Hello and welcome to the Third Quarter 2015 Harvard Bioscience Earnings Conference Call. My name is Hilda and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. [Operator Instructions] I would now like to turn the call over to Ms. Cheryl Schneider of Dian Griesel International. Ms. Schneider, you may begin.

Thank you, Hilda and good morning everyone. Thank you for joining us for the Harvard Bioscience third quarter 2015 earnings conference call. Leading the call today will be Jeffrey Duchemin, CEO and President and Robert Gagnon, Chief Financial Officer of Harvard Bioscience. Before I turn over the call over to management, I will read the Harvard Bioscience's Safe Harbor statement. In its discussion today, the Company may make statements that constitute forward-looking statements. The Company’s actual results and performance may differ materially from what it has projected due to risks and uncertainties, including those detailed in its Annual Report on Form 10-K for the period ending December 31, 2014, and its other public filings. Any forward-looking statements, including those related to the Company's future results and activities represent its estimates as of today and should not be relied upon as representing its estimates as of any subsequent day. Now I would like to turn the call over to Jeff Duchemin. Jeff, please go ahead.

Thank you, Cheryl. Good morning, everyone. Thank you for joining us for our third quarter 2015 conference call. In my discussion today, I will begin by giving you a brief overview of our top-line results. Our CFO, Robert Gagnon will then provide more financial details and then I will delve into our business activities, overall strategy and other matters. We reported revenue today of $25.7 million, about 1% higher than last year’s third quarter and 4% higher excluding the impact of foreign exchange. Non-GAAP EPS was $0.03, which was below last year’s third quarter of $0.per share. As you saw in today’s press release, the third quarter presented us with unanticipated challenges. We entered the first two months of the quarter on target with our revenue expectations. However, during September, the landscape changed and we are faced with a slowdown in sales that neutralized the gains that we had been anticipating. The slowdown is expected – the slowdown in unexpected was caused by four factors. First, currency translation has been a significant headwind for us all year. The euro has depreciated more than 15% relative to the dollar year-over-year. As approximately 35% of our revenues are in Europe, these headwinds have impacted us in multiple ways. For example, in addition to foreign currency translation, European customers faced constraints as a result of purchasing US priced or manufactured products wit euro-denominated budgets and grants. As we stated earlier in the year, the impact on the top-line is up to $10 million. Second, recently we were notified by GE of their decision to exit their NanoVue SimpliNano spectrophotometer product lines. As probably most of you are aware, we have manufactured these products for GE for many years. GE's decision to discontinue its spectrophotometer line of products had an unexpected impact on our…

Thanks, Jeff. As in previous quarters, much of my focus will be on non-GAAP quarterly results, which we believe better represent the ongoing economics of the business, it 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 earnings release we issued today, which can be found on our press release under Press Releases. Additionally, any material financial or other statistical information presented on the call, which is not included in our press release will be archived and available in the Investor Relations section of our website and a replay of this call will also be available for one week at the same location on our website at harvardbioscience.com. Revenues in the third quarter were $25.7 million, an increase of $283,000 or 1.1%, compared with revenues of $25.4 million in the third quarter of last year. The negative impact of currency translation was $710,000 and was due mostly to the weakened euro relative to the US dollar. Revenues on a constant currency basis would have been $26.7 million or an increase of $1 million or 3.9%. As we have discussed foreign currency headwinds have had a significant negative impact on reported results for the year. Based on current FX levels, currency translation is expected to continue to adversely impact the revenues through the end of the year. Jeff has already mentioned GE, as a result of that decision, there were reduced sales of spectrophotometers of approximately $900,000 in Q3 and we do not anticipate any sales of this product line to GE in the fourth quarter. We expect the impact to be $1 million and lower revenue in Q4. Bookings in Q3 were $27.3 million, an increase…

Thank you. [Operator Instructions] We have a question from Paul Knight from Janney Montgomery. Please go ahead.

Hi, Rob. Hi Jeff.

Hey, Paul.

Hey, Paul.

Hey, Rob, what was the adjusted op margin in 3Q, did you say?

It’s 5.5%.

And what does all of this translate into to a targeted op margin for 2016?

Well, if you adjust for, we have the timing issues with Biochrom which was $0.5 million of sales. There is GE which was about – it’s $900,000, about $1 million in the quarter. If those two items hadn’t happened in the quarter, we would have had revenue around $27 million or $27.1 million. That would have been an operating margin in the mid $2 million range, $2.5 million, $2.6 million. And then you layer on top of that, the restructuring that we announced today, that has a full year impact of $1 million, you layer on top of that a consolidation cost that we incurred as well as the savings we will have next year. If you crosswalk all that math, it will put you in the 12% to 13% range. Now that’s not official guidance for next year because that doesn’t reflects any of our organic growth plans or the tactical plans that Jeff was referring to earlier, But that’s what it would have looked like by Q3, we didn’t have those items.

Right. And then, okay. And then, on the general - organic growth in the quarter was what, do you think?

We – I think the best measure of the health of this business is to look at probably bookings and if you take out the FX impacts, which is in the range of three quarters to $1 million and if you take out the acquisitions, the acquisitions to about $12 million annually. So, approximately in the range of $3 million a year. Without the GE impact, bookings grew about 2%, 2.5% in that range.

Okay.

Now, we know that, that’s – that contributed to some of that backlog build that we experienced, but we were – aside from GE and some of the other challenges, I think we were pleased with where bookings came up on the base business.

Now was GE on a contract? Was that contract expiring in the third quarter, Jeff?

The contract was a contract that had a six month exit clause and as you know and many other people know that GE has been an OEM partner of ours for many years. We were notified recently that they were going to execute on their six month ability to exit the contract. So this all came about during the quarter. The way it will transition moving forward, I just want to add some color to this. This was actually the – probably the best case scenario for us with GE. GE has been somewhat of a disappointing partner for many reasons. They just really didn’t have a focus on the spectrophotometer line of business. They sold the product through a series of distributors on a global basis. The contract will end December 31 of this year. We will takeover the business, the spectrophotometer business January 1. GE has allowed us to acquire, really not acquire, they’ve given us their brand names, the SimpliNano and NanoVue are brand names. All we have to do is, basically go through the registration process for those brands. They have allowed us to contact all of their distributors. They have allowed us to contact their customers. We will be taking over the service element of these products, both past products, current products and future products which will become a revenue source for us. So this is actually a very good thing that happened. Unfortunately, it set us back in Q3, it will set us back in Q4, but moving forward, we take out this middle-man who has been GE, our margins will improve moving forward and we’ll really be able to focus and grow this business. So we are really excited about this.

Did GE decide just to leave the business or are they finding another product line?

No, had they found another product line, that would have been the alternative which would have been very bad for us. GE has decided to exit the product line. It’s just another strategic fit for them at this point moving forward. Had that happened, had they gone in a different direction, it would have been another competitor in the marketplace for us. This was really the best case scenario for us and they’ve been great to work with.

Okay, well. I'll let others ask questions.

Okay, thanks, Paul.

We have a question from Raymond Myers from Benchmark

Thank you. Let me shift over to the consolidations. Can you give us an update on which facilities that you’ve consolidated? And what additional facility consolidation is remaining in Q4 including any associated expenses that are specifically in Q4?

Yes, I’ll start off on, really for the quarter; the major site consolidation was our Biochrom manufacturing facility, which was our second largest manufacturing site globally. That was in Cambridge, UK. We’ve completed that project. It has been transferred here to Holliston, Massachusetts. That was a major milestone for the company. Coulbourn which is a facility in Pennsylvania. We were able to shut that down and move that here to Holliston also. One of our recent acquisitions, HEKA Electronics had multiple sites, manufacturing sites. Their main facility is in Germany. We are keeping that facility up and running. But they had a small facility in Nova Scotia, which we shutdown and transferred that to Germany. They also had a small location in Long Island. We were able to shut that down and move it to Germany also. So, we are very excited to have these projects complete. It was a major milestone for us. It’s something that we’ve worked on really since day one, since this management team got together. You’ve heard a lot of us talk about the number of sites on a global basis, that really just didn’t fit the size of this business. So this has been a project that’s been in place for a couple years now. We are very excited that is complete.

And we’ve – through the third quarter, we’ve spent $800,000 for these moves and as Jeff mentioned, they are essentially done at this point and the largest one being Biochrom, which was completed right at the end of the quarter. So in terms of Q4, to answer that question, there will be some costs that will trickle into fourth quarter, but that will be rather de minimus. It won’t be like what we incurred this quarter at all and we will start to realize the benefits and I just want to highlight, I know that we had about $0.5 million that didn’t ship at the end of the quarter because of the transition requirements associated with these moves. But I think it is a real positive sign that those products were able to ship the first week of October successfully, through QC into customers. So we were excited and pleased with that.

Thanks Rob. Can you elaborate on this delay just a little bit, because, investors will be interested to understand what impact these consolidations had on your business going forward and it kind of makes it sound like there was some impact due to this shift. Is that impact over?

Yes, I don’t want to overplay this. It was – if we are a talking a span of probably a week or less and in the range of $0.5 million. So, it was all that significant.

So, all the plant consolidations are wrapped up and over and no impact going forward?

Well, that’s right. And I think, we’ve categorized heading into 2015 as being a year of investment and embarking on a lot of these consolidations and site moves. 2016 will be the opportunity for us to reap the benefits of all the work that we’ve done this year, because to Jeff’s point, we tackled the largest pieces of our footprint at this point. So we are excited about that.

That's great, good. Let's move on to the next point that Jeff mentioned in his prepared remarks. The slowdown in academic market, is that’s something that's new or is this a continuing headwind?

Hey, Ray, it’s Jeff. I think you’ve heard us talk about the academic market all year and the ups and downs that we’ve seen. We are hoping for a stronger second half of the year coming from the academic segment, which is 70% of our business. And unfortunately, we are not seeing that. And I think if you look around the industry right now, the positive results that are coming out through the industry are products that are being sold into biopharma and products that are being sold in applied markets. Products that are being sold into academia, most of the companies out there right now are struggling and it’s relatively flat. We continue to hear positive things coming from the government in regards to NIH lending for next year. So we are very excited about that, but it was our expectations for a better second half in terms of funding, it just hasn’t happened yet.

Great. Let me understand the reduction in implied guidance for the fourth quarter, if you do the math on the three quarters and your changing guidance for the full year, it implies what your guidance is for the fourth quarter, and the reduction in revenue was a little bit more than the $1 million of impact that you are talking about from GE. Can you help us understand, what all the components are to that implied guidance cut?

Yes, so, GE – and so, you are right, I mean, you can do the year-to-date math back into what essentially would be a range of $26 million, $28 million and I would say, GE is clearly $1 million of that decline. The other decline, there is a $1 million to $2 million decline expectation around overall academic softness and it’s getting out what Jeff talked about in his prepared remarks, we experienced a strong July and August and a pretty strong pullback in September, that continued a bit into October. And so, we are looking at all the information we have available today as of the end of October and we are restating that guidance based on what we are experiencing and that’s how we are looking at that, Ray.

Was there anything that happened in the industry or globally in those months that may have driven that?

I think there is many different factors, Ray. I don’t think we need to go into all of them here, but there is government issues in different parts of the world. There is currency issues, but overall, I think the main driver this year from what we are hearing is, foreign currency, when the foreign currency impact that happened in Q1, it just sent this rippling effect through funding. Especially, our European customers that just really hasn’t allowed them to bounce back at all this year, just reduced dollars of spend on products that we sell. So that’s the – I think the main driver, right now for us.

And if I may, I just want to add a little bit of more color, some numbers around that. We haven’t got into quarterly disclosures in the past around sales by geographic region. But I would tell you in the third quarter, in the US, our sales grew 7%. That’s in contrast to Europe, our sales declined 7%. And I know, we’ve been looking at a flat business for a while, but that’s a trend that we’ve seen throughout the year and it’s a combination of just the FX translation, but even more so the ability of customers to buy products with reduced purchasing power in their grants and their budgets. So, that’s had a major impact this year.

Great, that's very helpful. Thank you. And could you touch on a little more about the GE transition? And how you expect that cadence to go from - I suppose impact in the fourth quarter to opportunity for 2016? You mentioned needing to register the brand names in the end-markets. When do we expect revenue from that to begin to return? And how long before the impact is neutralized?

Yes, Ray. I think, as I mentioned in my remarks, we will not be selling any more instruments to GE this year, which will have an impact in Q4. Starting in January, January 1 the way the contract is constructed, we will start to sell direct. We will start to gain revenue. GE will have some inventory that they will deplete. So that the ramp up will take several months, but we will start to see the impact immediately in January.

So, in January, you'll start to make of sales and - but they will still be. When do you think during the year that you’ll make up the margin that you would have made through GE?

Yes, well, the historical gross margins on that business, they were well below our average as a business, because the OEM nature of the contract, so that margins would have been in the low 30% range. Going forward, by eliminating that middle-man, we expect the margins to be a minimum of 50%. So, and that would be right out of the gate. Once we first – we ship that first spectrophotometer in January, it would be at that higher margin to the business.

Do you have the capability to service these accounts? Or do you need to hire new people? Is this a new effort for you?

Yes, we’ve had to – we have a plan in place. We have a project team working on the transitional agreement with GE. We have hired people and we will hire some additional people moving forward to allow us to do a couple of things. Number one, we are going to be servicing products, instruments. So we are going to have to hire some technicians to service products. We are going to have to hire sales people or channel managers to manage the distribution network, specifically in Asia for GE. But overall, we are fortunate enough where we – through the realignment of our commercial organizations which I spoke about in my comments, we are just shifting some of our people that currently work for Harvard Bioscience into different responsibilities which will manage the spectrophotometer line of products moving forward. So we are in really good shape.

Ray, we are talking a few headcount. This isn’t a substantial investment sort of in the 4 to 5 range. We had some service technicians today that can be leveraged and they will likely be a partner that will work within Asia. But this isn’t a substantial investment to take this piece of work on.

Great, and then just to wrap up, maybe you could give us any kind of guidance on outlook for next year, the possibility of a share buyback, now that the stock has fallen, as well as, any other concluding comments or remarks? Thank you.

Hey, Ray, it’s Jeff. Our strategy is in place. We are continuing to stay focused to the four elements of our strategy. We are focused. The teams know they need to go out and execute. But I don’t see any dramatic changes coming in terms of the way we go to market, or the strategy that we have in place managing the business today.

And I know we haven’t set guidance for 2016 and we will do that when we talk in Q4. But, again, I would just reiterate what I said earlier, 2015 was a year in investments for this business. 2016 will be an opportunity to realize those benefits. There has been a number of timing activities in 3Q like GE and the manufacturing transfer. Those will be behind us by the time we get to 2016, we’ll have the benefits of this $1 million restructuring that we announced today and we will have the benefits of the site consolidation suffice that we’ve made this year. And the site consolidations, just to reiterate, we won’t have the one-time costs, which are $800,000 through the third quarter. And we will have on top of that, up to $1 million in benefits from the moves. So we are rather excited to see what we will do in 2016, but we are finalizing our plans now and we look forward to updating you on that next call.

Thank you.

Thanks, Ray.

[Operator Instructions] The next question comes from Will Settle from Woodmont.

Yes, thanks. Just real quick on the GE business. You didn't have any service revenue. Do you have an idea how big the service revenue component could be going forward?

Hi, Will, it’s Rob. It’s – I’ll give you a ballpark estimate, but I think at this point, we are remaining conservative on it, but we think it could be in the range of $800,000 to $1 million for us going forward. We need to settle in, get familiar with that business, add a couple of resources, perhaps it would grow from there, but that’s what we are thinking we are not placing too significant a bet on that piece.

Right, and you said GE wasn't real focused, as you think about, now you have opportunity to market this. Were they - was GE hitting half the market or were they hitting all of it? I mean, any idea for how many distributors out there could promote this product or sell this product currently today?

They actually were hitting the entire market.

Okay.

I think what’s happened with GE is they just lost their focus with this specific product category over the last several years and if you follow the company, you know that sales have been declining for many years now with GE because of that. The number of distributors is many distributors out there and once again, and part of the transitional service agreement we have with GE that provided us information on all their distributors. We are in the process of reaching them and building relationships with these distributors and one of the upsides for Harvard Bioscience, as we meet and build relationships with these new distributors, there is the opportunity to cross-sell existing Harvard Biosciences products through some of these new distributors on a global basis. So that’s the upside in regards to allowing us to takeover that segment of business.

So a lot of them - as you look at the list that GE gave you, so there are a lot of them out there that you don't have current relationships with?

Correct.

Okay, great. On the currency issue, are you comfortable that your customers in Europe are just deferring purchases as opposed to you losing share to non-dollar denominated…

Yes, it’s – we feel is that we are not losing share, there is not a sense of competitive activity and we are losing out on price or just new products in the marketplace. Our customers just don’t have the dollars to spend at this point in time. Their budgets have been reduced.

Right, sure.

But it may take into Q1 of next year, before we start to see a pick up when new budgets are in place.

All right. And then, I think I heard Rob say, obviously September, things kind of dramatically fell off particularly in Europe. Can you give me a little color - more color on October? And how long kind of that September trend persisted? Or is it being reversal at all?

Yes, like I said, we had a strong – we had a really good July, good August and experienced an unexpected pullback in September. We had expected that trend to continue into September. And now it’s just here in October that’s continued. So, it’s difficult for us to say whether that will continue through the quarter or we will experience a rebound in November, that’s something we are keeping an eye on.

Okay. Do you think the government shutdown, obviously, not everybody expected or most people expected some things to be resolved, just any academic and NIH dependent segments, were there people holding onto the things little more than usual?

I think, what’s again, if you look at the numbers and Rob had mentioned about the US the performance of the US. US was okay, it was basically Europe that was the…

Yes, no, I was talking more into October in the US customer.

I don’t know, I don’t know. I don’t think so. I think it’s just a continued flatness that we’ve experienced all year.

Okay, great. Last one for me. On the cash flow, working capital, it's been a drag this year despite the decline in sales. Do you expect a reversal there to help with the cash flow picture?

Yes, there is a couple of things going on. If you look at receivables this quarter relative to last quarter, in my prepared remarks, I referenced December 31, just because that’s how we do it and how everybody does it. But if you look at our receivables as of Q1 and as of Q2, and where they are in Q3, there has been a substantial decline and the teams, I can credit to a few folks that did a nice job of getting receivables to a good level. Inventory, our general move which took place in Q2 that was transitional inventory and the build associated ahead of that move. That inventory has since stabilized and now we are addressing Biochrom, we had the Biochrom move that’s our second – one of our largest sites and we had a pretty substantial inventory transition requirement and it’s going to take us a couple of quarters to work that down, but I would expect we will see improvement in the fourth quarter and we will see further improvement in Q1. And working capital should be in a good place as we get through the first half of next year. And in terms of looking at cash flow and EBITDA, I just referenced all the costs that we’ve incurred this year to facilitate these moves.

Okay, great and Jeff, I do appreciate your open market purchase earlier in the month and further alignment with shareholders.

Thank you.

All right. Thanks.

Thanks, Will.

We have a question from Matt Campbell from Latter Day Capital.

Yes, good morning gentlemen. Jeff, I was wondering if you could expand on some of the anecdotes you are hearing from the government to stimulate the academic market?

You know, the only information I have is, information I’ve read, the 20th Century Cares Act which will add additional $8 billion to NIH funding. That’s out there for 2016, not sure where that stands today. I know that, the government has passed or the House has passed a bill that’s going to Senate which will keep the government up and running, which I think is favorable for progression with NIH. That’s really all the information I have at this point in time.

Okay. Thank you.

[Operator Instructions] We have a follow-up question from Paul Knight from Janney Montgomery.

Hey, Jeff. One quick follow-up and that is the China strategy you've been fairly aggressive. What's the color on that market? Most have shown some acceleration in the organic growth. Can you talk about what's happening for you in that marketplace?

Yes, China was favorable for us in Q2.I think we were up 12% or 13%. Q3, China was relatively flat. But with acquisitions, we grew about 12%. So we are happy with where we are in China. I would say, as a whole, Asia. Asia was a good quarter for us. We continue to progress throughout Asia. And Asia is still a strong part of our strategy moving forward.

And then the M&A environment, are prices changing at all in this period we've had the last 90 days of uncertainty or is it kind of as is right now?

Well, I think, there is – companies that we are attracted to that makes strategic sense for us are in the same situation. Their numbers are soft. So I think valuations have gone down because of what’s happening. So it’s a very attractive market. It’s just – everyone is in the same situation right now, specifically around academia. Biopharma, people are doing well and I am sure valuations are going up for biopharma companies, but what we are seeing is very similar to kind of the situation we are right now.

And then lastly, do you see more facility consolidation in 2016?

We – the phase that we just completed was a two-year project. It was lot of work and lot of energy by many of our employees. We are real happy with where we are, Paul, it’s very successful. Next year, I think we will continue to look at anywhere we can save cost, but there is no major projects to be announced today.

Okay, thank you.

[Operator Instructions] At this moment, we show no further questions. I would like to turn the call back over to Jeff Duchemin for any closing remarks.

Well, thank you, Hilda. I would like to thank our employees, customers and shareholders for their continued support. Thanks for calling in today everyone. We appreciate it. We will talk to you soon. Thank you.