Welcome to the Q2 2016 Harvard Bioscience Inc. Earnings Conference Call. My name is Jason, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I will now turn the call over to Corey Manchester. Mr. Manchester, you may begin.

Thank you, Jason, and good morning everyone, thank you for joining us for the Harvard Bioscience second quarter 2016 earnings conference call. Leading the call today will be Jeffrey Duchemin, President and Chief Executive Officer; and Robert Gagnon, Chief Financial Officer of Harvard Bioscience. Before I turn the call over to Jeff, I will read our Safe Harbor statement. In our discussion today, we make may make statements that constitute forward-looking statements. Our actual results and performance may differ materially from what we have projected due to risks and uncertainties, including those detailed in our Annual Report on Form 10-K for the period ended December 31, 2015, and our other public filings. Any forward-looking statements, including those related to the Company’s future results and activities represent our estimates as of today and should not be relied upon as representing our estimates as of any subsequent day. I will now turn the call over to Jeff Duchemin. Jeff, please go ahead.

Thank you, Corey. Good morning, everyone. Thank you for joining us for our second quarter 2016 conference call. In my discussion today, I will begin by providing some brief comments on our second quarter 2016 results, followed by a discussion on several other important areas of our business. Our CFO, Rob Gagnon, will then provide more financial details related to our second quarter 2016 results and our 2016 guidance. Our top line second quarter 2016 results were slightly behind where we expected them to be, but I would also like to remind everyone that we reported a fairly weak Q1 2015 due to the decline of the euro and other factors which was followed by an unusually strong sequential Q2. And based on these timing differences, we believe looking at our 2016 year-to-date results is a better indicator of our performance. Our revenues for the six months ended June 30, 2016 were $53.1 million, which was a decrease of approximately 1.7% on a constant currency basis compared to the same period in 2015. Excluding the impact of the GE transition and currency translation, year-to-date revenues are flat compared to prior year’s six month period. Now I’d like to touch on our results on a geographic basis, as well as add some additional context to our top line results and outlook. Through six months of the year, revenues in the U.S. grew 4%, while in China revenues grew 14%. We believe this performance is the result of our commercial team’s execution. These gains were offset by a 15% decline in Europe, and a 4% decline in the rest of the world, mainly driven by the impact of the GE transition and currency translation. We are within range of meeting our financial objectives for the year. In terms of the GE transition,…

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, reflect how we set and measure 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. As a reminder, we have included a comparative non-GAAP quarterly income statement as Exhibit 9 to the press release. 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. Beginning with the top line, revenues in the second quarter were $26.1 million, a decrease of $2.7 million or 9% compared with revenues of $28.8 million in the second quarter of last year. Revenues on a constant currency basis would have been $26.3 million or decrease of $2.5 million or also 9%. Our second quarter 2016 results were slightly behind where we expected them to be, but as Jeff stated, I would like to remind everyone that we reported a fairly weak Q1 2015 due to the decline of the euro and other factors which was followed by an unusually strong sequential Q2. And based on these timing differences, we believe examining the 2016 year-to-date results is a better indication of performance and where we are as a business. Revenues year-to-date were $53.1 million, a decrease of $1.5 million, or 3% compared with revenues of $54.6 million for the six months ended…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Paul Knight from Janney Montgomery Scott. Your line is open.

Hey guys. Could you talk about I guess the non-GAAP gross margin, 46.4%, that’s correct, right? Or is it 44.7% or 46.4% through the six month period?

Yes, so Paul, it’s 44.7% for Q2. I can address that. Let me go back on gross margins. Our GAAP gross margin was 46%, which was up 100 BPS. Our non-GAAP gross margin rounded to 45%, which was down 90 basis points year-over-year. And year-to-date, the non-GAAP gross margin was 46%, which was up 50 basis points. There are a number of things that went on that impacted gross margins in the quarter, so in addition to just the lower volumes on the top line, product mix was a significant factor. As you know, we sell several different instruments and the prices range from a few thousand dollars to several thousand dollars. The profit associated with each product can differ by more than an insignificant amount. And as a result, depending on product mix, overall gross margins can vary. So that product mix was a significant factor this quarter. We also had some onetime items that hit us in Q2 around higher shipping costs. And we had a minor technical issue with one of our product lines. And although individually they were minor, these things added up and unfortunately were all unfavorable and had a negative impact. We don’t believe Q2 is indicative of where we’ll finish for the year. Similar to after finishing Q1, we were 48%, we felt that was favorable and ahead of where we would trend for the year. We’re up basically 200 basis points. But now standing here halfway through the year at 50 basis points, we still believe that gross margins over the long run will normalize higher than Q2 but lower than what we experienced in Q1, excluding future plant consolidations.

Meaning somewhere around 46%?

I would put it somewhere in the 46% to 47% range. Yes.

Okay.

Yes. Now, if I may, I mean we were targeting $1 million in operating expense savings in 2016. And through six months, we’ve achieved $800,000, which is well ahead of where we thought we would be. I think what’s going on there is that we’re starting to see some benefits from site consolidations on the OpEx line as well because of savings in G&A costs and other costs. So I think as you look at our operating margin overall, we’re still expecting and targeting to be approximately in the 8% range, which would tie back to that EPS growth that we mentioned.

8% this year?

Yes.

And you had the foreign exchange gain in this quarter of $282,000, so that obviously helps the EPS a bit. And your non-GAAP op margin of 5% versus 8%, so I guess we see foreign exchange go away and then your op margin should pick up. I mean can you – what are the drivers again behind that op margin pick up potentially here in 3Q, 4Q?

Yes, I’m glad you mentioned that. So we did have a favorable impact due to the currency movement below the line, but we were negatively impacted on the revenue line.

Okay.

So that’s just the revaluation of some working capital accounts. But in terms of the drivers the back half of the year, there’s really two that are highlighted. It’s just the overall seasonality in the business that tends to pick up in the fourth quarter. And then also, as Jeff mentioned, some of the tailwinds, you know the GE comps last year are very low because of the transition. So that business continues to ramp up. That will be a favorable tailwind for us in the back half of the year. So I’d really say it’s those drivers.

And then my last question is, can you talk to GE? I guess it kicks in here in 3Q. You’ve got the sales force higher. The service has been going on, but can you talk to where are we with this GE transition today in the beginning here of third quarter?

Hey, Paul, it’s Jeff. As I stated last quarter, the GE transition has gone very well from both a sales and service end of the business. Our distribution agreements are in place. We’re seeing great activity from our distributor partners, along with the individuals internal that are overseeing the project. We’re right where we need to be at this point in the year, so the GE transition has gone very well.

Okay. Thank you very much.

Thanks, Paul.

Thank you. [Operator Instructions] Our next question comes from Raymond Myers from Benchmark. Your line is open.

Thanks, and thanks for taking the questions. My first one is, could you touch on just what the bookings and backlog were in the quarter?

Yes, so the backlog finished in the range of $6 million to $7 million range, the high $6 million side. Bookings would track sales. I think in this case bookings were probably slightly below sales because we came in with a slightly higher backlog. But we’ll have all those details for you when we file the Q, which we expect to do next week.

Okay, great. So excluding the currency and the spectrophotometer business, revenue was up for the first half of the year, but that was heavily weighted to the first quarter. Can you help us to understand what influenced the shift towards first quarter, and offer any visibility into how the rest of the year’s revenue could be supported more like Q1 versus impacted like Q2?

Hey, Ray, it’s Jeff. Q1 we had stated that we came into the quarter with a high backlog. We had some equipment sales in China. If you can remember, in Q1 we had 30% growth in China. After Q2 year-to-date we’re now at 14%, which we think is more of a normal run rate. So this is something that was expected. I think we’re doing very well in the U.S. with 4% growth year-to-date. So, moving forward, I think these numbers are more normalized and stable compared to what you saw in Q1. And so it was really right where we thought we’d be at this point in the year, a little bit softer on the top line. There’s some timing related to that. As Rob mentioned, some product mix that impacted gross margins. But overall I think these are some of the – the numbers that you’re seeing from a regional standpoint are more normalized now than they were after Q1.

Yes, and just in terms of those figures, Q1 of 2015 our reported revenues were $25.8 million. Q2 was $28.8 million. So it was kind of an unusual trend Q1 to Q2 sequentially last year, which I know certainly the shock of the euro had something to do with that. This year is more back to basics, what we typically experience, which is roughly $27 million in Q1 and $26 million in Q2.

Okay. That makes sense for the first half. Now looking out to the second half, what gives you the confidence that we’ll see growth in the second half relative to what was a more normalized Q2 then?

Well I think our sales marketing teams, the commercialization of new products. We mentioned a little bit in my script the launching of new products will help drive growth in the second half. We said all along that Q2 was going to be the challenging quarter for this business. By getting through Q2 where we are year-to-date, I mean we feel confident that we’ll continue to move forward and meet our guidance, our financial guidance. I think the fact that we’re seeing strong performance in China, I think that the fact that the U.S. is 4% growth year-to-date, the fact that the GE situation is now behind us, it’s all upside moving forward and we know there’s going to be a consistent ramp in the second half of the year with GE products, we feel confident that the back half will be stronger than the first half.

And if I can just add, the other piece there would be the potential NIH budget, which we haven’t factored into our plans, we’re not factoring it in, but that would be an additional tailwind should that come through.

That’s great. And have you heard anything about maybe still have any sense that the NIH budget is starting to factor into laboratory spending yet or is it still too early to say?

You know, this is just our personal opinion. We’re not seeing it. We’re not feeling it. But, you know, we hope it will transition. During the second half of the year it will be all upside for us.

Okay, great. Jeff, you mentioned the possibility of introducing more internally developed products, and you mentioned one that was introduced in Q2. Can you describe what the future products might be and give us a sense of possible timing for introduction of more internally developed products?

I don’t think I want to go into the timing of new products and what’s in store for us in the future, but I will tell you, you know one of the things that’s happened over the last couple of years is we’ve transitioned our R&D process from deferred maintenance now to developing innovative products that will come to market. The two products I mentioned, one was launched in Q2, which was our physiological monitoring system. The other is part of the DARPA grant, which is a neural recording system that monitors neuro signals for rodents. And this is coming from our Triangle BioSystems business. We’re really excited about this and we have several other products that I didn’t mention that are working their way through the process. So as we move forward as an organization, we’ll continue with deferred maintenance, we’ll continue to update existing legacy products, but we’re really excited about the launching of new products. It’s something this business hasn’t seen in many years.

That will be nice to see. Next I want to touch, if you could give us a little more visibility around the ERP systems. You mentioned that that is scheduled to be completed in a 6 to 12 month timeframe. Can you give us a sense of what ultimately the benefits of the ERP consolidation would be in terms of whether it’s cost or better management control, or what’s the purpose of it?

Yes, I’ll start. First of all the ERP core team that’s in place is doing a great job. We’re right in line with our timing of finalizing this project sometime later in 2016, probably a go live in Q1 of 2017. We’re really excited with the progress the team has made. And this is our German subsidiaries. There’s three subsidiaries that we’re working on in Germany right now. This is a phase two portion of our global ERP platform. The benefits are – they vary. They’re dominant. From a financial standpoint, able to track and record financial information that integrates multiple businesses into one, inventory systems. There’s a great amount of efficiencies that this program will bring to the business. The ability to integrate tuck in acquisitions or transformative acquisitions in a much faster timeline, the tracking of data, the cleansing of data. Many of these legacy businesses had data that was somewhat outdated. This is customer information and things like that. The ability to share customer information through multiple business units. There’s a variety of benefits that this global ERP platform will bring, not only to an individual business unit but to multiple businesses within Harvard Bioscience.

And Ray, I just want to add something there. You talked about the next six to 12 months. That’s really to complete a large portion of our European footprint. So there would be some work that would follow after that, but that would allow us to, like Jeff said, integrate future acquisitions, also benefit around sourcing. And when you have that many different systems, a lot of them are end of life. They’re no longer supported by the vendor, and it’s expensive to maintain third party consulting arrangements to support these systems. So we’ll be able to eliminate a lot of those costs by having one system that’s supported.

That’s great. Good. And then just to wrap up a final question. I’ll leave it kind of up to you to how to answer this. But over the last two years you’ve done a lot to consolidate facilities, now you’re going to the next stage and bringing it all onto a central ERP system. All great things that give you better control over the business, better cost structure, et cetera. But can you remind us of your vision of how you’re going to go from that to growth over the next two to three years?

I think the fact, Ray, that the business is much less fragmented today than it was several years ago, and I’ll give you a couple examples. We had multiple R&D teams within multiple subsidiaries of the business. The fact that we’re pulling all of our R&D resources together, sharing ideas, sharing technology, is providing us the ability to innovate and bring products to market faster. It’s just one example. I think from a customer standpoint, from a sales and marketing standpoint, we’ve launched CRM processes, which allows us to track customer information, vital customer information, and share that information among multiple subsidiaries. The fact that we’ve brought our selling organizations into one organization. We have specialized sales teams within that one organization. But the fact that our sales people are now talking to one another and sharing opportunities and sharing contact information, allows us to not only sell one particular product, but pull through other products. And these are just a couple examples of where the business is today compared to where it was in the past.

Okay. That sounds great. Thank you very much.

Thank you.

Thanks, Ray.

Thank you. And we have no further questions, so I would like to turn the call over to Jeff Duchemin for final remarks.

Thank you, everyone for joining us for today’s call. We look forward to presenting Q3 financials sometime in late October. Thank you.

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for participating and you may now disconnect.