Hello, and welcome to the Fourth Quarter 2018 Harvard Bioscience Incorporated Earnings Teleconference. My name is Michelle, and I will be your operator for today's call. [Operator Instructions]. Please note that this conference call is being recorded. I would 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 Fourth Quarter 2018 Earnings Conference Call. Leading the call today will be Jeffrey Duchemin, President and Chief Executive Officer; and Kam Unninayar, 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 on 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 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 Duchemin. Jeff, please go ahead.

Thanks, Corey, and good afternoon, everyone, and thank you for joining us for our Q4 earnings call. 2018 has been a really important year in the history of Harvard Bioscience. We addressed everyone today, a little more than a year, we moved from selling Denville and acquiring DSI. We are now a pure play life science research company with global reach, a more diverse and balanced customer base and improved profitability. Our team has done a tremendous job this year. During the year, the team closed the two transactions simultaneously as well as drove growth, integration activities and initiatives for sustained profitability. Before addressing our outlook for 2019, I will spend the first few minutes of my remarks discussing our Q4 results. Fourth quarter revenue was $33.9 million, a 24% increase over revenue for the fourth quarter last year. The $33.9 million in revenue was a record quarter for Harvard Bioscience and above our previously communicated range. EPS for the quarter improved 40% to $0.07 a share, which was within our previously communicated range, and the results of the overall revenue growth as well as significant improvements in gross margins and operating margins. For full year 2018, revenue was $122 million, a 20% increase over revenue in 2017. EPS for the year improved 67% to $0.20 a share. Much like our quarterly results, our full year revenue was above our previously communicated range from Q3, while EPS came within range we communicated during our Q3 call. The primary contributor to our increase in revenue was our DSI business. DSI produced a strong fourth quarter with approximately $13.3 million of revenue. Overall, DSI performed well against prior year in our internal plan in most geographies and sales channels. The strong results in the quarter and the strong close to the year,…

Thank you, Jeff, and good afternoon, everyone. Today, we are reporting our financial results for the fourth quarter and full year of 2018 as well as providing our financial guidance for the year 2019. Much like previous quarters, most of our 2018 and 2019 financial discussion will focus on adjusted non-GAAP measures. Starting with the top line. Revenue for the fourth quarter was $33.9 million, a 24% increase year-over-year on a reported basis. We finished the quarter with revenue above the high end of our third quarter guidance range of $32 million to $33.5 million. Our strong fourth quarter results were driven by a record quarter in our DSI business and solid growth in our electrophysiology business. Excluding the impact of our DSI acquisition, the divestiture of Danville scientific and foreign currency headwinds of approximately $300,000, organic revenue declined 3% in the fourth quarter. Revenue for DSI was $13.3 million in the quarter, reflecting our successful integration of this acquisition while driving strong growth in the business. Revenue for Danville scientific in the fourth quarter of 2017 was $5.8 million. For the full year of 2018, revenue came in at $122 million, also above the high end of our third quarter guidance range of $120 million to $121.5 million. This reflects an increase of 20% year-over-year on a reported basis. Turning to adjusted gross margins. Our adjusted gross profit for the fourth quarter was $19.1 million, a 45% increase over the $13.2 million in the fourth quarter of 2017. Our adjusted gross margins came in at 56.2%, an 820 basis points increase compared with 48% in Q4 of last year. This too came in at the higher end of our adjusted gross margin guidance range of 54% to 57%. Also, sequentially, we continue to see improvement in adjusted gross margin,…

[Operator Instructions]. The first question in the queue comes from Paul Knight with Janney. I'm sorry, Paul. We cannot hear response. Is your line muted?

Can you hear me guys.

Yes, we can hear you, Paul. Yes.

What was the organic in the two segments of DSI and then core in the fourth quarter, Jeff? And what's your implied for 2019?

Yes, Paul, in terms of breaking down DSI, organic for the year - when we acquired the company, we went out with expectations that the business would be in the mid-single digits. DSI finished right in that range, so they absolutely met our expectations for the year. And as you remember, Q2, which was the first quarter we owned DSI, a little bit slow out of the gate, but the last two quarters were record quarters for DSI. So they're progressing forward in both bookings and billings at a level that exceeds what we thought they'd be doing, so they're doing a great job. The two other businesses are legacy businesses. Ephys had a bounce back in Q4 as we had mentioned. Q3 was a little soft, and that was more timing related on large orders. Those orders did flow through into Q4, and we had a nice comeback with Ephys in Q4. And PCMI, as you all know, it's our legacy product lines. There are some very good product lines, and there are some product line that are simply out of product life cycle, and we're continuing to make improvements in terms of rationalization and divestitures and things like that. But the PCMI business had a bit of a slow year for us. Ephys came right in where we thought it would be. And we believe we'll see a nice turn around with the PCMI business in all regions of the world in 2019.

And then with overall operating margin expansion, it seems like a fairly conservative earnings guidance here. Are you anticipating anything like higher interest cost, higher tax rate? What are the puts and takes on this earnings guidance range?

So, Paul, thank you for the question. I would say that when it comes to our operating expenses, I think some - one thing to consider is that in 2019, we will have an extra month of January for the DSI acquisition. But when you look at our spending in 2019 relative to 2018, we are expecting to see flat to down as far as our spending is concerned after accommodating and adjusting for inflation and the extra month for DSI.

Will you have any - I guess, we should assume what, kind of, a 1.5 run rate on interest cost, maybe a little declining as you reduced that this year? And any change in tax? And also, with that, what is your target debt reduction level this year?

In 2019, we are expecting to close the year with our gross leverage ratio of around three or less by the end of the year. So the implied reduction in our debt will be somewhere in the mid-$50 million range. And as far as our tax rate, right now our guidance is in the range of 20% to 23% for the year.

The next question in the queue comes from Bruce Jackson with The Benchmark Company.

Just wanted to hone in on DSI with a couple other questions. So I mean you had the mid-single-digit growth rate for 2018. Do you expect a similar growth rate for 2019?

Yes. Bruce, this is Jeff. When we acquired the company, they had a CAGR that was anywhere from 4% to 6%. We believe that we should be able to do that and hopefully the higher end of that range, they're off to a great start. And as I said, they finished the year extremely strong, so we're expecting to be within that range in 2019.

And then this was a business where you had to integrate it during the year. You made great progress in hitting your targets in terms of cost savings. Would you - is this a business now where you've done what you wanted to do in terms of the cost savings piece of it, and it's going to be an investment type of business? Or is this - do you still see opportunities to continue to make the DSI business more efficient in 2019?

Well, the major cost savings was the renegotiation of the lease, which was completed in October of 2018. In regards to sales synergies, there's quite a bit of opportunities. And as I stated in my comments, we had expected $2.5 million to $3.5 million in synergies in the first 12 months of ownership. We've met those. But on the synergy side, the sale synergies side, there's still opportunity there. Next week, I'll be in Europe. We have a global sales meeting, and part of the global sales meeting is to kick off programs and initiatives to continue the synergies among all three Harvard Bioscience businesses.

Okay, and that's a nice segue to my next question about the core business. So it's been lumpy, it's had some challenges here, and - but you've also been investing in the new product flow, where it wasn't being invested in before. What are some of the things that you're doing in 2019 to help out the core business?

Well, we continue to see synergies in innovation. And I had mentioned in my comments some of the new products that are being launched. One of the products that I'd mentioned was a combination of two businesses that we had acquired Multi-Channel Systems and TBSI. TBSI makes the head stage for mice and rats, and Multi-Channel Systems has a state-of-the-art software program. We combined the head stage from TBSI and the software from Multi-Channel Systems and launched a new program or product line in the marketplace. This is just one example of where synergies come from. They - not only sale synergies but innovation. So our R&D teams are working together to bring out new products that will help drive growth in all three business units. So you have your legacy business, which is the PCMI business. You have the electrophysiology business, which is the combination of 3 of the 4 acquisitions that we've made, and then you have data sciences. So there's a lot of work going on right now among our three R&D teams to come together collaboratively to launch new products that will help drive growth in all three platforms.

The next question in the queue comes from Lisa Springer.

Jeff and Corey, just wanted to thank you again for participating in the Singular Conference yesterday. We really appreciated your input.

Yes, no problem.

Okay. And I wanted to ask you, do you expect the customer and geographic mix to be roughly the same in 2019 as it was in 2018?

Yes.

Okay. And then could you comment on what you think are going to be the main growth drivers for the electrophysiology business in 2019?

Well, once again, as we talk about new products, that's a business that is really in the forefront of innovation, and you have to remain highly innovative to stay a market leader. So what I expect is Multi-Channel Systems to be the main driver, it's the largest of the four business units that make up electrophysiology. HEKA Electronik has done very well for us, and now that we've combined the manufacturing from HEKA Electronik into Multi-Channel Systems, we expect to see a more efficient process of launching new products there. And then you have TBSI and the Warner business. So I think things are really coming together with electrophysiology business, and we expect to see market to better-than-market growth rates coming from that platform in 2019.

There are no further questions in queue at this time. So I will now turn the call over to Mr. Jeff Duchemin for any closing remarks. Please proceed, sir.

Thank you, Michelle. And I just want to thank all of our global employees and our shareholders for a great 2018. We look forward to exceeding expectations in 2019. Thank you, everyone, for joining the call today.

Ladies and gentlemen, this concludes today's teleconference. Thank you for participating. You may now disconnect.