Harvard Bioscience, Inc. (HBIO) Q4 2018 Earnings Report, Transcript and Summary

Hello, and welcome to the Fourth Quarter 2018 Harvard Bioscience Incorporated Earnings Teleconference. My name is Michelle, and I will be your operator for today's call. [Operator Instructions]. Please note that this conference call is being recorded. I would 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 Fourth Quarter 2018 Earnings Conference Call. Leading the call today will be Jeffrey Duchemin, President and Chief Executive Officer; and Kam Unninayar, 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 on 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 represents the ongoing economics of the business, reflects how we set and measure our incentive compensation plans and how we manage the business internally. The differences between our GAAP and non-GAAP results are outlined in the earnings release we issued today, which can be found on our website under Press Releases. Additionally, any material, financial or other statistical information presented on the call, which is not included in our press release will be archived and available in the Investor Relations section of our website. A replay of this call will also be available for one 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, and good afternoon, everyone, and thank you for joining us for our Q4 earnings call. 2018 has been a really important year in the history of Harvard Bioscience. We addressed everyone today, a little more than a year, we moved from selling Denville and acquiring DSI. We are now a pure play life science research company with global reach, a more diverse and balanced customer base and improved profitability. Our team has done a tremendous job this year. During the year, the team closed the two transactions simultaneously as well as drove growth, integration activities and initiatives for sustained profitability. Before addressing our outlook for 2019, I will spend the first few minutes of my remarks discussing our Q4 results. Fourth quarter revenue was $33.9 million, a 24% increase over revenue for the fourth quarter last year. The $33.9 million in revenue was a record quarter for Harvard Bioscience and above our previously communicated range. EPS for the quarter improved 40% to $0.07 a share, which was within our previously communicated range, and the results of the overall revenue growth as well as significant improvements in gross margins and operating margins. For full year 2018, revenue was $122 million, a 20% increase over revenue in 2017. EPS for the year improved 67% to $0.20 a share. Much like our quarterly results, our full year revenue was above our previously communicated range from Q3, while EPS came within range we communicated during our Q3 call. The primary contributor to our increase in revenue was our DSI business. DSI produced a strong fourth quarter with approximately $13.3 million of revenue. Overall, DSI performed well against prior year in our internal plan in most geographies and sales channels. The strong results in the quarter and the strong close to the year, especially the second half of the year, reinforces our confidence and optimism about the future of DSI and the contributions that this acquisition will bring to Harvard Bioscience. One of the major benefits to the combined company is the opportunity around sales and cost synergies. When we announced the acquisition early last year, we spoke about approximately $2.5 million to $3.5 million in combined revenue and cost synergies in the first year postacquisition. As of today, I'm happy to say we met our expectations and have realized synergies within that range over the first 12 months of ownership. Turning to our legacy business. Our legacy product families, PCMI and electrophysiology, when combined, decreased approximately 3% in the quarter. Ephys recorded mid-single-digit growth in the quarter and remains a key component of our growth strategy. As I mentioned in my remarks last quarter, our Ephys portfolio of brands and products are uniquely positioned in the niche life science space of electrophysiology, which we expect will drive outpaced growth in markets - within the markets we compete. Looking at our revenue from geographic - from a geographic standpoint, revenue in the U.S. for our legacy business excluding DSI grew approximately 3% in the quarter. This was a good bounce-back quarter for us in the U.S. and reflects the hard work our teams have done to execute in our largest geographic market. We remain confident in the health and the position of the business in the U.S. Our revenue in China for our legacy business excluding DSI grew approximately 13% in the quarter. Our teams executed well to finish the year. The China market continues to be lumpy quarter-to-quarter, however, we expect to see sustained growth in China over the long term, and that is built into our assumptions for our 2019 outlook. Moving on to Europe. Revenue in Europe pulled back in the fourth quarter after growing for four previous quarters. Our legacy business excluding DSI declined approximately 17% year-over-year and was mostly the result of a strong comparable period last year. Despite the decline in the quarter, the European market grew in the mid-single digits, and we believe that we will continue in 2019. Spending a moment on new products. We introduced several new products and product extensions in the quarter, and these developments remain an important part of our strategy. DSI has introduced two new products that will provide incremental revenue in 2019 and beyond. The first is an inhalation tower, which allows for accurate real-time respiration monitoring during exposure studies. This system is highly efficient, which creates exceptional repeatability and saves time through high-yield studies. The second new product to highlight is our new glucose monitor. Through the adoption of continuous glucose telemetry, our customers will now be able to monitor and analyze continuous data to perform preclinical research studies that will ultimately lead to the development of better drugs, devices and therapies. During our call - last call, I mentioned our Ephys products family was preparing to debut a few new products and technological advances at the Society for Neuroscience trade show in November. Two of those products have been launched since the show, including a Smart Ephys System, which utilizes neurological monitoring devices from our TBSI brand and data acquisition software from our Multi-Channel Systems brand. It is the first full hardware and software system on the market for neurological recording studies and just one example of combining technologies across our portfolio to address a market need. The other product from Ephys is a touch display control valve system from our Warner brand. Much like the Smart Ephys System, this new Warner-branded valve system addresses researchers' needs by providing flexibility and application and enhanced usability. There is no direct competition in the marketplace with the same specs. We continue to be excited about the new product launches and product line extensions, which will incrementally add growth and profitability. Our research teams have done a good job coming together in a collaborative way, and there is further room for growth and innovation. Before turning the call over to our new CFO, Kam Unninayar, I'd like to take a moment to comment on Harvard Bioscience's 2019 outlook. Although, there is a level of uncertainty in the market specifically around Brexit, China tariffs and funding impact of the U.S. Government shut down, we are committing to 2019 full year top line growth, while improving profitability through gross and operating margin expansion. We expect top line growth to come from our major geographic regions, including market expansion in the Asia region as well as growth coming from cross-selling and revenue synergies. Our combined commercial teams are meeting next week to spend time as the consolidated group to further develop initiatives and programs to drive collaboration, cross-training and alignment on cross-selling. We believe very strongly that these activities will pay dividends during 2019 as we drive growth throughout our portfolio. On the profitability side, our expansion in gross margins and operating margins will continue to be driven by prudent cost containment measures as well as improvement from two recent small-site consolidations. In the U.S., we moved our Hoefer brand from its previous facility in California to our Holliston, Massachusetts corporate headquarters. In Germany, we moved our HEKA Electronik manufacturing site to our Multi-Channel Systems facility. Both of these moves took place in Q4. We will begin to see the related incremental cost improvements in Q1 and beyond. In closing, 2018 was an exceptional year in many respects. Through the acquisition of DSI and divestiture of Danville, we significantly changed the composition of the company. I truly believe the foundation of Harvard Bioscience is in the best shape it has been since I started five years ago. With that, I will turn that discussion over to Kam. Kam, please go ahead.

Thank you, Jeff, and good afternoon, everyone. Today, we are reporting our financial results for the fourth quarter and full year of 2018 as well as providing our financial guidance for the year 2019. Much like previous quarters, most of our 2018 and 2019 financial discussion will focus on adjusted non-GAAP measures. Starting with the top line. Revenue for the fourth quarter was $33.9 million, a 24% increase year-over-year on a reported basis. We finished the quarter with revenue above the high end of our third quarter guidance range of $32 million to $33.5 million. Our strong fourth quarter results were driven by a record quarter in our DSI business and solid growth in our electrophysiology business. Excluding the impact of our DSI acquisition, the divestiture of Danville scientific and foreign currency headwinds of approximately $300,000, organic revenue declined 3% in the fourth quarter. Revenue for DSI was $13.3 million in the quarter, reflecting our successful integration of this acquisition while driving strong growth in the business. Revenue for Danville scientific in the fourth quarter of 2017 was $5.8 million. For the full year of 2018, revenue came in at $122 million, also above the high end of our third quarter guidance range of $120 million to $121.5 million. This reflects an increase of 20% year-over-year on a reported basis. Turning to adjusted gross margins. Our adjusted gross profit for the fourth quarter was $19.1 million, a 45% increase over the $13.2 million in the fourth quarter of 2017. Our adjusted gross margins came in at 56.2%, an 820 basis points increase compared with 48% in Q4 of last year. This too came in at the higher end of our adjusted gross margin guidance range of 54% to 57%. Also, sequentially, we continue to see improvement in adjusted gross margin, reflecting the impact of volume, cost synergies related to the DSI acquisition and continued productivity measures across the company. We ended the full year 2018 with adjusted gross margins of 55.8%, an 890 basis points increase versus full year of 2017. Now let's move to adjusted operating margins. Adjusted operating income in Q4 was $4.8 million, an almost 100% increase compared to Q4 of last year. Adjusted operating margin, in the quarter, was 14.1%, a 540 basis point increase compared to Q4 last year of 8.7%. Operating margins continue to be a highlight of our ongoing financial performance and also reflect sequential improvements as we continue to successfully integrate our DSI acquisition and drive growth. We finished the year with adjusted operating margins of 12.1%, a 540 basis points increase over full year of 2017 and at the higher end of our expected full year 2018 range of 10% to 13%. Our adjusted tax rate for Q4 was 16.9%, and we ended 2018 with the full year adjusted tax rate of 19.2%, primarily reflecting the beneficial impact of U.S. tax reform. Adjusted net income for the fourth quarter of 2018 was $2.8 million, a 66% increase compared to the same period in 2017. And now turning to adjusted EPS. Adjusted earnings for Q4 came in at $0.07 per diluted share, a 40% increase from $0.05 per diluted share from prior year. For full year 2018, adjusted earnings per share came in at $0.20, a 66% increase from 2017. Diluted weighted average shares outstanding were 37.9 million in Q4 compared to 34.9 million in Q4 2017. I'll now turn to a few highlights on our balance sheet. We finished the quarter with approximately $8.2 million in cash, and our debt balance at the end of Q4 2018 was $62.4 million, reflecting a reduction of approximately $7 million since we closed the DSI acquisition in January 2018. This now brings our gross leverage to less than 4x compared to 4.4x at the time of closing. This reflects our continued focus to reduce our debt by leveraging our cash flow. To recap our financial highlights for 2018, we successfully deployed capital to strengthen our life science portfolio through the strategic acquisition of DSI while divesting Denville Scientific. Our full year revenue and operating margins came in at the higher end of our guidance provided in Q3 2018. And we continue to make good progress, servicing our debt, bringing our leverage down to less than 4x. Now I'd like to turn to our financial outlook for 2019. Today, we are setting our 2019 full year revenue guidance at a range of $124 million to $126.5 million, reflecting growth in the range of 2% to 4% on a reported basis. With these growth projections, we expect adjusted earnings per share between $0.21 to $0.23 with a growth range of 5% to 15% over the prior year. In terms of quarterly phasing for our guidance, we expect Q1 to come in at the low end of our annual average with incremental improvement throughout the year. Our outlook for the first quarter of 2019 for revenue is in the range of $28 million to $29 million with adjusted earnings per share range of $0.03 to $0.04. We expect to see continued year-over-year margin expansion, both in adjusted gross margin and adjusted operating margins, and that is reflected in today's guidance. During the year, we expected - we expect adjusted gross margin in the range of 55% to 57% and adjusted operating margin in the range of 10% to 14% across the four quarters. We expect to continue to make progress in servicing our debt and finish 2019 with a gross leverage of around 3x or less. In summary, we had a good 2018 and finished the year strong, and we are confident in our efforts towards achieving our 2019 goals. And with that, I will now turn the call back to the operator to open the line for questions. Operator?

[Operator Instructions]. The first question in the queue comes from Paul Knight with Janney. I'm sorry, Paul. We cannot hear response. Is your line muted?

Can you hear me guys.

Yes, we can hear you, Paul. Yes.

What was the organic in the two segments of DSI and then core in the fourth quarter, Jeff? And what's your implied for 2019?

Yes, Paul, in terms of breaking down DSI, organic for the year - when we acquired the company, we went out with expectations that the business would be in the mid-single digits. DSI finished right in that range, so they absolutely met our expectations for the year. And as you remember, Q2, which was the first quarter we owned DSI, a little bit slow out of the gate, but the last two quarters were record quarters for DSI. So they're progressing forward in both bookings and billings at a level that exceeds what we thought they'd be doing, so they're doing a great job. The two other businesses are legacy businesses. Ephys had a bounce back in Q4 as we had mentioned. Q3 was a little soft, and that was more timing related on large orders. Those orders did flow through into Q4, and we had a nice comeback with Ephys in Q4. And PCMI, as you all know, it's our legacy product lines. There are some very good product lines, and there are some product line that are simply out of product life cycle, and we're continuing to make improvements in terms of rationalization and divestitures and things like that. But the PCMI business had a bit of a slow year for us. Ephys came right in where we thought it would be. And we believe we'll see a nice turn around with the PCMI business in all regions of the world in 2019.

And then with overall operating margin expansion, it seems like a fairly conservative earnings guidance here. Are you anticipating anything like higher interest cost, higher tax rate? What are the puts and takes on this earnings guidance range?

So, Paul, thank you for the question. I would say that when it comes to our operating expenses, I think some - one thing to consider is that in 2019, we will have an extra month of January for the DSI acquisition. But when you look at our spending in 2019 relative to 2018, we are expecting to see flat to down as far as our spending is concerned after accommodating and adjusting for inflation and the extra month for DSI.

Will you have any - I guess, we should assume what, kind of, a 1.5 run rate on interest cost, maybe a little declining as you reduced that this year? And any change in tax? And also, with that, what is your target debt reduction level this year?

In 2019, we are expecting to close the year with our gross leverage ratio of around three or less by the end of the year. So the implied reduction in our debt will be somewhere in the mid-$50 million range. And as far as our tax rate, right now our guidance is in the range of 20% to 23% for the year.

The next question in the queue comes from Bruce Jackson with The Benchmark Company.

Just wanted to hone in on DSI with a couple other questions. So I mean you had the mid-single-digit growth rate for 2018. Do you expect a similar growth rate for 2019?

Yes. Bruce, this is Jeff. When we acquired the company, they had a CAGR that was anywhere from 4% to 6%. We believe that we should be able to do that and hopefully the higher end of that range, they're off to a great start. And as I said, they finished the year extremely strong, so we're expecting to be within that range in 2019.

And then this was a business where you had to integrate it during the year. You made great progress in hitting your targets in terms of cost savings. Would you - is this a business now where you've done what you wanted to do in terms of the cost savings piece of it, and it's going to be an investment type of business? Or is this - do you still see opportunities to continue to make the DSI business more efficient in 2019?

Well, the major cost savings was the renegotiation of the lease, which was completed in October of 2018. In regards to sales synergies, there's quite a bit of opportunities. And as I stated in my comments, we had expected $2.5 million to $3.5 million in synergies in the first 12 months of ownership. We've met those. But on the synergy side, the sale synergies side, there's still opportunity there. Next week, I'll be in Europe. We have a global sales meeting, and part of the global sales meeting is to kick off programs and initiatives to continue the synergies among all three Harvard Bioscience businesses.

Okay, and that's a nice segue to my next question about the core business. So it's been lumpy, it's had some challenges here, and - but you've also been investing in the new product flow, where it wasn't being invested in before. What are some of the things that you're doing in 2019 to help out the core business?

Well, we continue to see synergies in innovation. And I had mentioned in my comments some of the new products that are being launched. One of the products that I'd mentioned was a combination of two businesses that we had acquired Multi-Channel Systems and TBSI. TBSI makes the head stage for mice and rats, and Multi-Channel Systems has a state-of-the-art software program. We combined the head stage from TBSI and the software from Multi-Channel Systems and launched a new program or product line in the marketplace. This is just one example of where synergies come from. They - not only sale synergies but innovation. So our R&D teams are working together to bring out new products that will help drive growth in all three business units. So you have your legacy business, which is the PCMI business. You have the electrophysiology business, which is the combination of 3 of the 4 acquisitions that we've made, and then you have data sciences. So there's a lot of work going on right now among our three R&D teams to come together collaboratively to launch new products that will help drive growth in all three platforms.

The next question in the queue comes from Lisa Springer.

Jeff and Corey, just wanted to thank you again for participating in the Singular Conference yesterday. We really appreciated your input.

Yes, no problem.

Okay. And I wanted to ask you, do you expect the customer and geographic mix to be roughly the same in 2019 as it was in 2018?

Yes.

Okay. And then could you comment on what you think are going to be the main growth drivers for the electrophysiology business in 2019?

Well, once again, as we talk about new products, that's a business that is really in the forefront of innovation, and you have to remain highly innovative to stay a market leader. So what I expect is Multi-Channel Systems to be the main driver, it's the largest of the four business units that make up electrophysiology. HEKA Electronik has done very well for us, and now that we've combined the manufacturing from HEKA Electronik into Multi-Channel Systems, we expect to see a more efficient process of launching new products there. And then you have TBSI and the Warner business. So I think things are really coming together with electrophysiology business, and we expect to see market to better-than-market growth rates coming from that platform in 2019.

There are no further questions in queue at this time. So I will now turn the call over to Mr. Jeff Duchemin for any closing remarks. Please proceed, sir.

Thank you, Michelle. And I just want to thank all of our global employees and our shareholders for a great 2018. We look forward to exceeding expectations in 2019. Thank you, everyone, for joining the call today.

Ladies and gentlemen, this concludes today's teleconference. Thank you for participating. You may now disconnect.