Oct 31, 2013
Executives
Robert E. Gagnon - Executive Vice President of Finance David Green - Co-Founder, President and Director Jeffrey A.
Duchemin - Chief Executive Officer
Analysts
Jack Wallace - Sidoti & Company, LLC Shai Dardashti - Dardashti Capital Management
Operator
Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Third Quarter 2013 Harvard Bioscience Earnings Conference Call.
[Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr.
Robert Gagnon, Executive Vice President, Finance. Please go ahead.
Robert E. Gagnon
Thank you, Pablo, and good morning, everyone. Thank you for joining us to discuss our results for the third quarter of 2013.
With me on the call today are Jeff Duchemin, our CEO; David Green, our President; and Tom McNaughton, our CFO. Before we begin, I just wanted to remind everyone that effective tomorrow, November 1, in conjunction with the pending HART spinoff, I will be assuming the role of CFO of Harvard Bioscience, and Tom will move to HART.
I just wanted to add that I am thrilled to be part of the Harvard Bioscience family and look forward to working with Jeff and the new management team. After the Safe Harbor statement, I will turn the call over to David, who will present comments on the company's third quarter business performance and the pending spinoff of HART, our Regenerative Medicine subsidiary.
Jeff, who joined the company 10 weeks ago as CEO, will then discuss his activities to date, significant observations made during this time, and some key hires he has made for the company's new leadership team. Following Jeff's comments, we will open up the call for any questions.
In our discussion today, we may make statements that constitute forward-looking statements. Our actual results may differ materially from those projected due to risks and uncertainties, including those detailed in our quarterly report on Form 10-Q for the quarter ended March 31, 2013, and our other public filings.
Any forward-looking statements, including those related to our future results and activities, represent our estimates as of today and should not be relied upon as representing our estimates as of any subsequent date. Please note that during this call, we will discuss non-GAAP financial measures because we believe those measures provide an enhanced understanding of how our businesses are performing.
For each non-GAAP financial measure discussed, we have made available as part of our press release 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.
A replay of this call will also be archived at the same location on our website at www.harvardbioscience.com. I will now turn the call over to David.
David Green
Thank you, Rob, and good morning, everyone. As I'm sure you all know, we're in the final stage of spinning off our Harvard Apparatus Regenerative Technology subsidiary to the stockholders of Harvard Bioscience.
The spinoff will be effective tomorrow, November 1. As part of the spinoff, I will be resigning my position as President of Harvard Bioscience, and therefore, this will be the last time I'll participate in the quarterly earnings calls for HBIO.
It is actually my 50th earnings call for HBIO. I'm very excited about becoming CEO of HART and bringing our trachea transplant product to patients who need it.
Despite some sadness at leaving HBIO after all these years, I can say I'm equally excited about Jeff Duchemin as the new CEO of Harvard Bioscience. Jeff has already started to bring new focus to organic growth at HBIO with the new team he's put in place, and Jeff will have more to say about this later in the call.
Although I'm resigning as President of Harvard Bioscience, I'm not leaving the company. I will remain on the Board of HBIO, and I will also remain as one of its largest stockholders.
I look forward to working with Jeff and his team in growing HBIO and creating value for all of the stockholders. On this call, I will first discuss the performance of the core LSRT business of HBIO and then separately discuss the progress in HART.
First the LSRT business. In Q3, in the LSRT business, revenue was down approximately $1 million or about 4% from both Q3 last year and sequentially from Q2 this year.
This decline was due in part to poor performance from GE Healthcare initially anticipated in last quarter's call, as well as continued softness in certain European markets and the effect in the U.S. sequestration.
However despite the overall weak economic environment, we saw a modest growth in our Denville and Harvard Apparatus businesses in the North American markets, and we're encouraged by the market penetration rate by our new BioDrop microvolume spectrophotometer product line. Overall EPS was down $0.03 from last year with the unfavorable revenue comparison costing us approximately $0.01 in earnings per share.
We also have one-off expenses related to the hiring of our CEO and CFO, which also cost approximately $0.01 per share versus last Q3. The final $0.01 was a combination of higher tax rate, higher interest costs and a slightly adverse product mix.
We expect full year 2013 revenue to be down approximately 6% versus last year. We've already implemented cost-cutting initiatives to partly mitigate the impact of the decline in revenue on operating profit during the balance of the year.
Now let me update you on the spinoff of our HART business. We have cleared all necessary approvals to spinoff, and tomorrow, the spinoff will be completed.
Every 4 shares you now own of HBIO, tomorrow, you will still own those 4 shares, but in addition, you will get 1 share of HART. From then on, HBIO will be a pure play Life Science Research Tools business, and HART will be a pure play biotechnology company focused on creating regenerated organs for transplant.
Let me now discuss clinical progress within the HART business. I'm very pleased to report that since our last earnings call, the 9th and 10th successful regenerated trachea transplant surgeries have taken place.
These surgeries both took place at the Krasnodar hospital in Russia and were performed by Dr. Macchiarini.
One of these was a retransplant. This was an unusual procedure as the patient had received a regenerated trachea transplant back in June 2012.
This patient had the original scaffold, which was not manufactured by us, removed and a new scaffold, manufactured by us, implanted to replace the x planted one. This is the third surgery to use scaffold manufactured by us.
The retransplant was required due to the partial collapse of the previous scaffold. The 10th surgery was performed on a new patient who was suffering from tracheal stenosis.
Looking forward, we anticipate that 2 additional surgeries will take place in this Russian clinical trial later this year. In addition to the new patients who've been treated, we have important news on the patient who received the world's first regenerated trachea transplant.
Many of you already have seen our press release of last week on the 5-year followup on this patient. This patient is alive, well and free of complications at over 5 years post the transplant.
This type of long-term followup is important in establishing the safety of the regeneration transplant technique. This followup was published in The Lancet, one of the world's top medical journals.
In addition to the clinical progress, we've also made regulatory progress. In August this year, we received written confirmation from the FDA that the InBreath Airway Transplant System will be regulated by the Center for Biologics Evaluation and Research or CBER as a combination product biologic under the BLA Pathway.
This removes any uncertainty over the regulatory pathway in the U.S.A. Furthermore it confirms that the InBreath System is eligible for designation as an orphan product biologic.
If we receive this designation, the InBreath System will be granted a 7-year exclusivity for marketing in the U.S.A. once the BLA is approved.
Of course, there can be no assurance that we will receive BLA approval as that is dependent on successfully completing clinical trials. We have already begun the process of agreeing to the design of a preclinical and clinical work that will be needed to bring the InBreath System to market in the U.S., and we have submitted our request for a pre-IND meeting to the FDA.
We expect that meeting to occur during this quarter. So in conclusion, let me return to the spinoff of HART.
Tomorrow every shareholder of Harvard Bioscience will also become a shareholder of HART. It is not only a turning point in the history of our 112-year-old company but also, I believe, an inflection point in the creation of value for all our stockholders.
Since we announced the spinoff of HART, the Harvard Bioscience stock price is already up over 50%. As 2 separate companies, I believe each will be better able to focus on success in its own business.
Harvard Bioscience has a great new leadership team that, I believe, will transform the company. In the short time Jeff has been CEO, he's already made a positive impact on the business, and I'm confident of his ability to grow the revenue and profits of Harvard Bioscience.
HART, by making regenerated organ transplants real, has an opportunity not just to transform the lives of patients with life-threatening conditions but also just might help transform the practice of medicine. Let me now introduce Jeff and hand the call over to him.
Jeff?
Jeffrey A. Duchemin
Thank you, David. Thank you, Rob.
Good morning, everyone. First I'd like to start by thanking both David and Tom for their years of service and leadership of Harvard Bioscience.
They've built a great organization and are leaving me with a strong foundation to build upon as I lead this organization into the future. I would especially like to congratulate David for building up the world-class reputation of Harvard Bioscience since his arrival here in 1996.
I can truly say that without his vision and insight, the company would not have achieved the success it has witnessed, both in its traditional avenues, as well as in the regenerative medicine advances that have led to the spinoff of HART. He has been and will continue to serve as an inspiration for all of us as we move forward.
I would like to now update you all on my first 10 weeks on the job. As David stated, our performance was soft in Q3 as our customers continued to feel the effects of government austerity in U.S.
sequestration, especially in the academic and government markets. Due to these events, we will continue to face headwinds through Q4.
My activities during the first 10 weeks have been divided into several areas. First I've undertaken a complete review of the company's operations.
I've consulted with the current management team, and I'm listening closely to them as they suggest initiatives that can bring us forward. This is an ongoing task, and I welcome the feedback that I've been gathering and continue to gather.
Secondly I have traveled to many of our subsidiaries, including Harvard Apparatus U.S., Hoefer, Biochrom, Harvard Apparatus U.K., Panlab, AHN and Denville Scientific. This has provided me a chance to speak with most of our employees and many of our customers around the world and given me a first view -- a first-hand view of our current operations.
I have also met with our -- with GE, which is one of our strategic partners. My takeaway is as follows: as we are fortunate to have skilled employees, a strong culture and great brand, I do see the need for increased support in sales and marketing efforts.
1 key step in our success moving forward will be a strengthened emphasis in global expansion. We are seeking a truly global footprint for the company, especially in China, which we believe presents an extraordinary rich opportunity for our services and products.
Also I see a need for us to reinvigorate our new product development process to meet changing market needs. We will do this through increased strategic marketing competencies.
My third major activity has been choosing a new management team. Building a strong management team will assist me in developing both short- and long-term strategic goals for Harvard Bioscience.
This will include back-filling Tom McNaughton's position as CFO, along with building a management team focused on global commercial excellence, operational effectiveness and improved financial performance. Over the last 2 months, I've been successful in attracting and hiring 3 key individuals who will help lead us into the future.
These new hires are an important component on our path forward to driving growth. First is the hiring of our new CFO, Robert Gagnon.
Rob brings a tremendous amount of high-level financial experience from his 10 years at Biogen Idec and Clean Harbors. I believe Rob's experience heading global finance operations, along with his successful completion of acquisitions and his overall business acumen will be a great asset to us as we lead this company forward.
The second individual is Yong Sun. Yong's position is new to Harvard Bioscience.
Yong will be the Vice President of Global Strategic Marketing and Business Development. Yong will guide us in developing a strategic path forward for Harvard Bioscience.
I am honored that Yong Sun, a native of Beijing, China, with more than 25 years experience working for leading U.S. companies, has accepted this role.
I have worked with Yong in the past and can say with the highest level of confidence that he is the right person for this new position. His impressive career experience in marketing and sales in the Life Science sector make him especially qualified to guide us in our move into emerging markets.
Both Rob and Yong hold M.B.A.s from MIT Sloan School of Management. The third individual is Yoav Sibony.
Yoav's position is new to Harvard Bioscience. Yoav has joined the organization as the Vice President, Global Sales.
As we continue to drive global expansion, it is vital that we implement a far-reaching global sales strategy tying in our customers to our overall portfolio of products and services. Having worked with Yoav in the past and knowing first hand of his long and impressive track record of sales management and sales operation experience, I am confident that he will help Harvard Bioscience attain the next level of growth.
I am excited and look forward to collaborating with him as the company expands its global footprint. Yoav holds an M.B.A.
from Pacific Lutheran University. I want to assure all listeners that Rob, Yong, Yoav and myself, along with the rest of the management team, share a strong sense of urgency with regard to strengthening and streamlining the performance of Harvard Bioscience.
We are dedicating ourselves, thoroughly analyzing the company's operations and sales initiatives as they stand today. Following this, we will immediately unroll new initiatives aimed at improving our performance.
We will, of course, keep all of you up-to-date with news of these initiatives as we put them into place. To summarize, our key initiatives in 2014 will include organic growth throughout the company, accelerating growth in China, building strong channel capabilities and pursuing a prudent set of strategic acquisitions.
As we build our strategy for 2014, I look forward to sharing updates with each of you along the way. Our vision is clear.
We would like to become a world-class life science research company providing solutions to scientists. As an organization, we will focus on alignment and execution.
Most importantly, we will build an organization that meets and exceeds the demands of science today and into the future. Thank you.
I would now like to open up the call for questions.
Operator
[Operator Instructions] And our first question is from Jennifer Ling [ph] of Webster Court [ph].
Unknown Analyst
It sounds like things are moving along very nicely over at Harvard Bioscience. Jeff, I was wondering if -- you've been there about 10 weeks now, if you could, number one, give us your overall impression of the business and, secondly, tell us, please, what gets you excited about the future prospects of your business.
Jeffrey A. Duchemin
Thanks, Jennifer, for the questions. First, the thing that's most impressed me on my first 10 weeks is the amount of talent within the organization.
As I stated in my comments, I've traveled around the world. I've been to many of our subsidiaries, and I am very excited with the talent that exists here today at Harvard Bioscience.
The next thing that really excites me is the brand recognition of our products, the innovation and, really, our ability to channel. I think the combination of these 3 will guide us and build a strong foundation for us in the future of the business as we build a strategic path forward.
And I think the third thing that's really excited me is my ability to come in and build my own management team. It's a very unique opportunity that I have with the spinoff of HART to be able to come in and bring in a new CFO, a Vice President of Marketing and a Vice President of Sales.
So I'm very excited about this, and I think this part of the uniqueness of this opportunity. In regards to the future prospects of the business, I think with the new management team we have in place, I'm really looking forward to building our both our short- and long-term strategies for the business.
I would say that's the first thing that is a great prospect. I think the second thing is geographic expansion.
How do we expand, specifically in China, in India, in 2014? I think there's a great opportunity there for us as we move forward.
And the last is, really, our acquisition strategy. I look forward to working with Rob and the management team to look at strategic acquisitions for the business in 2014.
Operator
[Operator Instructions] And our next question in queue is from Jack Wallace of Sidoti & Company.
Jack Wallace - Sidoti & Company, LLC
You talked on the call in the prepared remarks here about cost cutting. Can you talk to me a little bit more about that?
Should I read into this as being better integration of some of the acquired companies, maybe some product line divestments? Can you just give me a little bit more color there?
Jeffrey A. Duchemin
Jack, thanks for the question. I think, right now, we met Monday this week for the first time with our new management team, and we're taking a look at the entire business operation.
I think over the next several weeks, we'll start to determine, really, what 2014 looks like for us in terms of everything: How we're going to achieve top line revenue growth, and how we're going to improve profitability for the business. And I think at this point in time, it'd be a little early to comment on that.
But over the next several weeks, the management team will be putting together a plan for 2014.
Jack Wallace - Sidoti & Company, LLC
And then you talked about, I think this is you, Jeff, supporting the sales and marketing efforts. You've gone ahead and added another senior position that didn't exist before.
When I'm thinking about this on a net basis in terms of cost cuts and then increased support in sales and marketing, should I think of this going forward as a net out, as maybe a net cost reduction, net cost increase? How should I think about that?
Jeffrey A. Duchemin
Yes. I think if you take a look at the business, the way it stands today, you have David leaving the organization to go off with HART, and the Chief Operating Officer position here has been eliminated.
So just with those 2 changes, there's -- I would say we're actually -- there's a cost savings moving forward.
Jack Wallace - Sidoti & Company, LLC
Great. And can you maybe just talk a little bit more about, I guess, some of the efforts to go ahead and support the sales and marketing efforts, particularly in the existing markets where Harvard Bioscience sells its products?
Jeffrey A. Duchemin
Yes. I'm really excited about this.
Both Yong and Yoav -- Yong started Monday. Yoav started a week ago.
They're both actively speaking with, really, everyone in the organization that is customer facing. I think there's a lot of opportunity for us in Asia.
With Yong's background and his experience, I'm looking forward to building our Asia Pac strategy for 2014. But really, it's going to be a strong emphasis in terms of how we brand our products, our overall marketing strategy moving forward, integrating the acquisitions that have been made over the years, creating maybe better synergies in terms of how we utilize relationships in the field.
Taking all of this into consideration, this will be part of the basis for our 2014 sales and marketing strategy.
Jack Wallace - Sidoti & Company, LLC
Okay. And then you also talked about some new product development, possibly, maybe a pickup in R&D, but the history of the company has been fairly active on the M&A front.
Will we be looking for R&D to lead the way with new products or vice versa there, with you going ahead and acquiring smaller companies to fit maybe needs or holes in the product portfolio you guys have?
Jeffrey A. Duchemin
Yes. I think moving forward, the approach will be more of a balanced approach, where we'll have some internal R&D projects in place.
Talking about the new product development process that I mentioned in my comments, we're looking to enhance that along with acquisitions to fill any gaps in our portfolio of products. So it will be a balanced approach moving forward.
Jack Wallace - Sidoti & Company, LLC
Great. And then just thinking about Q4, obviously, this year has been tough for a number of reasons, macro, as well as, specifically, with one of the suppliers.
Can you give me just an idea for -- or maybe some reasonable expectations are for Q4, maybe from a sequential basis and a year-over-year comparison.
Robert E. Gagnon
Jack, it's Rob Gagnon. Thanks for that question.
Yes, I think David touched on this a little bit in the prepared remarks. We talked about, in terms of the year-over-year performance, topline performance, we see it being down approximately about 6%.
So if you back-solve for that, that would be about $27 million, $28 million topline revenue for Q4 or about $104 million for the full year. So I think that's kind of what we're thinking in terms of the fourth quarter for guidance.
Operator
[Operator Instructions] Our next question is from Shai Dardashti of DCM.
Shai Dardashti - Dardashti Capital Management
I'm curious to understand what revenue per employee have been at previous companies that the new CEO has been involved with, and if this revenue per employee metric might be relevant to Harvard Bioscience going forward.
Jeffrey A. Duchemin
So you're asking me the question of revenue per employee at previous companies that I've worked for? This is Jeff.
Shai Dardashti - Dardashti Capital Management
Correct. I mean, I'm trying to understand in this industry, is there a sense of 1 employee could do x dollars with sales, and if this observation at previous companies might be applicable for Harvard Bioscience one day?
Jeffrey A. Duchemin
I don't think we've approached it that way in the past, and really, the conversations that we've had internally, that hasn't been the way why, I think, we'll approach in the future. It's more in regards to what we do today.
Are we built to grow the business in the direction we think we're going to take it? Where are the gaps and skill sets in the organization?
And so those are some of the things that we're focused on today, really, sales, marketing, internal R&D, new product development. Really haven't got to the point yet where we're breaking it down to revenue per employee.
Shai Dardashti - Dardashti Capital Management
Okay. And I've read the proxy filing with your bonus compensation structure, and I think it's absolutely phenomenal.
So thank you for such a shareholder-driven compensation package. I'm curious if the hurdles are publicly disclosed, so what the hurdle rate would be to get paid a bonus.
Jeffrey A. Duchemin
That hasn't been established yet. I think the Board, the way they look at this, is it's really -- for the entire management team, it's going to be a performance-based structure moving forward.
As we build our 2014 budget, those hurdles will be identified to the Board and accepted along the way, I believe. That's the process right now.
Robert E. Gagnon
Yes. And I just wanted to add, we're just very much -- that process is in the works right now.
We're right in the middle of our planning process for 2014, and that will come together over the next couple of months. And Jeff and I would come back to you with more information on our plans for 2014 when we meet to discuss the fourth quarter results.
Shai Dardashti - Dardashti Capital Management
And I believe there was a comment a couple of quarters ago with an EBITDA percent in the past. Is that comment no longer applicable given the new situation?
David Green
This is David. Let me just answer that.
We certainly have used EBITDA or operating margin, which, personally, I tend to prefer versus EBITDA because, I would say, if you use EBITDA, you need to have back end CapEx, and CapEx in this business tends to equal depreciation. So you're right back at operating margin, anyway.
But using operating margin is an important metric. In the past, we were aiming to get that up to 20%.
We are nowhere near 20% right now. But I think that's part of Jeff and Rob's challenge going forward, is to improve the financial performance of the business as he said, streamline some of the systems and operations we've been using in the past, and build the company from here.
So I think, really, it's going to be up to Jeff and Rob to decide what the critical metrics are that they want to be judged by going forward, that the Board, obviously, is going to buy into. And I think if that continues to be one of the important metrics, then I'm sure we'll be hearing from them about reporting against that metric going forward.
Shai Dardashti - Dardashti Capital Management
And this is my final question. Could you comment what the operating margins tend to be of your closest peers, do you think, are most relevant to your operations, please?
David Green
Yes. Excuse me, this is David again.
Within the Life Science Research Tools industry, you can find operating margins run from mid-teens to a high of about 30%. The companies that are as high as 30% tend to be more consumables-oriented, whereas we're sort of a mix of consumables and equipment.
But that's probably the range, and I certainly think there's an opportunity for us to improve from where we are today.
Operator
And with that, I am showing no further questions in queue. I'd like to turn it back to Mr.
Jeff Duchemin, CEO, for further comments.
Jeffrey A. Duchemin
Thank you, everyone, for calling in today. We appreciate it.
We look forward to keeping everyone up-to-date and talking to you for our Q4 earnings in February of 2014. So thank you.
Appreciate it. Have a good day.
Operator
Thank you. And once again, thank you, ladies and gentlemen, for joining today's conference.
You may now disconnect. Have a great day.