Harvard Bioscience Inc (HBIO) 2017 Q3 法說會逐字稿

Welcome to the Q3 2017 Harvard Bioscience, Inc.

Earning 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.

Corey Manchester, you may begin.

Thank you, Adrienne, and good afternoon, everyone.

Thank you for joining us for the Harvard Bioscience Third 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, reflects how we set and measure our incentive compensation plans and how we manage the business internally.

The difference 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 Q3 earnings call.

On today's call, I will start with a brief review of Q3 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 will look forward to taking your questions.

During the third quarter, we produced solid business results, including top line organic growth, and continued to execute against our strategic objectives.

Third quarter revenues were $25.1 million, reflecting 2% organic growth, excluding the impact of currency translation and the disposition of AHN.

We are encouraged by these results and believe we will continue to -- continue this progress with expected fourth quarter organic growth of 1% to 2%.

Taking a look at our revenues from a geographic standpoint, our U.S. business grew approximately 3% in the third quarter.

Our electrophysiology brands were the key driver in our growth this quarter.

Electrophysiology continues to be a key market for us, a market where we've invested heavily through our last 3 acquisitions: Triangle Biosystems, Multi Channel Systems and HEKA Electronik.

The acquisitions have performed well, especially as we continue to cross-sell systems and gain market share in the U.S. market.

The integrated portfolio of products makes Harvard Bioscience a leading provider of electrophysiology products for our customers on a global basis.

Electrophysiology remains a key market for continued commercial expansion as well as a niche area of life science where we are well-positioned to make strategic acquisitions.

In addition to our commercial execution, we continue to see positive signs of change with increased funding outlays from the NIH to academic labs.

Third quarter NIH outlays were up approximately 5% year-over-year.

For the NIH fiscal year, which ended September 30, total annual growth was over 7%.

While funding outlays don't immediately translate to increased academic spending, or in the same proportions, we continue to be encouraged by the directional shift.

There are many factors that can change funding.

However, we are more confident than ever that the U.S. result this quarter is an encouraging indicator that certainty and optimism continues to strengthen with our end customers.

Under the current funding environment, we believe the U.S. business is poised for continued top line growth.

Revenues in China increased approximately 70% in the third quarter.

This market now represents close to 7% of our overall revenues.

What we are most pleased with is the growth in China is broad-based.

Our commercial team has done an excellent job in executing this year, and we are firmly on pace to outperform the midteens growth rate we reported in 2016.

Although our results continue to lag in Europe compared to the results we've reported in the U.S. and in China, we believe there are indicators of improvement.

Excluding the impact of foreign currency and the impact at AHN, our Q2 -- - Q3 European revenues were down approximately 3% year-over-year.

We are not satisfied with our results in Europe, however, our results are improving as we continue to work closely with our commercial teams in Europe on initiatives to grow our business across all brands.

Before I turn the call over to Rob to discuss the financials, I would also like to welcome 2 new board members who were appointed to board earlier this week.

Katherine Eade and Tom Loewald are life science industry veterans who will add tremendous leadership and industry experience to our board.

Katherine is the Director of M&A Law and Transactions at Corning, while Tom is currently a Division President at ProAmpac and previously spent 15 years at Thermo Fisher Scientific.

Both Katherine and Tom bring experience and backgrounds that align nicely with our corporate strategy and will be assets to myself and our management team as we continue to execute on our strategy of commercial excellence, acquisitions, product development and operational efficiencies.

We remain focused on the strategic vision of our organization and believe it will 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?

Thanks, Jeff.

I'll start with the top line.

Revenues for the third quarter were $25.1 million, a 0.2% increase year-over-year as reported.

Third quarter revenues were negatively impacted by the divestiture of AHN, which included approximately $674,000 of nonrecurring revenue during the third quarter of 2016, while currency translation positively impacted revenues by approximately $230,000.

Excluding the impacts of currency translation and AHN, revenues on an organic basis grew 2% in the quarter.

Cost of revenues on a non-GAAP basis were $13.4 million for Q3 compared to $13.3 million for Q3 of last year.

As a result, our non-GAAP gross profit was $11.7 million this quarter, essentially unchanged with the third quarter of 2016.

Gross profit margin was 46.6% in Q3, down slightly from 46.8% in Q3 of last year.

Non-GAAP operating expenses for Q3 were $10.1 million, a decrease of $140,000 compared to $10.3 million in Q3 of last year.

This decrease is due to the realization of cost containment measures as well as the sale of AHN, partially offset by unfavorable foreign currency.

And year-to-date, our non-GAAP operating expenses were down $1.1 million compared to the same period last year.

Operating income on a non-GAAP basis in Q3 was $1.5 million, unchanged from Q3 of last year.

Our non-GAAP operating margin in Q3 was 6.2%.

This compares to an operating margin in Q3 last year of 6.1%.

Our non-GAAP effective tax rate was approximately 17% in Q3 compared to 26% in Q3 of last year.

The decrease in effective tax rate was primarily the result of favorable mix in income across several tax jurisdictions.

Our non-GAAP net income for both Q3 of this year and last year was $1.1 million or $0.03 per diluted share.

And weighted average shares outstanding were 34.8 million in Q3 as compared to 34.3 million in Q3 of last year.

We finished the quarter with approximately $5.8 million of cash and equivalents.

Our accounts receivable as of Q3 were $15.3 million compared to $15.7 million as of Q4 last year, or a decrease of $480,000.

Our inventory at the end of Q3 was $21.4 million compared to $20 million at the end of Q4 last year.

This increase is due to the strengthening in foreign currencies.

And our capital expenditures were $236,000 for Q3 compared to $518,000 for Q3 last year.

Debt at the end of Q3 was $12.6 million compared to $13.9 million at the end of Q4 last year.

I'll now turn to our financial outlook.

We expect to report 1% to 2% organic growth for the fourth quarter.

In terms of dollars and at current FX rates, 1% to 2% represents fourth quarter revenue of $27.2 million to $27.4 million.

And on the bottom line, we expect to report fourth quarter non-GAAP earnings per share of $0.05 to $0.06.

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

Operator?

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

Jeff, could you talk on electrophysiology?

What was the growth in that business?

Is it a beneficiary of regenerative medicine?

Do you see incremental improvement quarterly?

Just some color around that business.

Paul, thanks for the question.

Yes, the electrophysiology segment of our business had strong results in the quarter.

We don't break out the numbers, so we don't have detailed information in terms of what that percentage growth was.

But I can tell you across the board, we were very pleased with existing and new products coming out of our electrophysiology portfolio, specifically in the U.S. market.

And if you recall 3 years ago, when we acquired Multi Channel Systems, the reason why we acquired the business, number one, was to add it to our current legacy company, Warner, which was in electrophysiology.

Multi Channel Systems had strong presence in Europe but really didn't have strong presence in U.S. or Asia.

And the purpose of the acquisition was to have a stronger electrophysiology portfolio for the U.S. market.

And what we're seeing right now is the results of, really, a couple of years of work of building a sales organization, putting commercial plans in place and executing to our plan.

So we're really pleased with where we are with electrophysiology year to date.

And then op margin, a little low relative to my estimate, at least in the quarter.

Any factors going on, on the op margin side?

No, nothing unique there.

I think you'll see that stuff up in the fourth quarter with seasonality in the business.

And then I think overall for the year, we'll be looking at an op margin in the range of 8% to 9%, based on those revenues in the fourth quarter.

What's your goal on op margin?

Double digits.

Okay.

Yes, I mean -- so Paul, in terms of longer term, we believe in getting this business to double digits.

We believe it's achievable, and we'll be looking at that as we think about guidance for 2018.

And the next question comes from Raymond Myers from Benchmark.

Well first, congratulations on your second quarter of organic growth.

I know you've been working hard at that, so congratulations.

Let me ask this first, Jeff, might you describe some of the specific geographic and product line actions or initiatives that management has taken over the past couple of years to restore organic growth now?

Yes, it was a global commercial plan that we've put in place.

And I think we've done really well here in the U.S., and in Asia, specifically China.

We still have work to do in Europe.

Let me start with Europe.

As you know, the numbers are still down in Europe.

But we've put a lot of commercial plans in place, specifically, distributor initiatives in Europe.

And even though the number was soft in Q3, the trend is heading in the right direction in Europe.

So we're actually pleased with the direction that we're seeing in Europe right now across the board with all our brands.

But here in Europe -- in the U.S. rather, the main initiative, going back 2 years, was to build a commercial electrophysiology sales team.

And we believe that with the addition of Triangle Biosystems, Multi Channel Systems and HEKA Electroniks, along with our Warner business, that we could build a competitive portfolio of products in the electrophysiology space.

And I think we're achieving that right now.

China has been a great success story for us.

As you know, we have 6 salespeople in China.

Going back 3.5 years ago, we had 1. We've put a lot of time and energy into that market, that region.

And across the board, all of our major brands showed growth in Q3 in China and within Asia.

So we're really happy with the initiatives that are in place today.

And we believe we'll continue to execute through the remainder of the year.

Good.

Can I ask another question, Jeff...

Sure, gladly.

With what you've done with electrophysiology, can that serve as a template for other businesses in your portfolio that might benefit from the same type of attention?

I believe it can.

And the way we go about looking at potential acquisitions, one of the key indicators is finding a technology, some type of innovation, that we can market in scale through our commercial teams.

And Multi Channel Systems was a prime example of taking great products, a great business that had strong positions throughout Europe and commercializing that in the U.S. and Asia.

And I think as we continue to look for potential acquisitions, our discipline, our profile of how we identify strategic fits for the company fall right into that mindset.

Good.

And I imagine that your discipline, as you referenced, has prevented you from making any acquisitions recently.

But can you describe what your appetite and expectations are for acquisitions here in the near term and 2018?

I think over the last few years, we really wanted to stabilize this business.

We've put a lot of work into consolidating facilities, implementing ERP systems.

A lot of process changes have taken place.

But what that allows us to do is actually have a stronger base to go out and make strategic acquisitions and integrate those acquisitions.

I think we're at a point now, with 2 quarters of growth, we believe the trend will continue, that we'll become more active.

We've been active, but as you know, it's a difficult market to value companies.

Valuations are high right now, and we have strict guidelines, we have strict discipline, and we hope in the near future that we'll be able to do something.

But it will be very similar to what we've done in the past.

It will be highly strategic, something that we can integrate and utilize our commercial presence globally.

That's great.

My last question is around new products.

You mentioned that you were planning to introduce some new products.

You touched on them being a driver of some of this growth.

Can you describe in a little more detail what these new products are?

Yes, several new products that were launched in the quarter came from our electrophysiology portfolio.

One was an MEA256.

It's a basically an in-vitro system used for recording of -- could be neural, cardiac cultures, stem cells, brain or cardiac cultures.

This was a product that was launched by Multi Channel Systems.

They also had an additional new product, what's called an ME2100.

It's a head stage, it's an in-vivo recording system.

Those 2 products have done really well.

They were launched later in the quarter.

But we're off to a great start and we expect incremental revenue coming from these 2 products in 2018.

We also have put a lot of time and effort into our new product development process.

We continue with deferred maintenance programs on many of our legacy product lines.

But at the same time, we're coming out with new products.

And next year, I think this process that we've put in place over the last couple of years will continue to put out new products that will help drive, hopefully, better than market level growth.

(Operator Instructions) And your next question comes from Lisa Springer from Singular Research.

Jeff, during your prepared remarks, you commented though even revenues were down in Europe, there are indications of improvement.

Could you give us a little bit more color around that?

Yes, if you look at our results in Q1 for Europe, we're, I believe, down 22%.

Q2, we were down 23%.

Now we've actually reduced it to minus 3%, excluding currency and AHN.

So the trend is actually progressing better.

The initiatives that we've put in place, the sales initiatives that we've put in place, are starting to take -- or actually starting to execute and see results from that.

So we're actually pleased with the turnaround in Europe.

It's still not where we want it to be, we still have some work to do, but we believe the trend has changed into a positive direction.

(Operator Instructions) And the next question is from Will Settle for Woodmont.

Just quick question to clarify.

You made a comment about EBIT margins, longer term.

Were you -- double digit.

Did I hear you say about -- in 2018?

Or define longer term.

Kind of what's the -- what's your goal there?

Hi Will, it's Rob.

Yes, so in terms of an operating margin, we believe we can get the business back to double digits.

We believe we can get it back to 10%.

We'll be putting together our plans for next year.

We're in that process now.

So I would say, over the next 1 to 2 years, we believe we can get there and beyond.

We'll be back to you with guidance back at year end when we announce Q4 earnings.

But we do have a goal to get back to double digits.

(Operator Instructions) And we have no further questions.

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

Thanks again, everyone.

Great quarter for the business.

I want to thank our global employees.

Total team effort here.

But thank you to everyone.

We look forward to catching up with everyone later in February or early March.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.