Welcome to the Q3 2019 Harvard Bioscience Incorporated Earnings Conference Call. My name is Darrel, and I'll be your operator for today’s call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to David Sirois. David, you may begin.

Thank you, Darrel, and good afternoon, everyone. Thank you for joining us for the Harvard Bioscience Third Quarter 2019 Earnings Call. Before we begin, I’d like to suggest that you take a moment and download a copy of the presentation that will be referred to during this call. The file is entitled HBIO Q3 Quarterly Earnings Presentation and is located in the Investor Overview section of our website. 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 and the slide presentation, these documents can be found on our website under Investor Overview. Additionally, any material, financial or other statistical information presented on the call, which is not included in our press release and presentation, 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.

Thank you, Dave. Good afternoon, everybody. Let’s go right to slide #4 of the presentation which is our Q3 revenue came in $27.4 million that’s down 4.3% from Q3 last year. Our gross margin on GAAP basis was measured at 54.6%. On a non-GAAP basis adjusted gross margin was 55.6%. This quarter had an operating loss of $1.4 million on a GAAP basis. Our adjusted operating income was positive at $3.3 million, so our adjusted operating margin was 12.1%. GAAP earnings per share was negative $0.07 and our adjusted diluted earnings per share was $0.04. Finally our cash flow from operations on a year-to-date basis was $5.8 million. Moving onto slide #5, we will take a look at our revenue by product family. As you know, we’ve combined our legacy PCMI and EFSG into one combined group called Cellular and Molecular Technologies. This group engineers, manufactures, sales and services, leading edge equipment in support of discovery and research for new drug development. In the Cellular and Molecular Technologies saw growth in North America and Asia Pacific driven by CRISPR related products and precision infusion pumps. Europe declined on large equipment order and shipment timing. Our preclinical systems team also known DSI is an industry leader in the engineering, manufacture, sale and services of telemetry and monitoring technologies for the preclinical safety testing with animals required by regulatory bodies prior to even clinical trials. In the quarter North America was up driven by growth in pharma sales, as our clinical research organizations returned to historic run-rates, however, Q3 prior year was an all-time high giving us a tough comparison. Europe declined modestly and Asia Pacific was down on continued trade uncertainty however, we do see signs of improvement coming. So we move to slide #6 and give you an update on our 2019 action plans that position us to deliver on the 2020 financial targets that we published this last September. First, I’m happy to say we have complete leadership team with the addition of Mike Rossi, our CFO, Ken Olson, our leader of the preclinical or DSI team in Minnesota and Yash Singh who leads our Cellular and Molecular team. In the quarter we completed the consolidation of our North Carolina TDSI operation into the Minnesota operation. We’re closely managing our operating expenses. We’re in the process of consolidating our Cellular and Molecular sales team into one well-run team with improved physical and technical support coverage. We’re finalizing consolidation plans for our linear global footprint and we continue to reduce our debt, well at the same time securing flexibility that we need to cover the costs of restructuring. So now I’ll turn it over to Mike for further financial review. Mike?

Thank you, Jim, and good afternoon, everyone. As a reminder I’ll be referring to certain non-GAAP measurements with the line with our internal reporting and management processes and any references to adjusted results represent a non-GAAP measure we’ve reconciled the GAAP figures within today’s release and presentation. I’ll walk through finally to highlights for Q3 including our cash flow and debt before covering the full P&L. On revenue in our largest market North America, we showed solid growth across multiple product lines including growth from our higher margin products such as infusion pumps. As Jim noted, CRO revenue improved in Q3 after a low volume over the first half of 2019, but were down year-over-year on peak sales in Q3 2018. Outside of North America we did see declines in EMEA and APAC which drove an overall 3% reduction in constant currency sales. We believe these declines are primarily driven by timing of large equipment or system orders and expect to see improved sales in Q4 in these markets. Adjusted operating income increased 3.6% or 90 basis points as cost reduction and improved product mix more than offset lower revenue. On the balance sheet, we continue to reduce debt with $6 million in year-to-date cash from operations driving a $7 million reduction in net debt since December 2018. Improving cash flow and reducing debt is a top priority as reflected in the leveraged targets we communicated in September. As articulated in our 2019 action plan, we were recently able to amend the terms of existing debt to provide operating flexibility required to drive our business improvements. This includes a higher maximum leverage ratio and an increase in permitted restructuring related costs while reducing interest expense remains as a priority, in the short term this amendment will allow us to invest…

Thanks, Mike. So let’s move to slide 10 of our summary and outlook. We continue our strategic actions to underpin next year’s profitability and growth targets. Consolidations and operating efficiencies will drive gross margin and operating margin improvements for 2020, the significant improvement in the second half of 2020. We expect the current headwinds to annualize in the first half of 2020 and sales optimization with improved products to drive topline growth throughout the year and significantly in the second half. Now for our 2019 outlook, we see revenue stabilizing at this lower run-rate into Q4, so we expect for the year a range of $116 million to $118 million. We remain on target for adjusted gross margin at approximately 56% for the year. Adjusted Q4 operating margins should improve to 17% to 18% that’s up 3 to 4 full points from 14% last year bringing the full year to a range of 12% to 13% versus 12% last year. And finally, we expect to deliver adjusted diluted earnings per share of $0.19 for the year. Thank you and I’ll turn the call back over to the operator to open the lines for questions and answers. Thank you.

[Operator Instructions] And our first question comes from Bruce Jackson, go ahead with your question, Bruce.

Thank you for taking my question. With regard to China you had some continued weakness here, some of the other bioscience companies have reported, have been doing all right. I’m just kind of curious to know why you think, you might be having some slower growth relative to the other companies. And then, if you could remind us, what is your exposure to China directly and then do you have a sense of like how much exposure you’ve got via your distributors?

Well actually, I want to make sure that I understand your question. So starting with China, we’ve good exposure to China, but as we’ve seen, as we look at our sales in the China we’ve seen things, it’s slowed down for a little while and as we look particularly at the discovery type products, that’s where the products that sell into research institutes that’s where much of the funding comes from the Chinese government and many of these institutions have been instructed to try and buy other than U.S. goods. So in that particular space, that’s where we’ve seen the slowdown for probably at least last few quarters. Now with our DSI and our preclinical work that business has tended to do pretty well although it was down for a bit and at this point, we do see things starting to pick up as we look forward into the next quarter and forward, we see things actually picking up nicely in that area. So I’d ask you to first up, maybe -- I didn’t answer much of your question. I was kind of distracted first, we were looking at something.

Yes, no worries, that’s fine. Then my other question is, just with regard to some of the restructuring that you’ve discussed with your new strategic plan. Have you looked at closing down any sites and what are some of the restructuring activities we can look forward to over the next quarter or two?

Yes, great question. Well, we’ve already shutdown our TBSI site which is in North Carolina. We shut the manufacturing of those products into Minnesota operation that operation has been completely shutdown at this point again, the products will continue to sell though, it was offered through our DSI product line and that will continue. So, that's been completed, we have a number of other smaller operations that we're looking at that are essentially part of the plan. And we're looking at on the larger operations in Europe. We're looking to see, how we're going to better share those opportunities and view Europe as more of one logical operating site as opposed to a number of smaller ones. So again, we'll have more detail for you on the call next time and actually we’ll be announcing a little more detail on what exactly it will be made up of the restructuring because we have to establish what the charges will have to look like. We'd like to take much of these actions here. I'd like to get much of it either started or at least defined here in this year, so that we understand what kind of charges we're looking at and have that done in time, so that we see the improvement in the overall business. As we see it clicking in starting in the first half, but really going full stream in the second half of next year. And I do expect that much of these consolidations are going to result in improvement in both gross margin and that's where we would expect to see much of the improvement. So, lower cost of goods, improving our gross margins, lower overall cost of organization and OpEx. And you'll see us investing much of the savings into areas that we can expand sales that we can improve on some of the products to help drive the topline. So, expanding the coverage of the topline, expanding a sales organization and coverage and technical support, along with refreshing certain of the products is going to help drive the topline of the business at the same time. But again, all of that kicking in, we think about the same time as we've annualized the lower run rate, we've been sitting at for the last few quarters. We expect that to annualize in the first half of next year. And then, when you combine that with the improvements in the topline and the changes we're making to optimize growth that's where we see moving to a nice organic growth sector as we get into the second half of next year.

All right, that's it from me, thank you very much.

All right, thanks Bruce.

[Operator Instructions] And our next question comes from Paul Knight, you can go ahead with your question, Paul.

Yes, can you hear me Jim?

Yes. Hi Paul, how are you?

Can you talk about the reorganization of the Cellular and Molecular technologies? Is it kind of interrupting sales? What do you have to do? How many people is it? And how long does it take?

Yes, it's actually one of our top priorities. It's really consolidating those two teams; it's not really necessarily lowering costs. It's really getting better coverage. If you look at the two teams, essentially, the PCMI and the EFSG legacy team. They called on the same call point, they called on primarily academic research areas selling the discovery and research products. So it just -- it didn't seem to make much sense to have them split, where you had coverage split where you have a small number of people covering a large group like the United States. By combining them, both groups carry the same product lines, and we're able to have better physical coverage to the customers. In addition we'll be able to put more technical support in place. Always as you make certain changes that's one area I'm always very careful about when you start making improvements or changes in your commercial channel. We don't see any issues in doing this. Certainly, we've secured our sales force, they understand what's going on. The sales leadership and the sales team are involved in much of the design changes here for the organization. So again, this is something that by getting -- by expanding our coverage, we see that as being a primary driver to helping us get back to an organic growth sector for this business.

In DSI, can you talk about, what you're seeing about or we pass the CRO mergers where you stand on?

Yes, we're making a lot -- we're actually in pretty close contact with the CROs at this point. We do see, first with the two primary customers there with Covance and Charles River, we do see them stabilizing, in fact, as I said, on the call, we see the CRO revenues actually coming back to about to the historic numbers, the more annual average type numbers. So, we're happy to see that happening. And when we think that will now start to see, with those combined groups, there will be incremental revenue, the incremental volume of drugs going through those groups. So we're again, we're paying close attention to it, certainly much of the kind of impact of the changes we think are behind us. We do think that this is going to start improving here now going forward, certainly it's stabilized and we're back at run rates, at least in the U.S. we're back on the growth side, too. I think it's taking maybe a little bit longer outside the U.S., but the majority of our CRO business is really here in the U.S.

And then Jim, could you talk on, you had mentioned on your corporate handout here for 3Q CRISPR related products? How much of that what -- CRISPRs what affecting what percent of the Cellular and Molecular Technology segment and what is the growth rate there, is it double-digit to flush it out CRISPR and --

Sure, with much of the new drug development these days and moving to the biologics, so we're seeing a lot more happening in things like gene slicing and such where our DTx product is a well known product. It is one of the fastest growing parts of our business and I believe it is and it's growing at double-digits. It's an area that we're putting a lot of attention to you're going to see us investing more in that area. You'll also see us investing to make that -- to make those products even more attractive into the Pharma and the CRO space. Typically, we really haven't taken much of our discovery product into the CROs and Pharma’s where we have a very strong connection we have -- it's a place where our name is well known and very well connected in through our DSIs business. So as the CROs and the Pharma group start to do more and more testing, even down to the cellular level, where typically it was almost, all in the past been required, but much of this has been the animal testing or which is really, really great for our preclinical business. But as that starts to expand into getting more and more to cellular level products like our DTx type product and things that are involved with CRISPR, and electrophysiology, these are products that we think are going to start to be -- we will be able to pull more into those spaces.

And, lastly, I know that you were trying to sort out, maybe sorting out your interest costs. Where are you in that process?

Yes, I'll let Mike to respond to that.

Sure. Paul, this is Mike. So, what you -- we talked about is, I think our first priority was to get the business improved from an operating margin perspective and we got the operating flexibility with our debt amendment. I think as we start to deliver margin improvements and get the leverage down that there will be opportunities in 2020 to get to a lower interest rate.

Yes, we made that as the strategic decision was first picture, we have the flexibility with the balance sheet to take the charges to get the business right sized, certainly we're also very interested in getting the debt to the point where the interest rate is more in line with what we would expect to get as we get into the early part of next year. But again, priority was to be able to make the changes we need to do. And you do see, we are cash flowing nicely, we're paying down the debt, and we are going to be working on next Friday, we would make sure we get the interest rate in the right place at the right time.

Thank you.

Thanks, Paul.

[Operator Instructions] And our next question comes from Lisa Springer, go ahead Lisa.

Thank you for taking my question. You are guiding for a pretty nice sequential improvement in operating margin for the fourth quarter. I was wondering if you could kind of summarize what are going to be the growth drivers for that big surge in operating margin?

Sure. Hi again, thanks, Lisa. It's nice to hear your voice. Typically Q4 is a stronger quarter for us. So certainly, there's going to be -- and there will be growth sequentially over Q3. When you combine that with the fact that we're really managing the run rate cost of the business, so we'll see revenue growth, we also expect to see a stronger mix as we get into Q4, where the business is focusing on the higher margin products and we're expanding in some of these areas, like we talked about with the DTx product and such. So, we think Q4, we see that coming in nicely and with these costs, with the cost improvements that we're doing not only does that lead into Q4, it also moves into next year with a lower cost basis. When you combine that with the actions that we are taking, we expect to see gross margin improving. We expect to see OpEx continue to drop. And we expect to start seeing more organic growth rolling into the business.

Thank you.

Thanks Lisa.

And 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 for joining us this evening. This ends today's presentation and we look forward to you dialing into our Q4 call as we get into the beginning of next year. Thank you very much and have a good night.

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