Harvard Bioscience Inc (HBIO) 2017 Q2 法說會逐字稿

Welcome to the Q2 2017 Harvard Bioscience, Inc.

Earnings Conference Call.

My name is Adrienne, and I'll be your operator for today's call.

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

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

Corey Manchester, you may begin.

Thank you, Adrian, and good afternoon, everyone.

Thank you for joining us for the Harvard Bioscience Second 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 represent the ongoing economics of the business, reflect 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 Duchemin.

Jeff, please go ahead.

Thanks, Corey.

Good afternoon, everyone, and thank you for joining us for our Q2 earnings call.

On today's call, I will start with a brief review of Q2 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 second quarter, we produced solid business results and continued to execute against our strategic objectives.

Second quarter revenues were $25.2 million, reflecting 1% organic growth, excluding the impact of currency translation and the disposition of AHN.

We are encouraged by these results and believe we will continue this progress with 1% to 2% organic growth expected in the back half of the year.

As a result, we expect 2017 revenue to be flat compared to 2016, which equates to the high end of our previously issued guidance range.

Taking a look at our revenues from a geographic standpoint.

Our U.S. business grew approximately 3% in the second quarter.

As I stated on our Q1 call, we're beginning to see positive signs of change with increased funding outlays from the NIH to academic labs.

NIH outlays are approximately 7% year-to-date.

We continue to be optimistic that the second half of 2017 will experience a sustained acceleration of academic funding from the NIH.

While funding outlays don't immediately translate to increased academic spending, we're encouraged by the directional shift and are optimistic that spending will increase with a sustained acceleration of academic funding from the NIH.

Although a quarter or two of positive numbers does not yet demonstrate a trend, we believe that the U.S. result this quarter is an encouraging indicator that certainty and optimism may be returning to our end customers.

We're confident that our commercial organization will continue to execute the plan and is well positioned to benefit from these tailwinds.

We believe our U.S. business is poised for continued top line growth.

Revenues in China increased approximately 56% in the second quarter.

As you may remember, our Q1 results in China declined due to the impact of timing of instrumentation orders and on our call, we indicated that we anticipated a rebound.

This quarter shows that rebound as well as a continued strong execution by our commercial team.

Overall, we continue to be pleased with our performance in China, which is one of the fastest-growing lab products and service markets globally.

We're also working with our team to further expand our reach and to capitalize on expansion into complementarity territories including Japan, Korea and Southeast Asia.

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

Excluding the impact of foreign currency and the impact of AHN, our Q2 European revenues were down approximately 10% year-over-year.

We're focused on improving results in the second half of the year based on a number of initiatives, including the launch of 2 new products in our electrophysiology product portfolio.

Overall, we are encouraged to see some acceleration in our business following a slower start to the year and would like to highlight one of our product lines.

Our BTX product line continues to be a growth driver for the company.

BTX, which is our legacy electroporation product line, is experiencing growth due to its application in the rapidly growing gene editing market as a result of CRISPR.

Although BTX sales makes up approximately 6% of our consolidated revenues, the strong growth we are experiencing is an example of our positioning in a new and exciting innovative life science market.

In sum, we are pleased by our results in the second quarter and encouraged about our prospects for the back half of the year.

More specifically, U.S. revenues grew 3% during the quarter.

Revenues in China grew almost 60% and our BTX product line continues to make solid gains.

In addition to these top line highlights, gross margins expanded and operating expenses declined in the quarter.

We remain focused on the strategic vision of our organization and believe that we'll continue to 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?

Okay, thanks, Jeff.

Beginning with the top line, revenues for the second quarter were $25.2 million, a decrease of 4% year-over-year as reported.

Revenues were down 1% year-over-year constant currency.

Second quarter revenues were also impacted by the divestiture of AHN in October 2016, which included approximately $620,000 of nonrecurring revenue during the second quarter of 2016.

Excluding the negative impact of currency translation and AHN, revenues on an organic basis grew 1% in the quarter.

Revenues year-to-date were $49.4 million, a decrease of $3.7 million or 7%, compared with revenues of $53.1 million for the 6 months ended June 30, 2016.

Revenues on a constant-currency basis were $50.6 million, a decrease of $2.5 million or 5%.

Included in that decline is the revenue impact from the prior year divestiture of AHN, which accounted for approximately $1.3 million.

Excluding the negative impact of currency translation and AHN, revenues are down 2% year-to-date.

Now turning to costs and expenses.

Costs of revenue on a non-GAAP basis were $13.8 million for Q2, compared to $14.4 million for Q2 of last year.

As a result, our non-GAAP gross profit was $11.4 million this quarter, compared with $11.7 million for the second quarter of 2016.

Gross profit margin was 45.1% in Q2, up from 44.7% in Q2 of last year.

This 40 basis point increase in gross profit margin was partially muted by a few noncash charges at some of our sites related to inventory write-downs.

During our site consolidations in 2015, we increased levels of safety stock inventory to ensure a smooth transition.

Most of that safety stock inventory has sold through to end customers.

However, some surplus inventory has remained on our books, namely at our Coulbourn subsidiary.

Due to that amount we have on hand, certain levels are reserved for as part of our own ongoing analysis of inventory.

Excluding this item, which amounted to approximately $200,000 for the quarter, our gross profit margin would have increased over 100 basis points compared to Q2 of last year.

And year-to-date, our gross profit margin was 46.4%, essentially flat compared to the same period last year.

Non-GAAP operating expenses for Q2 were $9.7 million, a decrease of $770,000 compared to $10.4 million in Q2 of last year.

The decrease is due to the realization of continued cost containment measures as well as foreign currency favorability and the disposition of AHN.

Year-to-date, non-GAAP operating expenses were $20 million, a decrease of $1 million compared to the same period last year.

Operating income on a non-GAAP basis in Q2 increased to $1.7 million as compared to $1.2 million in Q2 of last year.

Year-to-date, operating income on a non-GAAP basis was $2.9 million as compared to $3.6 million for the same period last year.

Our non-GAAP operating margin in Q2 was 6.7%.

This compares to an operating margin in Q2 of last year of 4.8%.

And year-to-date, our operating margin was 5.8% compared to 6.8% for the same period of last year.

Our non-GAAP effective tax rate was approximately 30% in Q2 compared to 25% in Q2 of last year.

The increase in effective tax rate was primarily the result of jurisdictional mix of income and, to a lesser, extent changes in R&D tax credits.

Our non-GAAP net income for Q2 was $870,000 or $0.03 per diluted share, compared with $0.03 per diluted share in Q2 of last year.

And year-to-date, our non-GAAP diluted earnings per share were $0.04 compared with $0.08 per diluted share in the same period of 2016.

Before moving on, I'd like to highlight 1 below the line fluctuation that had an impact on our quarterly profitability.

Due to changes in currency exchange rates and the functional currency in which certain working capital balances are recognized, we reported a $270,000 currency loss in the quarter.

This compares to a $280,000 currency gain in Q2 of last year.

That swing, based on current shares and tax rate, impacted our earnings by approximately $0.01.

Although we don't have control over fluctuations in currency exchange rates, we're actively reviewing our working capital and the functional currencies in which they are held to identify steps to minimize the impact of future fluctuations.

Weighted average shares outstanding were $34.7 million in Q2 as compared to $34.1 million in Q2 of last year.

I'll now turn to the balance sheet.

We finished the quarter with approximately $4.7 million of cash.

Accounts receivables were $16 million as compared to $15.7 million as at Q4 last year, an increase of $230,000.

Inventory at the end of Q2 was $20.4 million compared to $20 million at the end of Q4 of last year.

And our capital expenditures were $240,000 for Q2 compared to $200,000 for Q2 of last year.

Debt at the end of Q2 was $13.3 million compared to $13.9 million at the end of Q4 last year.

Turning now to our financial outlook.

We expect to report 1% to 2% organic revenue growth for Q3 and Q4 which equates to the high end of our previously issued full year revenue guidance.

In terms of dollars, 1% to 2% represents third quarter revenue of $24.6 million to $24.8 million and fourth quarter revenue of $26.5 million to $26.8 million.

On the bottom line, we're updating our full year 2016 earnings per share guidance to reflect current expectations including foreign currency rates as well as the negative impact of the noncash inventory charge we incurred in Q2.

As a result, we now expect 2017 non-GAAP earnings per share of $0.13 to $0.15.

From a quarterly standpoint, we expect to report $0.03 to $0.04 in the third quarter and $0.05 to $0.06 in the fourth quarter.

We'll now open the call to questions from participants.

Operator?

(Operator Instructions) And our first question comes from William March from Janney.

First question.

Jeff, you called out the BTX product segment.

This is the first time you're talking about it.

Maybe could you just give us a little more detail on the application and is this for clinical research, kind of where -- who's buying it?

And then maybe a bigger picture, just in terms of your different product segment, if you could give us a sense of where you're seeing growth coming from, whether it's cell analysis, lab equipment, molecular analysis, just kind of an underlying growth trend for each of the segments.

BTX is a product family that has been part of Harvard Bioscience for several years, the legacy product and it's used in gene editing transfections.

It's an electroporation device.

And because of the CRISPR transfection application that the industry is seeing and the increase in gene editing, this product has been also increasing with the demand of this type of application.

It's one of the faster growing product families that we have in Harvard Bioscience today.

One of the things that we've done this year is added resources to accelerate that growth.

Over the years, over the last several years, we've increased our capabilities in Asia and we've seen very good results as you saw this quarter with 56% increase in sales.

One of the things we've done is we've added a resource in China for our BTX product line.

So we expect continued growth in this area.

We'll continue to add resources where needed.

But BTX has been a fantastic product for us and we got a great commercial and marketing team executing to our plan this year around this family.

In regards to some of the other product families, we've acquired 3 companies over the last couple of years in electrophysiology, our molecular -- Multi Channel Systems business, our Triangle Biosystems and HEKA Electroniks.

In electrophysiology, one of the things that we've done is we've added resources in the U.S. One of the opportunities for us when we bought Multi Channel Systems was taking advantage of their market presence in Europe but lack of market presence here in the U.S. And by adding resources and building an electrophysiology sales team in the U.S., we're actually starting to see positive results come from that.

It's taken about a year to get our resources in place and trained and on the ground running, but here in the U.S., we saw positive results in the quarter from electrophysiology.

In our Denville business, our lab products and supply business, we've added some new people in that business and we're actually seeing a nice turnaround there.

Bookings are increasing.

We have a new Director of Operations in our Charlotte facility, who's done a great job.

And our sales and marketing teams are putting in new initiatives to help drive the growth of Denville.

So I think that really covers our 3 basic product families.

Got it.

And then in terms of capital deployment, you made a slew of acquisitions a few years ago.

In the past couple of years, you've been taking the cash flow and paying down debt.

Maybe just where are you in terms of strategy on M&A?

And what areas are you looking for to maybe add a product to your portfolio?

Yes.

But let me take a step back on this question, add a little color to where we were, where we are today and where we expect to go.

Just remember, 3 or 4 years ago, this was a very fragmented business.

We had 10-plus manufacturing facilities.

We've reduced that in half.

We had 10-plus legacy systems, computer systems.

With our new ERP implementation, we've cut that in half.

We had an outdated product portfolio.

We've implemented new product development processes.

We -- there was a need for geographic expansion in our business.

We've added a sales team in China, and you see the results that we've had in China over the last couple of years.

Along with that, we've faced some challenging headwinds.

Foreign currency, devaluations has had an impact on this business.

GE exited the spectrophotometer business.

In the funding landscape, specifically the NIH has been very difficult over the last years, but we're seeing a rebound this year.

With all of that, with all of the work that's been done internally, I think we're at a point right now we're actually starting to see the benefits of building this foundation.

We knew we had to do this all along.

We knew it would be difficult.

We knew we would not be rewarded for it.

But by building this foundation, it's allowed us now to grow organically and we continue -- we believe we'll continue to see organic growth moving forward.

And it also puts us in a great position to start making acquisitions.

And so that's where we are today and we feel very positive about the position we're in today and where we're going in the future.

Got it.

And just one last one.

Rob, maybe more so just if you could help us -- help walk us through the update for the back half of the year in terms of it seemed like the one-off inventory thing was an impact to gross margins.

Kind of how do you see margins playing out in the back half of the year, both in terms of gross margin and then operating expenses?

Yes.

Thanks, Bill.

Let me -- I want to go back and just repeat some of the guidance that we covered a few minutes ago just to make sure it's clear to folks.

On the top line, we're expecting 1% to 2% organic revenue growth.

That means for the third quarter, $24.6 million to $24.8 million.

That's 1% to 2% organic growth.

For the fourth quarter, it would be $26.5 million to $28 point -- $26.8 million -- excuse me, $26.5 million to $26.8 million.

So I want to make sure that, that's clear what the organic numbers are and what the growth would look like.

On the EPS side, $0.13 to $0.15, you're correct, revised because of the inventory charges that we took in the second quarter relating to those site consolidations that we initiated back at the end of 2014 into 2015.

We wanted to make sure that we had ample safety stock and overshot the market I think on a few of the products.

In terms of what that breaks down to on a quarterly basis, the fourth quarter always being -- typically being the strongest quarter of the business, that's going to have higher EPS.

So for the third quarter, it's $0.03 to $0.04; the fourth quarter, it's $0.05 to $0.06.

In terms of gross margins, so Q2 last year was our lowest quarter in the year.

We're certainly down sequentially in gross margins.

But we're still expecting over the long run that gross margins will be in the range of 46% to 47% -- sorry, 47% to 48%.

On operating expenses, we were favorable almost $800,000 in the quarter, real good result this quarter.

Anytime we're below $10 million, I think is good for our business.

Wouldn't expect that to repeat the back half of the year.

But we're certainly seeing good favorability around operating expenses.

So hope that helps.

And our next question comes from Raymond Myers from Benchmark.

Let me just clarify what you said, you don't expect the -- that really nice decline in Q2 operating expense to continue in the second half, you don't expect the $800,000 sequential decline to repeat again?

Or the rate of $11.3 million of operating expense, will that return back to a higher rate in the second half?

No, no.

I wouldn't expect that to happen again.

I would expect that this level of $9.7 million for the quarter would be a good level in terms of projecting forward for the next couple of quarters; probably actually slightly higher than that, but in that range of sort of probably $9.8 million to $10 million as an estimate.

Okay, great.

Well that's excellent cost control.

Congratulations on achieving the positive organic revenue growth.

That's a real accomplishment.

What are the factors that most contributed to that improvement now?

Ray, as you know, we've put a lot of time and effort in many initiatives into our commercial teams globally in all 3 of our major product categories, everything from continuing our geographic expansion and building up our capabilities in Asia, building an electrophysiology sales team here in the U.S., and now, more than ever, really adding some exciting initiatives and new product launches in Europe to help drive and offset the decline we're seeing in Europe.

That's really where the focus has been over the last couple of years.

Okay, great.

Let me touch on that.

You mentioned adding 2 electrophysiology products in Europe.

Can you elaborate on those?

And what opportunity they create?

Yes, the 2 products, there's what we call an ME2100 and an MEA2100.

One is in an in vivo, the other one's an vitro system.

And what this allows us to do is, obviously bring in incremental sales revenue for the back half of the year in Europe.

But it also allows us to continue the growth that we've seen in the U.S. in the first half of the year and really, differentiate ourself among some of our competitors.

We're excited about this.

And one of the great aspects of acquiring a company like Multi Channel Systems was their ability to innovate and develop new products and launch new products and we're starting to see that now, not only with our electrophysiology business, but throughout the entire company.

That's great.

I've got an accounting question for Rob.

These inventory charges in the second quarter that affect your full year guidance.

Had you given any thought to excluding them on a non-GAAP basis?

Or are you just being conservative?

Yes.

Ray, thanks.

I'm not sure that it's -- yes, I would -- it's probably some level of conservatism but inventory reserves and write-offs come up from time to time, certainly, not at this magnitude.

So I think it's more of a consistency thing.

We've treated write-offs in the past this way and so we thought the best thing to do was to be consistent.

But highlight it for folks so that they're aware of what was driving that lower margin and in the EPS charge.

Okay, great.

I like the conservatism.

Let me touch again on the pipeline for acquisitions.

Do you have a robust pipeline?

Have you identified potential acquisitions?

And would you still expect to be able to finance these with other cash or low-cost debt?

Ray, we have a robust portfolio of companies that strategically make a lot of sense for Harvard Bioscience.

But at this point in time, the focus of this company has been gaining organic growth.

We will get to a point some time hopefully in the near future where we'll start to acquire companies again.

But right now, I would say, the focus of the organization is on our organic growth and that's where we're dedicating our time and resources.

And, Ray, just in terms of capital available to us, to the extent we do execute on tuck-in acquisitions, we're going to look to cash on the balance sheet as well as that credit facility we have through Bank of America, which you know is a commercial rate facility for 4.5%, very attractive yields.

That's what we would look to in terms of financing those acquisitions.

And our next question comes from Lisa Springer from Singular Research.

I wanted to ask a couple more questions about Europe.

You mentioned new products are something that's going to help shore up that business.

Could you give us -- first of all, are those products available right now?

Or are they going to start selling in Europe in the third quarter?

And secondly, could you give us a little bit of a big picture overview of Europe?

What would it take for that market to become attractive again?

How low would the dollar have to go before you would start to see some meaningful sales growth there?

The new products will be launched this quarter.

We're actually taking orders for those new products now.

So we'll generate revenue in Q3 for these new products.

In regards to get Europe to be a growth driver for Harvard Bioscience, I think we need a couple of things to happen.

Number one, we need currency to stabilize.

We need the academic investment community to basically see -- compete with what we're seeing here in the U.S. with the NIH and what we're seeing in China.

I believe that will happen.

I believe we will see a turnaround in Europe.

The question is timing, when that will happen.

But in the meantime, what we're doing is we're installing many different initiatives that weren't in place in the past to help drive and grow business and offset anything we're seeing in the lack of funding on the academic environment in Europe.

So right now, there are many sales, marketing initiatives in place for our cell and animal physiology business, for our electrophysiology business that we believe will help reduce the decline we've seen in Europe over the last couple of quarters.

And our next question comes from Matt Campbell from [Ladera] Capital.

Yes, it's Laridae Capital.

Could you guys just go over your CapEx for the back half of the year?

Just a little more granularity on your -- taking your computer systems from 10 down to 5. Where are you going to take that?

What's the goal there?

Matt, it's Rob.

Yes.

So in terms of CapEx, we expect between $1.5 million and $2 million for the year.

The business requires about $1 million in maintenance capital.

So it's really that strategic capital that makes up the difference.

In terms of ERP, the infrastructure is in place, the licenses are acquired.

They were acquired a few years ago.

So a lot of that spend is behind us.

There is certainly some capital around consulting dollars and service spend as we continue to wrap up the ERP program.

But we're not expecting them to be significant relative to capital and where it's headed the next couple of years.

And our next question comes from [Jon McCullough] from Glacier Peak.

I know you might have dived into this in the past and I might have missed it.

But I know currency has been a headwind, but we've kind of to the end of June had a pretty good move in the dollar/euro where the dollar's weakened.

So could we see the headwind either subside or reverse going forward?

Just any clarity there would be helpful.

Yes, thanks for the question.

So in terms of the back half of the year, we -- currency is no longer a headwind.

So as of the end of the quarter, June 30 and for the first couple of weeks of June, I would have said if rates stay where they are, it's actually somewhat neutralizing, there's essentially no impact to the business, or very little impact to the business.

But just over the last week or so, the euro has really strengthened from about the EUR 1.12 level up to EUR 1.17, EUR 1.18, somewhere around there.

So it is -- still it's very volatile, challenging to predict.

EUR 1.17 is still an awful far cry from EUR 1.35 where it was 2 years ago.

But certainly, if it continues to strengthen, would help with our European businesses.

But difficult to quantify and still has a long ways to go.

All right.

And then sounds like you guys are again doing great in China.

I know you mentioned last quarter about starting to roll out or get going in Japan and possibly Korea.

Kind of any color there of how it's going or just…

Yes.

More Japan than anything.

Korea has been a great market for us for many years and we have great distribution partners there.

But in Japan, we added a resource last year.

We're building up our distribution network there.

Things are progressing forward.

We like what we see and I think there's a bright future for us there.

So we're still in the beginning stages of building up our business in Japan, but we're moving forward with it.

Got it.

And then I know it's always -- it's a wildcard with political environment changing every minute, but I guess, with the budget, NIH, the whole nine yards, just how you guys are looking at and thinking about going to the next year or sort do you still feel that bipartisan will still kind of protect NIH?

Yes.

I mean we like what we see with the NIH.

Year-to-date, funding outlay is up 7%.

Right now, there is a proposal for about $1 billion increase for the 2018 budget.

So yes, I mean, things are moving forward with the NIH.

I think there's bipartisan support there and we like the position we're in moving forward because of that.

That concludes our question-and-answer session.

I'll turn the call back over to Jeff for final remarks.

Thank you, everyone, and thanks for your continued support around Harvard Bioscience.

We look forward to talking to all of you on the October time frame.

So thank you very much.

Appreciate it.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.