U.S. Markets open in 4 hrs 26 mins

Edited Transcript of HTL.V earnings conference call or presentation 27-Aug-19 3:00pm GMT

Q2 2019 Hamilton Thorne Ltd Earnings Call

BEVERLY Aug 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Hamilton Thorne Ltd earnings conference call or presentation Tuesday, August 27, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David B. Wolf

Hamilton Thorne Ltd. - President, CEO & Director

* Michael W. Bruns

Hamilton Thorne Ltd. - VP of Finance & CFO

================================================================================

Conference Call Participants

================================================================================

* Andrew Hood

M Partners Inc., Research Division - Research Analyst

* David C. Martin

Bloom Burton & Co., Research Division - MD & Head of Equity Research

* Doug Cooper

Beacon Securities Limited, Research Division - MD and Head of Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to the Hamilton Thorne Ltd. 2019 Second Quarter Conference Call. Before turning the call over to your host today, please be reminded of our standard public company policy on forward-looking information. Certain information presented or otherwise discussed on this call may contain forward-looking statements. These statements may involve, but are not limited to, comments related to strategies, expectations, planned operations, product announcements, scientific advances or future actions. This information is based on current expectations that are subject to significant risks and uncertainties that are difficult to predict. Should one or more risks or uncertainties materialize or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by these forward-looking statements.

These factors should be considered carefully, and prospective investors and other parties should not place undue reliance on these forward-looking statements. The company assumes no obligation to update such forward-looking statements or to update the reasons why actual results could differ from those reflected in the forward-looking statements unless and until required by security laws applicable to the company.

Additional information identifying risks and uncertainties is contained in filings by the company with the Canadian securities regulators, including without limitation, the company's management's discussed and analysis for quarter and year-to-date end June 30, 2019, which filings are available under the company's profile at www.sedar.com.

As a reminder, today's call is being recorded. Now let me turn the call over to David and Michael.

David and Michael, you may begin your conference.

--------------------------------------------------------------------------------

Michael W. Bruns, Hamilton Thorne Ltd. - VP of Finance & CFO [2]

--------------------------------------------------------------------------------

David, are you there? Sorry, operator, we might have a technical difficulty here. I'm not sure whether David to -- lost his signal, he needs to redial in. If we could hold 1 minute that would be appreciated.

(technical difficulty)

Operator, do you have David calling back in?

--------------------------------------------------------------------------------

Operator [3]

--------------------------------------------------------------------------------

Not as of yet, but I do his line -- see his line has disconnected.

--------------------------------------------------------------------------------

Michael W. Bruns, Hamilton Thorne Ltd. - VP of Finance & CFO [4]

--------------------------------------------------------------------------------

All right. My apologies for the timing. Let's wait 1 more minute if we could. My apologies to all those on the call, and David must have a cellphone signal problem and should be dialing right back in.

Perhaps in the interest of everybody's time this morning, let me go ahead and start with David's remarks, and then actually let me flip over to the results of operations. And I'll begin with my remarks and then David will be dialing back in, in just a minute. As everyone knows, I am Michael Bruns, the CFO of Hamilton Thorne.

The results of operations for the second quarter and year-to-date. The company's total sales increased 10% to $8.0 million for the quarter ended June 30, 2019, an increase of $704,000 from the $7.3 million during the previous year. 6 months year-to-date sales for 2009 (sic) [2019] increased 9% to $15.6 million over the same period in 2018.

Total equipment sales increased 8% in the quarter compared to a very strong prior year Q2 and 9.5% for the year. Consumables and services increased 10.7% in the quarter and 9.3% year-to-date. Gross profit increased 1%, $4.2 million in the quarter compared to $4.1 million in the previous year, and increased 1% to $8.2 million for the comparable 6-month period.

Gross profit as a percentage of sales was consistent with Q1 at 52.2% for the quarter and 52.1% for the 6 months ended June 30, 2019, versus 56.7% and 56.5% for the comparable periods in 2018, primarily attributable to product mix, increased sales of products through distribution channels, volume discounting and certain supplier price increases, all partially offset by increases in direct sales of higher-margin, branded consumables and quality control testing services.

Operating expenses increased 14% for the quarter and 8% for the 6 months ended June 30 to $3.6 million and $6.5 million for the 3 and 6 months ended June 30 versus $3.1 million and $6.1 million for the comparable periods during the previous year, primarily due to the addition of acquisition expenses of $315,000 incurred in the second quarter relating to the Planer acquisition, increased G&A expenses and marketing expenses. Excluding acquisition-related expenses, all other operating expenses increased 4% and 3%, respectively, for the 3- and 6-month periods. Research and development expenses increased slightly to $409,000 for the quarter and $851,000 for the 6-month period, primarily due to increased personnel cost and significantly offset by increased cost incurred in the development of new products, which the company capitalizes.

The largest expenditures this quarter were for the poised to launch our next-generation LYKOS DTS moveable laser.

Sales and marketing expenses increased to $1.8 million for the quarter and $3.4 million for the 6-month period due large part to the timing of our large international trade show in Europe, which occurred in the second quarter of 2019 compared to the third quarter in the prior year as well as continued investment in direct sales, support and marketing resources.

General and administrative expenses increased to $1.4 million, which was $1.1 million excluding the acquisition expenses for the quarter. 6 months year-to-date, G&A increased to $2.3 million, which was $2.0 million when excluding acquisition expenses.

Net interest expense increased slightly to $300,000 for the quarter and $631,000 for the 6-month period versus the prior year, primarily due to increased interest expense related to the reclassification of a portion of rental expense pursuant to IFRS 16, partially offset by a reduction in the company's other term loans and revolving line of credit borrowings.

Income tax expense decreased somewhat to $183,000 for the quarter and $435,000 for the year-to-date, primarily to lower taxable income attributable to acquisition expenses. The deferred tax expense remains a noncash expense, which is offset against the deferred tax asset.

Net income for the quarter ended June 30, 2019, increased from a net loss of $133,000 in the prior year quarter to net income of $100,000, primarily due to the increased gross profit and partially offset by the $315,000 of acquisition expenses incurred this year, in Q2.

Year-to-date, after the Q2 net income of $133,000, the net loss of $464,000 is entirely attributable to the $1.0 million Q1 noncash expense related to the change in the fair value of the convertible debentures issued in connection with the 2017 Gynemed acquisition. As we have discussed in many of our quarterly earnings calls, the variables in this required quarterly Black-Scholes valuation model are dynamic, and substantial variations occurred each quarter in 2018 and in 2019 Q1 as well. The June 2019 conversion of 45% of these debentures reduces future exposure to this fair value measurement.

Adjusted EBITDA, one of our key metrics in measuring our business, increased 3% to $1.6 million for the quarter and 2%, $3.1 million for the 6 months year-to-date, attributable to revenue and gross profit growth and partially offset by planned increases in operating expenses in the period.

Turning now to the company's balance sheet and cash flow for the first 6 months of the year. Cash generated by operations was again positive for the quarter and the 6 months, which ended year-to-date increased 18% to $2.0 million compared to $1.7 million in the prior year first half. We invested over $600,000 in inventory growth year-to-date to continue to facilitate our expanded product offerings primarily in Americas and to enhance production efficiency in the U.S. and provide the industry's best fulfillment turnaround in Germany and the EU in our Gynemed operations.

We continue to review and manage our inventory to optimize new and existing opportunities.

Cash used in investing activities was $469,000 for Q2 and $751,000 year-to-date, primarily for ongoing investments in intangible development cost by our R&D teams related to the LYKOS DTS laser. Cash utilized by financing activities was $922,000, primarily for scheduled acquisition term loan debt and lease obligations and partially offset by $150,000 drawdown to our revolving line of credit. Our cash position of $14 million at June 30, was subsequently reduced in August to approximately $9 million after the Planer acquisition.

In addition, we have an additional $1.5 million of availability in our $2.5 million total revolver, and we are replenishing our $3 million of availability in the acquisition line of credit, which we utilized in the Planer acquisition, which is an important resource in our ability to complete acquisitions at a relatively low cost, cost of capital.

And now as you know, on August 13, we announced the acquisition of Planer Limited. David will talk more in his closing remarks about the strategic benefits of this acquisition, but I thought I would take a minute or 2 to discuss the financial side.

Planer acquisition will be immediately accretive to both revenues and earnings, adding over $6 million of revenues after eliminating intercompany sales, and nearly $1 million of EBITDA on an annual pro forma basis. From the structure perspective, we acquired 3 distinct assets. Please note that for purposes of clarity today, I will discuss the transactions strictly in U.S. dollar terms although the transaction documents and the press release address the British pound Sterling amounts as well.

First and foremost, we paid $7.3 million for the enterprise value of the Planer business, based on a 7.5x targeted Planer EBITDA as of May 31, 2019, of approximately $975,000. In addition, we paid $1.2 million for the acquired cash and working capital, including excess capital typical operating needs and $2.1 million for the value of promissory notes from certain of the Sellers and Planer Associates Limited, their affiliated real estate company to the acquired holding company, Sunbury. On closing, Hamilton Thorne paid aggregate consideration of approximately $10.7 million consisting of the $7.3 million in cash, the issuance of in aggregate of 1.4 million common shares of HTL, which was at an issuance price of a moving average of 1 point -- CAD 1.13 per share and was valued at $1.2 million, and the issuance of a promissory note in the physical -- in the principal amount of $2.1 million, which was immediately retired in exchange for the Seller Notes received as assets in the acquired holding company.

As security, 74% of the shares issued to the Sellers will be subject to a 2-year escrow pending final calculation of any closing adjustments and to satisfy any possible indemnity claims that might arise.

The total cash paid of $7.3 million was financed with the company's cash on hand and a drawdown of $3 million from our acquisition line of credit facility with our senior lender, Middlesex Savings Bank. Line of credit drawdown automatically converted to a secured term loan of U.S. $3 million, which now bears interest at the rate of 4.45% per annum, amortizes over the life of the loan and matures 5 years from the closing date.

Now I'd like to thank you all for your attendance. David has dialed back in and like to turn it back over to David.

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Yes. Thank you, Michael, and I apologize to all for the technical difficulties. I'm not sure if you started with my part of the discussion or you just jumped into the financials so I should decide where to start.

--------------------------------------------------------------------------------

Michael W. Bruns, Hamilton Thorne Ltd. - VP of Finance & CFO [6]

--------------------------------------------------------------------------------

I just jumped into financials. So you should begin with your intro.

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [7]

--------------------------------------------------------------------------------

I will start at the beginning. So first of all, obviously Michael has talked about some of the sales results and you have the opportunity to read our press release, but I'd like to provide some commentary. So I'm pleased to report that we did have a strong start to the year in Q1, which has continued into the second quarter. Sales increased 10% year-over-year to $8 million for the quarter and were up 9% to $15.6 million for the 6-month period. Currency fluctuations continue to impact our reported results in U.S. dollars, but we are pleased to report we achieved constant currency growth of 12% for the quarter and 13% for the 6-month period. Sales into the clinical market continued to grow substantially for the 3- and 6-month periods, driven by strong demand for Gynemed products worldwide, increased direct sales of equipment in the EMEA regions and in the U.S. and increases in quality control testing service sales. Sales into the animal breeding market were down for the quarter but slightly up for the 6-month period, while sales into the research markets were down for both periods, again, reflecting our continued focus and emphasis on the ART business.

We also continued to make substantial progress in several of our business goals, including completing our first 2 lab buildouts in the U.S. and substantially increasing cell culture media sales in our established markets worldwide. We also have successfully launched our much-anticipated next-generation LYKOS DTS moveable laser and have received positive feedback from our customers. Laser sales, which were down slightly in the first quarter, rebounded in the second quarter, albeit somewhat below the prior year's total, which was a record laser sales for the quarter, for the company.

Gross profit margins were 52.2% for the quarter and 52.1% for the 6 months, primarily due to the factors that Michael discussed in his comments. Organic growth in U.S. dollars was 8% for the quarter and 10% in constant currency and 7% in U.S. dollars and also 10% in constant currency for the 6-month period, essentially on target with our expectations.

For the quarter, we had net income of $100,000 while we had net loss of $464,000 for the 6-month period, largely attributable to the approximately $1 million of noncash adjustments in valuation of derivatives relating to the outstanding debentures in Q1, which again Michael discussed. Net income was also negatively impacted in the second quarter by over $300,000 expenses incurred in the quarter relating to the acquisition of Planer Limited.

Adjusted EBITDA, which among other things eliminates the change in value to the derivative and the acquisition expenses, is one of the key metrics we used to measure our progress, was up 3% for the quarter and 2% for the first half at $1.6 million for the quarter and $3.1 million for the second half.

I'd like to talk a little bit now about the Planer acquisition and our outlook. So looking forward to the balance of 2019, we expect to see enhanced growth driven by continued growth in U.S.-based business, augmented by strong performance of our equipment services and consumables brands as well as our most recent acquisition. As we discussed earlier, in the third quarter, we completed the acquisition of Planer Limited. Planer is a leading worldwide provider of incubators, control rate freezers and monitoring equipment. With manufacturing sales and support operations in the U.K, this acquisition enhances our product solutions in incubation, cryopreservation and lab monitoring solutions as well as providing us a direct sales and support platform for our entire Hamilton Thorne portfolio of products in an additional major market, ART market in the U.K. While in the short term, enhancing our direct sales and support capabilities in the U.K., will require investment in marketing and sales personnel, over the long term, we would expect to see increased sales and profitability from the sale of our products through direct channels as well as closer customer relationships.

Gross profit margins were down from last year but roughly the same as the first quarter as we saw a significant contribution from third-party equipment products and increased distribution sales and volume discounting primarily in Europe. The Planer business, which historically has had somewhat lower gross profit margin, EBITDA margin than our existing business based somewhat on product mix but primarily it has historically sold its products through distribution channels. While this will dampen our efforts to increase margins in the short term, however, as previously discussed, over longer period, we look to see enhanced margins through direct sales of Planer products in markets where we have direct sales coverage. We also expect to continue to make investments in personnel, R&D, programs and systems to support our growth with an eye to balancing our top line growth and overall sustained EBITDA expansion.

I'd like to add a few comments on our media business. In the second quarter, we achieved significant growth of our Gynemed branded media despite continued delays in getting FDA clearance for our sales of media in the U.S. We remain confident that clearance is imminent, however, realistically we will see minimum sales impact in the second half of this year. On the other hand, as our media products as well as all the other Gynemed branded consumables, are CE marked, we will be able sell them immediately in the U.K. although we should remember it will take a little time for this business to ramp up.

In closing, with continued EBITDA growth, strong cash flows and healthy cash balance of over $9 million following the Planer acquisition, we believe we are well-positioned to continue our acquisition strategy to complement organic growth. I'd now like to open the line up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of David Martin.

--------------------------------------------------------------------------------

David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [2]

--------------------------------------------------------------------------------

I've got a few questions. First one is the industry appears to be growing at least in the upper-single digit range, which is already pretty respectable like given the multiple big demographic drivers, do you see a potential inflection point coming where the industry growth is going to take a material jump to even higher rates?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [3]

--------------------------------------------------------------------------------

So the -- thank you for the question. So the growth rates, as you can imagine, are a blend of growth rates in various countries. Historically, in the U.S. growth rates have actually been fairly modest with the expansion of egg freezing, which is a significant growth area. That has the potential to grow because there's some secular activities that are going on in the U.S., primarily relating to additional funding. I think we've discussed this in the past that we see additional funding both for employer-provided benefits. So large tech -- primarily technology companies are offering IVF funding as a separate additional benefit beyond what their health plans mandate. In addition, we've seen 2 states in the past 6 months add mandates, New York added a mandate for large employer plans and New Hampshire, which is obviously not large demographic, has also added a mandate. So we expect to see continued growth in IVF and, therefore, an acceleration of growth in IVF because of the availability of third-party funding. In Europe, where there's already strong third-party funding but generally stable population growth despite the need, we expect that market to continue to grow a bit fast than the U.S. has historically grown but not quite as fast as the Asia-Pacific region and some other developing economies where again we would expect to see significant growth. As to the question of whether that inflection point will occur in, let's say, the Asia-Pacific region, which could cause significant growth well over the 6% to 8%, but most industry analysts believe it is -- calls for a little more crystal ball and I'm ready to do.

--------------------------------------------------------------------------------

David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [4]

--------------------------------------------------------------------------------

Okay. And second question, Vitrolife recently reported 18% organic growth in 2Q. What do you see as the differences -- the main differences between their businesses that account for the different organic growth rate? And what can you do to get up to that type of organic growth rate?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Yes. So I think you have to look at things over maybe a somewhat longer period. I think if you look at Vitrolife's Q1, their organic growth was low single digits, I think it was in the 3% to 4% range. So if you average constant currency organic growth, we're pretty -- frankly pretty similar with our 6-month period. That being said, the Vitrolife business is primarily a consumables business and of that primarily a media business that has good growth opportunities and perhaps something specific happening in that one quarter. They also announced a significant sale of some equipment, which is not really a major part of their business in China. But I think we'll have to wait and see whether that's the new normal for that company or frankly likely a good, solid quarter but maybe an aberration.

--------------------------------------------------------------------------------

David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [6]

--------------------------------------------------------------------------------

Okay. I've got one more question and then I'll get back to the queue. You mentioned the delays in FDA clearance for the Gynemed cell culture media. What's the nature of the delays? Is it something that could prevent you from getting the products to the market or is it just a matter of time?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [7]

--------------------------------------------------------------------------------

So I would say maybe, editorially, this has been one of the more frustrating regulatory experiences in my career. Though, frankly, I find it hard to criticize the FDA. They're just literally doing their job with crossing every I and dotting -- crossing every T and dotting every I. So the issues that we've been having, have been largely relating to, I would say, stability testing as it relates to labeling. So I would think, in total, we are very much in the end game and that we should be seeing clearances for the products that we've originally applied for imminently and to be followed on ideally very closely by a wider range of products. I think when we get that -- start to get those clearances, we'll be able to announce little more detail on that. So the short answer is, I would be -- I don't see any reason, but you never know that there is any fatal problem. I think it is literally just delay as the FDA does its job -- thoroughly does its job.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Your next question comes from the line of Doug Cooper.

--------------------------------------------------------------------------------

Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [9]

--------------------------------------------------------------------------------

Just want to focus on the Planer acquisition. I think it was originally announced that company was doing $6.7 million in trailing revenue, and then you just noted that $6 million-plus, it was at the intercompany sales or...

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [10]

--------------------------------------------------------------------------------

Yes. Exactly. So -- and this is one of the things by the way that has made us comfortable with this acquisition. So both in the U.S. and in Germany, our direct sales team had been selling Planer products and -- but we don't want to give the exact number in terms -- so there's some, obviously, duplication and you eliminate that in consolidation. So it is certainly over $6 million of revenues that will be added and I think the good news is it will be more profitable revenue at least high gross profit percentage because you will -- while you eliminate the -- some of the revenue in consolidation, you actually take up or keep all the margin.

--------------------------------------------------------------------------------

Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [11]

--------------------------------------------------------------------------------

Is this going to be classified as equipment sales?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [12]

--------------------------------------------------------------------------------

So the business is a combination of equipment, consumables and services. Equipment is the most significant portion of the business and followed by services and then consumables. Obviously, one of our goals is to use this platform in the U.K. to begin to sell additional consumables, primarily Gynemed consumables.

--------------------------------------------------------------------------------

Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [13]

--------------------------------------------------------------------------------

So the gross -- you mentioned gross profit was a little less than -- excuse me, the rest of the consolidated business. Can you give us an idea what that is like a -- I guess, if we do the $1 million off of 6-plus to kind of a 15% or 16% EBITDA business. But what's gross margin?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [14]

--------------------------------------------------------------------------------

So the gross margins for the last audited financials, which are available at Companies House, were in the mid-40s, mid-ish 40s, a little over 46%, 47%. That's certainly something we hope to grow over time.

--------------------------------------------------------------------------------

Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [15]

--------------------------------------------------------------------------------

Okay. And you indicated that you are selling some of the products in Europe and the U.S. but is the majority of the product sale in the U.K. at this point in time?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [16]

--------------------------------------------------------------------------------

No. No. This is a worldwide business. The majority of the sales are certainly outside the U.K. So the U.S., Europe, China, Japan, Russia, Saudi Arabia, Australia, are the markets that we all sell into.

--------------------------------------------------------------------------------

Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [17]

--------------------------------------------------------------------------------

Okay. And in particular, the nature of the incubator businesses, is this mostly for lab setups? Or how do you see the selling cycle for such a product?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [18]

--------------------------------------------------------------------------------

So one of the things I like a lot about the incubator business is obviously when you equip a new lab, you have to buy incubators, it's table stakes where there are other products that we sell, while they have tremendous benefits are things that you may decide you don't need or you defer the expense, particularly if you're building a very small lab where incubators are not optional. Also, incubator usage unlike a lot of equipment scales fairly linearly with a number of cycles. If you have any -- a typical incubator, we have relatively -- these are relatively small benchtop incubators. Depending on loading, it could have just 2 patients and the nurse and then as many as 8 or 10 per chamber. And when your incubator is full, you need to buy another incubator. And that will be based -- and then, of course, it's a step function, you don't need to buy another incubator until that incubator is full again. So it's one of the few pieces of equipment that does scale. So we see the growth prospects of this are going to not be exactly similar to consumables business, but more similar to the consumables business, growth will be again scalable too.

--------------------------------------------------------------------------------

Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [19]

--------------------------------------------------------------------------------

So it's not a -- is it a, I was going to say lumpy business but is it sort of less lumpy because of that growth in the number cycles for the clinics?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [20]

--------------------------------------------------------------------------------

So it's been a fairly consistent business over the years. In terms of, I'll call it, pretty close to lumpiness, I think -- again, we've talked about the lumpiness in U.S. business particularly it had more to do with significant lab sales where you might have a $200,000 to $500,000 or more sale made in one quarter, which obviously can have a significant difference. The incubator sales, I would say, are generally more of a steady business.

--------------------------------------------------------------------------------

Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [21]

--------------------------------------------------------------------------------

Okay. And I guess, you had mentioned incubators for a while as sort of on your wishlist. Now that you have one, what is the focus of the acquisition pipeline now?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [22]

--------------------------------------------------------------------------------

So the focus of the equation pipeline continues to be the kinds of things we've always been looking for. The Planer acquisition provides us with a much stronger offering in incubators and good offering in cryopreservation that covers a piece of the waterfront but not the complete piece of the waterfront. So one of the areas we continue to focus on is cryopreservation devices, which are the disposables and reusables that are used in cryopreserving sample, so it will be the freezing devices themselves as well as the straws in which things are stored in. On the equipment side, we still do not have our own workstations and flow hoods. So that's an area that we're looking at. And then I think one of the areas we want to pay a little more attention to is software, both lab management software and quality control software, which I think both of which can fit very nicely with our product offerings.

--------------------------------------------------------------------------------

Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [23]

--------------------------------------------------------------------------------

Okay. So this is basically 2, almost 2.5 years since the last major one, which I'll call Gynemed. Do you think that the next one will be quicker? Like how long will it take to integrate the Planer? And how quickly can you be ready to do when it comes to you?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [24]

--------------------------------------------------------------------------------

Yes. So I think the readiness is pretty high. We integrate as you know, we do our integration planning in really good detail before we close. Also since we are -- as we said in our press release, continuing to retain both the physical plant, the manufacturing and the personnel in place, we're not really doing -- and because we've already sold Planer products in other areas, a lot of the kind of mechanics of -- part of the mechanics of integration are relatively straightforward and the things that we will be adding, which is new sales and support capabilities in the U.K. and ability to import both U.S.-based and the German-based products into the U.K., really obviously are a significant level of work for the Planer team for the U.K. team, but don't really require a level of sort of organizational investment and -- other than cash I suppose, but organizational investment and time and resources. So I would say on the readiness side, we are fairly ready. We've been working on this acquisition for quite some time. So they all take time. So I'm not -- I don't know if this one is particularly long. But I would say this could have been closed maybe even a year ago. And we'd sitting here without asking about -- maybe asking that question. We've also added resources to our M&A team. We just hired a Director of Corporate Development who will help both with some of the integration and management activities but obviously significantly accelerate our M&A activities.

--------------------------------------------------------------------------------

Doug Cooper, Beacon Securities Limited, Research Division - MD and Head of Research [25]

--------------------------------------------------------------------------------

Okay. And final question for me, and Michael, you said in the MD&A, the share outstanding as of June 30, 123.7 million basic. I'm assuming the Planer acquisition shares would be not included in that number. So the basic share count now roughly 125.5 million, is that correct?

--------------------------------------------------------------------------------

Michael W. Bruns, Hamilton Thorne Ltd. - VP of Finance & CFO [26]

--------------------------------------------------------------------------------

That's exactly right. Yes.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

Your next question comes from the line of Andrew Hood.

--------------------------------------------------------------------------------

Andrew Hood, M Partners Inc., Research Division - Research Analyst [28]

--------------------------------------------------------------------------------

Most of my questions have been answered now, but I'll just go into little bit more detail on Planer's. I'm wondering is there any number for synergies or cost savings you're expecting there?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [29]

--------------------------------------------------------------------------------

So I think -- and we've talked about this in the past, we do not anticipate any meaningful cost savings off the numbers that we've been talking about. The adjusted EBITDA and kind of pro forma adjusted EBITDA that we've discussed reflects the elimination of certain costs that were related to essentially the ownership group of the company that will not be continuing with the business. That's a primary area of the cost savings as well as those couple of smaller areas of cost savings. In terms of -- in fact, as I mentioned, in the short term, you may even see additional expenses as we continue to invest in growing the business on the sales and marketing side.

--------------------------------------------------------------------------------

Andrew Hood, M Partners Inc., Research Division - Research Analyst [30]

--------------------------------------------------------------------------------

Okay. Do you have any idea what that number could be? Or how many -- you are hiring new people, is that what you're insinuating?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [31]

--------------------------------------------------------------------------------

Yes. So we will be adding sales staff in the U.K. devoted to direct sales. Obviously, since geographically it's much smaller country than, let's say, the U.S. where we add 3 salespeople and a couple of support people to do this. In the U.K., we're talking about initially 1 additional salesperson and maybe half of full-time equivalent on the support side. So not trivial numbers, but not really significant numbers and not -- GBP 100,000, so $120,000 per year.

--------------------------------------------------------------------------------

Andrew Hood, M Partners Inc., Research Division - Research Analyst [32]

--------------------------------------------------------------------------------

Okay. So for those Planer's markets, I'm wondering about cryopreservation in particular, do you know what the market size is in your geographies for cryopreservation?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [33]

--------------------------------------------------------------------------------

So cryopreservation is a, I would say is an umbrella term for a wide range of approaches. So if you think of all the cryopreservation activities that are done let's say in IVF, and then I'll talk a little bit about Planer's target markets for cryopreservation as well. It's certainly well over $100 million a year of annual spend, roughly $1.1 billion to $1.2 billion of annual spend on products that are used in the VF lab. The Planer business though, is frankly more of a niche business where we focus on selling control rate freezers, which are used in IVF but not in all markets and frankly, have been replaced in large part by vitrification in a number of markets and are also used in IVF for -- but are used large -- primarily for larger samples. So they're coming -- making a comeback a little bit in IVF for freezing of tissue -- ovarian tissue, as an example, and certainly used in general lab use. So in terms of the specific products that we sell, the overall businesses would be measured, I would say, in tens of millions versus hundreds of millions. But importantly, this provides us with significantly more technical expertise so that as we both assess some of the other products that we might see if we're thinking of acquisition or one of our own product development, we have a much stronger base of both scientific and engineering knowledge to build on.

--------------------------------------------------------------------------------

Andrew Hood, M Partners Inc., Research Division - Research Analyst [34]

--------------------------------------------------------------------------------

Okay. Good. So for the other -- your other product that you're getting from Planer, so in the past you were selling those third-party, I believe. Are you not going to sell those third-party at all anymore? You are completely replacing them with these first-party products or you can -- going to continue selling those?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [35]

--------------------------------------------------------------------------------

So it's little bit of a mixed bag. On the lab monitoring equipments, which is just making sure we describe what that is, so that's a typically a computer system hooked up to sensors and communications devices that are placed throughout the labs to measure temperature, gases, humidity and other environmental factors so you can make sure that the lab is operating properly and that the storage devices are properly maintained and maintaining temperature. Those -- there may have been some small ones around the edges, but on those, we primarily only sold the Planer products over the last couple of years. So there we would obviously put more -- continue our emphasis on those, I don't see that we would add any meaningful third-party products. On the incubation side, as I mentioned, we've sold both Planer products and other products. We would continue to sell some of the other products, primarily based on form factor so the Planer products have very specific form factors on benchtop. There are other so-called large-format incubators that are big box incubators that we sell provided by others that we don't make, Planer probably wouldn't make those. They're relatively, I would say, they're commodity products but they're less technically complex. And certainly, time-lapse incubation which we sell in Germany. We don't have a time-lapse incubator through - at Planer. And again, I don't want to make any promises on this but this certainly also provides us with the basis for technical expertise that should we decide to develop a time-lapse incubator, we would have a much quicker time to market on that.

--------------------------------------------------------------------------------

Andrew Hood, M Partners Inc., Research Division - Research Analyst [36]

--------------------------------------------------------------------------------

Okay. Good. One thing I noticed you stated that your sales to research labs was down for both the first 2 quarters. How much of your sales are from research labs now?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [37]

--------------------------------------------------------------------------------

Low single digits, and I think it's historically been in the 5 percentage range. So it's dropped a couple of points off that. I will add and I should have -- so thank you for reminding me on this. The Planer business is a little bit different than the -- certainly than the overall Hamilton Thorne business in that it is primarily selling products into human IVF, very small amount into the animal world, but a meaningful amount of their business is sold into research labs and other general biology labs. So I think you will see that number begin to come up, and frankly, we may even change the categorization of that from research to general laboratory because it's -- a lot of these customers maybe using the products for things like blood banking or stem cell tissue preservation, which is sometimes in the research side and sometimes more in the call it the production side.

--------------------------------------------------------------------------------

Andrew Hood, M Partners Inc., Research Division - Research Analyst [38]

--------------------------------------------------------------------------------

Okay. My final question, I also noticed that you stated that your first 2 lab buildouts in the U.S, full lab buildouts, was substantially completed. I'm just wondering does that mean, now you're recognizing any more revenues from that? Or it's just in terms of getting it installed -- or getting both of them installed?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [39]

--------------------------------------------------------------------------------

Yes. So they were completed and installed is probably -- well, hopefully, there will be substantial continued revenue coming largely from consumables, but there is always going to be a little bit more equipment business. In fact, one of these labs is having their open house shortly. So they'll be up and running in quick order.

--------------------------------------------------------------------------------

Andrew Hood, M Partners Inc., Research Division - Research Analyst [40]

--------------------------------------------------------------------------------

Okay. Just as a quick follow-up before I jump out of the queue here. So in relation to those, are they part of the larger network of clinics that -- could you get follow-on orders from those?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [41]

--------------------------------------------------------------------------------

So I don't want to get too much into the details of follow-on orders because that relates a little bit to their strategic plans. But one of them is part of a larger network and one of them is a startup.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Your next question comes from the line of David Martin.

--------------------------------------------------------------------------------

David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [43]

--------------------------------------------------------------------------------

Just want to follow up on that last question. You said completed and installed in second quarter. So there are revenues associated with the buildout itself. I am not considering the go-forward consumable revenues that you'll get. Were any -- were all of those revenues booked in Q1? Or were any of your Q2 revenue is due to these large lab buildouts?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [44]

--------------------------------------------------------------------------------

They were booked in combination of Q1 and Q2. I think I would refer to is there is no more left over and nothing meaningful leftover that will come in -- that will roll into Q3.

--------------------------------------------------------------------------------

David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [45]

--------------------------------------------------------------------------------

Okay. For Q3, are there any new large lab buildouts that you're…

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [46]

--------------------------------------------------------------------------------

We have a couple of good sized projects, some workstations, I think then we talked about kind of these large labs, small labs and workstations and workstations can be certainly well over $100,000 in orders. So I think you'll see meaning -- measurable revenues from labs in Q3, but not the same kind of, I think you used Doug's term lumpiness that you might have seen in Q1, Q2.

--------------------------------------------------------------------------------

David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [47]

--------------------------------------------------------------------------------

Okay. And these labs -- the workstations, do they involve just your proprietary instrumentation? Or is there also third-party in there like fuller large lab buildouts?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [48]

--------------------------------------------------------------------------------

So a combination. So a typical workstation that we would sell would be a so-called ICSI station where one uses inverted microscope, laser, micromanipulators and maybe an anti-vibration table, might be inside of the hood or not. So depending on how one sets that up and which micromanipulation set they choose, it could be substantially our products or it could be -- well, we -- obviously a combination since obviously we don't make our microscopes or could be a higher percentage of third-party products.

--------------------------------------------------------------------------------

David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [49]

--------------------------------------------------------------------------------

Okay. You mentioned vitrification as an alternative to cryopreservation freezers. Do you have vitrification products?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [50]

--------------------------------------------------------------------------------

Yes. So we -- through our Gynemed subsidiary, we sell vitrification media products but we still have -- market share on that is very low. So I think that's one of the areas we want to focus on. But there are still some disposable devices and storage devices that are -- that we don't sell that would -- that we don't sell under our own manufacture that would complete our product portfolio.

--------------------------------------------------------------------------------

David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [51]

--------------------------------------------------------------------------------

Okay. Got it. The $975,000 of target EBITDA for Planer, does that include your increase in expenses to grow the sales force? Or is that a pro forma number of those expenses? Or should we take those expenses out of $975,000?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [52]

--------------------------------------------------------------------------------

Take them out of the $975,000. So that was based on the historical through May 31, 2019, adjusted EBITDA number of the business that we bought. What we decided to do with it is our -- is on us.

--------------------------------------------------------------------------------

David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [53]

--------------------------------------------------------------------------------

Okay. And last question, acquisition expenses for Planer, you booked some in 2Q. Should there be a similar amount in Q3?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [54]

--------------------------------------------------------------------------------

I'll let Michael respond to that.

--------------------------------------------------------------------------------

Michael W. Bruns, Hamilton Thorne Ltd. - VP of Finance & CFO [55]

--------------------------------------------------------------------------------

So that was incurred through June 30, and we worked very hard to have the acquisition done then, a few sort of natural legal timing delays stretched that out into Q3. So we will have -- additional closing cost, probably will not reach the same amount as Q2, but we will have a meaningful closing -- final closing cost in Q3 for Planer, yes.

--------------------------------------------------------------------------------

David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [56]

--------------------------------------------------------------------------------

Okay. Sorry, I do have one more question. You mentioned the rebound in laser sales from Q1 of this year but it was below last year's total. You mentioned 2Q last year was particularly strong. Why was 2Q so strong last year?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [57]

--------------------------------------------------------------------------------

I would love to be able to give you the exact answer because then we would work hard to repeat it. But I think sometimes it's -- no, maybe back to my Vitrolife comments, sometimes just the luck of the draw in a particular quarter.

--------------------------------------------------------------------------------

David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [58]

--------------------------------------------------------------------------------

Okay. It was part of year-over-debt --year-over-year debt because of next-gen products weren't launched until May 1 and going forward, should we see a full recovery in quarters going forward or is demand slow...

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [59]

--------------------------------------------------------------------------------

Yes. So I hesitate to use the word -- to make any guarantee, but certainly, we would work hard and would hope to see not only a full recovery but increasing sales because of the increased demand for this innovative product. As you know, I try not to make too many forward-looking promises. So I would say, that's our objective and we'll report on it as we go along.

--------------------------------------------------------------------------------

David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [60]

--------------------------------------------------------------------------------

Okay. And what proportion of the new buyers of the LYKOS new system are new customers versus labs that are existing customers and are upgrading?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [61]

--------------------------------------------------------------------------------

That's actually a very good question. So most of our sales of these, because of both for regulatory and other reasons, were in markets outside the U.S. and through distribution. So it's sold in Asia and Europe primarily because we do have CE mark for it and regulatory approved clearance in certain Asian countries or in selling to countries that don't require regulatory clearance. With distribution sales, we don't always have full transparency to essentially answer that question because we don't know. We'll find out who the buyer was but we don't know which lab went it to but we don't necessarily know exactly what they have installed in their location. And that is one of the reasons we are interested in and willing to make investments in greater direct sales because we think having closer relationships with the end-user will give us not only that kind of market intelligence but also the ability to provide better service and therefore, to be more of use and some orders come through these labs.

--------------------------------------------------------------------------------

David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [62]

--------------------------------------------------------------------------------

Okay. Just to clarify, did you say the new lasers aren't yet cleared in the U.S or they are?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [63]

--------------------------------------------------------------------------------

That's right. They are not.

--------------------------------------------------------------------------------

David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [64]

--------------------------------------------------------------------------------

They are not. When do you expect that clearance?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [65]

--------------------------------------------------------------------------------

Again, I'm skeptical of making any promises in regard to FDA clearance, but certainly we would hope by the end of this year.

--------------------------------------------------------------------------------

David C. Martin, Bloom Burton & Co., Research Division - MD & Head of Equity Research [66]

--------------------------------------------------------------------------------

And are U.S. customers holding off for the new lasers like they did in other markets?

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [67]

--------------------------------------------------------------------------------

Hard to say. There is a fair amount of geographic difference in demand for certain products. So one of the features that we've added to this product, which is the moveable laser, is something that for whatever reason has not been exceptionally highly demanded in the U.S. as it has been in other markets. So I don't think it's going to materially affect sales in the U.S. But certainly, I would expect to see some of that.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

There are no further questions at this time. I'll turn the call back over to the presenters.

--------------------------------------------------------------------------------

David B. Wolf, Hamilton Thorne Ltd. - President, CEO & Director [69]

--------------------------------------------------------------------------------

All right. I would like to thank everybody for joining our conference call this morning. We encourage you to go to our website for more information on our products, initiatives and further investor information. We look forward to speaking to you again in November. Thank you.

--------------------------------------------------------------------------------

Operator [70]

--------------------------------------------------------------------------------

This concludes today's conference call. You may now disconnect.