Welcome to the Q3 2018 Harvard Bioscience, Incorporated Earnings Conference Call. My name is Adrian, and I’ll 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. [Operator Instructions] Please note this conference is being recorded. I’ll now turn the call over to Corey Manchester. Corey Manchester, you may begin.

Thank you, Adrian, and good afternoon, everyone. Thank you for joining us for the Harvard Bioscience third quarter 2018 earnings conference call. Leading the call alongside me today, will be Jeffrey Duchemin, President and Chief Executive 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 represents 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. Jeff, please go ahead.

Thanks, Corey. Good afternoon, everyone, and thank you for joining us for our Q3 earnings call. I want to begin today’s call by saying that I’m so pleased with the company’s overall performance and progression. The transformation of our business earlier this year by selling Denville and acquiring DSI was an inflection point in our company’s evolution and has dramatically improved the profitability of the organization. Our financial performance improved this quarter, with substantial improvements in gross margins, operating margins and earnings. Our corporate controller, Corey Manchester, will provide further details about our third quarter financial results after my review of corporate highlights and developments. We had another quarter of year-over-year improvements in our key financial metrics. Third quarter revenue was $28.7 million, a 15% increase over revenue for the third quarter in 2017. The $28.7 million in revenue was a record third quarter for Harvard Bioscience. EPS for the quarter improved 33% to $0.04 a share, which was the result of overall revenue growth as well as significant improvements in gross margins and operating margins. The primary contributor to our increase in revenue was our DSI business. DSI produced a strong third quarter, with approximately $11.2 million in revenue. DSI performed well against prior year in our internal plan in almost all geographies and sales channels. In addition to its strong revenue, DSI also had a record bookings this quarter, which reinforces our optimism about the contributions that this acquisition will bring to our company and is a solid indicator of future growth. Our legacy product families, PCMI and electrophysiology, when combined decreased approximately 6% in the quarter. PCMI grew slightly in the quarter, while Ephys was the primary contributor to the decline. This was a disappointing result for us. However, the decline occurred for a few reasons, including…

Thanks, Jeff. Much like previous quarters, most of our financial discussion will focus on the non-GAAP results. Starting with the top line. Revenue for the third quarter was $28.7 million, a 15% increase year-over-year. Denville revenue was $6.3 million for the third quarter 2017 and DSI revenue was $11.2 million for the third quarter of 2018. There was also some foreign currency headwinds, which amounted to $119,000 in the quarter. Organic revenue declined 6%. However, we finished within the revised estimate range provided last quarter of $28.5 million to $29.8 million. Now turning to gross margins. Cost of revenues were $12.7 million this quarter compared to $13.4 million in Q3 last year. As a result, our gross profit was $16 million, an increase of $4.4 million compared with $11.7 million in the third quarter of 2017. We posted impressive gross margins of 55.8%, which is a 920 basis point improvement, compared with 46.6% in Q3 of last year. Per our guidance earlier this year, we communicated that we expected to see gross margins in the range of 54% to 57%. Q3 of 55.8% is within that range. We continue to expect gross margins to fall within this range. Let’s now discuss operating margins. Operating income in Q3 was $3.2 million, an increase of $1.7 million compared with $1.5 million from Q3 of last year. As a result, operating margin in Q3 was 11%. This compares to an operating margin in Q3 last year of 6%. As we discussed last quarter, operating margins continue to be a highlight of our ongoing financial performance. We are excited about how our business is performing and pleased with this result for Q3 and still expect the operating margins to be 10% to 13% for full year 2018. I’ll now turn to EPS. Our net…

[Operator Instructions] And the first question comes from Paul Knight from Janney. Please go ahead.

Jeff, what was your guide on Q4 – I’m sorry, for the full year operating margin, 10% to 13%?

That’s correct. Go ahead. Yes, go ahead, Corey.

That’s correct, Paul. Sorry.

And then, can you kind of walk through growth specifically, what was the U.S. growth rate? I didn’t catch that either.

For – you’re talking about for the quarter, Paul?

Yes.

There was a decline in the U.S., 11%.

So that gave you an overall ex DSI decline of minus 6%?

Correct. That is correct.

Okay. And then, you talked to DSI and you seem optimistic, record bookings, et cetera. Did DSI grow in the quarter? And what gives you the positive outlook on DSI?

Yes, so let me, kind of, break down the DSI question along with the U.S. numbers. First of all, U.S. – DSI had a phenomenal quarter, they grew 19% quarter-over-quarter last year. They did have a soft comp last year, but still 19% growth is impressive. But more impressive is their bookings. They had record bookings, and we all know bookings lead to future sales. Really impressed with the reaction of the organization with some of the changes that have taken place there. Going back, three or four months, the team really stepped up and the record bookings is something we’re very impressed with. So we feel confident that we will have a strong Q4 with DSI and really have a running start into next year. Now back to the U.S. for a second, the majority of the loss came from our Ephys business. Ephys is our fastest-growing business unit within Harvard Bioscience. It’s really the crown jewel of the company. We sell large equipment, large systems. It’s very lumpy, it’s very hard to forecast and time some of these orders going out. We did have several orders that just did not ship in the quarter that have already shipped in Q4, so we feel confident in our year-end results for the Ephys business. PCMI continues to do well. They’re showing growth. They put a lot of different processes in place and made some internal changes to operations that are – that is doing much better than it had in years past. So we feel conference with the business right now. It was disappointing to see a slip in the top line, but more timing related than anything, and DSI did a really, really good job for us, so we’re very excited about that acquisition and the integration of that business.

And what do you think is making DSI do what it’s doing in terms of that kind of growth? Are you adding salespeople? Is there synergy yet? What’s making that kind of big jump in Q3 sales?

Well, I think for the first – yes, I mean, it’s a great question, Paul. I think for the first time in the about five years, that business now has a focus of growth. They were under a private equity and really under sale for the last four or five years. Their focus was cleaning up the business and selling it. Now their focus is building a growth strategy. And I think some of the initial improvements and changes we’ve made to the business have really paid off. And the team really stepped up and reacted well. I’m excited. I’m excited with the talent within the organization. I’m excited with the R&D product development process that they have, new products coming to market. I think this is going to be a – really an exciting acquisition for us. And we’re already seeing the highlights of that.

And then last, Jeff. What was the level of pay – debt paydown in Q?

It was normal principal payments, Paul. $400,000.

Okay. Thanks.

Thanks, Paul.

And the next question comes from Bruce Jackson from Benchmark. Please go ahead. Your line is open.

Good afternoon and thank you for taking my questions. With regard to the new guidance, can you just generally tells us, do you feel like this, you’re just being more conservative with what you’re doing? And then, if you could also comment on some of the overall market conditions. I know that the fourth quarter is a big quarter for contracts. Is there – do you sense any hesitation in the market with regard to China? Or do you think this is something that’s going to work itself out going forward?

Bruce, it’s Jeff. Thanks for the question. As you recall, our guidance on revenue was $118 million to $123 million. Our guidance now is $120 million to $121.5 million. I think basically what we’re doing is just tightening up the guidance going into the fourth quarter. The same thing with EPS. We originated with $0.19 to $0.23, now we’re $0.20 to $0.22. And so, basically what we’re doing is tightening up the forecast that we have in hand. We – I think, we’re in a pretty good range for both revenue and EPS. In terms of the market, what’s going on. Europe continues to be strong for us, four consecutive quarters of growth. We’re really excited with what the teams are doing over there in Europe, and we expect that to continue. The U.S. is – it’s been a lumpy business for us. Once again, Ephys, which has been the fastest-growing business unit in Harvard Bioscience for the last couple of years, just had some large orders that didn’t ship during the quarter. So we expect that to bounce back in Q4. And China, once again, the fastest-growing region in the world for us over the last four years. Every now and then, you have a lumpy quarter. It happened last year. Q1, we were down 30%, Q2, we were up 60%. So it happens from time to time. We feel confident with the team over there. And we’re going to outpace the market, when the year-end results come in for China. So that’s really, kind of a snapshot of what’s going on in the world for Harvard Bioscience.

Okay, that makes sense. And then, with the – so basically you’ve already got the orders shipped during the fourth quarter and you’re feeling comfortable about the rest of the year?

Yes, I mean, we feel confident with the rest of the year. We feel confident with the guidance that we’ve provided. But I will say, it’s – when you’re selling large systems and large orders, it’s very difficult to time exactly when these orders will be shipped. And it’s not an issue with Harvard Bioscience shipping the product. It’s more around when the customers are available to accept that order. So we feel confident with the guidance that we provided, and we should finish the year strong and have a good start going into 2019.

Okay, super. One more question, you had some nice gross margin improvement during the quarter. Is that a trend that we can – that could continue moving forward?

Yes, I’m glad you asked that question. Because for the quarter, gross margin improvement, operating margin improvement, EPS improvement, year-to-date you’re seeing improvement across-the-board including revenue. Obviously, that has to do with the DSI acquisition, but the teams have done a phenomenal job, not only at DSI, but internally. Our base business with PCMI and Ephys, some of the cost-cutting activities and operational improvements that have been put in place this year with – efficiencies are really starting to pay off, and we’re seeing it in gross margins.

All right. Thank you very much. That’s it from me.

Thanks, Bruce.

And your next question comes from Lisa Springer from Singular Research. Please go ahead.

Hi, Jeff, I was wondering, if you could give us a little more color around the new products and product extensions that were introduced during the quarter? And if there’s anything you can say about products you’re going to introduce in November?

Yes. We’ve had a nice year with the development of new product, new product launches, product line extensions. This quarter, we had a two products that were launched. Both of them were in a OEM segment. So they’re private-label products for key customers. One was with the – from the Harvard Apparatus group, the other one from BTX. So those were the two new product launches in the quarter. What we’re really excited about though is the Society for Neuroscience, which takes place in early November. It’s the largest trade show of the year for us. We’ll be launching several new products. I look forward to sharing the data and the information of those new products during our Q4 earnings call, but we’re very excited about this upcoming trade show not only with new product launches but just existing products that are pulling the entire team together. DSI, the Ephys business, Harvard – the original Harvard Apparatus group and really sharing the developments of the company to our largest customer base.

Okay. Thank you.

Thanks, Lisa.

And this concludes the question-and-answer session. I’ll turn the call back over to Jeff for final remarks.

Thank you, everyone. We appreciate your time today. We look forward to updating everyone after Q4. Have a great day and a great rest of the year. Thank you.