Welcome to the Q1 2019 Harvard Bioscience Incorporated Earnings Conference Call. My name is Adrienne, and I'll be your operator for today's call. [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, Adrienne, and good afternoon, everyone. Thank you for joining us for the Harvard Bioscience First Quarter 2019 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 in our annual report on Form 10-K for the period ended December 31, 2018 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. Jeff, please go ahead.

Thanks, Corey. Good afternoon, everyone, and thank you for joining us for our Q1 earnings call. During today's call, I will provide an overview of our first quarter operating results as well as general commentary on business end markets. Kam will then review our financial results in detail, including 2019 guidance. After that, we'll take your questions. First quarter revenue was $28.2 million, a 2% increase over revenue for the first quarter last year and came within our previously communicated revenue guidance range. Organically, our revenue declined approximately 4% from last year's Q1. On the bottom line, EPS for the quarter came in at $0.02 a share, $0.01 lower than our previously communicated range. These results were a disappointing start to the year. Overall, in the quarter, we experienced a greater-than-expected impact on revenue due to uncertainty in end markets, specifically around Brexit, China tariffs and the funding impact of the U.S. government shutdown. We expect some of these trends to continue through the second quarter. Additionally, we have experienced some lumpiness in buying patterns of our biotechnology and CRO customers as both industries continued to face consolidation. During the quarter, three of our largest CRO customers announced mergers, which had an impact on our top line. Both the macroeconomic environment and consolidation in our end customers were factors in adjustments to guidance announced this afternoon, which Kam will discuss more in detail shortly. Looking at our revenue from a geographic standpoint, organic revenue in the U.S. was slightly down in the quarter, which was partially the result of softness in the academic end markets as well as end-customer consolidation. We remain confident in our teams and our portfolio position in the U.S. market and believe we will see favorable trends in purchasing during the second half of the year…

Thank you, Jeff, and good afternoon, everyone. Today, we are reporting our financial results for the first quarter of 2019 as well as updating our financial guidance for the full year. Much like previous quarters, most of the financial discussion will focus on adjusted non-GAAP measures. Before I start, I'd like to remind everyone that we sold our Denville Scientific business on January 22, 2018 and acquired DSI on January 31, 2018. Also note that the financial results for the first quarter of 2019 include DSI results for the entire quarter and exclude any impact of the Denville business, while the first quarter in 2018 included a portion of Denville results prior to the sale and DSI results only for the last two months of Q1 2018. Starting with the top line. Revenue for the first quarter was $28.2 million, a 2% increase year-over-year on a reported basis. While we finished the quarter with revenue within the range of our previously communicated guidance of $28 million to $29 million, we saw a slow start to the year across most end markets and regions. Excluding the inorganic impact of our DSI acquisition, the divestiture of Denville Scientific and foreign currency headwinds of approximately $670,000, organic revenue declined 4% in the first quarter. Turning to adjusted gross margin. Our adjusted gross profit for the first quarter was $16.2 million, a 7% increase over the $15.2 million in the first quarter of 2018. Our adjusted gross margins came in at 57.5%, a 260 basis point increase compared with 54.9% in Q1 of last year. These results came in slightly above the higher end of our adjusted gross margin guidance range of 55% to 57%. Similar to last quarter, we continue to see sequential improvement in adjusted gross margin, reflecting revenue mix, the impact…

Thank you. [Operator Instructions] And our first question comes from Paul Knight from Janney Montgomery.

Hi Kam, the 4% organic decline, did you say that excludes DSI or – and also, what was DSI growth in the quarter pro forma?

So Paul, thanks for the question. When I gave my comments around the organic growth for the quarter, it excluded the inorganic component of DSI, so it excluded the month of January for DSI. The 4% organic growth includes two months of DSI on an organic basis and our legacy Harvard Bioscience businesses.

Okay. And the – what was the growth of DSI?

So DSI for the quarter saw – we saw a challenging quarter and we saw a decline year-over-year. As far as on a pro forma basis, I would say that we saw a decline of somewhere in the range of high-single-digit.

Okay. In the CRO's merge, specifically which ones?

Well, I don't think we want to give out the name of the CROs. But I will tell you, our largest CRO and our third-largest CRO came together. And what happened during the quarter, this was in the January-February time frame, orders basically came to a screeching halt, and that led to the slowdown in DSI's results in the quarter. And this was unexpected. And we also saw another CRO, another one of our large CROs, merge with an additional customer of ours, which also led to a slowdown in orders coming for the DSI business. So this was unexpected, and this led to the results of the softness of DSI over the quarter.

Wasn't the majority of DSI, CRO revenue, Jeff?

It's about – well, their pharma CRO business is about 60% of their overall revenue, 40% is academic-government.

Got it. Okay. And the – can you attribute any particular issues or product lines within the Europe weakness? Is it the CRO merger there and other, or what is the color?

Paul, this was a very unique quarter for us, where we saw consistent slowdown in orders coming from really most of our end-users in the European market. I'll give you an example. Our Multi Channel Systems business has been a predominately high-growth business in Europe since the day we bought them four, four and half years ago. They saw our slowdown in orders come across the board. And it's not like we're losing business there, it's just that the customers were not placing orders. And this was consistent with DSI, it was consistent with our electrophysiology business, it was consistent with the PCMI business. So it was across the board in Europe. And some of the activity was led by Brexit and some of the concerns there throughout the European Union.

And then, I guess, lastly, you're guiding $0.04 to $0.06 in 2Q from the $0.02 number this quarter. Is it – is currency improving? Is – what are the factors behind that pickup?

Well, this quarter, we did see currency headwinds that affected our bottom line. And we also did see one nonrecurring onetime charge that affected our bottom line, so we do expect to see favorability next quarter relative to this quarter.

What was that charge, Kam?

This was a long-term receivable that deteriorated this quarter. And we assessed the collectability and made a determination to write off this receivable, and it's a onetime charge.

How much? Sorry.

Approximately $400,000.

Okay. Thank you.

And our next question comes from Bruce Jackson from Benchmark. Your line is open.

Hi, thank you for taking my question. I wanted to talk about the gross margins this quarter. That was a very nice uptick. And over the course of the year, are we going to go back to kind of a seasonal pattern where the second and third quarter are down slightly and then back up in the fourth quarter? How do you see the gross margins unfolding over the course of the year?

Bruce, it's Jeff. I'll start, and I'll let Kam jump in if she needs to. But gross margins, obviously, were at the high-end, exceeded our guidance range, which we're happy with. The majority of it came from product mix, and the other was we had two sites that we've consolidated and moved the HEKA electronics business in Germany and our Hoefer business on the West Coast, we moved here to Holliston. So that was the leading drivers in gross margin improvement. We expect to be, once again, within our range, our guidance range, for gross margins during the course of the year. In terms of seasonality, I think the year's going to play out similar to what it did last year. We had a slow start, we had a strong finish, and our pipelines, the sales pipelines are full. It's just a matter of customers getting back to their normal buying patterns. And hopefully, once the CRO consolidations come through fruition, the buying patterns there will continue to open up and business will be back to normal.

Okay. Speaking of revenue and also getting to the seasonality question, would we expect to see kind of a pattern again where the second quarter is within the range that you laid out and then we've got a third quarter downtick and then the rest of it is going to fall into the fourth quarter or something like that?

It's typically the flow of this business where you do see a dip in Q3 and then increase in Q4. But I think the range that we gave for guidance for Q2 is we feel confident that we'll be within that range.

Okay. And then looking at some of the things that you discussed internationally in the markets, is there – with China, do you think it's something that's just broadly the market? Or is there something about your product line, in particular, that's more sensitive to China?

Well, Bruce, we've done very well in China, consistently over the last five years, and we feel confident that we're going to be within our expected revenue guidelines as an organization in 2019. We had 3% growth in the quarter. There is concern around tariffs. I was there, these distribution partners that I met with, it wasn't a conversation, it was a meeting that we had where tariffs didn't come up. So there is a concern from a distributor standpoint, there's a concern from an end-user standpoint. So there was a little bit of a slowdown there, but we feel confident with the business and we feel confident that we'll meet our expectations in 2019 coming from China.

And can you give us like a sense of – with China, some businesses, some industries are more sensitive to the tariff situation. For a long time, some of the med-tech companies kind of escaped the tariff situation. How would you gauge your exposure on that front?

Analytical instruments. That's the category we fall in. The original tariff was 10%. The next tariff that was put on hold, which is on hold right now, we'll bump that from 10% to 20% – I think 25%. So there's concern in who's going to pay for that tariff. And so that's where the slowdown comes from. And I can't speak to other businesses, but I'll speak to ours because I've seen it firsthand. There's concern. But once again, the forecast that we have put in place internally for China for 2019 we feel confident it will hit that number this year. And we have baked in the concern around tariffs.

Okay. Great. Then last question, taking a look at the U.S. academic-government market and the government slowdown, was this a situation where the pent-up demand is still there and it was a matter of the government not releasing the money and we should get that – those sales back at some point later this year? Or is there something else going on with that market?

The academic market has been a very finicky market for many years, and with the U.S. government shutdown, a little bit of some delays that we're feeling within our business here in the U.S. But once again, if you look at our sales pipelines, which we do, and we look at a good probability in terms of closing deals, we feel that the back half of the year will be much better than the first half of the year.

Alright, that’s it from me. Thank you.

Thanks Bruce.

And our question comes from Lisa Springer from Singular Research.

Hi Jeff, you mentioned in your earlier comments about looking into some incremental cost reductions. I wonder if you could give us a little bit more color around that and maybe kind of give us an idea of what level cost reductions you might be looking at.

Well, we are continuing with both cost and revenue synergies coming from the DSI acquisition. So those are programs that have been in place for quite some time. But obviously, internally, we're making adjustments. We're looking at different and defined line items where we can put a halt to spending. Simple things such as noncustomer-facing travel, international travel, things like that. There's a whole host of different programs that we can put in place to reduce spending. And that's what we're looking at right now, along with potentially some deeper cuts and working through that process right now, but we'll keep – obviously, the market well communicated in terms of where we're going with that.

Okay. And is it too early to give us an idea of what level of cost reductions you might be looking at?

I would say, yes, we're working through that right now and hopefully have that completed sooner than later

Okay. Thank you.

Thanks Lisa.

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

Despite the disappointing start to the year, we remain confident in the business. We are a much stronger company today than we were a year ago prior to the acquisition of DSI, with a more diverse customer base and more robust product portfolio to address our end-customer needs. Thank you, everybody, and I look forward to speaking to you at the end of our Q2 earnings call. Have a good day.

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