Good day, ladies and gentlemen and thank you for standing by. Welcome to the fourth quarter and year-end 2014 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, Ms. Cheryl Schneider of Dian Griesel International. Please go ahead.

Thank you Kate and good morning everyone. Thank you for joining us today for the Harvard Bioscience fourth quarter and year-end 2014 earnings conference call. Leading the call today will be Jeffrey Duchemin, CEO and President and Robert Gagnon, Chief Financial Officer of Harvard [AUDIO GAP]

Kate, can you hear us? Hello.

Cheryl, your line might be muted. Ladies and gentlemen, you call will resume momentarily. Once again, ladies and gentlemen, please stand by. Your conference call will resume momentarily.

Kate, Cheryl? This is Jeff. We are back on.

I am able to hear you, Jeff. But Cheryl, we are unable to hear your line. Have you possibly muted on your end?

Actually, Kate, why don't we do this? Let's get started and I am sure Cheryl will be joining us.

Okay. In that case, sir, please go ahead.

Thank you, everyone. Good morning. Thank you for joining us for our fourth quarter and year-end 2014 conference call. I am pleased to be addressing you today about our strong fourth quarter and very exciting and transformational year for Harvard Bioscience. Before going to details, I want to thank our worldwide employees who were instrumental in helping us achieve our results. Our positive financial and operational results reflect the initial successes of our new growth strategy and of our world-class organization that we are building on and adding to through organic growth and acquisitions. I am proud to say that our business is on track and getting stronger, exactly as we had planned. Our strategy remains on target as we continue to leverage our growth, implement operational efficiencies and improve productivity as well as our bottom line. Our strong performance positions us well for further growth in 2015. On today's call, I will review the progress we have made in each of the four elements of our business strategy, which are first, commercial excellence and organic growth, second, new product development, third, business development and acquisitions and fourth, operational efficiencies. The first element I want to discuss is commercial excellence and organic growth. Following the realignment of our operations at the end of 2013, our reinvigorated sales and marketing teams has strongly focused on advancing our global growth initiatives. I am happy to report that our commercial teams are executing to plan resulting in return to revenue growth. As a brief overview, revenue for the fourth quarter ended strong with an 11% increase to $30.4 million on a constant currency basis compared to last year's fourth quarter. Revenue for the full-year increased approximately 2.4% to $108.7 million, excluding foreign currency compared with $105.2 million in 2013. In terms of geographic…

Thank you Jeff and good morning everyone. I just want to begin and state that the remarks we make today, they may constitute forward-looking statements. The company's actual results and performance may differ materially from what has been projected, due to risks and uncertainties, including those detailed in our Annual Report on Form 10-K for the period ended December 31, 2013 and our other public filings. Any forward-looking statements, including those related to the company's future results and activities represent estimates as of today and should not be relied upon as representing estimates of any subsequent day. So consistent with previous quarters, much of my focus will be on non-GAAP quarterly results, which we believe better represent the ongoing economics of the business, reflects how we set and measure our incentive compensation plans and how we manage the business internally. However, I will briefly review the GAAP results, the differences of which are outlined in the press release we issued today, which can be found on our website under Press Releases. Our results for Q4 and full-year 2014 will also reflect the results of our two recent acquisitions, Triangle BioSystems and Multi Channel Systems, both of which were completed on October 1, 2014. As a reminder, HEKA Electronik is not reflected in these results as that business was acquired in early January 2015. 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 and a replay of this call will also be our archived at the same location on our website at www.harvardbioscience.com. Now beginning with the topline. Revenues in the fourth quarter increased 11% to $30.4 million on a constant currency basis, compared with revenues of…

[Operator Instructions]. Our first question comes from the line of Paul Knight with Janney Capital Markets. Your line is open.

Hi, Jeff. The FX hit on 4Q EPS, did you guide on that or indicated on that?

I am going to let Rob answer this, Paul. Hold on one second.

Yes. Paul, we did not guide on the FX impact to EPS for 4Q. It actually wasn't as significant as the impact that we expect in 2015 because the weakening or the strengthening of U.S. dollar has large largely occurred right at the end of the year and into January.

And then, Jeff on your quote where you say you completed your China commercial initiatives, what you mean by that statement?

We had put in, in the beginning of the year, the goal of filling five positions in China, five commercial positions in China. We have a full team in place today.

And how many more positions would you want to add in the rest of Asia now?

Well, I think I stated, we are looking outside of China in 2015. We are now going to spend some time in Korea, Japan and Southeast Asia. We are currently there. We currently have business there. But we are putting a little bit more focus. We haven't guided to adding headcount in those areas at this point in time, but it is a focus for us in 2015.

And Jeff on the macro, can you talk to what you are seeing on the academic side? And then second on the biopharma side of the market for you?

Yes. The academic market, we believe will drive 1% to 3% growth in 2015. As we have stated many times, about 70% of our business is in the academic space. But the way we look at our business and the way we look at growth for 2015 is off of the execution of our strategy and not relying on the budgeting process of the NIH. We believe any upside in growth coming from the NIH budget will just add to topline performance for us in 2015. On the bio side and pharma side. I think you are seeing strength, global strength, coming from those areas and what we would like to do is, diversify our portfolio in the future to be a little bit better balanced in academia, biotech and pharma moving forward. So, as we develop new products, as we look at business acquisitions, we also have in mind, a better balance to our market approach.

And then last, Multi Channel, Triangle and HEKA. What do you think that's added to your organic growth rate?

Well, Paul, the 11% that we experienced in 4Q, I think the way to think about that is, 8% to 9% of that would be contributions from acquisitions and approximately 2% to 3% would be organic. That gets you to 11%. FX was a negative headwind of about 2%. But I think in terms of the guidance we gave at the time of the acquisitions, I still think we feel good about that guidance and that's where we are thinking about it for 2015.

I guess my question was really, what you think the growth rates are of those three combined firms together?

Well, I think you have look at the segment of the market. Electrophysiology is about $100 million market. We believe we will see or the market will see high single digit growth coming from that market. We would expect similar type growth coming from those three acquisitions moving forward. One of things that we are doing though is we are blending these products into other product families within Harvard Bioscience. So they not going to be standalone or it will not be a standalone product family. Electrophysiology will be blended and it will actually cross over into multiple product families that we have today, such as our cell analysis business and our animal physiology business.

Okay. Thank you.

Thanks, Paul.

Our next question comes from the line of Ray Myers with Alere Financial Partners. Your line is open.

Thank you for taking the questions. Can you hear me?

Yes, Ray.

Hi Ray.

Great. Hi. First of all, I want to touch on the gross margin trends. So, Jeff, what gross margin trends are you expecting going into next year, in light of the restructuring that conducted during 2014 and some of the changes that you are planning this year?

Yes. So I am going to let Rob jump in. I would just give my overview real quick, Ray. Gross margins, I think will continue to improve and the will improve for multiple reasons. Once again, as we execute our strategy, as we become more efficient, as we look at expanding products on a global basis, we would expect to see improvement in gross margin.

Yes. And Ray, it's Rob. Just to add to that, like we have discussed, 2015 is going to be a year of investment for us as we relocate and consolidate two large facilities. And so the impact on margins year-on-year, I think what we experienced in 2014 is probably a good expectations for 2015. It would really be 2016 where we would start to reap the benefits of those investments and those moves.

Okay. Good. Understood. So the two facilities, would that be Denville and the Biochrom that are being shifted? Is the correct?

That's correct.

Okay. So the Biochrom was the source of the $760,000 gain from the sale of manufacturing facility. Is that right?

No. Actually so we had, when we started the year, we had two manufacturing operations in the U.K. So our first consolidation was to combine both of those facilities which would be really the first step in bringing one facility back to the U.S. So that that was a separate operation.

Okay. So you made a gain previously on another facility and Biochrom is the second one. Are there similar types of potential gains from selling either equipment or facilities, real estate, either from Biochrom or from others that you only want one?

Certainly. The $760,000 gain was significant in the fourth quarter. It probably exceeded our expectations of what we thought we would receive for that building. But we tend to lease our facilities. And so as we look at optimizing our footprint, in terms of monetizing assets, I wouldn't expect a lot of facilities to be sold. There may be opportunities to rationalize equipment and we could realize some gain or losses down the road on operating assets. But this one was a little bit larger than usual.

Okay. That makes sense. The recent currency exchange fluctuation has been pretty dramatic and we do see that Harvard has facilities all over the world. Does that open opportunities to shift production to lower-cost regions to take advantage of global currency changes?

Well, Ray, we are looking at that relative to our strategic plans around optimizing the footprint. So that is a key component of those considerations, but today the impact that you see, the impact that we expect on 2015 revenues, that $6 million to $7 million that I spoke about, that impact on the bottomline is far less. It's closer to, say, $1 million because largely we are manufacturing in these countries and the decrease in cost and expenses from translation offsets the decrease in revenue. So the impact is actually muted and that's only a couple of pennies of EPS. But it is a factor of consideration that we look at when we think about our plans for facility consolidations.

That makes sense. And finally are there plans to drive operating efficiency in 2015 and beyond, in addition to the ERP system that you are launching this year? Are there other initiatives that might be enacted to further increase efficiency?

Hi, Ray. This is Jeff. I think the answer to that, we are going to be consistent with our current strategy and under the operational efficiency code of that strategy, we will continue to look to right size our global footprint. We will continue to integrate acquisitions as they are made and ERP is a multiphase strategy that will continue in 2015.

Okay. Thank you. I will get back into queue.

Thanks a lot, Ray.

Our next question comes from the line of Andrew Fleming with Heartland. Your line is open.

Good morning, Rob.

Good morning.

I just had a question. Nice pickup in the organic growth this quarter. Can you just explain what happened there? Is that just the market improving? Or is that company initiatives come into fruition?

Yes. I will start. This is Jeff. I think, you know, as part of our strategy this past year, we have put a lot of emphasis on our commercial organizations, our global commercial organizations. I think you are starting to see the results of that. You have seen our backlog increase all year long. But on the top of that, there were acquisitions made and there was a positive -- there has been positive results due to those acquisitions in Q4. But overall, we have built a very strong sales and marketing team on a global basis, which is aligned, which is something different from the past and we are heading in the right direction.

Okay and then, Jeff or Rob, maybe if you could just comment on the incremental margins that's inherent in this business model? And I understand we are not going to reap the benefits of the facility consolidations until 2016, but just if we think about 2016, what does an incremental $10 million revenue generate in terms of gross profit or operating profit?

Well, inherent in our guidance, you can actually pull apart the pieces from the acquisition and what's inherent in it is growth, sort of the low to mid single digits. And clearly, a large piece of that would -- or a component of that would fall to the bottomline after you back out and assume fixed cost and people cost. We haven't stated publicly what that exact amount is, but I think in terms of planning, if you think of 1% to 3% organic growth and then a variable component through cost of sales and the sales commission, you could get a pretty good estimate.

Okay and then as we go out maybe two or three years, is 50% gross profit margins achievable?

Yes. So we, to Jeff's point, we are going to continue to integrate acquisitions and look at optimizing our footprint and we will reap the benefits of that longer-term, but I wouldn't want to commit to you today that that results in a particular gross margin.

I am more just curious, is that in the realm of possibility or is that --?

I think we will see.

Okay. Then in terms of the balance sheet, where do you guys expect to end the year, assuming no further M&A activities, in terms of your net debt position?

The scheduled payments annually are about $5 million in principal. So we finished the year with about $21 million of debt. So we would make $5 million of payments on that.

And the cash generated from the business?

So we finished the year with roughly $14 million of cash. We announced the acquisition of HEKA, which was purchased with cash. So in terms of a pro forma, you are sort of in the $7 million to $8 million of cash and then in terms how we think about that balance growing, you look at the overall profitability and cash flow generation of the business and back off those $5 million of scheduled debt payments.

Okay. Thanks.

Thank you.

Our next question comes from the line of Bryan Kipp with Janney Capital Market. Your line is open.

Hi, guys. A couple of quick follow-ups. I guess I am sitting here looking at the acquisition contribution. It's a little bit stronger than I expected and I guess color around your expectations. I believe those closed in October. So it was only two months of contribution. Yet I estimate it a little bit north of $2 million of acquisition contributions. So how is that outpacing in regards to where you guys had it and any color in addition would be helpful?

Yes. Bryan, it's Rob. I am going to start and then I will let Jeff add some color. But the acquisition contribution, it was actually three months. So we closed on those acquisitions, October 1. So we had the benefits of their financial performance for the entire Q4. In terms of topline performance, I think they performed in line with our expectations at the time we had acquired those two businesses. The midpoint of the guidance we gave was about $8 million. So if you take again a quarter of that, that's a pretty good estimate and in line with how they performed. And in terms of the bottomline, I think they are in line with what we had expected for the fourth quarter. Clearly, any time you go through the sale or an acquisition of a business, it's extremely disruptive and we have to get them up and ready for SEC reporting on our close schedule and inventory systems. But I think overall it was in line with our expectations. I wouldn't say it was below. I wouldn't say with ahead.

Bryan, just to add, this is Jeff. I think Rob stated it well. But to look beyond 2014 into 2015, these acquisitions bring very exciting technology. There is significant room for growth. Our sales and marketing teams are heavily involved in growing these product lines today and will continue in the future.

Rob, are you willing to tease out what the banking fee contribution was to Op expenses in the quarter. Just trying to think of a fully adjusted non-GAAP thinking on a core basis?

Yes. Sure. And just to be clear on that, the banking fee for the acquisition of Multi Channel Systems. There was no banking fee for Triangle BioSystems. But the banking fee for Multi Channel Systems has been reported in our other expenses category and it has been backed out of the non-GAAP results and that amount was in the $400,000 to $500,000 range.

Okay, helpful. And then I guess, a new hire. What was the reason for it? What's the view, direction? What does he bring to the table? As well I was surprised to hear, I think a year ago you guys had mentioned much maybe leveraging Denville and using some other brands, ex-U.S., especially on the lab consumables and supply side? And it seemed like today the focus was on leveraging Denville, primarily in the U.S. So any comments around that and direction in light of hire?

Bryan, I will start with the reason or the purpose for the hire. Our business is growing. We acquired three companies recently in the instrumentation equipment side of our business. Our business is becoming very complex. If you look at Harvard Bioscience, youth you have Denville, which is our distribution arm and you have everything else that is instrumentation and equipment. For us to grow Denville, which is a big part of our strategy, we felt it was necessary to have a dedicated commercial leader leading that business. Yoav Sibony, who oversees all of our instrumentation and equipment business on a global basis, he has done a tremendous job this year, but his job is one of the most complex jobs among our executive leaders. So what we have done is, we separated that. So now have a dedicated leader for Denville Scientific and we have a dedicated sales leader for all instrumentation and equipment. That was the idea around that. What does he bring to the table? He bring significant sales leadership, an understanding of taking businesses that need an emphasis in terms of transformation, need an emphasis of a growth vision and strategy and he is someone that I have worked with in the past and have 100% confidence that he is going to come in and help drive to grow this business, not only here in the U.S. but as we build a strategy to possibly look at building distribution outside of North America, Ryan will play an instrumental role in that.

Thank you. And then I guess your thoughts on free cash? I mean in light of the comments, M&A continues to be a focus, it continues to be a pillar. There's a lot of moving parts, lots of facility consolidations, inventory builds, et cetera. But how are you looking at free cash and how should we look at it going forward so that you can leverage for your M&A pipeline?

Bryan, it's Rob. And we haven't given guidance on free cash in the past. But I would just tell you, with the addition of the acquisitions, with the investments that we are making around the consolidations, I wouldn't see the profile of the business changing dramatically in 2015. I think it's really 2016, we start to reap the benefits of a lot of these changes.

Is there a view in your mind that you can get to plus the 100% conversion on that income? Or is it something that will continue to hover at that 100% to sub-100% range?

I don't think we are prepared to give you that today, Bryan. But it's something that we continue to monitor and will think about it going forward.

Okay and the last one I had was just capacity on M&A. I think I heard you guys that $20 million to $30 million next year, $15 million capacities. Is that where you guys think? Or is there is other opportunities? Or is it less than that?

No. I mean it's like what we have talked about before. Outside of the U.S. is where we have a lot of our cash. We are leveraged in the U.S. with debt. And so our ability to continue to lever is subject to the ability to generate cash flow to service that debt. But your amounts, I would say they are in a reasonable range and that's probably how we think about it, absent looking at sort of other alternative financings, which are just we are not considering at this point.

All right. I appreciate, guys.

Thanks, Bryan.

Our next question comes from the line of [indiscernible]. Your line is open.

Good morning.

Good morning.

I had a couple of questions. First question is, Jeff you made it clear that, in past meetings and on calls, clearly that this business can and should be operating at higher and more efficient levels. So as you look out, I calculated your adjusted operating margin for the full-year 2014, it was around 11.4%. Is it unrealistic to assume that you can get to the mid-teens level over time?

Well, I don't think we are going to indicate exactly where we think we can get it. But I will elaborate a little bit on our strategy moving forward. So if you look at the four elements of our strategy, we will start with organic growth. We are going to continue to geographically expand our commercial organizations and I will give you one example. Latin America, which is probably one of the top four or five growth markets for research today, is a market that Harvard Bioscience has spent very little time focused on. We have recently hired a channel manager for Latin America. We have recently hired the Vice President of Sales for Denville Scientific. So we are going to continue to grow from an organic standpoint. That will remain a top priority for us moving forward. New product development. As we launch new products, there will be significant growth coming from the launch of new products, whether it's a new product or it's a product line extension. If you go into business development and acquisitions, I think as we acquire companies, they will be accretive and they will help generate both topline performance for Harvard Bioscience along profitability for the company. And operational efficiencies, Beth I think will really impact, if we can take that 11.4% to 15% by the way we optimize our global footprint and we continue to create operational efficiencies. So is it out of reach? I don't think it is. But I don't think we are prepared to comment on that exactly how long it will take for us to get there.

Okay. But if you look at your peer group, they are a lot higher than where you are today. So?

Absolutely. But if you look at our peer groups, probably been a little bit well organized, they are better organized than Harvard Bioscience has been in past. We were a business that was, I believe, had close to 26 acquisitions over the last 15 to 17 years. These acquisitions were never integrated, never aligned and so that's what we have been doing over the last year 12 to 15 months, is basically aligning these businesses, aligning product families, aligning sales and marketing organization and creating operational efficiencies better, so that we can be aligned with our peer companies in that 15% plus range.

Yes. Okay. and I don't know if you gave this number, but what percent of your revenues are considered to be consumables?

About 30% of our overall revenue.

Okay. Great. And then the last question is more of housekeeping. What was your depreciation and amortization for the full-year?

Beth, I will get that for you in a moment.

Okay. Thanks.

It can take a couple of seconds to pull that up. The amortization was $0.08 per share in 2014. And our depreciation runs at a little more than $1 million, roughly, a year.

Okay.

When we file our 10-K, in the next five to seven business days, we will have the exact numbers for you.

All right. So your amortization is about $2.7 million and your depreciation is about $1 million. So it's a total about $3.7 million.

Yes. Actually, amortization is $2.6 million.

Got it. Okay. Perfect. Great. That's all I have. Thank you.

Thanks, Beth.

[Operator Instructions]. Our next question comes from the line of Jack Wallace with Sidoti & Company. Your line is open.

Thanks for taking my questions, guys.

Hi, Jack.

Hi, Jack.

Hi there. Some of my other questions were answered. But can you just talk a little about how you are thinking about some of your leadership below the two of you guys. It sounds like we have got a new head over at Denville, head of sales there, new head of Latin American sales. Are we going to see as the business continues to evolve, additional leadership hires there to go after other, whether it's geographic areas or maybe a consolidated business families?

Well, I think we have touched on the new hire for Denville and I have elaborated over the last year the other executive leaders, functional leaders in the business. Our head of strategic marketing and business development, our head of, obviously, sales for the instrumentation side of the business, we talked about earlier and our head of operations. There is another position that we haven't talked about today, but it's the head of IT. We brought in a very talented IT leader, who is leading the ERP integration for Harvard Bioscience. That's a position that's very important today and will be for the future growth of the business. But as we look out, I would say over the next 12 months, I think our management team is in very good shape. And I think the focus now is on the middle level management of the organization. We have some very, very talented people. We are providing additional responsibility for them. We want to see them grow and continue to help maintain the business along with grow the business in the future as we acquire companies. So that's where we are today, Jack.

Thank you and my apologies if this is, I am asking a repeat. My line was blank earlier in the call. But have we seen any pickup in China, call it year-over-year or even sequentially, anything that suggests that the spigot is starting to turn back on?

I think what we are seeing right now is what we are hearing that things will continue to improve in China. I think, personally market conditions will probably remain the same in China in 2015, especially Q1 and Q2, but as the year progresses, I believe will see growth coming from China.

Got you. Thank you. That's helpful. And then lastly and then I will take the rest of my questions offline. Do you have any timing on the restructuring charges for the facilities realignment might have? Is that first or a second quarter event?

Jack, it's Rob. So starting to sanction for them now in the fourth quarter, but that will largely be through, say, the first three quarters of 2015.

Got it. Thank you, Rob. Thanks, Jeff.

Thanks, Jack.

[Operator Instructions]. I am not showing any further questions at this time. I would like to turn the call back over to management for closing remarks.

Thank you very much, everyone, for calling in, taking the time to listen to our year-end call. I just want to think the employees of Harvard Bioscience one last time. It was a tremendous year for us. We have great growth opportunities moving forward. It's been a phenomenal experience on the transformation of this business. So thank you, everyone. Have a great day and we will talk to you soon.