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Harvard Bioscience, Inc.

Q2 2008 Earnings Call Transcript

August 11, 2008 5:30 pm ET

Executives

Sue Luscinski - COO

Chane Graziano - CEO

David Green - President

Analysts

Jay Jacobs - Analyst

Kelly Cardwell - Central Square Capital

Kwan Thom - Salumet

Kerry Nelson - Skystone Capital

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2008 Harvard Bioscience Inc. Earnings Conference Call. My name is Latetia, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this call. (Operator Instruction)

I would now like to turn the presentation over to your host for today's call, Sue Luscinski, Chief Operating Officer. Please proceed.

Sue Luscinski

Good afternoon. This is Sue Luscinski, Chief Operating Officer of Harvard Bioscience. Thank you for joining us to discuss our results for the second quarter of 2008. Chane Graziano, our CEO, and David Green, our President are also on the call today. After the Safe Harbor statement, I will turn the call over to Chane and David who will present an overview of this quarter. We will then open up the call for any questions.

In our discussion today, we may make statements that constitute forward-looking statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results may differ materially from those projected due to risks and uncertainties, including those detailed in our annual report on Form 10-K/A for the fiscal year ended December 31, 2007, and other public filings. Any forward-looking statements, including those related to our future results, represent our estimates as of today and should not be relied upon as representing our estimates of any subsequent day. Further information regarding forward-looking statements and risk factors is included in the press release issued earlier today reporting our second quarter results.

Please note that during this call, we will discuss non-GAAP financial measures. For each non-GAAP financial measure discussed, we have made available, as part of our press release or on our website in the Investor Relations section, a reconciliation to the most directly comparable GAAP financial measure. 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. Look on the Investor Relations section and then click on the Investor Presentations or website icon, as appropriate. A replay of this call will also be archived at the same location on our website. Our website is located at www.harvardbioscience.com.

Lastly, all financial information presented on this conference call relates to our continuing operations unless otherwise stated.

I would now like to turn the call over to Chane. Chane?

Chane Graziano

Thank you, Sue, and good evening, everyone. During the second quarter, we continued to make excellent progress towards achieving our goals for 2008. Our results are in line with our guidance and the strong order rate in the first half of the year significantly increasing our backlog positions us well to achieve our operating plan for the year.

Our growth in orders was driven by the demand for the new Biochrom microliter spectrophotometer, the launch of the Harvard Apparatus Physiology Catalog, world wide sales of Panlab behavior product and a large order from China for plate readers.

Additionally, we have completed the relocation of our Asys Anthos product lines from Austria for our Biochrom facility in the UK. Based on these trends, we are comfortable with our guidance for the full year of $0.36 to $0.38 non-GAAP adjusted EPS and $94 million to $96 million in revenue.

Our guidance for the third quarter is $0.07 to $0.09 non-GAAP adjusted EPS and revenue of $21 million to $23 million. Guidance for both the year and third quarter exclude the impact of any additional acquisitions.

I will now turn the call over to David to expand on these initiatives. David?

David Green

Thank you, Chane, and good evening, everyone. The implementation of our growth plan of organic growth for tuckunder acquisitions was operational improvement is starting to deliver results. In the second quarter overall revenue grew 12.9% and in the first half revenue grew 13.9%. We anticipate overall revenue growth for the year of between 13% and 15% excluding the impact of any additional acquisitions. We anticipate non-GAAP adjusted EPS growth of approximately 20%, again excluding the impact of any additional acquisitions.

The reported revenue growth understates the true strength of the business. The $1.2 million in growth of Panlab over Q2 last year which was before owned Panlab accounts for the acquisition growth the way we reported and not as organic growth. This combined with the unusually high backlog nearly $7 million at the end of Q2, it will give us increased confidence in our full year guidance of 5% to 6% organic growth and total revenue growth of 13% to 15% for total revenue of $94 million to $96 million.

We are clearly starting to see the impact from several of the organic growth initiatives we outlined in our plan. Let me review each one of these in turn. The most important growth initiative we announced for the year was our new microliter spectrophotometer, which did especially well in the quarter driving overall spectrophotometer revenue growth of 31% in local currency. Sales to GE were the biggest contributor. The sales of spectrophotometer to other OEMs also did well in the quarter. The second major growth initiative we announced was with the launch of the new Harvard Apparatus Physiology Catalog. Revenue for the products contained in this new catalog in the US grew 10% in the second quarter.

In addition, the marketing of the recently acquired Panlab products in the USA has led to a 27% increase to Panlab orders to the US this year versus the run-rate of 2007.

Total Panlab revenue grew 72% or approximately $1.2 million over the same period last year. These successes in the Harvard Apparatus business were offset by some weakness in France which had a long sought order come through in Q2 of last year and I wanted to tell biology product which are not included in the latest Harvard Apparatus Catalog. However, we plan to mail a new one catalog later this year.

The third major growth initiative we announced with the launch of our 2D electrophoresis product of Hoefer subsidiary. This launch had come slower than we expected so far. So we plan additional marketing for the third quarter which we hope will drive growth in the balance of the year. These successes in growing the business were offset by a 30% drop in revenue from GE, through our Hoefer electrophoresis products. We are currently in discussions with GE to try to improve on this situation in the future.

In addition, we also had low shipments of Asys plate readers after a particularly strong quarter in Q2 last year. However, orders were up significantly including another large order from China that we expect will be shipped in the second half of this year. We ended the quarter with $1.6 million in backlog in this product line.

In addition to organic growth, we also derived total revenue growth for making tuckunder acquisitions. As discussed previously, the acquisition of Panlab has been successful so far contributing to both revenue and profit growth. We intend to continue to focus on the acquisition components of our growth strategy and expect to be able to add approximately 10% to 15% of revenue each year through these tuckunder acquisitions.

We have recently made good progress with our pipeline of acquisition candidates. We are currently working on three to four near-term prospects and believe we are on track to complete at least one acquisition this year. Additionally, we have begun discussions to increase our credit facility, either by increasing the limit on the current facility with brown brothers Harriman and Bank of America or entering into a new larger credit facility to accommodate our acquisition strategy.

The third driver of EPS growth is operational improvements. Our goal is to get our non-GAAP adjusted operating income to 20% of revenue. We have already completed the consolidation of the Hoefer marketing administrative functions in San Francisco to Holliston which resulted in significant cost savings. We have also now completed the consolidation of the entire Asys and Anthos plate reader business from Austria to our Biochrom facility in Cambridge UK. We expect it will lead to substantial cost savings in the second half of this year and into next year.

We expect that the annualized impact of both of these consolidations is likely be a gain of approximately $0.02 to $0.03 per share. Based on little what I have just discussed, we believe we are on track to deliver our plan for 2008 and our long-term goal of 20% to 25% of annual growth in non-GAAP adjusted earnings per share.

We will now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instruction)

Our first question comes from the line of [Jay Jacobs]. Please proceed.

Jay Jacobs - Analyst

Yes, hi. Question with respect to increasing the visibility of the company going forward. Clearly you are meeting your benchmarks and your stated expectations. To what degree is the Company making efforts to attend conferences, get to know the community – re-address the community and increase sponsorship?

David Green

Hi, Jay. This is David. As you probably know, I do a lot of the road shows and conferences on behalf of the company. And I think this year I have actually done more -- more meetings one-on-one meetings with fund managers than probably in any previous year. There are also conferences coming up which I expect to attend later in the year. Part of our overall plan in addition to putting together the growth plan which we just reviewed so far and that we are on track both for this year and the long-term growth plan, was also to increase the visibility of the company through putting more effort into the Investor Relations programs. So, those two really do go hand in hand. Yes, we think we have really turned the corner with the Company in terms of the operating performance now, but we are on a much better growth track. I don't think we are getting recognized for that yet. And that's why we want to go hand-in-hand with the results, an increased effort on Investor Relation.

Jay Jacobs - Analyst

Great. Thank you.

Operator

Our next question comes from the line of Kelly Cardwell from Central Square Capital. Please proceed.

Kelly Cardwell - Central Square Capital

Hi, guys. How are you?

Chane Graziano

Fine.

Kelly Cardwell - Central Square Capital

Hi. Just could you give us a little bit more clarification on the backlog number and the conversion into revenues in the second half? It looks like -- I mean obviously there is a low end for your guidance for Q2, but you are still comfortable for the full year. I just wanted to get a little more color in terms of how that translates. It sounds like bookings were in line, but maybe you just didn't get to recognize it.

Chane Graziano

Yes, actually bookings growth was very strong in the first half of the year. And that was both at Panlab and at the rest of the business too, particularly strong in the Biochrom spectrophotometry business. So we go into the second half of the year with over 7 million in backlog, which is an increase of 4 million from the same point in 2007. So I think you can see from that, we think all of that increase in backlog is shippable between now and the year end. So we expect that that will turn into revenue growth by the year end. Obviously, the revenue growth is what we actually count as organic growth. So by the year end, we think we will be reporting somewhere in the range of 5% to 6% organic growth for the full year. And I think that really marks the turn-around from the prior year we showed -1% to 8% the year before that. We didn't really get back onto that track that we talked about, getting to 5% to 10% organic growth plus the 10% to 15% from acquisitions -- chances of little bit operational improvements giving us a 20% to 25% overall growth in earning per share.

Kelly Cardwell - Central Square Capital

Okay. Thanks.

Operator

Our next question comes from the line of Kwan Thom from Salumet. Please proceed.

Kwan Thom - Salumet

Good morning. Hi, Chane.

Chane Graziano

Hi, Kwan.

Kwan Thom - Salumet

How are you guys doing?

Chane Graziano

All right.

Kwan Thom - Salumet

I was just wondering, can you just give me the order growth rate this quarter, I mean, you are talking about really strong order growth rate even though it didn't turn into revenue growth?

David Green

It was 20% in the quarter and it was also 20% year-to-date.

Kwan Thom - Salumet

Okay, 20% in the quarter. And then the $7 million, you said you expect that to be converted into revenue by the end of this year?

David Green

Not quite. $7million is the total backlog. Obviously, we don't expect to end the year with zero backlog.

Kwan Thom - Salumet

Okay.

David Green

That has never happened. We always carry a few million dollars of backlog, but the increase in backlog over this time last year, which I mentioned, which is $4 million.

Kwan Thom - Salumet

Right.

David Green

We would expect at least that amount to turn into revenue between now and the year end.

Kwan Thom - Salumet

Okay. And then most of that will be coming into your Q4, I mean, is that why Q4 is a little bit more back-end loaded this year than previous years?

David Green

Yes, that is the main reason. We think a lot of that will actually end up shipping in the fourth quarter.

Kwan Thom - Salumet

Okay. And just on the guidance, and regarding currency, I mean currency recently had just dropped a little bit. The price -- the spot price that you are using, is that as of today or was it a range from the last couple of weeks, can you just remind me how you look at that for your guidance?

Sue Luscinski

It is based on the exchange rates as of the end of July.

Kwan Thom - Salumet

Okay. Okay, perfect. Thank you, guys.

Operator

(Operator Instruction) At this time, our next question is a follow-up from Kwan Thom from Salumet. Please proceed.

Kwan Thom - Salumet

Sorry to jump back in again. On the cash flow statement, can you just remind me, how much was the restructuring charge impacting you guys this quarter? Cash charge?

Sue Luscinski

Cash charge in the quarter?

Kwan Thom - Salumet

Yes.

Sue Luscinski

Don't know off the top of my head to be honest in the quarter. We have recorded $1.9 million total.

Kwan Thom - Salumet

Right.

Sue Luscinski

And it remains 1.1 on the cash flow as non-cash and accrued. So first two quarters 0.8.

Kwan Thom - Salumet

Okay. Okay, perfect. And for the year -- last year, you guys did about almost $11 million in terms of free cash flow. Does it look like we are going to get the same kind of run rate again this year? The operating income for us is going up year-over-year. So should we still expect about roughly the same proportion increase in the free cash flow?

Chane Graziano

Generally, I think that is about right, Kwan. I think the way we report our non-GAAP adjusted operating income, it is pretty close to what most people will consider an EBITDA minus CapEx number. It is pretty close to that sort of number and that's honestly why we reported it that way. So, yes, I think generally speaking, cash flow moves, bar the change in DSO or inventory terms, cash flow is pretty much going to track that non-GAAP adjusted operating income number.

Kwan Thom - Salumet

Okay. All right. Thanks, guys.

Operator

Our next question comes from the line of Kerry Nelson from Skystone Capital. Please proceed.

Kerry Nelson - Skystone Capital

Hi. A couple of different questions. Could you comment on how much of the restructuring or rate of restructuring charge went through? Did that go through the COGS line?

Sue Luscinski

Most of that went through the restructuring line. There is like $260,000 that went through cost of goods sold.

Kerry Nelson - Skystone Capital

Okay. Can you help us understand that Warner catalog? When do you expect that to ship and what sort of impact in the past has it had on revenue?

Chane Graziano

We expect the Warner catalog to go out probably right at the end of the third quarter or the beginning of the fourth quarter. The last time, we did a Warner catalog, we saw a quite substantial increase in revenue; it was around 15% to 20% in the post-catalog period versus the pre-catalog period. So, I think we would probably expect something similar this year if this maiden follows the trends of the past ones.

Kerry Nelson - Skystone Capital

Okay. And then could you just remind us how big is the Warner business?

Chane Graziano

I am sorry. I couldn't hear you?

Kerry Nelson - Skystone Capital

How big is the Warner business? How big is that catalog in terms of revenue?

Chane Graziano

The Warner product line is about $4.5 to $5 million in revenue.

Kerry Nelson - Skystone Capital

Okay. Could you also give us some color on what you are seeing from an acquisition front - on the acquisition front?

Chane Graziano

I can give you some very limited color. At any point in time -- sorry?

Kerry Nelson - Skystone Capital

I was going to say maybe a chain could jump in?

Chane Graziano

Kerry, as you know, we are always working on general acquisitions. I think the color David tried to give at this time is we are further along with several of the candidates. At any time, we have six or eight people that we are talking to, but we are pretty well down the path with three or four of those. And we are pretty comfortable we will get one of those done this year, and hopefully even more. As I said, I think last time, the acquisitions over the next 12 to 18 months is about $70 million in revenues, and those are still very active, and I think that they will all happen. I think that getting them done this year, in the time frame I had hoped to have one done in six months and one done in the second half of the year. They will be back-ended, what happens, this year, but we are pretty comfortable with one significant one, and there is the possibility of a couple other small ones.

Kerry Nelson - Skystone Capital

Okay. So the $70million refers to the total revenue of the four that you are talking about?

Chane Graziano

No. It is the -- there is more than four in the pipeline that we are talking to over the 24-month period that we have been looking at. That includes what we think will happen this year, and next year. It has the potential of $70 million in revenue.

Kerry Nelson - Skystone Capital

All right. Okay. And then could you give a little bit more color on Panlab, and what is driving the growth there and now that you have had it for almost a year, could you comment on what you think the outlook for growth on Panlab is?

Chane Graziano

Yes, I think that the Panlab -- particularly coming in the US, as I said on the last call, we would expect potentially a million dollars worth of growth. And it seems to be tracking towards that. It is going up very strongly in the US because it is a segment of the market we haven't been in, in the past. And the market is about a $50 million market segment that we have had a very small position in. So, I think taking their products and pushing them through our subsidiary is the key driver of that growth.

Kerry Nelson - Skystone Capital

Okay. Thanks.

Operator

Our next question comes from the line of Jay Jacobs. Please proceed.

Jay Jacobs

Hi, my question was asked. Thank you.

Chane Graziano

Okay.

Operator

Okay. (Operator Instructions) At this time, there are no more questions.

Chane Graziano

Okay. If there are no more questions, I want to thank all of you for joining today's conference call. I look forward to our prospects for a bright future. Have a good evening. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

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Source: Harvard Bioscience Inc., Q2 2008 Earnings Call Transcript
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