Harvard Bioscience Inc (HBIO) 2017 Q1 法說會逐字稿

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  • Operator

  • Welcome to the Q1 2017 Harvard Bioscience, Inc.

  • Earnings Conference Call.

  • My name is Nicole, and I will be your 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.

  • Mr. Manchester, you may begin.

  • Corey Manchester - Director of Finance and IR

  • Thank you, Nicole, and good afternoon, everyone.

  • Thank you for joining us for the Harvard Bioscience first quarter 2017 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, 2016, 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.

  • Also, much of today's call will focus on our non-GAAP quarterly results, which we believe better represents the ongoing economics of the business, reflects how we set and measure our incentive compensation plans and how we manage the business internally.

  • The differences between our GAAP and non-GAAP results 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 available for 1 week at the same location on our website at harvardbioscience.com.

  • I will now turn the call over to Jeff.

  • Jeff, please go ahead.

  • Jeffrey A. Duchemin - CEO, President and Director

  • Thanks, Corey.

  • Good afternoon, everyone, and thank you for joining us.

  • On today's call, I will start with a brief review of Q1 results as well as an overall business update.

  • Our CFO, Rob Gagnon, will provide details on our financial results and our 2017 outlook.

  • And after that, we look forward to taking your questions.

  • During the first quarter, we continued to produce solid operational results against the challenging funding environment.

  • As a result, we are reiterating our 2017 revenue expectations to be flat to slightly down compared to 2016 and adjusted 2017 EPS expectations in the range of $0.15 to $0.17.

  • First quarter revenues were $24.2 million, down 10% compared to first quarter 2016.

  • Excluding currency translation, revenues decreased 8% or $2.1 million.

  • Additionally, included in the organic revenue decline for the quarter is a decrease in revenue of approximately $660,000, which is a result of the AHN disposition in October 2016.

  • Excluding the impact of those 2 items, our revenues declined approximately 6%.

  • As a reminder, our Q1 results from last year were unseasonably high due to certain factors, including the timing of a few large distributor orders in Asia.

  • In comparison to Q1 of 2015, our business was flat on an organic basis.

  • In addition, as we discussed when we provided guidance on our last earnings call, we were experiencing a slow start to the year.

  • But on a positive note, we experienced an acceleration in the month of March, which has continued into April.

  • We are pleased to see more predictability in our business on the top line as well as continued solid leverage to the bottom line.

  • Net income on a non-GAAP basis was $0.6 million or $0.02 per diluted share for the quarter.

  • The benefits of cost containment, coupled with gross profit expansion from our site consolidation efforts, continue to produce positive results.

  • Our Q1 gross profit margins were 47.7%, or 180-basis point sequential improvement over Q4 of last year.

  • The gross profit margin we reported today is the second highest quarter reported in the last 2 years, only outpaced by 48.1% we reported in Q1 of 2016.

  • We are making meaningful progress on our strategic initiatives and operational efficiency against this challenging funding environment.

  • In the meantime, and as I stated on previous calls, 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.

  • Looking at our revenues from a geographic standpoint.

  • Our U.S. market business was down 3% in the first quarter.

  • While we have not yet realized the full benefit of incremental funding, we are continuing to see signs of changing tides with increased funding outlays from the NIH to academic labs.

  • For the quarter ended March 31, 2017, NIH outlays are up almost 6% compared to the same period in 2016.

  • As I've mentioned in the past, we believe there is a natural lag between funding of labs and the purchase of consumables and benchtop instrumentation.

  • While we haven't reflected it in our guidance, we continue to be optimistic that the second half of 2017 will experience a sustained acceleration of academic funding from the NIH based on last year's approved budget, and as of this point, bipartisan congressional support for funding increases from the government, going forward.

  • We remain cautiously optimistic that our customers' confidence will be restored when funding certainty resumes.

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

  • Excluding the impact of foreign currency and the impact of the AHN disposition, our European revenues were down approximately 7% quarter-over-quarter.

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

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

  • The biggest impact in the unseasonably high quarter-over-quarter comparison was seen in China and the rest of the word, where we declined approximately 30% and 5%, respectively.

  • Our results in China were impacted by timing and equipment orders this quarter as compared to last year.

  • We are confident this trend will reverse based on visibility into order trends and backlog.

  • Our team is working extremely hard to drive meaningful growth in this important region, and we believe we have a line of sight to achieve year-over-year growth in China.

  • We do not believe there have been any significant changes in the business environment in China, and we are keenly focused on our execution in the region.

  • In terms of the rest of the world, we remain well positioned to capitalize on expansion in the complimentary territories, including Japan, Korea and Southeast Asia.

  • In closing, we believe we are well positioned to continue to strengthen our operational performance and financial profile while executing our strategy to strengthen our market position and ultimately, accelerating top line growth.

  • Namely, our commercial resource allocation is aimed at expanding in complementary territories, including Japan, Korea and Southeast Asia, as well as renewed focus on growing product families and brands.

  • We are unwavering in the strategic vision of our organization and believe it will drive top line growth, improve profitability through 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?

  • Robert E. Gagnon - CFO and Treasurer

  • Okay, thanks Jeff.

  • Beginning with the top line.

  • Revenues in the first quarter were $24.2 million, a decrease of $2.8 million or 10% compared with revenues of $27 million for the first quarter of last year.

  • Excluding the negative impact of the strengthening U.S. dollar, revenues in the first quarter would have decreased 8%, or by $2 million compared with the first quarter of last year.

  • And as Jeff mentioned, included in that decline is the revenue impact from the divestiture of AHN, which took place in October 2016, which accounted for approximately $660,000.

  • Excluding the negative impact of currency translation, AHN, the revenue declining to 6% in the quarter.

  • As Jeff mentioned, our Q1 results from last year were unseasonably high due to certain factors, including the timing of a few large distributor orders in Asia.

  • Now turning to costs and expenses.

  • Cost of revenues on a non-GAAP basis were $12.6 million for Q1 compared to $14 million for Q1 of last year.

  • As a result, our non-GAAP gross profit was $11.5 million this quarter compared with $13 million for last year's first quarter.

  • Gross profit margin was 47.7% in Q1, down from 48.1% in Q1 of last year.

  • This 40-basis point decrease in gross margin is primarily attributable to lower volumes.

  • As Jeff mentioned, however, despite revenues being down this quarter, our gross profit margin was the second highest quarterly margin we reported in the last 2 years.

  • Our non-GAAP operating expenses for Q1 were $10.3 million, a decrease of $222,000 compared to $10.6 million in Q1 of last year.

  • And operating income, on a non-GAAP basis, in Q1 decreased to $1.2 million, as compared to $2.4 million in Q1 of last year.

  • Our non-GAAP operating margin in Q1 was approximately 5% on a non-GAAP basis, as compares to an operating margin in Q1 of last year of about 9% on a non-GAAP basis.

  • Our non-GAAP effective tax rate was 27.1% in Q1 compared to 27.9% in Q1 of last year, and the decrease in the effective tax rate was primarily due to lower earnings in the quarter.

  • Our non-GAAP net income in Q1 was $620,000 or $0.02 per diluted share, compared with $0.05 per diluted share in Q1 of last year.

  • Weighted average shares outstanding were 34.6 million compared to 34 million in Q1 of last year.

  • I'll turn to the balance sheet.

  • We finished Q1 with approximately $4.6 million of cash, a decrease of approximately $1 million compared to $5.6 million from Q4 of last year.

  • The decrease is timing related.

  • Our accounts receivable were $15.5 million compared to $15.7 million as of Q4 last year, a decrease of $267,000, and inventories were $20.3 million compared to $20 million at the end of Q4 last year.

  • For capital expenditures, they were $200,000 for both Q1 this year and last year.

  • In terms of guidance, we expect to spend approximately $1.5 million in CapEx over the course of the year.

  • Debt at the end of Q1 was $13.7 million compared to $13.9 million at the end of Q4 last year.

  • Our available borrowing capacity, subject to covenants and working capital restrictions at the end of the quarter, was approximately $5 million, and we expect that borrowing capacity to grow throughout the year with earnings expectations.

  • I'll now turn to financial guidance.

  • Today, we are reaffirming our full year 2017 guidance, which we issued on March 9 of this year.

  • We continue to expect 2017 revenues to be flat to slightly down compared to 2016 revenues on a constant-currency basis and excluding the decline of revenues from the sale of AHN.

  • And just to clarify, flat revenues would be approximately $100 million, excluding foreign currency in AHN.

  • As a result of our increased operating leverage and expected modest acceleration of our top line, we continue to expect 2017 non-GAAP earnings per share of $0.15 to $0.17 or up to a 13% increase compared to 2016 non-GAAP diluted earnings per share.

  • We will now open the call to questions from participants.

  • Operator?

  • Operator

  • (Operator Instructions) And our first question comes from Paul Knight from Janney Montgomery.

  • Paul Richard Knight - MD, Head of Healthcare Research and Senior Analyst

  • Can you talk to the academic market?

  • And I mean, it's been tough in -- any thoughts on the outlook for that?

  • And what do you see going on with academia right now?

  • Jeffrey A. Duchemin - CEO, President and Director

  • Yes, I think what we saw was a carryover of Q4 into Q1.

  • I think trends were consistent early in the quarter.

  • But as I mentioned in my script, we actually started to see the trend turn in March and we like what we're seeing right now.

  • I think what's happening is, the outlay of funds that has increased since October from the NIH, we've always known that there's been a lag or a delay, and I think what we're seeing is spend actually start to happen for smaller instrumentation, and that's a good sign.

  • So our bookings are up.

  • We like the trend we see going into Q2, we're into Q2, and so I think that's what happened.

  • We started carryover from Q4.

  • Things started to pick up in the quarter.

  • And we like the position we're in right now for Q2.

  • And I think, yes, if you look at Q1, overall, we finished right where we thought we'd finish.

  • And I think we did a little bit better on the bottom line.

  • But in terms of revenue, were knew there were going to be some timing delays coming from some distributors in Asia, and that happened.

  • But overall, we're pretty confident with where we are and what the outlook for the year is.

  • Paul Richard Knight - MD, Head of Healthcare Research and Senior Analyst

  • On the international side, are you trying to sign up more distributors?

  • What can you do to build up the China business in the rest of Asia, in particular?

  • Jeffrey A. Duchemin - CEO, President and Director

  • Yes, I think we're positioned well in China.

  • I think in terms of distribution expansion, it will come from Japan this year and Southeast Asia.

  • I would say our distribution partnership is solid in China and Korea.

  • And we're building in Japan and Southeast Asia.

  • Paul Richard Knight - MD, Head of Healthcare Research and Senior Analyst

  • So you did a lot of facility consolidations over the prior 1.5 years, 2 years.

  • Is there any more work you want to do there on the operating margin side for Harvard Bioscience?

  • Jeffrey A. Duchemin - CEO, President and Director

  • I think ERP has led to efficiencies, operational efficiencies for us, and we just completed Phase II of our ERP initiative.

  • It was our German facility, our multichannels facility.

  • That implementation went really well.

  • And what I believe it will do, it will provide our ability to become more efficient from an operational standpoint, moving forward.

  • In terms of site consolidation, the heavy lifting is over.

  • There's always room for improvement moving forward, but I believe we are well positioned in terms of continuing to add to the bottom line through these efficiencies led by ERP.

  • Paul Richard Knight - MD, Head of Healthcare Research and Senior Analyst

  • And then my last question is, at the NIH, we can achieve a 0% growth rate on that budget line.

  • What do you think Harvard Bioscience's organic growth could be?

  • Jeffrey A. Duchemin - CEO, President and Director

  • Well, I don't think we built anything from the NIH into our budget.

  • So our budget is set right now to flat to a slight decline without anything coming from the NIH.

  • And once again, the outlay of funds has been positive.

  • But we feel confident that if this continues, it could lead to organic growth for this business.

  • But as of today, I think, we're going to stick with our feeling on flat guidance for the year.

  • Operator

  • And our next question comes from Raymond Myers from Benchmark.

  • Raymond Alexander Myers - Research Analyst

  • Jeff, maybe you could start by discussing what drove the strong sequential gross margin in the first quarter and discuss whether there's any seasonality to this, or it just happens to be strong in the first quarter lately.

  • Jeffrey A. Duchemin - CEO, President and Director

  • Well, I mean, I think if you look at Q4's results, we -- the trend was starting to turn.

  • I think the site consolidation, the operational improvements that we've been working on for a couple of years now, are starting to pay off.

  • And so that transitioned into Q1.

  • Product mix is -- always plays into that, but really, what's leading this, Ray, is just the efficiencies of the organization and the heavy lifting that has been completed.

  • And we knew the turnaround would happen, from a bottom line standpoint.

  • Really, what the organization is focused right now on is organic growth, and we need to get the top line growing.

  • That's where we're focused.

  • We've got some great sales and marketing initiatives in place, and that will also lead to improved gross margins, moving forward.

  • Robert E. Gagnon - CFO and Treasurer

  • And Ray, it's Rob.

  • I just wanted to add.

  • So there's a little bit of timing that could be mixed here.

  • We still expect margins to be in the 46% to 47% range throughout the course of the year.

  • Raymond Alexander Myers - Research Analyst

  • It's still higher than it was for the balance of last year.

  • So is that due to these efficiencies that you were discussing, Jeff?

  • Jeffrey A. Duchemin - CEO, President and Director

  • I believe so, yes.

  • Robert E. Gagnon - CFO and Treasurer

  • Absolutely, absolutely.

  • Raymond Alexander Myers - Research Analyst

  • Okay, good.

  • As you look across the range of businesses, worldwide, which product lines are performing relatively better?

  • And then what can you do to shore up the laggards?

  • Jeffrey A. Duchemin - CEO, President and Director

  • Well, I mean, you know this business, Ray.

  • There's some product lines that perform really well and our market leaders.

  • There's other legacy product lines that are not performing well.

  • And what we're focused on right now is accelerating the growth of our top performers, our top-performing brands, our top-performing product lines.

  • We have some exciting technology.

  • And I think I talked a little bit about it the last quarter, I'll talk about it again now.

  • How can be accelerate our growth in China?

  • How can we accelerate our growth around our BTX product line, things like that.

  • And what we're doing is we're adding resources, we're implementing sales and marketing activities around these growing brands and products for Harvard Bioscience, and they're going to be the leader to turn this business around.

  • The lagging products, unfortunately, sometimes, you have to put all your resources into focusing on what's going to drive the growth of the business.

  • And the lagging product lines, there's different things we can do, there's different programs we can run.

  • But we're really, at this point in time, more focused on the growth drivers for the business.

  • And there are several major product categories, our electrophysiology product lines, our BTX product line, that's where the focus is right now from the sales and marketing standpoint.

  • Raymond Alexander Myers - Research Analyst

  • Okay, that's great.

  • I would applaud that focus.

  • You touched on electrophysiology, that's where I was going next.

  • You've done a 3 large -- or 3, you made 3 EP acquisitions.

  • They weren't large, but in total, they were large, about 2 years ago.

  • How are those businesses performing now?

  • And what have you learned about your acquisitive strategy vis-a-vis their performance?

  • Jeffrey A. Duchemin - CEO, President and Director

  • They've performed well.

  • We've integrated the 3 companies into Harvard Bioscience.

  • There was 3 very good acquisitions.

  • One of the business units was slightly down last year, but what we did was we added some sales capabilities to that business.

  • And what we're seeing is the book of business increase already through the end of Q1 this year.

  • So the outlook for that business that was down last year is going to be positive this year.

  • So now you have 3 acquisitions that are leading the way for Harvard Bioscience.

  • And back to your last question, where are we focused as an organization?

  • We're focused on these 3 acquisitions because they're going to help turn this business around.

  • So the electrophysiology business is really the leading product lines and brands that will transform this business, moving forward.

  • Raymond Alexander Myers - Research Analyst

  • That sounds good.

  • One question I had is, has there been any change in the proportion of sales made under direct distribution versus distributorships in the mix of the business?

  • Jeffrey A. Duchemin - CEO, President and Director

  • That's a good question.

  • I think the resources that we've added recently have been more in the direct side.

  • Last year, we did add a Channel Manager in Asia to manage our Japanese business.

  • But right now the resources that we're discussing internally are more direct than they are for distribution management.

  • Raymond Alexander Myers - Research Analyst

  • And I presume that's higher margin and maybe is that supporting why you're having higher gross margins?

  • Jeffrey A. Duchemin - CEO, President and Director

  • Yes, our direct business is a higher-margin business for us.

  • And obviously, that would lead, if they're their successful in their roles, that would lead to improved margin.

  • Raymond Alexander Myers - Research Analyst

  • Okay.

  • Good, good.

  • I guess lastly, we've talked on other calls about the opportunity for further tuck-in acquisitions.

  • Where does that stand?

  • And do you still see that as the front-burner item.

  • Jeffrey A. Duchemin - CEO, President and Director

  • It's still part of our strategy.

  • We still continue to review a pipeline of very interesting companies.

  • We're disciplined in our approach.

  • And, unfortunately, sometimes, some of these companies, their valuations are a little bit out of line from what we'd willing to pay.

  • But we're active, it's part of our strategy and we'll continue to focus on that moving forward.

  • Operator

  • And our last question comes from Lisa Springer from Singular Research.

  • Lisa Springer - Research Analyst

  • My question concerns the markets in Japan and Korea, we've talked about the opportunities there.

  • Could you give us a sense of the scope of those markets, and what are the characteristics of those markets?

  • Jeffrey A. Duchemin - CEO, President and Director

  • Well, I have more information in Korea than I do in Japan, only because I've been to Korea.

  • I was in Korean back in February.

  • The Korean market is a strong life science market, overall.

  • It's been a very good market for us.

  • We have excellent distribution partners there.

  • Our physiology business is strong.

  • Our molecular business is also very good in Korea.

  • The Japan market though, is a market that we just entered last year.

  • We have a spectrophotometer market that we're trying to increase in Japan, and we have sales of -- actually, the Channel manager did a real nice job last year growing that small base of business.

  • We expect to see that base of business continue to grow this year.

  • But our strategy in Japan is to really start to pull some of the other high-value products into that market, our molecular, overall molecular products, our physiology products and electrophysiology products into that market.

  • So that's the goal in Japan this year.

  • The Korean market is a strong market, we have great distribution partners and we believe we'll continue to see growth there in 2017.

  • Lisa Springer - Research Analyst

  • How do those markets compare in size, to say for example, the U.S. market.

  • Jeffrey A. Duchemin - CEO, President and Director

  • They are much smaller.

  • The Asian market as a whole is about 15% of our total revenue.

  • I don't think we have ever broken down each individual country in Asia.

  • But the U.S. is 50% of our revenue and the entire Asian market is 15%, so it's a much smaller market.

  • Lisa Springer - Research Analyst

  • Okay.

  • And the next thing I wanted to ask you about, is if you could update us on the ERP implementation.

  • How's that going globally?

  • Jeffrey A. Duchemin - CEO, President and Director

  • It's going very well.

  • As I mentioned, a couple of minutes ago, Phase II is complete.

  • Actually exceeded our expectations in terms of the team that was put in place to manage and integrate AX into our German facility.

  • Now we move on to, I guess, you would call Phase III, and there are some other German facilities along with some U.S. facilities that we're looking at right now for Phase III.

  • So there's no timeline on that.

  • Operator

  • We have no further questions at this time.

  • I would like to turn the call back over to Jeff Duchemin, for final remarks.

  • Jeffrey A. Duchemin - CEO, President and Director

  • Thank you, everyone, for calling in this afternoon.

  • We appreciate it, and we look forward to speaking with all of you on our Q2 earnings call.

  • Thank you.

  • Operator

  • Thank you, ladies and gentlemen.

  • This concludes today's conference.

  • Thank you for your participating, and you may now disconnect.