Welcome to the Second Quarter 2019 Harvard Bioscience Incorporated Earnings Conference Call. My name is Hilda, and I'll be your operator for today. [Operator Instructions] Please note that this call is being recorded. I will now turn the call over to Mr. David Sirois. Sir, you may begin.

Thank you, Hilda, and good afternoon, everyone. Thank you for joining us for the Harvard Bioscience Second Quarter 2019 Earnings Conference Call. Leading the call today will be Jim Green, President and Chief Executive Officer; and Mike Rossi, Chief Financial Officer of Harvard Bioscience. Before I turn the call over to Jim, 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 Jim. Jim, please go ahead.

Thanks, Dave. Good afternoon, everyone, and thank you for joining us for our Q2 earnings call. I'm honored to be here today as the newly appointed President and CEO of Harvard Bioscience. As announced earlier this month, the Board appointed me in this role as they believe Harvard Bioscience needs a CEO with extensive public company experience and a proven track record of shareholder value creation including executing successful turnarounds and creating organic growth. Our plan for the remainder of this year includes first stabilizing the team and this started with bringing in our new CFO, Mike Rossi and you'll hear from him this evening. Our main focus is improving the underlying performance of our business, including revenue and gross margin growth, lowering operating expenses, reducing interest expense and improving cash flow. In addition, we intend to optimize product portfolio and improve manufacturing and supply chain. We've already begun a deep dive into each of our business and product lines. While this work is underway, we've made the decision to put new acquisitions on hold for the near term and focus on substantially consolidating and integrating our previous acquisitions to efficiently operate our business on an organic basis. We will reconsider inorganic tuck-ins when we feel the platform is ready for further consolidations. I’ve spoken with many of our shareholders over the last few weeks and have reaffirmed my commitment to improving our performance through focused execution. During today's call, I'll provide an overview of our second quarter operating results as well as general commentary on our overall business in markets. Mike Rossi will then review our financial results in detail. After that, we'll take your questions. Now looking at the quarter, our second quarter revenue was $29.6 million, a 6% decrease as reported versus last year. Organically, our revenue…

Thank you, Jim, and good afternoon, everyone. I'm very excited to be onboard to partner with Jim on the initiatives he outlined to improve the business and its financial performance. I know we are well aligned on moving with speed to identify specific improvement targets, initiate related actions and communicate with our investors on where we are taking the business. As I walked through our Q2 2019 results, I note that most of the financial discussion is focused on adjusted non-GAAP results consistent with historical company practice. Also, this is the first period we are reporting a full quarter of results in the prior year inclusive of the DSI results. Revenue for the second quarter was $29.6 million, a 6% decrease year-over-year on a reported basis. Excluding foreign currency headwinds of approximately $500,000, revenue declined 5%. In addition to the market conditions Jim noted, Q2 trends were impacted by order timing, including a large OEM sale recognized in Q2 2018. Our adjusted gross profit for the second quarter was $16 million, a 9% decrease compared to $17.7 million in the second quarter of 2018. Adjusted gross margins came in at 54.2%, 180 basis point decrease compared with 56% in Q2 of last year. The gross margin decline is primarily due to volume, including lower absorption levels associated with revenue softness in Europe. Gross margin was also impacted by the timing of a larger higher margin product sale noted in our revenue discussion. Operating expenses for the quarter were $12.7 million, $700,000 lower than Q2 of 2018 due primarily to lower personnel expense and variable sales costs. Steps have already been taken under new leadership to drive operating expenses lower in the second half of 2019 and beyond. Adjusted operating income in Q2 was $3.3 million, a decrease versus Q2 of…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have a question from Paul Knight from Janney Montgomery Scott.

Jim, when you talked about the operational focus, could you talk to what you want to do? Is it consolidating manufacturing? Is it doing more with what you have in manufacturing? Is it reducing overhead? Or I guess you could point to examples at Analogic and go from there?

Okay. Thanks, Paul. When I think about improvements in the manufacturing operation side, there are a number of operating sites that I believe still need to be swept in and integrated. We'll get – we'll see efficiencies there. We'll see better purchase price. We'll see better absorption of overheads. So what we'll start to see there is, just with the further consolidation and getting it down to more of an optimum consolidated operation, we'll see COGS reduced, we'll see better purchase price variance, we'll see a better-running operating group. With that, I also see an improvement required in the sales operations side, how we build the demand flow for the factory, how we manage order processing, and then move toward how we evaluate the basic order-to-cash cycle. So those are some fundamental – the things that I would typically look for and expect to see the improvement showing up in the gross margin line.

On the 5% organic number you pointed out to, does that include the negative impact of currency? Or would it be a little better than that if you didn't have currency moving the number around?

Yes. I think we reported 6% and 5% organic, so the currency was really the primary driver that brought it down to organic. It wasn't an inorganic component. It was really currency. So including the – if you exclude currency, it was 5% down, and that was primarily in Europe and primarily in PCMI. You'll see that the rest of the businesses actually saw some level of moderate growth and improvement. So they offset a lot of it, but again, the primary decline was in PCMI and in Europe.

Can you talk about what are the dynamics in PCMI in the market? Is it competition? Is it European reliance? Or what's going on with PCMI?

Yes. That's a great question, Paul. PCMI, I would say is the area that we have to put the most focus on right now. I know at some point, we'll look at the other groups, but that's the area where we need immediate focus. I do believe that what we're going to find and what we're seeing so far is some fundamental blocking and tackling will help us improve there. You'll notice over the past few quarters, we've seen write-downs of inventory. That kind of also helps to speak to why, in that area, we've been struggling. What are – we have to look at how we reach those products. There'll be evaluation of the product, the pricing and the portfolio. I really see it more of just getting the operating business running right for PCMI. It's hard to say at this point. I think as we get to the investor presentation, I'll have more information about more of the long-term view for PCMI, but that's the area where most of our focus is right now.

How big is that business?

It’s probably close to half, I would say, of the total business. So it's a pretty big portion.

Okay.

And I know DSI is roughly a third maybe a little better than a third, and then the rest would be the Ephys piece.

Okay. Thank you.

Yes. Thanks, Paul.

The next question comes from Bruce Jackson from The Benchmark Company.

Hi. Thanks for taking my question. Speaking of Ephys, can you tell us what the growth rate was for that unit and also for DSI during the quarter?

Yes. In the quarter, Ephys was really a fairly minor increase in growth. It was on the order of 1% or so-ish, so I would say slightly up over flat. DSI did a little better, but DSI, as you know, had – with the consolidation of the CROs, that was a pretty, pretty big headwind for us, I mean, with double-digit decline in the CROs. But if you look at the numbers, the fact that we're up tells us that the upside that came and the growth in pharma and for some of these – a couple of these new products that are selling now into pharma, they more than offset the headwind. And I guess when I think of the positive effect of that is that the CRO business annualizes and steadies to a new run rate where that's going to be. We'll start to see now the growth vector from pharma start to really kick in and give us a nice level of organic growth.

Okay. Great. And then in the past, there has been some discussion about impact from China and also from the Brexit situation on the business. Do you have anything new to add to that? And what would you estimate the actual – your actual China exposure to be from a revenue standpoint?

Yes. That's a really good question. In China, what's happening is a lot of the government grants that are used for universities for research equipment and such, they are now being directed not to apply government grants toward a U.S.-originated equipment. But when I really looked at it, it's just kind of felt like a flimsy excuse because we just don't sell that much into China in that space. So I didn't really feel like I needed to call that out as to a major impact for us at this point. We are keeping a close eye on it because clearly China is a great opportunity for us, but it's not a big number of what's been impacted. Brexit, that Brexit could have been a piece of why we saw some of the downturn in a PCMI in Europe because a lot of our product comes from UK and goes to Europe. And when this happens – and this happened in my last business where – when there was concerned about Brexit that the Europeans would even buy an advance and start to buy it more than they needed and then you'd see a slow down when the channel was full. So there's no question, there's some of it there, some of that hit PCMI. But again, I don't see those as a major, we were a small enough player and enough white space that we expect to manage around these things.

Okay. Then last question. So you maintained the annual revenue guidance range for the company. Should we expect to see a similar seasonal pattern this year compared to the other years where there's, kind of a slowness in Q3 and then it picks up in Q4.

Yes. As I looked back over the quarters and years, there does, there is certainly some level of seasonality that we see. I would expect that it's probably, we would project it to be similar as far as looking forward on a quarterly seasonal basis.

Okay, great. Thank you very much.

Thanks. Thanks Bruce.

The next question comes from Lisa Springer from Singular Research.

Hi Jim. Could you – in the second quarter, what was the breakdown of revenue U.S. versus non-U.S.?

Hi Lisa. I'm not sure. Do we usually break that out, Dave? Or do you have a rough feel for that?

Yes. So this is Mike, it's the U.S. is about $13 million out of the $30 million that we reported for the quarter.

Okay, great. And could you give me a little more color around the impairment charge that the company took for the quarter?

Yes. The impairment on the in-process engineering there was – there at the time of the acquisition of DSI, there was a certain amount of engineering product that had engineering effort that had been done and product that that would have been used for a particular product. And when the acquisition occurred there was an assignment of a certain amount of value to those assets when they were with the acquisition. So over time though, it became pretty clear that what was built might not be completely usable with the upcoming product lines. So in the testing of it, there was those normal testing of goodwill and value of some of these types of assets. So, the question was asked, is this going to be used? It's already, on the books. And as we looked at it, it looked like some of it might be usable and in fact, some of it, would likely give us an advance start towards the new family of products that are coming out. But it was hard to justify the value on it. So I think, accounting practice says if you really can't justify the value, then you just take it down to non-cash charge and you just accept that it's probably, not a measurable value that you're going to want to go out and have to test all the time.

Okay. And, one final question. SG&A was down sequentially as well as year-over-year. How should we think about SG&A for the balance of the year?

Well, a lot of what we're doing now, I would expect that you'll see that we're going to continue to really keep the pressure on spend and keep the spend down for this year. There are a number of larger activities that we're investigating that are going to be a little more structural in nature to really position us as a better more profitable business going forward. So, we'll be addressing those throughout the rest of this fiscal year. I'd like for next year to be a clean year and for much of the actions and the sweep-ins to be done by then or at least initiated by then. So, we have a good solid, set of tailwinds coming into 2020. I'm looking forward to the time to sit with the institutional investors, our investors to understand what our plans are and what our targets are. I'm accustomed to setting targets and making them public and having something that investors can judge our performance against. So you'll, see some pretty, pretty particular, particular types of specific targets and the kind things you'd expect, gross margin, operating margin, cash flow, and in improving this business. And you'll see things that will result in what I call real value creation. And when I think of value creation at the business level, it's really about that revenue vector and the gross margin. That's the fundamental value of the business. And I expect that I will be able to set for you the kind of targets of what we will do in terms of improvement in those spaces. So again you'll see that and we'll be able to give you a better view over the next couple of months as we come out and show you that and you'll have something to measure us against.

Okay, great. Look forward to it. Thank you.

Thank you Lisa.

Thank you. That is all the time we have allotted for questions. I will now turn the call over to Mr. Green for final remarks.

Thank you everyone. Harvard Bioscience. We've got a long history, we have an excellent reputation and we have the fundamental capabilities to achieve significant improvements in our overall business. And I look forward to updating you in the coming months ahead with more specific details on our strategy and our targets against we should be measured. In the meantime, I want to thank you for joining us on our call and have a good evening. Thank you.

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