Hello everyone and welcome to the 2018 First Quarter Harvard Bioscience Earnings Conference Call. My name is Michelle, and I will be your operator for today’s conference. [Operator Instructions] Please note that today’s conference is being recorded. I will now turn the call over to Mr. Corey Manchester. Sir, you may begin.

Thank you, Michelle, and good afternoon, everyone. Thank you for joining us for the Harvard Bioscience first quarter 2018 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 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, 2017 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. Also, much of today's call will focus on our 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. The differences between our GAAP and non-GAAP results are outlined in the earnings release we issued today, which can be found on our website 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. A replay of this call will also be available for one week at the same location on our website at harvardbioscience.com. I will now turn the call over to Jeff. Jeff, please go ahead.

Thanks, Corey. Good afternoon, everyone, and thank you for joining us for our Q1 earnings call. I am excited to share a number of highlights from the quarter, notably strong top line and bottom line growth, some highlights of synergies we have begun seeing between the legacy Harvard Bioscience business in DSI, and an update on product development. Our CFO, Rob Gagnon, will provide further detail on our first quarter financial results and after that, we look forward to taking your questions. During the first quarter, we produced strong business results in the top line and bottom line. I’ll spend a few minutes highlighting the top line before moving to a discussion on the bottom line. First quarter adjusted revenue was $27.7 million reflecting a 15% increase over adjusted revenue for the first quarter in 2017. DSI contributed approximately $7.7 million to our first quarter revenue, while currency translation was $1 million favorable tailwind due to strengthening currencies. Finally, our legacy product families PCMI and electrophysiology, when combined were virtually flat for the quarter. Taking a look at our adjusted revenue from a geographic standpoint. Revenue in Europe grew for the second consecutive quarter. Coming of fourth quarter constant currency revenue growth, our revenue in Europe for our legacy business were approximately 11% year-over-year. Our commercial teams have done an excellent job turning around the business. With the acquisition of DSI, we are confident we will continue to progress during 2018. Our revenue in China for our legacy business was up approximately 15% in the quarter. We are well positioned to continue to outperform the overall market and adding DSI to our portfolio should only increase our competitive advantage in this growing market. Our ongoing legacy U.S. business declined approximately 2% in the first quarter. The decline in the quarter…

Okay, thanks Jeff. Before I start. I like to remind everyone that we sold Denville on January 22, 2018 and acquired DSI on January 31, 2018. With that in mind, the financial results I highlight today will include the Denville results for the portion of the quarter prior to the sale, as well as the DSI results for the last two months of the quarter. The second quarter will be the first full quarter of DSI as part of Harvard Bioscience. Beginning with the topline, adjusted non-GAAP revenue for the first quarter was $27.7 million, a 15% increase year-over-year. Inclusive within the reported adjusted non-GAAP revenue is the revenue generated by Denville prior to the sale. Revenue from Denville amounted to 893,000 for the first quarter 2018, compared to revenue of 6.1 million for the same quarter in 2017. Our Q1 2018 revenue also included includes approximately $7.7 million from DSI, which is the revenue contribution for the last two months of the quarter. Additionally, foreign currency translation was a $1.1 million favorable tailwind to the topline in the quarter. Now, turning to cost and expenses, costs of revenues on a non-GAAP basis were $12.5 million for Q1, compared to $12.6 million in Q1 of last year. As a result, our non-GAAP gross profit was $15.2 million this quarter, an increase of $3.7 million, compared with $11.5 million in the first quarter of 2017. Gross profit margin was 54.9% in Q1, a 720-basis point increase compared with 47.7% in Q1 of last year. This meaningful improvement was largely due to mix as a result of the acquisition of DSI and the sale of Denville. To reiterate, our 2018 expectations, we anticipate 2018 non-GAAP gross margins in the range of 54% to 57%. Non-GAAP operating expenses for Q1 were $12.7 million,…

Thank you, sir. [Operator Instructions] The first question in the queue comes from Raymond Myers with Benchmark. Your line is open sir.

Thank you, and congratulations on nice results here.

Thanks Ray.

First question is about your new products. That was quite a flurry of new product announcements yesterday, and I was hoping you could tell us a little bit more about those and particularly the diabetes products and how you might possibly cross-sell that into the DSI's sales channels.

Thanks Ray for the question. As many of you know, we’ve been talking for several years around new product development, whether internally with our legacy Harvard Bioscience businesses or the acquisitions that have been made, the three-electrophysiology business, the most recently DSI; and thankfully these companies have come with great innovation and great technology. And we're very pleased to be at a point in our business life cycle where we are starting to develop and launch new products, which will help us grow our top line. And I think it’s important for everyone to know for the last four or five years it has been a transformational story. And we have talked a lot around IT technology, ERP implementation, site consolidation and what we're really trying to do is get the focus on Harvard Bioscience being a new highly innovative growth company. And with that, I think you're going to see more communications coming out from the company around product development and product launches. The two product launches that have taken place recently, one from DSI and one from multi-channel systems are very exciting technologies. We'll start with multichannel systems, they are beta sell system. As many of you know, diabetes is a growing disease state both from a clinical aspect and a research aspect. These products will allow us to continue to focus in high growth areas of research. So, we're very excited about the product coming out for Type II diabetes for multi-channel systems. And then with DSI, they continue to expand their telemetry portfolio of implants. On the product that they launched recently, the PhysioTel Digital L03 and L04 are really exciting technologies. They are non-invasive products and they focus in two main areas. They focus neuro related disorders and cardiovascular studies. And if you look at the NIH, where the NIH is heavily funded, the disease states that are heavily funded around, neuroscience being one of them, cardiovascular being another. Diabetes also highly funded area from the NIH. So, what we're trying to do is develop and launch products that really are in highly funded areas of science. To give you an example, Alzheimer's. In the past four years from the NIH. In 2013, there was $504 million funded from the NIH on Alzheimer research. In 2017, it was 1.35 billion. So, you can see the increase in terms of neuro related disorders. And as a company, we’re focusing on developing and launching products that will resolve many issues from a research standpoint around these disease states. Thanks Ray.

Great thanks. A quick question for Rob, on the revenue guidance, that looks strong, is that on a non-GAAP basis?

It is. If it is in reference to the second quarter, that now incorporates 100% of DSI. So, it reflects three months where the first quarter only reflected two months. So, it is on a non-GAAP basis, but the difference is there between GAAP and non-GAAP, it could get pretty small as you get into the second quarter.

Okay good. And about the seasonality with weather, you did pretty well even with the seasonality and the weather that you discussed, reversing that or eliminating it in April, does that suggest that the trend could be even stronger?

Ray, I think you take out whether and let me comment on that in a second, but to answer your question, yes, we would have been right in-line with previous quarters around what we had seen in the U.S. in terms of growth. In regards to weather, I just want to make sure everyone understands the town of Holliston where our corporate headquarters is, where we manufacture and produce a high percentage of our products, and our revenue, the facility was shut down for four days in the month of March. I mean this is something in five years we’ve never seen. Power down, trees across the street, employees couldn't even get to our office. This was pretty significant and we saw strong results in January. We saw strong results in February, and then because of the four days of weather in Easter just falling from a timing standpoint of a last day, it really impacted our overall business, but our confidence level is extremely high in the U.S. I think we will continue to see what we’ve seen over the previous quarters such as the comments we made on Europe last year, you know midway through the year. We knew there would be a turnaround in Europe. We saw the turnaround in Q4. We saw great results in Q1. We will continue to see strong results in Europe throughout the 2018 and China has been very consistent for us and we expect another great year in China.

Well that sounds great. I’ll leave you with one last question. Jeff you’ve owned DSI for a few months now, what has surprised you either favorably or not in that business?

I think there has been a lot of positives that have come out from the acquisition and integration of DSI. Number one, we’ve got a great leadership there. I think Kristen Knox has done a fantastic job of working closely with our other two Vice President and General Managers. Karl-Heinz Boven with our electrophysiology business, and Yong Sun with our PCMI business. I think the sales and marketing teams have worked extremely well with one another and collectively the two organizations have come together to realize these cost and revenue synergies and we’re really ahead of our expectations at this point in time. We believe that we will continue to move forward and be able to execute to the guidance that we provided on both the cost side and revenue side of synergies.

Thank you. Glad to hear it.

Thanks Ray.

The next question in the queue comes from Paul Knight with Janney. Your line is open.

Hi Rob, could you talk to DSI's run rate of revenue in the quarter?

Yes. So, Paul what’s reflected in our results for the first quarter is just under $8 million. It was $7.7 million for February and March. So, you would have to – you could come up with an estimate for the first month of January. So that will obviously step up and is reflected in the guidance that we provided for the second quarter. But in terms of their performance it is right in line with what we had expected and what we have seen in the past and comfortable as well.

Organic growth at DSI and then also at the core Howard Bio was what?

Yes. So, Paul we analyze it in total. We’ve looked at it in total. In the U.S., it was a 2% decline like Jeff was referencing and it’s largely due to the last days in the weather. Overall, in Europe it increased 11%. China was up 15%, and the remaining rest of world countries where down 3%.

Okay. And the NIH after long time do you think that’s finally better Jeff?

Yes. We’ve seen consistency in the outlay of funds now for I would say 14 months to 16 months. We will continue to see positive outlays. Year-to-date we’re significantly up with a 9% increase that was approved for the budget. I think we’re in a very favorable market for some time to come.

Do you think you’re tracking that NIH growth rate?

Well, there is not a direct correlation for the outlay of funds and what we see in growth from our U.S. business, but I can tell you this, there is definitely a favorable impact to our performance due to the positive outlay of funds that have come out over the – like I said the last 12 months to 14 months. So, if the outlays will just say 7%, we would expect 1% or 2% of that to be an impact on our business. So, right now the academic market is very favorable for us.

And then have you guys looked at the DSI acquisition, any margin, I mean what type of cost-cutting do you envision, is there synergies that are easy, what’s going to happen on growth or op margin there?

Hi Paul it’s of Rob. So, we’ve talked a little bit in the past about the topline and bottom-line synergies. I’ll start with the cost synergies. There are some changes that were put in place day one, and we are now benefiting from certain cost reductions, but the big one is the facility lease and we're working with the landlord presently to – but renegotiate and enter into a long-term lease and we believe that that will produce significant savings of up to $1 million a year. And so, we continue to work on that. We're making good progress there. That’s probably the biggest piece. But as we work through integration there is also other things like board fees and insurance cost and other G&A type cost where we’ve been able to realize some cost savings. In terms of our operating income rates, our reported operating income rate in the quarter was 9% and that reflected obviously two months as opposed to 3 months of DSI. They are a very profitable business and going back to the guidance that we issued back in January we’re still targeting double-digit operating margin of 10% to 13% for the full-year, reflecting that profitability.

Okay, thanks very much.

Yes, Paul just one comment, this is Jeff, in regards to the cost synergies, we’re uncovering things that are coming up almost weekly as our functional teams get together, whether it’s IT or HR or any other function in the business. We’re incurring opportunities that really weren’t aware of when these companies come together that will also be favorable to cost side. So, others there is great opportunities coming out of these two companies coming together.

Thank you.

The next question in the queue comes from Lisa Springer with Singular Research. Your line is open.

Thank you. Congratulations on a really nice quarter. I wanted to ask you about the nice improvement in gross margin which you attributed basically to product mix, could you give a little bit more color about that and if you anticipate that the product mix is going to continue to turn more and more favorable during the year?

Hi Lisa, it’s Rob. And I guess by product mix what we mean there are the DSI products. So, the DSI product family overall has a much higher gross margin then some of our legacy businesses. And I will give you an example, overall DSI's gross margins are in the 60% to 70% range, and they are highly profitable, a big piece of that is software and so that’s driving some of the profitability there. That compares to the business that we divest at Denville, which had margins in the low-to-mid 30% range. So that’s really what we mean by product mix, it is Denville coming out and DSI and its products are coming in. Going forward, we still expect gross margins to be 55% to 57%. As you can see, we achieved that 55% with only two months of DSI. So, there is some great opportunity to expand margins further. As we get into the second quarter and into the third quarter, we’ll see if we can tighten up that guidance a bit more, potentially even move that up a bit, but that’s where we are at today.

Okay. And the nice gain in Europe, a 11% gain. How much of that was from DSI?

Lisa this is Jeff. If you can remember last year we put in some sales and marketing initiatives made way through the year. The majority of the growth we’ve seen so far has been due to the Harvard Bioscience legacy businesses. The sales and marketing initiatives that were put in place and activated last year and we believe we will continue to see good results coming from Europe in 2018.

Okay. Thank you.

Okay. The next question in the queue comes from Larry Haimovitch from HMTC.

Hi Rob, hi Jeff. Couple of questions, China continues to be a tremendous performer for you, what percent of the total company revenue does it account for at this point?

So, including DSI it is about 10%.

10%? And it’s the fastest geographic region for you. It’s the fastest growing geographic region.

It has been, yes Larry.

And then second, I wanted to address the question about the debt, you said you paid down some debt during the quarter, what’s the overall strategy Rob that you can discuss with us in terms of getting the balance sheet in better shape, obviously you don't want to carry that much debt for a very long time. You have a shelf-up, you could potentially do it that way, but what’s the overall strategy that whittled the debt down, particularly at a time when it appears that net interest rates are going to be going higher and could be a headwind for you?

Yes Larry, so we’re levered at just over four times, you know historically that’s higher than where we’ve then, but that’s really not that high of a level. We're very comfortable at this level, we have a very strong balance sheet, very strong cash flow generation. We have adequate cushion in our covenants and we feel comfortable about where we are today with the facility we entered into. And we feel comfortable that we could continue under the five-year term of that facility. In terms of the Shelf, I’ll just reiterate what I said in my prepared remarks that we have no plans at this point to initiate any sort of equity offering.

Rob, and then one more question. Cash flow for the year, what’s a rough ballpark guestimate for your cash flow generation in 2018?

So, maybe what I’ll do is I’ll start with EBITDA and then we can talk about some of the assumptions around capital requirements. Our guidance, we have talked about revenue in the range of $120 million to $123 million. We have talked about operating margins of 10% to 13%. That would put you in the range of $13 million to $15 million of operating income. We have about $2 million of depreciation a year. So that would be roughly call it $16 million as the midpoint and our capital needs are about $2 million a year. Maintenance CapEx is about $2 million.

So, 14 million free tax and about 20% tax rate. So that gets you to say roughly ballpark as $10 million in cash flow generation, is that kind of a good ballpark guess?

Well it’s not. Keep in mind, we have substantial tax assets and so we won't be a taxpayer in the U.S. for up to 4 years and so our cash tax rate is closer to 8% to 10%. So, there is some good cash flow generation there as well through leveraging tax assets.

So, 14, say less 10% ballpark you’re generating approximately $12 million in cash this year, just a very ballpark number.

Anything else?

No, thank you.

Great. Thank you.

Thanks Larry.

I’ll now turn the call back over to Jeff.

Thank you everyone for making time for our Q1 earnings call. We appreciate it and we look forward to speaking to you next quarter. Thank you everybody.