Hello, and welcome to Q2 2018 Harvard Bioscience, Inc. Earnings Conference Call. My name is Michelle, and I will be your operator for today's conference. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] Please note this conference is being recorded. I will now turn the call over to Corey Manchester. Corey Manchester, you may begin.

Thanks, Michelle, and good afternoon, everyone. Thank you for joining us for the Harvard Bioscience second 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 our 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 Duchemin. Jeff, please go ahead.

Thanks, Corey. Good afternoon, everyone, and thank you for joining us for our Q2 earnings call. We had a great quarter, and I'm excited to share a number of highlights with you today. Our CFO, Rob Gagnon, will provide further detail on our second quarter financial results. And after that, we look forward to taking your questions. During the second quarter, we produced excellent business results in revenue and earnings. Second quarter revenue was $31.6 million, reflecting a 25% increase over revenue for the second quarter in 2017. DSI contributed approximately $10.6 million to our second quarter revenue, while currency translation was a $600,000 favorable tailwind. Finally, our legacy product families, PCMI and electrophysiology, when combined, grew 8% in the quarter. This was a record quarter in terms of reported revenue for Harvard Bioscience. I'm extremely proud of the execution of our global team and feel very confident based on our strong first half of the year that we are well on our way to achieving our financial goals for 2018. Taking a look at revenue from a geographic standpoint. Revenue in Europe grew for the third consecutive quarter. Our revenue in Europe for our legacy business, excluding DSI, grew approximately 24% year-over-year. Our commercial teams have done an excellent job turning around the business. The initiatives we put in place last year have provided a catalyst for growth in the European region. With the acquisition of DSI, we are confident in our positioning in the European markets and our growth prospects moving forward. Our revenue in China for our legacy business, excluding DSI, was up approximately 11% 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. Although there…

Okay. Thanks, Jeff. As a reminder, most of my discussion will focus on the non-GAAP results. So let's start with the top line. Revenue for the second quarter was $31.6 million, a 25% increase year-over-year. And for comparison purposes, Denville revenue was $6.3 million in the second quarter of 2017 and DSI revenue was $10.6 million for the second quarter of 2018. There is also some foreign currency favorability, which amounted to $560,000 in the quarter. However, Q2 was a great quarter on the top line for us. $31.6 million is a record quarter in revenue for Harvard Bioscience, and organic revenue increased 8%, and we finished above the higher revised estimate range provided last quarter of $30.5 million to $31.5 million. So good result on the top line. I'll now turn to gross margins. Starting with cost of revenues, were $13.9 million this quarter compared to $13.8 million in Q2 of last year. As a result, gross profit was $17.7 million, an increase of $6.3 million when compared to $11.4 million in the second quarter of 2017. That resulted in impressive gross margins of 56%, which is over 100 – or over 1,000 basis point improvement, compared to 45% in Q2 of last year. Per our guidance earlier in the year, we communicated that we expect to see gross margins in the range of 54% to 57%. Q2 result of 56% is well within that range and a real nice improvement and good outcome for Q2. We continue to expect to see gross margins to fall in this range. I'll now discuss operating margins. Operating income in Q2 was $4.3 million, an increase of $2.6 million compared to $1.7 million from Q2 of last year. As a result, operating margin in Q2 was an impressive 14%. This compares to…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Paul Knight with Janney Montgomery. Please go ahead. Your line is now open.

Hi, Jeff and Rob. How are you? Congratulations.

Hi Paul.

Hi Paul. How are you? Thank you.

That's a great growth number, and I'd like to dig into it a little bit. And specifically on the legacy business, the U.S., you said, was light. Do you expect those orders to resume? That's point one, could you talk to legacy? And then what is the growth rate of DSI right now? And then could you put color around these growth rates? Is it NIH, biotech? Could you just kind of start from the top on that.

Yes, Paul. It’s Jeff. I'll start with the U.S. business. I'll let Rob discuss DSI. But in regards to the U.S., as you know, our orders are sometimes – well, actually the billing cycle is a little lumpy. The order activity has been very strong, as you can see in our total organic growth for the business. With the electrophysiology business in the U.S., we had a high comp in Q2 of last year that we're going up against. And the activity is there, the orders are there, it's just a timing of when these orders ship. So we feel confident in the back half of the year that we're going to be right in line with our internal forecast, external forecast around both the electrophysiology business and the PCMI business here in the U.S. The activity in Europe continues to be very, very strong. We continue to see above our expectations in terms of our growth in China. So overall, the legacy business is doing very well on a global standpoint. Rob, with DSI?

Yes. And just to reiterate, the legacy growth rate was – we've said it a couple times but was 8% for Harvard Bioscience. On the DSI side, so DSI came in at $10.6 million. Keep in mind, private company, it's in terms of the rigor of closing the books. I think what's important is that we've now owned this business for five months. It's performed in line with our expectations and embedded within our overall expectation numbers. We're still on track for the year. So it's on track with what we had expected and where we thought it would be.

Yes, one other comment, Paul, the NIH you had mentioned, we continue to see positive outlays on an annual basis from the NIH. The academic market here in the U.S. and globally is performing very well right now. And we expect that to continue through the rest of the year.

So therefore, should we assume a pickup in organic as the year rolls out?

Well, I mean, Paul, it's sitting here today. We're very confident in the business. We're very confident in the strategy of the business. We've executed to our plan in the first half of the year. We believe we'll execute to our plan in the second half of the year. As Rob said, our guidance is not changing. We still feel very confident that we'll fall within the range of revenue and EPS, and I think that's where we stand today.

Okay. And then last, I guess, I'll dig into a little bit on the operating margin. You did a lot of heavy lifting into legacy business over the past three years. You had operating margins roughly, like Rob said, 14% versus 7%. If I look at this seven percentage point increase in operating margin, what portion was it from your reorg efforts and what portion from DSI?

Hi, Paul, that's – 14% is definitely a great result for us. It's a little bit ahead of where we thought we would be at this point. It's only one quarter. We still believe in the 10% to 13% result for the year. In terms of bifurcating it between DSI and all the heavy lifting, that's a challenging assessment to make. But there's no doubt, a decent part of that is from both of those factors. But it's a good strong solid results, but still expecting 10% to 13% for the year.

Thank you. Our next question is from Bruce Jackson with Benchmark. Please go ahead. Your line is now open.

Hi, guys. Nice quarter.

Thanks Bruce.

Thank you, Bruce.

So I wanted to get some more color around the 8% organic growth number. If you could give us a little bit more information around the – how sustainable is the demand in the marketplace? What are you seeing in terms of your backlog in your contracts right now? How long do you think that organic growth rate can continue?

Hey Bruce, it's Jeff. As I said in my script, we had 24% growth in Europe, 11% growth in China. We had 3% growth on our legacy products excluding electrophysiology. If we break it down by region, Europe, I think there was a soft – softer comp in Q2 last year. So obviously the number is pretty high. I don't believe we'll continue to see mid-20s in terms of growth. But the activities, the programs that were put in place in the back half of last year have really come through for us. So I can – we sit here confident today that Europe will continue to be a growth driver for the business over the next two quarters. China continues to outperform our expectations. We believe they'll continue to finish in the mid-teen range for the year. We like what we see, both with our legacy business and our DSI business in China moving forward. We've got a great team of sales and marketing people there. So back half of the year, we should see positive results. And then in the U.S., I mean, once again, outside of electrophysiology, the business performed really well. And the lumpiness in the electrophysiology business, these large system sales, it's just a matter of timing. And so in the back half of the year, we think we'll see both the PCMI business and the electrophysiology business with strong results. So we feel confident that back half of the year is going to be a better year for Harvard Bioscience.

Okay, great. That’s helpful. And then on the gross margin side, traditionally, Q2 is a little bit softer for you in terms of gross margins to get a rebound in the back half of the year. Do you expect to repeat in that pattern?

Bruce, hi, it’s Rob. Like I mentioned in my prepared remarks, there is a level of seasonality from Q3 to Q4. So if you look back historically year after year, the third quarter is always the lowest quarter, the fourth quarter is the highest quarter. There'll be a small affect in gross margin because of that. I wouldn't expect it to be significant. And we still feel confident in that range that we provided guidance for the year. Clearly, the DSI acquisition and the divestiture of Denville has had a significant positive effect on gross margin that we're realizing, and we're excited about that.

Okay, that’s it from me. Thank you.

Thanks Bruce.

Thank you. Our next question is Lisa Springer with Singular Research. Please go ahead. Your line is now open.

Congratulations on a really great quarter.

Thank you, Lisa.

Thanks, Lisa.

I wanted to ask about, you seem pretty aggressive in reducing the debt in the first half. Should we expect you to be equally as aggressive in the second half as well?

Hi, Lisa, it's Rob. We've been leveraging the cash flow generation of the business as well as some cash that was on the balance sheet and some of our ex U.S. cash. I think that that's probably a faster pace than what you'll see going forward. But it is a good result. We'll continue to work it down, but be more in line with the scheduled principal payments going forward.

Okay, thank you.

And we have a follow-up from Paul Knight with Janney Montgomery. Please go ahead with your follow-up.

Hi Rob, can you hear me?

Yes, hi Paul.

What was currency impact on the quarter?

$600,000 positive impact on the top line.

Okay. And I'm sorry, and you also mentioned how – what was the revenue contribution from DSI in the quarter?

DSI is $10.6 million.

And last year, you had, sorry, $6.3 million of Denville, right?

Correct. That is correct, yes.

Okay. And then we should assume the 21.5% tax rate, that's a good number?

I think that number is a little low than – a little lower than what I was expecting, but it's a low 20%. I would say, in the range of 21% to 24% going forward, something like that.

Okay. Great, thank you very much.

Thanks Paul.

Thanks Paul.

We have no further questions at this time. I'd like to hand it back to Jeff Duchemin for closing remarks.

Thank you everyone. Great quarter for Harvard Bioscience. We look forward to speaking to everyone after Q3. Have a great week. Thanks.