Harvard Bioscience Inc (HBIO) 2016 Q4 法說會逐字稿

Welcome to the Q4 2016 Harvard Bioscience Inc.

earnings conference call.

My name is Allie, and I will be your operator for today's call.

(Operator Instructions) Please note this conference is being recorded.

I will now turn the call over to Corey Manchester, Director of Finance and Investor Relations.

Corey, you may begin.

Thank you, Allie, and good afternoon, everyone.

Thank you for joining us for the Harvard Bioscience fourth-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.

Jeff, please go ahead.

Thank you, Corey.

Good afternoon, everyone.

Thank you for joining us for our fourth-quarter 2016 earnings call.

I will begin today by providing comments on our Q4 and 2016 results, as well as some overall business updates.

I will then turn the call over to our CFO Rob Gagnon, who will provide more details on our financials and guidance.

We will then open it up for questions.

2016 was not without its challenges.

Despite that, we made important operational progress on improving profitability.

More specifically, during 2016, we encountered headwinds throughout the year related to currency translation, softness in the European funding environment, and slower than expected NIH funding outlays in the US which adversely impacted our top line.

Throughout this, we were able to execute on our priorities aimed at leveraging our infrastructure, exercising tight controls on our business and expanding our margins.

Looking to operational successes, our profitability improved in the quarter and year as we realized the benefits from our site consolidation and cost containment measures.

Non-GAAP operating expenses declined $1.5 million this year.

Our non-GAAP gross margins for the year improved 60 basis points from 2015, while our non-GAAP earnings per share increased 15%.

Our balance sheet continues to strengthen as we generate operating cash, focus on working capital and pay down our debt.

And during 2016 we generated over $5 million in operating cash.

We reduced inventory by more than $2 million, reduced accounts receivables by approximately $2 million, and reduced overall debt balance by $5 million.

Additionally, at the beginning in January, we went live on our ERP platform in our largest German subsidiary, Multi Channel Systems.

The cross functional team that worked on this effort did an excellent job.

We are pleased with the implementation and look forward to the future benefits that will be afforded through this project.

As I stated in the past, we expect that with our sites on one system, we can drive further operational efficiencies through coordinated purchasing and inventory management, as well as realize other benefits such as having a common platform on which we can integrate future acquisitions.

Turning to the fourth quarter, starting with our strongest regions, revenues increased approximately 16% and 2% in China and rest of the world respectively in Q4.

Full-year 2016 revenues increased approximately 14% in China and 2% rest of the world.

We continue to be pleased with our performance in China, one of the fastest growing lab products and services markets globally.

We are also working with our team to further expand our reach in 2017 and beyond, including in Japan, Korea, and Southeast Asia.

Revenues declined approximately 5% in the US and approximately 16% in Europe in the fourth quarter.

Full-year 2016 revenues were virtually flat though slightly up in the US, while they declined approximately 14% in Europe.

The end market in Europe continues to be soft due to currency translation and weakness in the funding environment.

Excluding currency translation, our European revenues were down approximately 10% in the fourth quarter.

With the euro devaluation in 2015, Brexit, and the pound sterling devaluation this year, the European market has been plagued with challenges.

Looking ahead in 2017, we expect currency translations to continue to pressure our business results.

While the macro environment faces these challenges, we have taken initiatives to improve our operational performance.

As I have outlined in the past, approximately 50% of our business comes from the US market, and within that, roughly 70% of our US customers are academic labs which are primarily funded by the National Institutes of Health.

We continue to be optimistic that we will experience a sustained acceleration of academic funding from the NIH based on last year's approved budget, the proposed fiscal 2007 budget and, as of this point, bipartisan support for funding increases from the government going forward.

While we haven't realized the full benefit of incremental funding yet and while it's still early, we did see some signs of changing tides with increased funding outlays from the NIH to academic labs in the fourth quarter.

We believe there is a natural lag between funding to labs and the purchase of consumables and benchtop instrumentation.

So, as of today, we remain cautiously optimistic.

We expect the outflow of funds will improve and that our customer's confidence will be restored when funding certainty resumes.

It isn't a matter of if but when.

Since we're not in the business of predicting future outcomes or timing of those outcomes, we will continue to be prudent stewards of capital with a disciplined approach in managing our bottom line until clarity and certainty occur.

When the certainty to our end customers returns, our commercial teams are positioned to reap the benefits.

With that backdrop, we expect 2017 revenues to be flat to slightly down and adjusted 2017 EPS expectations in the range of $0.15 to $0.17.

Rob will go into more details on the puts and takes affecting our financial guidance in his remarks.

In summary, despite the top-line challenges we faced in 2016, we are encouraged by our accomplishments in 2016 and believe we are well positioned to continue this momentum as we move into the new year.

There are several key factors which we believe can bolster our positioning and success in 2017.

First, improved geographic positioning.

We believe we will continue to post strong results in China, and we are positioned to capitalize an expansion into complementary territories, including Japan, Korea, and Southeast Asia.

Second, we will continue to benefit from our cost containment measures and operational improvements around site consolidations and ERP implementation.

Third, as I stated earlier, we are poised to capitalize on improvements in the academic environment when it occurs.

And finally, we remain committed to acquiring companies through thoughtful and deliberate strategic development.

Because of our improved profitability, increasing cash generation and working capital improvements, as well as access to attractive debt financing, we have the capacity to execute on acquisitions when it makes both strategic and financial sense.

We are steadfast in the strategic vision of our organization and believe it will drive top-line growth, improve profitability, operational performance, and ultimately create shareholder value.

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

Rob?

Okay.

Thanks, Jeff.

So 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 measure and 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 archived at the same location on our website at harvardbioscience.com.

Now beginning with the top line, revenues in the fourth quarter were $26.4 million, a decrease of approximately $2 million or 7% compared with revenues of $28.4 million in the fourth quarter of last year.

Excluding the negative impact of a strengthening US dollar, revenues in the fourth quarter would have decreased 4% or by $1 million compared with the fourth quarter of last year.

Included in that decline is the revenue impact from the divestiture of AHN in October, which accounted for approximately half of that amount.

So excluding foreign currency and AHN, the organic decline for Q4 was 1.8%.

For the full-year 2016, revenues were $104.5 million, a decrease of approximately $4.1 million or 4% compared with revenues of $108.7 million in 2015.

Excluding the negative impact of a strengthening US dollar, revenues for the full year would have decreased by 2% or $2 million compared with full-year 2015.

And again, excluding foreign currency and AHN, the organic decline for 2016 was 1.5%.

Now turning to costs and expenses, costs of revenues in Q4 were $14.3 million, a decrease of approximately $1.1 million compared to $15.4 million in Q4 of last year.

And for the full-year 2016, cost of revenues were $56 million, a decrease of approximately $2.9 million compared to $58.9 million in 2015.

Gross profit margin in Q4 was 45.9%, an increase of 20 basis points compared to 45.7% in Q4 of last year and for the full year 2016, gross profit margin was 46.4%, an increase of 60 basis points compared to 45.8% in 2015.

Operating expenses for Q4 were $10.5 million, a decrease of $600,000 compared to $11.1 million in Q4 of last year, and for the full-year 2016, operating expenses were $41.7 million, a decrease of $1.5 million compared to $43.2 million in 2015.

Operating income in Q4 decreased to $1.6 million, a decrease of approximately $200,000 as compared to $1.8 million in Q4 of last year, and for the full-year 2016, operating income increased to $6.8 million, an increase of approximately $300,000 as compared to $6.5 million in 2015.

Our operating margin in Q4 was 6.2% on a non-GAAP basis, a decrease of 30 basis points compared to 6.5% in Q4 of last year.

For the full-year 2016, operating margin was 6.5% on a non-GAAP basis, an increase of 50 basis points compared with 6% in 2015.

Our non-GAAP effective tax rate was 25.9% in Q4, a decrease of 300 basis points compared to 28.9% in Q4 of last year.

The decrease in effective tax rate was primarily due to mix of profits and changes in the R&D tax credit.

For full-year 2016, our non-GAAP effective tax rate was 26.4%, an increase of 230 basis points compared to 24.1% in 2015, and the increase in the year-over-year rate was primarily again due to mix of profits and the R&D tax credit.

We continue to forecast our effective tax rate in a range of 28% to 30%.

On a GAAP basis, our net loss was $1.3 million in Q4 compared to $17.1 million of a net loss in Q4 of last year.

Included in our 2016 fourth-quarter results was the loss on the sale of AHN of approximately $1.2 million, and included in our 2015 fourth-quarter results was the recognition of a $16.4 million valuation allowance on our US deferred tax assets.

For full-year 2016, our net loss on a GAAP basis was $4.3 million compared to $19 million of a net loss in 2015.

Included in our 2016 full-year results was the forensic investigation costs from the first half of the year, the AHN impairment charge from the third quarter, and the loss on sale of AHN from the fourth quarter.

The cumulative impact of these three expenses in 2016 was approximately $3.6 million.

We had weighted average shares outstanding of $34.4 million in Q4 compared to $33.9 million in Q4 of last year.

I will now turn to the balance sheet.

We finished Q4 with approximately $5.6 million of cash and equivalents, a decrease of approximately $1.1 million, compared to $6.7 million from Q4 of last year.

Accounts Receivable as of Q4 were $15.7 million compared to $17.5 million as of Q4 last year.

DSO was 56 days at the end of Q4 compared to 57 days as of Q4 last year.

Inventory at the end of Q4 was $20 million compared to $22.3 million at the end of last year, and our inventory turns were 2.8 times compared to 2.7 times in Q4 last year.

For capital expenditures, they were $1.4 million for the 12 months ended December 31, 2016 compared to $3 million for 2015.

That decrease in capital expenditures is due to last year's investments in our IT infrastructure, as well as the ERP implementation.

Debt at the end of Q4 was $13.9 million compared to $18.9 million as of December 31, 2015.

The decrease was due to scheduled principal payments made during the year.

I will now turn to annual guidance.

As Jeff's comments alluded to, we will continue to be challenged by the weakened pound sterling for a portion of 2017, along with uncertainty in the markets and geographies we serve.

However, we are committing to bottom-line growth in spite of these challenges, primarily through further benefits of cost containment measures and continued financial discipline.

With that said, for 2017 we expect revenues to be flat to slightly down compared to 2016 on a constant currency basis and excluding the decline in revenues from the sale of AHN in late 2016.

For non-GAAP EPS, we expect $0.15 to $0.17 or up to a 13% increase compared to 2016 non-GAAP EPS.

The EPS range is based on forecasted weighted average shares outstanding of 35 million.

And for modeling purposes, we expect that Q1 revenue will be at the low-end of our expectations with incremental improvement throughout the year.

As mentioned on past calls, the differences between our GAAP and non-GAAP financial guidance, including EPS and reconciliation, 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.

Hey, guys.

This is actually Bill on for Paul.

How are you guys doing?

Hey, Bill.

How are you doing?

Hey, Bill.

Hey, guys.

So first question, just as you guys continue to execute on some of the operational improvements and the gross margins continue to expand, how do you think about reinvesting some of those savings back into the R&D and sales channel?

And then maybe just as bigger picture question within that, kind of within R&D, what are you guys working on there?

Bill, yes, so we're going to continue down the path of our current strategy that's in place, and one of the areas where we will reinvest is Asia.

Asia has been growing very fast for us.

We believe that we have strength in Asia moving forward, specifically China.

So we're going to continue to invest in China.

Channel expansion is an area of focus right now.

Countries like Japan, Korea and even Southeast Asia are areas where we can expand our distribution partnerships.

That's just one example of reinvesting dollars into a region that is growing.

We also doing the same thing in terms of specific product lines that are growing fast for us such as our electroporation and electrofusion product lines.

These are two products that -- or product category that continues to grow rapidly.

It is related to CRISPR gene editing and immuno-oncology research.

So just two examples of reinvesting dollars into areas or regions and products that are growing rapidly for us.

Got it, got it.

And then on the top line, obviously Europe has been weak.

What are you guys seeing in that end market?

Has that continued to soften?

And then as you think about NIH funding, is there any -- are you starting to see some of those dollars flow through?

Well, we will start with Europe first.

Europe was very challenging last year.

Everything from Brexit to just delayed funding throughout the region.

Germany was down, England was down, and we feel as though that this year, what we're seeing and what we are hearing at the beginning of the year could be soft backend of the year.

We could see some progress moving forward.

In terms of NIH, the good news is the last few months of the quarter, in Q4, the outlay of funds were increasing.

January had strong outlay of funds of three consecutive months in a row of -- consistent outlay of funds is a good sign.

The question is, what is the delay period from the time the funds reach our customers to when they actually spend on instrumentation and consumables?

So we like what we are seeing with the NIH.

It looks as though it should be a favorable year if this trend continues.

It's just a matter of predicting a timeline of when the dollars will be used.

And then just one last one.

Maybe more so for Rob.

You guys have done a very good job this year of controlling inventory and receivables and improving the cash conversion cycle, paying down debt.

Is there more room to go with additional ERP implementation?

Maybe just free cash flow, how do you guys continue to grow that number, deleverage the balance sheet, and then as you think about M&A as cash continues to build, what areas, whether it's a product line or geographic region, are you guys evaluating potential targets?

Thanks, guys.

Have a good evening.

Yes, thanks, Bill.

So Bill, I think there is room for improvement on the balance sheet.

I think we have made a lot of progress this year.

I wouldn't expect that to continue 2017, 2018 at that same level, but there's definitely improvements to be made around working capital, and we will go and get that and get that done.

I think the opportunity to improve cash flow is probably more around gross margins and operating expenses.

So there's been a lot of change in this business in fiscal 2015 and early 2016 around on-site consolidations and improvements, and we have really started to realize those benefits the back half of fiscal 2016.

And so I think we will see that continue into 2017, and that, of course, will convert into greater free cash flow.

In terms of deployment around M&A, I think we are looking across a number of different geographies and opportunities for our business, and you are well aware of the three product families we have today.

We find all three product families equally interesting, and there's opportunities in all three.

Some of those opportunities are more domestic.

Others may be over in Europe.

But we have a pretty good pipeline as well.

So I will leave it at that.

Thanks.

Raymond Myers, Benchmark.

Let me first ask just just a real specific question.

I see your cash balance increased a little bit again.

That is great.

What was year-end debt?

Yes, it was just over $13 million, Ray.

$13 million and change.

That's good.

So down a couple million more sequentially?

Yes, Ray, it was $13.9 million.

Sorry, just getting the exact number for you.

$13.9 million.

Yes, it's down as well.

That's right.

Yes, that's good.

You're generating cash.

Let's talk about the business lines.

You talked about which geographies were performing better and worse.

What about the specific business lines?

Which were the best performing lines of business and which were the most challenging?

Ray, our instrumentation product line, which is the majority of our revenue, actually did well in the US last year.

Slightly up.

Europe is really where the issues for this business came.

The funding challenges that existed at all year long led to really reduced revenue results across the board throughout our instrumentation line.

But if you look at Asia, we had strong growth in Asia as we noted in our comments earlier.

The US was slightly up, so we're happy with the performance there.

It is really overcoming what is going on in Europe.

And I think we have some plans in place -- some sales and marketing plans in place that will help us to drive growth, drive market share expansion, and those initiatives are underway right now.

So we hope the results in Europe are better.

And as the funding environment changes in a positive light, which we are starting to hear it will, I think we're going to benefit from that moving forward.

Good.

I hear that the funding environment appears to be improving perhaps dramatically actually in the US.

What is happening in Europe that Germany and England are down so much?

Is still heavily currency related, or are there other specific issues in Europe?

I mean I think there's a bunch of things going on in Europe.

I was at a conference this week -- I was at the [Bitcon] conference, and there was an analyst speaking from the Cleveland Research Group and he had mentioned Germany.

And the inflow of refugees -- the government had to delay some budgets, had to alternate spending in certain areas to put initiatives together to be able to sustain the amount of refugees flowing in the country.

Things like that we are hearing, and maybe that impacted our business.

There are so many different -- there is so much information flowing around what's going on, but really the currency is what's driving it.

The ability for our customers to have money to spend.

As the dollar strengthened, our US manufactured projects became more expensive to purchase for European customers.

So like I said, we have initiatives in place to offset that.

We feel confident that we will see better results in Europe this year, and we will go from there.

Okay, understood.

So the US is better and Asia is better.

Are there specific investments in sales or new products or anything at all where you could deploy some of this cash that you're generating to get back to a positive organic growth putting?

Yes, I think I mentioned it earlier.

We're going to look to accelerate our growth in Asia.

And that could be some resource -- additional resources added to that region.

We're going to look to do -- potentially add some resources on specific product lines that are growing double digits for the business.

Our electroporation product lines are a very fast-growing category for us.

Plus we do some different things there this year.

So we're looking at everything across the board in terms of how we can continue to grow in Asia, have better results in the US, and really improve sales and marketing programs in Europe to offset any budgeting issues.

Okay.

Good.

Let me leave it there.

I will go back into queue.

Thank you.

And as we have no further audio questions at this time, I will turn it back over to Jeff for closing remarks.

Thank you, Allie.

Thank you, everyone, for joining us today.

We look forward to speaking with all of you soon.

Appreciate your continued support.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.