Harvard Bioscience Inc (HBIO) 2018 Q1 法說會逐字稿

Hello, everyone, and welcome to the 2018 First Quarter Harvard Bioscience Earnings Conference Call.

My name is Michelle, and I will be your operator for today's conference.

(Operator Instructions) Please note that today's conference is being recorded.

I will now turn the call over to Mr. Corey Manchester.

Sir, you may begin.

Thank you, Michelle, and good afternoon, everyone.

Thank you for joining us for the Harvard Bioscience First Quarter 2018 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, 2017, 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 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.

Thanks, Corey.

Good afternoon, everyone, and thank you for joining us for our Q1 earnings call.

I am excited to share a number of highlights from the quarter, notably strong top line and bottom line growth, some highlights of synergies we have begun seeing between the legacy Harvard Bioscience business and DSI and an update on product development.

Our CFO, Rob Gagnon, will provide further detail on our first quarter financial results.

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

During the first quarter, we produced strong business results on the top line and bottom line.

I'll spend a few minutes highlighting the top line before moving to a discussion on the bottom line.

First quarter adjusted revenue was $27.7 million, reflecting a 15% increase over adjusted revenue for the first quarter in 2017.

DSI contributed approximately $7.7 million to our first quarter revenue, while currency translation was $1 million favorable tailwind due to strengthening currencies.

Finally, our legacy product families, PCMI and electrophysiology, when combined were virtually flat for the quarter.

Taking a look at our adjusted revenue from a geographic standpoint.

Revenue in Europe grew for the second consecutive quarter.

Coming off fourth quarter constant currency revenue growth, our revenue in Europe for our legacy business grew approximately 11% year-over-year.

Our commercial teams have done an excellent job turning around the business.

With the acquisition of DSI, we are confident we will continue to progress during 2018.

Our revenue in China for our legacy business was up approximately 15% in the quarter.

We are well positioned to continue to outperform the overall market, and adding DSI to our portfolio should only increase our competitive advantage in this growing market.

Our ongoing legacy U.S. business declined approximately 2% in the first quarter.

The decline in the quarter is a result of weather in the Northeast in the quarter.

During March, we experienced significant disruptions due to weather at our primary manufacturing facility and corporate headquarters in Holliston, Mass.

In the quarter, we lost approximately 5 shipping days, 4 due to weather and 1 due to the Easter holiday.

This timing -- this is timing and due to -- and it is not indicative of our business.

We have already experienced a rebound in April.

The Biotech and CRO end markets continue to grow, while the academic end market and NIH spending continue to improve.

The latest U.S. fiscal budget approved in March calls for nearly a 9% increase in NIH funding.

We believe our business in the U.S. will continue to be strong due to the overall funding environment, the capabilities of our combined commercial organization and the pull through of cross-selling opportunities at Harvard Bioscience's legacy customer base and DSI's legacy customer base.

In addition to our top line growth, our margins bottom line improved substantially this quarter.

Rob will get into the quarterly detail shortly, but we are pleased to report our adjusted non-GAAP gross margin percentage improved 720 basis points to 54.9%.

Our adjusted non-GAAP operating margin improved 400 basis points to 8.9%, and our adjusted non-GAAP earnings per shares increased 50% to $0.03.

These improvements are impressive despite the first quarter containing only 2 months of DSI's results and are a testament to the improved profitability of the company following the sale of Denville and the acquisition of DSI.

We are well on our way to meeting and hopefully exceeding our expectations for our financial performance in 2018.

Moving to synergies.

We have made excellent progress since the DSI acquisition closed at the end of January.

As a reminder, we expect to realize between $2.5 million and $3.5 million in top line and bottom line synergies in the first year.

In the first year, we expect the majority of synergies to come from cost savings.

However, over time, the top line synergies will drive long-term shareholder value.

This momentum will only increase in the short and long-term as we share sales leads as combined companies, bringing Harvard legacy products offerings into DSI customer base, bringing DSI's product offerings to legacy Harvard Bioscience customer base and develop ways to bundle offerings which address the needs of our customers and the needs of Life Science Research Community.

One of the core competencies of the companies we've acquired since I joined Harvard Bioscience in 2013 is their product development capabilities.

DSI is no different.

Whether it is with the 3 electrophysiology companies or DSI, we've always looked for good cash flow generating businesses with superior technologies and niche spaces of Life Sciences.

I'd like to highlight 2 new products that we have been -- that have been showcased at recent trade shows that have come to market in 2018.

The first is a beta cell screening system from MCS used for diabetes research.

The system leverages MCS existing multi-electrode array or MEA technology.

It is a new method to support the development of new drugs for treatment of type 2 diabetes.

This new beta cell screening system is noninvasive as well as easier and faster than conventional methods.

The second product I'd like to highlight is the new PhysioTel Digital LO3 and LO4 from DSI.

These implantable devices allow researchers to record physiological channels, such as ECG as well as temperature during neuroscience research.

These are only 2 examples of products that have been brought to market in 2018, but we are excited about our product development pipeline and look forward to sharing additional details as more products are brought to market.

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

Rob?

Okay, thanks, Jeff.

Before I start, I'd like to remind everyone that we sold Denville on January 22, 2018, and acquired DSI on January 31, 2018.

With that in mind, the financial results I highlight today will include the Denville results for the portion of the quarter prior to the sale as a well as the DSI results for the last 2 months of the quarter.

The second quarter will be the first full quarter of DSI as part of Harvard Bioscience.

Beginning with the top line.

Adjusted non-GAAP revenue for the first quarter was $27.7 million, a 15% increase year-over-year.

Inclusive within the reported adjusted non-GAAP revenue is the revenue generated by Denville prior to the sale.

Revenue from Denville amounted to $893,000 for the first quarter 2018, compared to revenue of $6.1 million for the same quarter in 2017.

Our Q1 2018 revenue also includes approximately $7.7 million from DSI, which is the revenue contribution for the last 2 months of the quarter.

Additionally, foreign currency translation was a $1.1 million favorable tailwind to the top line in the quarter.

Now turning to costs and expenses.

Cost of revenues on a non-GAAP basis were $12.5 million for Q1, compared to $12.6 million in Q1 of last year.

As a result, our non-GAAP gross profit was $15.2 million this quarter, an increase of $3.7 million, compared with $11.5 million in the first quarter of 2017.

And gross profit margin was 54.9% in Q1, a 720 basis point increase, compared with 47.7% in Q1 of last year.

This meaningful improvement was largely due to mix as a result of the acquisition of DSI and the sale of Denville.

To reiterate our 2018 expectations, we anticipate 2018 non-GAAP gross margins in the range of 54% to 57%.

Non-GAAP operating expenses for Q1 were $12.7 million, an increase of $2.4 million compared to $10.3 million in Q1 of last year.

This increase is primarily the result of the acquisition of DSI and the sale of Denville.

Operating income on a non-GAAP basis in Q1 was $2.5 million, an increase of $1.3 million compared to $1.2 million from Q1 last year.

And our non-GAAP operating margin in Q1 was approximately 9%.

This compares to an operating margin in Q1 last year of approximately 5%.

Our non-GAAP effective tax rate was 20.7% in Q1 compared to approximately 27.1% in Q1 of last year.

The decrease in effective tax rate was primarily the result of the newly enacted tax reform and a favorable mix of income across several tax jurisdictions.

Our non-GAAP net income for Q1 was $930,000 or $0.03 per diluted share as compared to $620,000 and $0.02 per diluted share for last year's Q1.

Diluted weighted average shares outstanding were 35.5 million in Q1 as compared to 34.6 million in Q1 of last year.

Now turning to the balance sheet.

We finished the quarter with approximately $6 million of cash.

Debt at the end of Q1 was $64.9 million compared to $11.9 million at the end of Q4 last year.

Our debt balance is down almost $4 million from the end of January, when we closed on the DSI acquisition with approximately $68.8 million in outstanding debt.

Our practical borrowing capacity as of the end of Q1 was approximately $14.6 million.

Now turning to our financial outlook.

We are amending our previously issued guidance by tightening the ranges for both revenue and EPS.

We now expect to report full year 2018 revenue of between $120 million and $123 million.

This compares to previous guidance of between $118 million and $123 million.

On the bottom line, we now expect to report full year 2018 non-GAAP earnings per share of between $0.20 and $0.23.

This compares to previous guidance of between $0.19 and $0.23.

In the second quarter, we expect revenue of between $30.5 million and $31.5 million, and non-GAAP EPS of between $0.05 and $0.07, which reflects a full quarter of DSI's operations and the seasonality experienced by DSI in the second quarter each year.

This would represent an increase of between 21% and 25% on the top line and between 67% and 133% on the bottom line as compared to our reported results in the second quarter of 2017.

Before we turn the call over to questions from participants, I have one more comment I'd like to make regarding the recent shelf registration filing.

And as you may have noticed, on Monday, we filed a new shelf registration statement.

If you recall, we had a shelf registration statement for the last 3 years for an offering of up to $50 million.

That registration statement expired on Monday, April 30.

The new filing will provide coverage for up to another 3 years and also for an amount up to $50 million.

We have no immediate plans to initiate the shelf, which is consistent with our message 3 years ago.

This filing was done for corporate governance reasons and is meant to provide us with financial flexibility for future capital needs, which may include future acquisitions.

We will now open the call to questions from participants.

Operator?

(Operator Instructions) The first question in the queue comes from Raymond Myers with Benchmark.

Congratulations on nice results here.

First question is about your new products.

That was quite a very new product announcements yesterday.

And I was hoping you could tell us a little bit more about those, and particularly the diabetes product?

And how you might possibly cross-sell that into the DSI sales channels?

Thanks, Ray, for the question.

As many of you know, we have been talking for several years around new product development, whether internally with our legacy Harvard Bioscience businesses or the acquisitions that have been made, the 3 electrophysiology business and most recent DSI.

And thankfully, these companies have come with great innovation and great technology.

And we're very pleased to be at a point in our business lifecycle where we're starting to develop and launch new products, which will help us grow our top line.

And I think it's important for everyone to know, for the last 4 or 5 years, this has been a transformational story.

And we talked a lot around IT technology, ERP implementation, site consolidation and what we're really trying to do is, get the focus on Harvard Bioscience being a new highly innovative growth company.

And with that, I think, you're going to see more communications coming out from the company around product development and product launches.

The 2 product launches that have taken place recently, one from DSI, and one from Multi Channel Systems, are very exciting technologies.

We'll start with Multi Channel Systems, their beta cell system.

As many of you know, diabetes is a growing disease state, both from a clinical aspect and in a research aspect, these products will allow us to continue to focus in high growth areas of research.

So we're very excited about the product coming out for type 2 diabetes from Multi Channel Systems.

And then with DSI, they continue to expand their telemetry portfolio of implants.

On the product that they launched recently, the PhysioTel Digital L03 and L04 have really exciting technologies.

They're noninvasive products.

And they focus in 2 main areas.

They focus on neuro-related disorders and cardiovascular studies.

And if you look at the NIH, where the NIH is heavily funded, the disease states that are heavily funded around, neuroscience being one of them, cardiovascular being another.

Diabetes also a highly funded area from the NIH.

So what we're trying to do is develop and launch products that really are in highly funded areas of science.

To give you an example, Alzheimer's.

In the past 4 years from the NIH, in 2013, there was $504 million funded from the NIH on Alzheimer research.

In 2017, it was $1.35 billion.

So you can see the increase in terms of neuro-related disorders.

And as a company, we're focusing on developing and launching products that will resolve many issues from a research standpoint around these disease states.

Great.

A quick question for Rob, on the revenue guidance, that looked strong, is that on a non-GAAP basis?

It is.

If it's in reference to the second quarter, that now incorporates 100% of DSI.

So it will reflect 3 months where the first quarter only reflected 2 months.

So it is on a non-GAAP basis, but the differences there between the non-GAAP and non-GAAP get pretty small as you get into the second quarter.

Okay, good.

And about the seasonality with weather.

You did pretty well even with the seasonality and the weather that you discussed.

Reversing that or eliminating it in April, does that suggest that the trend could be even stronger?

Ray, I think, you take out weather, and let me comment on that in a second, but to answer your question, yes, we would have been right in line with previous quarters around what we've seen in the U.S. in terms of growth.

In regards to weather, I just want to make sure everyone understands, the town of Holliston where our corporate headquarters is, where we manufacture and produce a high percentage of our products and our revenue, the facility was shut down for 4 days in the month of March.

I mean, this is something in 5 years we've never seen.

Power down, trees across the street, employees couldn't even get to our office.

This was pretty significant, and we saw strong results in January, we saw strong results in February, and then because of the 4 days of weather and Easter just following in from a timing standpoint of a lost day, it really impacted our overall business.

But our confidence level is extremely high in the U.S. I think, we'll continue to see what we've seen over -- previous quarters, such as the comments we made on Europe last year, midway through the year.

We knew there would be a turnaround in Europe.

We saw the turnaround in Q4.

We saw great results in Q1.

We'll continue to see strong results in Europe throughout 2018, and China's been very consistent for us, and we expect another great year in China.

Well, that's sounds great.

I'll leave you with one last question.

Jeff, you've owned DSI for a few months now.

What has surprised you either favorably or not in that business?

I think there has been a lot of positives that have come out from the acquisition and integration of DSI.

Number one, we've got great leadership there.

I think Kristen Knox has done a fantastic job of working closely with our other 2 Vice President and General Managers, Karl-Heinz Boven with our electrophysiology business and Yong Sun with our PCMI business.

I think the sales and marketing teams have worked extremely well with one another.

And collectively, the 2 organizations have come together to realize these cost and revenue synergies, and we're really ahead of our expectations at this point of time.

We believe that we'll continue to move forward and be able to execute to the guidance that we provided on both the cost side and revenue side synergies.

The next question in the queue comes from Paul Knight with Janney.

Rob, can you talk to DSI's run rate of revenue in the quarter?

Yes.

So Paul, what's reflected in our results for the first quarter is just under $8 million.

It was $7.7 million for February and March.

So you'd have to -- you could come up with an estimate for the first month of January.

So that will, obviously, step up and is reflected in the guidance that we provided for the second quarter.

But in terms of their performance, it's right in line with what we had expected and what we've seen in the past in the (inaudible).

Organic growth at DSI and then also at the core Harvard Bio was what?

So Paul, we analyze it in total.

We've looked at it in total.

In the U.S., it was a 2% decline, like Jeff was referencing, and it's largely due to the lost days and the weather.

Overall, in Europe, it increased 11%.

China was up 15% and the remaining rest of world countries were down 3%.

Okay.

And the NIH after a long time, do you think that's finally better, Jeff?

Yes.

We've seen consistency in the outlay of funds now for, I would say, 14 to 16 months.

We'll continue to see positive outlays.

Year-to-date, we're significantly up with the 9% increase that was approved for their budget.

I think we're in a very favorable market for some time to come.

Do you think you're tracking that NIH growth rate?

Well, there's not a direct correlation for the outlay of funds and what we see in growth from our U.S. business.

But I can tell you this, there is definitely a favorable impact to our performance due to the positive outlay of funds that have come out over the -- like I said the last 12 to 14 months.

So if the outlays are, we'll just say, 7%, we would expect 1% or 2% of that to be an impact on our business.

So right now the academic market is very favorable for us.

And then as you guys look at the DSI acquisition, any margin, I mean, what type of cost cutting do you envision?

Is there synergies that are easy?

What's going to happen on gross or op margin there?

Yes.

Paul, it's Rob.

So we've talked a little bit in the past about the top line, bottom line synergies.

I'll start with the cost synergies.

There's some changes that were put in place day one.

And we're now benefiting from the certain cost reductions.

But the big one is the facility lease, and we're working with the landlord presently to -- but to renegotiate and enter into a long-term lease.

And we believe that, that'll produce significant savings of up to $1 million a year.

And so we continue to work on that, we're making good progress there, that's probably the biggest piece.

But as we work through integration, there's also other things like board fees and insurance costs, and other G&A-type costs where we've been able to realize some cost savings.

In terms of operating income rates, our reported operating income rate in the quarter was 9%.

And that reflected, obviously, 2 months as opposed to 3 months of DSI.

They are a very profitable business.

And going back to the guidance that we issued back in January, we're still targeting double-digit operating margin of 10% to 13% for the full year, reflecting that profitability.

Yes.

Paul, just one comment, too -- this is Jeff.

In regards to cost synergies, we're uncovering things that are coming up almost weekly.

As our functional teams get together, whether it's IT or HR or any other function in the business, we're uncovering opportunities that we really weren't aware of when these 2 companies come together that will also be favorable to the cost side.

So there's great opportunities coming out of these 2 companies coming together.

The next question in the queue comes from Lisa Springer with Singular Research.

Congratulations on a really nice quarter.

I wanted to ask you about the nice improvement in gross margin which you attributed basically to product mix.

Could you give a little bit more color about that?

And if you anticipate that the product mix is going to continue to turn more and more favorable during the year?

Lisa, it's Rob.

Yes, and I guess by product mix, what we mean there are the DSI products.

So the DSI product family, overall, has a much higher gross margin than some of our legacy businesses.

And I'll give you an example.

Overall, DSI's gross margins are in the 60% to 70% range.

And they are highly profitable.

A big piece of that is software.

And so that's driving some of the profitability there.

That compares to the business that we divested, Denville, which had margins in the low to mid-30% range.

So that's really what we mean by product mix.

It's Denville coming out and DSI and its product set coming in.

Going forward, we still expect gross margins to be 55% to 57%.

As you can see, we achieved that 55% with only 2 months of DSI.

So there's some good opportunity to expand margins further.

As we get into the second quarter, in to the third quarter, we'll see if we can tighten up that guidance a bit more potentially even move that up a bit, but that's where we're at today.

Okay.

And the nice gain in Europe, the 11% gain.

How much of that was from DSI?

Lisa, this is Jeff.

If you can remember last year, we put in some sales and marketing initiatives midway through the year.

The majority of the growth we've seen so far has been due to the Harvard Bioscience legacy businesses, the sales and marketing initiatives that were placed -- put in place and activated last year.

And we believe we'll continue to see good results coming from Europe in 2018.

The next question in the queue comes from Larry Haimovitch from HMTC.

Couple questions.

China continues to be a tremendous performer for you.

What percent of the total company revenue does it account for at this point?

So including DSI, it's about 10%.

10%?

Yes, yes.

And it's the fastest -- it's the fastest geographic region for you?

Is it fastest growing geographic region?

It has been, yes, Larry.

Okay.

And then second, I wanted to address a question about the debt.

You said you paid down some debt during the quarter.

What's the overall strategy, Rob, that you can discuss with us in terms of getting the balance sheet in better shape?

Obviously, you don't want to carry that much debt for a very long time.

You have a shelf up, you could potentially do it that way.

But what's the overall strategy to whittle the debt down, particularly at a time when it appears that interest rates are going to be going higher and could be a headwind for you?

Yes.

Larry, so we're levered at just over 4x.

Historically, that's higher than where we've been.

But that's certainly not that high of a level.

We're very comfortable at this level.

We've a very strong balance sheet, very strong cash flow generation.

We have adequate cushion in our covenants, and we feel comfortable about where we are today with the facility we entered into.

And we feel comfortable that we continue under the 5-year term of that facility.

In terms of the shelf, I'll just reiterate what I said in my prepared remarks that we have no plans at this point to initiate any sort of equity offering.

Rob, and then one more question.

Cash flow for the year, what's a rough ballpark guesstimate for your cash flow generation in 2018?

So maybe what I'll do is I'll start with EBITDA and then we can talk about some of the assumptions around capital requirements.

Our guidance, we've talked about revenue in the range of $120 million to $123 million.

We've talked about operating margins of 10% to 13%, that would put you in the range of $13 million to $15 million of operating income.

We have about $2 million of depreciation a year, so that would be roughly, call it, $16 million is the midpoint.

And our capital needs are about $2 million a year -- maintenance CapEx is about $2 million.

So $14 million pretax and about a 20% tax rate?

So that gets you to, say, roughly ballpark just $10 million in cash flow generation?

Is that kind of a good ballpark guess?

Well, it's not.

Keep in mind, we have substantial tax assets.

And so we won't be a taxpayer in the U.S. for up to 4 years.

And so our cash tax rate is closer to 8% to 10%.

So there's some good cash flow generation there as well through leveraging tax assets.

So $14 million, say less 10% just ballpark you're generating approximately $12 million in cash this year?

Just a very ballpark number.

Anything else?

No.

I'll now turn the call back over to Jeff.

Thank you, everyone, for making time for our Q1 earnings call.

We appreciate it, and we look forward to speaking to you next quarter.

Thank you, everybody.

Ladies and gentlemen, this concludes today's teleconference.

Thank you for participating.

You may now disconnect.