties, including those detailed in our annual report on Form 10-K for the period ended December 31, 2015, and our other public filings.

Any forward-looking statements, including those related to the Company's 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. I will now turn the call over to Jeff Duchemin. Jeff, please go ahead.

Thank you, Corey. Good morning everyone. Thank you for joining us for our first-quarter 2016 conference call. In my discussion today, I will begin by providing some brief comments on our fourth-quarter and full-year 2015 since we did not hold a conference call to discuss those results, followed by a discussion of our first-quarter 2016 results. Our CFO, Rob Gagnon, will then provide more financial details related to our first-quarter 2016 results and our 2016 guidance.

As most of you are aware, 2015 was an important year of investment for Harvard Bioscience. We started the year with the acquisition of HEKA Elektronik, which added to our industry-leading portfolio of electrophysiology companies. During the year we launched the first phase of a common ERP system and we finished the year having successfully consolidated five facilities. The tremendous effort by our team to accomplish these initiatives in one year is a testament to the team we've assembled at Harvard Bioscience.

2015 was not without its challenges. As we've discussed, foreign currency was a significant headwind in 2015 as was GE Healthcare's decision to discontinue the sale of its spectrophotometer brands. We also spent a significant amount of time and effort over the last two months working to finalize our full-year 2015 financial close and audit following the identification of an embezzlement and its concealment at our Denville subsidiary. As reported a few weeks ago, the investigation and audit are closed.

Moving to our first-quarter 2016 results. We reported a solid quarter with both top line and bottom line growth over last year's first quarter. Revenues for the quarter were $27 million, approximately 5% higher than last year's first quarter. Excluding currency translation, our revenues grew 6% compared to last year's Q1. Non-GAAP EPS was $0.05, up 150% from the $0.02 reported last year for Q1. The results speak to our team's ability to execute and deliver growth.

While Rob will provide specific results in his remarks, I'd like to touch on our results on a geographic basis. Revenues in the US and China grew double-digits, offset by softness in Europe, driven by the impact from the GE transition. Our cell and animal physiology product lines accounted for the majority of the increase in the US, while our China performance was the result of higher product sales of spectrophotometers and amino acid analyzers, both products within our molecular analysis product family. In terms of the decline in Europe, during the third quarter of 2015 GE Healthcare informed us of its decision to discontinue the sale of its spectrophotometer products at the end of 2015. This line of products includes the GE brands NanoVue and SimpliNano, which we manufacture and distributed through GE.

As of January 1, 2016, we began selling NanoVue and SimpliNano spectrophotometers through our own direct sales force and through distribution partners, as well as servicing previously sold products in the field. In terms of the transition, we are meeting our expectations and are receiving positive feedback from our distribution partners and customers.

Now moving on to the bottom line. We are starting to reap the benefits of the restructuring we announced in the fourth quarter of 2015, as well as the gross margin expansion from our site consolidation efforts. Our non-GAAP gross margin percentage increased to 48.1%, an increase of 190 basis points from Q1 last year. Our non-GAAP operating income increased to $2.4 million from $960,000 for last year's first quarter.

While it is still early, we are excited about the results we're beginning to see on the cost side. Our operations team has done a good job in executing the site consolidations while supporting the rest of the organization and our commitment to our long-term growth strategy. As I've mentioned in the past, product development is an important component of our strategy. We are working on a number of projects across our entire portfolio. In particular we have meaningful gains in new product development at our MCS and TBSI subsidiaries, two of our more recent acquisitions.

In conclusion, let me leave you with this. We posted solid Q1 results which met our expectations. We have begun to benefit from the investments made in 2015. We continue to see progress being made from operational efficiencies and the benefits associated with the five site moves. Our GE transition is meeting expectations on both revenue and service. We believe our results reported today provide a solid foundation for us to achieve our financial and strategic goals for the year.

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

Thanks, Jeff. Before I began to discuss Q1, I'd like to briefly address the topic of the embezzlement and subsequent forensic investigation. This was an unfortunate situation and we are relieved to be putting it behind us. The total cash embezzled was less than $50,000 and while this episode only impacted a small group of people, they put forth a tremendous effort to complete the forensic investigation as well as complete the year-end financial reporting process. I'd like to acknowledge that group and thank them for their efforts. Also, as disclosed in the recent annual report on Form 10-K, the Company reported weaknesses in internal controls and information related to our remediation plan. We are working diligently to resolve these issues.

Now turning to Q1, as in previous quarters much of my focus will be on non-GAAP quarterly results which we believe better represents 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.

Also new this quarter, we have included a comparative non-GAAP quarterly income statement as Exhibit 10 to the press release. 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.

So now beginning with the top line. Revenues in the first quarter were $27 million, an increase of $1.2 million or 5% compared with revenues of $25.8 million in the first quarter of last year. Revenues on a constant currency basis would have been $27.3 million, an increase of $1.5 million or 6%.

And in terms of geographic regions, the US grew approximately 10% quarter over quarter. Revenues in China grew approximately 30% quarter over quarter. Europe and rest of world declined approximately 7% and 4%, respectively. Much of the growth in the US and China was the result of strong bookings in the fourth quarter of 2015.

We will get into financial guidance in a moment, however, we still expect revenue growth of up to 2% for the full-year 2016. In terms of the decline in Europe, as Jeff discussed, this was primarily the result of the GE transition. In the first quarter of 2016 revenues were unfavorable by approximately $500,000 related to this business, and accounted for substantially all of the decline in Europe.

Now turning to costs and expenses. Cost of revenues were $14 million in Q1, compared to $13.9 million in Q1 last year. As a result, our gross profit was $13 million this quarter compared with $11.9 million for last year's first quarter. Gross profit margin was 48.1% in Q1, up from 46.2% in Q1 of last year. This 190 basis point increase in gross profit margin, or $500,000 of gross profit in Q1, is primarily attributable to our site consolidation efforts in 2015.

Operating expenses for Q1 were $10.6 million, a decrease of $360,000 compared to $10.9 million in Q1 of last year. This decrease in operating expenses is due to a number of factors, but mostly the result of the restructuring that took place last November as well as the site consolidations.

Operating income in Q1 increased to $2.4 million, as compared to $960,000 in Q1 of last year. And operating margin in Q1 was 8.9% on a non-GAAP basis. This compares to an operating margin in Q1 last year of 3.7% on a non-GAAP basis. Again, Q1 was the first indication that the site consolidation efforts will contribute to the increase in operating margin which we believe will continue over the long run.

Our non-GAAP effective tax rate was 27.9% in Q1 compared to 18.6% in Q1 of last year. The increase in effective tax rate was due to higher pretax income. Our GAAP net loss was $636,000 in Q1 or $0.02 per diluted share, compared with a net loss of $1.4 million or $0.04 per diluted share for Q1 of last year.

Included in our Q1 GAAP results is $1.2 million of expense related to the forensic investigation cost. This item has been excluded from the non-GAAP results and we expect to report additional cost in the second quarter, albeit not at this level. Our non-GAAP net income for Q1 was $1.6 million or $0.05 per diluted share, compared with $0.02 per diluted share in Q1 of last year. And weighted average shares outstanding were 34 million in Q1 as compared to 32.9 million in Q1 of last year.

Now turning to the balance sheet. We finished Q1 with approximately $4 million of cash and equivalents, a decrease of $2.5 million compared to $6.7 million from Q4 last year. The decrease is primarily due to scheduled debt payments in the first quarter as well as changes in working capital.

Accounts receivable as of Q1 were $18 million, compared to $17.5 million as of Q4 last year. The increase of $473,000. And inventory at the end of Q1 was $22.2 million, compared to $22.3 million at the end of Q4 last year. Inventory turns were 2.5 times compared to 2.7 times for Q4 last year.

Just an additional comment on working capital. As an organization, we are working to reduce our working capital and cash conversion time. Our finance team is working with our customers to collect on outstanding receivables while our operations team is working on vendor rationalization, local sourcing of inventory, and streamlining purchasing following the five site consolidations from last year.

Capital expenditures were $200,000 for Q1, compared to $1 million for Q1 last year. Our capital expenditures have come down significantly since the first quarter of last year due to timing of the ERP implementation and site consolidations. We expect capital expenditure levels will increase in the second half of the year as we enter the next stage of our ERP build out.

Debt at the end of Q1 was $17 million, compared to $18.7 million at the end of Q4 last year. The decrease was due to principal payments made during the quarter, offset by net draws on our revolving credit facility to fund working capital needs.

I will now turn to annual guidance. Today we are reaffirming our guidance of up to 2% growth, despite reporting a 5% quarter-over-quarter growth for Q1. If you recall last year, we reported a fairly weak Q1 due to the decline of the euro and other factors, which was followed by an unusually strong sequential Q2. As a result for full-year 2016, we still expect to report revenues of approximately $109 million to $111 million, and non-GAAP EPS of $0.17 to $0.19.

As Jeff remarked, we had a solid start to 2016 in which we grew on both the top line and bottom-line. While there is still work to be done, we believe this has set a good foundation for us to achieve our financial goals for the year. As mentioned on past calls, the difference 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 Montgomery.

On the Q4 bookings you mentioned, what product lines was that and why wouldn't you expect to see that type of -- why wouldn't you expect to see this type of organic growth the rest of the year, is my first question?

Paul, this is Jeff. Some of the products that were part of that, booking at a large booking in Q4, were more timing. If you look at China, we will talk a little bit about China here for a second. We had significant growth in Q1 in China, about 30% growth.

More timing related with AAAs, which is our amino acid analyzer product being sold into China. We don't expect that to repeat in Q2.

We will continue to sell product during the year, but we won't see the significant number of units that were sold in Q1, transitioning to future quarters. So more of a timing-related topic with China and with the AAA units that were sold there from a bookings standpoint.

Okay. On the operating margin, again, is that -- it seems like you are implying kind of moderate to flat levels the rest of the year. Is that because of this bolus in orders you had, or what is your thoughts on Op margin for FY16?

Paul, it's Rob. If you take the midpoint of the guidance which is $0.18, multiply it out to 35 million shares, assuming a 30% tax rate, the operating margin based on the guide is around 9%. So it's right in line with what we reported for the first quarter. But I think your point is right on. I'd also add, the fact that we had 190 bp improvement on gross margin was a bit ahead of what we had expected and I think there's probably some timing there through the rest of the year, but nonetheless we're still seeing the improvements in gross margin because of those consolidations.

Third question is, the academic market, we would hope, gets better. Are you seeing any comment? Are you hearing any comments? Seeing anything in terms of orders, even post Q1?

I think, Paul, this year in Q1 compared to last year we're seeing a much more stable academic market on a global basis. Specifically in Europe. We're happy with the results that we've achieved in Q1 in the US. What I've read, what I'm hearing is that as the year transitions the increase in the NIH budget will hopefully funnel into buying habits of our customers.

So we expect the back half of the year to be stronger than the first half of the year, but right now we see a stable, academic market. I still believe it's in the 1% to 2% growth range. I think the majority of the growth in the industry is coming from biopharma, which is a small percentage of our business, but I would say the back half of the year should be some tailwinds for us.

Lastly, Rob, could you talk about balance sheet, where you are with your debt due, credit line, et cetera?

Absolutely. We amended the facility. It was disclosed in the 10-K that we filed a few weeks ago, but we amended that facility in the first quarter. It was an amendment to change the amortization of the principal payments.

So historically it's been $5 million a year. It's been reduced to $2.5 million a year and we have at the moment, we have the line of credit available which will grow over the course of the year.

We're expecting that, June 30, that number will be high single-digits that's available and throughout the year it will expand into the teens. So we're feeling pretty good about where we are right now with the credit facility and the line of credit.

(Operator Instructions)

Raymond Myers, Benchmark.

Thank you for the clarity of the remarks this morning. It was very helpful. Jeff, your remarks suggest that the margin expansion here in Q1 might be just the first benefit of your consolidation plan. Can you describe the next stages of your plans and how much more improvement might be in store?

It was a great deal of work done last year with five sites being consolidated in one year. That's an incredible accomplishment for the organization. I think we're starting to see the benefit as we posted today. The benefit will continue. It will continue in many aspects of the business.

I think we're going to become more efficient in terms of building products. I think we're going to reduce inventories. We're going to be able to increase our service levels to customers. So the consolidation efforts of last year I think will continue not only in 2016 but beyond, in terms of our ability to produce high-quality products and service our customers better than this Company ever has.

That's great. Next maybe for Rob. Help me to translate some of this to the income statement.

The non-GAAP G&A expense that you reported this quarter was under $4.2 million. That looks like a big reduction from last year. But once the investigation charges ended, can you help us understand what level of quarterly G&A expense we would expect going forward?

Sure, Ray. Ray, so just so it's clear, the non-GAAP G&A number excludes those forensic investigation costs. So we reported today $4.2 million in the third quarter of 2016, which is right in line with what we reported on a non-GAAP basis for the first quarter last year.

I think that that's a pretty good run rate number to be thinking about. There's clearly going to be some ups and downs throughout the year, but I think that's probably in line with our expectations throughout 2016. Is that helpful?

Yes, that definitely does, thanks. I want to touch on the GE spectrophotometer business. Jeff, you said that that business is meeting your expectations. That's helpful, but could you give us a sense of what are your goals and expectations for this business?

Over the last three or four months ending 2015, we had a transitional service agreement in place with GE. We had a plan in place. We had a team working on that. What we've been able to do is make contact with all of GE's spectrophotometer dealers on a global basis. We have direct agreements with these companies.

We have hired both sales and service individuals to represent this product category for us. We monitor this on a weekly basis, both sales and service, and at this point time, as I said in my comments, we're right where we need to be at this point in the year. So we're very happy with the transition and the performance of our new distribution partners on a global basis.

You mentioned in your remarks that the MCS and TBSI businesses were showing meaningful gains. Could you elaborate on that? That sounded interesting.

I didn't touch base on the particular products they are working on, but there is some exciting technology and innovation being developed at both MCS and Triangle BioSystems. I will start with Triangle BioSystems.

They received a DARPA grant, and I'm not sure if you understand or know what DARPA is, but DARPA stands for Defense Advanced Research Project Agency. And basically it's a funding agency, it's part of the Department of Defense, and we were granted an award to develop some technology, technology that we will have the rights to, we will own the patents to, and basically we're developing three specific systems.

One is an electrical stimulator system. The second is an optogenetic stimulator system and the third is a neural recording system. And the interesting thing about this is, the technology and science itself related to brain research, optogenetics is a very exciting and progressive area of science, and we are in the forefront of that with our electrophysiology acquisitions and legacy businesses that were part of Harvard Bioscience. So we're really excited about that.

On the MCS side, they are also working on some new technology, I don't want to elaborate too much because the products haven't been launched yet. But they also are coming out with some stimulator systems and recording systems that will progress their baseline of current products. So we are excited about that.

And one other thing too I think we'll mention probably post Q2, our animal physiology business is coming out with a physiological monitoring system. And we're excited about this, we will be launching this and we'll be discussing it post Q2.

That sounds encouraging. You described a number of new products that have been developed internally at Harvard. That sounds like a new growth driver going forward that really had not been a focus of Harvard in the past with respect to internally developed new products. Is that a fair statement?

Ray, going back 2-1/2 years ago when I started and the new management team was developed and we changed our strategy, one of the elements of our strategy was reinvigorating product development. It's been around for a couple of years and there's many phases of product development.

There's new products, there's breakthrough technologies, there's product line extensions. We've been working on all of these for the last 2-1/2 years. Most of it is continued improvement, continued maintenance of current legacy products.

We are now at the point where we're starting to work on innovation. And the exciting part of these acquisitions that we've made and the benefit they bring to our business, not only do they bring a revenue source but they bring some very talented individuals, research and development individuals, that can help innovate and transition Harvard Bioscience, not only into just a manufacturing company but a global innovation company, so we're excited about where we are.

It's been a project that's been in place, or a process that has been in place for a couple of years now, but we're getting to the point where we're going to start to launch new products and hopefully be talking about it in the upcoming quarters.

That's great. I just have two more. First housekeeping, Rob maybe if you could tell us what were backlog in bookings? And then Jeff, maybe finish up with discussion of what you see as opportunities for further accretive acquisitions? Thank you, guys.

Ray, bookings were just over $26 million and on a currency adjusted basis they were relatively flat year over year. We finished with $8 million of backlog and just to note, reflected in the book and also in the backlog is the fact that the spectrophotometer business is back, but it's building back and as I mentioned in my prepared remarks, it was unfavorable $0.5 million in the quarter in terms of sales.

Ray, the back half of your question around acquisitions, acquisitions continue to be an element of our strategy, but I will tell you the focus right now here at Harvard Bioscience is top line growth. Really everything we're doing from a business standpoint is working with our global commercial organizations to drive the top line. That's the number one goal of this business this year and I think we started off the year on the right foot, we want to continue it moving forward and the focus is there right now in terms of top line growth.

Great. Thanks for all your comments. Appreciate it.

We have no further questions at this time. I would like to turn the call back over to Jeff Duchemin for closing remarks.

Thanks, Ellen. I would like to thank our shareholders and employees for your continued support. We truly appreciate it.

We look forward to speaking again to all of you after Q2. Have a good day, everyone. Thank you.

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