Welcome to the Fourth Quarter, 2019 Harvard Bioscience Incorporated Earnings Conference Call. My name is Paulette and I will 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 that this conference is being recorded. I will now turn the call over to David Sirois. You may begin.

Thank you, Paulette, and good afternoon, everyone. Before we begin, I would 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 Q4 Quarterly Earnings Presentation and can be 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, our Chief Financial Officer. Let me remind you that on today's call, the company may make various remarks about future expectations, plans and prospects for Harvard Bioscience Inc. that constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various factors, including those discussed in our Annual Report on Form 10-K for our fiscal year ended December 31, 2018 and in subsequent filings made by the Company with the SEC. To the extent the company utilizes as non-GAAP measures, reconciliations will be provided in various press releases and on the company's website. Further, I would like to inform you that the Company, its Directors and certain of its Executive Officers are participants in the solicitation of proxies from the Company's shareholders in connection with the Company's 2020 Annual Meeting of Shareholders. The company will file a proxy statement and proxy card with the SEC in connection with its solicitation of proxies for the 2020 Annual Meeting. Shareholders are strongly encouraged to read the proxy statement, the accompanying proxy card and all other documents filed with the SEC carefully and in their entirety as they contain important information. The information regarding the entity of company's participants and the direct or indirect interest by security holders or otherwise will be set forth in the proxy statement and other materials filed by the company with the SEC which can be found for free through the investor overview section of the Company's website at harvardbioscience.com or through the SEC's website at sec.gov. We will not comment on Engine Capital or their Director nominations on this call. I will now turn the call over to Jim. Please go ahead, Jim.

Thanks David. Good afternoon, everybody. Let’s start by moving to Slide 4 and take a quick look at the highlights. We drove significant year-over-year adjusted operating margin expansion going from 14% to 18%. We saw strong cash flow with year-over-year leverage reduction from 3.7 times to 3.3 times. We initiated a major restructuring giving greater than $4 million in annualized savings. This year, we expect to return to organic growth, deliver significant operating - adjusted operating margin expansion well into the mid-teens and strong cash flow to reduce our debt and our leverage ratio to below 2.5 times by the end of the year. Let's move on to Slide 5 of the presentation and let's take a look at Q4. Q4 revenue came in at $31 million, down $2.9 million or 8.6% from Q4 last year and included impacts of negative $0.2 million in FX and negative $1.3 million from low margin portfolio rationalization. Our gross margin on a GAAP basis measured 55.6%, up 30 basis points. Non-GAAP adjusted gross margin was 55.6%, down 30 basis points. This quarter had GAAP operating income of $1.6 million or 5.3% of revenue. Our adjusted operating income was $5.6 million, so that means our adjusted operating margin came in at 18.1% and that's up 4 percentage points from last year. GAAP earnings per share was $0.01. Our adjusted diluted earnings per share measured $0.08, up $0.01 from the prior year, but it was impacted and includes the impact of FX and some taxes and Mike will talk to you about that a little bit later on. Finally, our cash flow from operations was $2 million. Let's move on to Slide 6 and a look at the full year. Revenue for 2019 was $116.2 million, down 3.8%. GAAP gross margin was 55.4%. Non-GAAP adjusted…

Thanks, Jim. So on Slide 10 of the presentation folks. On the full P&L for the quarter, as noted, revenue was down 8.6% year-over-year. To augment Jim's commentary, the Americas were down due to planned product rationalization and large pharma orders in the prior year, and the rest of the world where we reported headwinds through Q3 2019. Both Europe and China finished the year strong, a positive sign entering 2020. Turning to profitability, we grew adjusted operating income and expanded margins 400 basis points through continued focus on reducing our cost base via both manufacturing efficiencies and OpEx discipline. Gross margin was essentially flat as cost reductions offset the impact of lower volume. Adjusted EPS increased one penny from the operating income improvement noted with the higher effective tax rate partially offsetting these gains. The reported tax rate is higher for the quarter and the year due to certain tax credits in Europe which lapsed since the prior year. Overall, cash taxes remain low for the business. Turning to the balance sheet, we reduced debt by over $7 million over the course of 2019 which included the benefit of $3 million reduction in inventory year-over-year. We are pleased to exit 2019 having deleveraged the business and with the operating flexibility to execute the planned restructuring noted. Turning to the full-year financials on Page 11, the organic revenue decline for the year was due primarily to the CRO consolidation impact, Europe headwinds and product rationalization efforts noted. The full-year results in 2019 include a net increase of approximately $2.4 million from the January 2018 acquisition of DSI and divesture of the Denville distribution business, essentially one extra month DSI sales in 2019 which has overall improved the profitability of the business. Adjusted operating income was modestly up with 70 basis point margin improvement, based on the cost reduction focus we've noted. Gross margin was essentially flat as these cost savings and improved product mix offset the impact of lower volume. Full-year adjusted diluted EPS declined on the higher tax rate noted, as well as to a lesser extent FX and the share count. With that, I'll turn it back to Jim to share our 2020 outlook. Jim?

Thanks Mike. Let's move to Slide 13 and review the 2020 cost reductions that are designed to expand both our gross margins and our operating margins. We expect $4 million in annualized savings from global restructuring announced in Q4 2019 with savings beginning in this Q1. These actions included a consolidation of the Connecticut manufacturing into our core manufacturing operations. This action is expected, it is in progress now and expected to complete by midyear. Restructuring the Cambridge UK operation is also in progress and also should complete by midyear. Our global headcount reduction of approximately 10% across the functions is essentially complete here in Q1 and will pay back throughout the year. Let's move on to Slide 14 and talk a little bit about the 2020 growth drivers. The impact of the CRO consolidations has annualized now and we see a return to growth in the first half. Our CRO and Pharma customers expect increased growth on demand of our next-generation implantable telemetry devices, and these start shipping here in Q1. We expect incremental pull through sales of our cellular based products on expanding use of cell-based testing in both CROs and Pharma customers. Our academic sales are expected to remain stable and we see expanded opportunity in our CRISPR related products and cellular level testing. Our challenge is with certain distributors and OEM partners, where we expect a modest decline. It has our attention and we are addressing better management of these channels. I'd say the coronavirus situation could be a mixed bag at this point. It is likely a headwind early in the year, there could be more demand for certain kinds of our products when we look at what's happening in the use of cellular preclinical type testing products. So let's move to finally we'll look at Slide 15. Let me just take a minute to say that the Board and I believe the current share price does not reflect the true value of Harvard Bioscience. We have taken strong actions to address this, such as establishing a new management team, restructuring actions, focusing on growth, and setting public targets against we are measured. So as I look to the outlook for 2020, we're on track with the public targets that we set last September. We see revenue returning to organic growth in the low single digits for the year, primarily coming in the second half. We expect gross margin expansion of approximately two percentage points. We expect operating margin expansion of approximately three percentage points, reaching the 15% to 16% level for the full year. We continue to focus on debt reduction and expect our leverage ratio to be below 3 at the end of the first half. Thank you. Now I'll turn the call back over to the operating and open the line for Q&A. Thank you.

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

Hi Jim and yes, you really are good happy guys on the phone as well Mike. And the first quarter I had is the product rationalization, what product line was that in the fourth quarter Jim, and what kind of level of revenue would you say are you looking at, is there is there any – is there another $4 million, $5 million worth of additional rationalization you think about or you don’t know yet, but starting with what was in that 1.3?

Yes, thanks and good to hear your voice Paul. The first thing would be the TBSI products, those are the jacketed type products that go typically actually sell through our DSI business, but those products are in the preclinical, that was an operation down in North Carolina. It was subscale, losing money, the revenue associated with it was on the order of annualized maybe $1 million or so last year. So in moving that and just keeping the jacketed products which have a have, those moved forward. But I would say with that shutdown that was probably affected on an annual basis somewhere maybe a little around $1 million dollars of revenue. Now, again that was what I would typically call bad revenue. It was older products, low margin. We have newer types of products that would transition to and look at over time anyway. So it just made sense to take that out of the portfolio. But the small amount of continued revenue that we will get from these current jacketed products, does contribute but at a much lower revenue level. The other thing is, there was kind of a – there were – the company had been selling large systems that had very small company factored content in it. So which meant they might look like big revenue number, but they are very low margin and very little contribution and something like that just strategically does not make sense for this business. My focus is to drive growth with profitable business. That means gross margins that are accretive to our gross margin, I'm not saying that could be significantly dilutive, and in that space I think I identified in a particular, one particular product that that was a little over $1 million, maybe $1.5 million, up to $1.5…

Yes, and then you are mentioning the several things on Slide 7, like changing the large OEM distribution arrangement or impact and also gaps in European sales coverage. Do you expect these things you are changing in distribution and the sales group, does that take first half or does that take the year to get the distribution network the way that you wanted?

Some of it starts right away. The sales, the gaps that we had in the sales area where we had gaps of good coverage, we have already filled those spots over the last couple of months, but as you know, these are quarter based type opportunities, they take, they might take a year for an individual rep to really get up to speed on average. But certainly they start contributing even in the first half. As far as the one OEM customer, there a couple, one main one that we are dealing with, that – that's not going to really – that's still going to be a bit of a headwind through the first half, so that's why, you know, again when I look at the business, I have kind of – had predicted that we kind of roughly flat in the first half, there – you know again we're – it is kind of hard to predict the coronavirus thing, but that – that's going to have, that's certainly going to have a bit of impact early on in the first or second quarter. But we see other things that are growing, especially when you have the CROs now coming back to growth and telling us that. I mean actually indicating growth and demand. You know the Pharma, also same thing. Some of the exciting products that you are aware of like the CRISPR related products, those have some nice tailwinds. They are also - again with the situation in China you start to see some of these – a number of these products, everything from solar based testing through preclinical, to some of the gene splicing things that are used for the – we are creating some of the potential solutions, these are getting a lot more attention now. And everybody is working on it and these – almost all these customers working and are customers of ours. So again, it is a mixed bag, we hate to see what's happening there, but it does highlight that we are in a place that can really help. So, but yes, and I think that's where we are. A little bit, it will take a little while in the first half, but again the other things are offsetting a lot of – some of these downward movements in the first half, but as those are done and we address them, we are – we are full speed ahead as the second half comes in.

And then the way you expect for the tax rate on 2020?

Mike, on the tax rate?

I'd say the low 20s is probably the right way to think about it Paul.

Okay, than last question is the cellular and molecular product lines, I know that you know obviously the cell and gene therapy market is the most rapidly growing part of the marketplace. What level of revenue do you have directly related to studies involved in cell and gene therapy and CRISPR related work, et cetera? It is a part of - what part of cellular and molecular is it?

It is a fairly large component of our academic sales of the cellular and molecular. So if you look at – like the MCF or the EFIS [ph] related products for individual cell testing and the CRISPR related products where you see a lot of the fusion type technologies for adjusting and loading different things into the cells. So those are the two, so again I would say CRISPR related and the cellular based testing which between the two of them I would say it is certainly in the range of around half of our CMT business I would say, roughly speaking that address those type of areas. And what is also very exciting to us is that our relationships with the CROs and the Pharma companies, we've sold those technologies reasonably well into those markets in Europe, but never really did much in the U.S. So we're now talking with the big EFI [ph] customers, Pharma and CROs and starting to offer those products there and that's where we see it, that's where the additional incremental type pull through starts to come through. So they are interested in it. We are talking with them about it and again specifically those areas [indiscernible] cellular testing and things that are associated with biologics.

Okay, thank you.

Thanks Paul.

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

Good morning. I wonder if you can comment on how the CRO landscape has changed over the past year and how that might create future opportunities for you?

Yes, well, you know we had - our four largest CRO customers consolidated to two. So now that we have Charles River and Covance they are – I guess they are our two largest customers now. There was as you might expect a little bit of chaos during those acquisitions where they were sorting out who was going to – which tools they were going to be using. The good news is all four were using our tools, but the delays - and they had told us point blank that they knew there were going to be some delays in purchasing, so things sorted out like which labs were going to be concentrating on what and who is going to be in charge. That's behind us now and they've both, the large customers have indicated they see both of them increasing demand on our products and that's starting now. So we know we are pretty happy to see that, that not only has it stabilized, but they are moving back toward at least to where they were and they look forward to growth. If you look at their – if you look at what they project publicly, they are on a nice steep growth curve and we're able to draft that nicely with the CROs. And the pharma business is still moving more and more to the CROs and that's part of growing it. So we could play both sides of that. If it is with pharma, that's great, if it moves the CRO that is fine too. And we are becoming the standard of the standard actual symptoms that are used by these folks, so that puts us at a great position.

Okay, and could you comment on expectations for R&D spending in 2020 and where that R&D is going to be concentrated?

I don’t know that we say what the numbers are on R&D, but certainly I will tell you this, we're putting it into the areas where we see expansion and growth. A lot of it really is targeted toward the commercial sides of pharma and CRO, it is in the platforms that really are used by these folks that are I would say very sticky and those then as they use our platforms and our data analytics symptoms, then they use our consumables and our telemetry devices. The other area I would say is, when you look at the areas that we see, that we know are being used an expanding in academia, but also being pulled into the CRO and Pharma world, comes down to the cellular based testing products. Those we see, that's where we're investing there and we're investing in the gene splicing or CRISPR related products too. Those are natural tailwinds and that's where we are making more investment to be able to offer a wider spectrum and be able to go more across the full line from the academic side that may be doing small numbers of tests to more high volume things that are happening in the CROs and Pharma.

Okay, thank you.

Thank you, Lisa.

Our next question comes from Bruce Jackson from The Benchmark Company. Please go ahead.

Hi, good morning, and thank you for taking my questions. A follow up question on the coronavirus situation and the CROs, I mean, have you heard anything from your CRO accounts about, how the recruitment and trial work is going and then does that have any impact on your product flow and how do you see that playing out over the course of the next couple quarters?

Yes, well I mean, as we see it, you know the initial demand is primarily in the academic side, but as that starts to work and as we start to see vaccines staring to be – come out through the weather and staring to move toward the clinical testing, we see that as – certainly that demands our products and in particular, we think that and we’re starting to see a lot more interest and tick up in the inhalation type products. So when you look at how you are going to test situations like this, inhalation is really critical. So you know, that's something we're preparing for. We think that that's going to be something that's going to be some upside for us. On the other hand, in China, we know a lot of the academic institutes. They've been told to stay home for about a couple of months. So we know we've got some – there'll be some impact to the China revenues and the good news for us is, I mean good news or not, we don’t have a lot of China revenue. I've never made a big deal out of it. So it's not a massive exposure to it at all. It is more minor, but it is something that as that corrects that will start to be an opportunity for growth. But again the need for our products are right in line with the kind of things that are needed to help solve problems like these.

Okay, that's helpful. And then in terms of the CRISPR related product line…

I assume you are referring primarily to the BTX electroporation and electrofusion product lines. That's right.

Specifically around - is there anything else in the product line that's gene therapy related or CRISPR related?

That's probably the most on the upfront side and you know, we've tended to have the one product that was kind of one size fits all and we know if we really want to draft that with the growth opportunity that's there, is for us to have a couple more configurations, one that will get us higher volume and then also for places where they don’t have the budget to have a more value based offering. So we are expanding that capability. And electroporation is big, big part of CRISPR. And then when you looked at the [indiscernible] type products individual cell testing areas that would be is related, but typically we expect - we see those both. Those are the two that will apply to that space. So again, BTX is a big one and we see a lot of opportunities for us.

Okay, great. And then last question from me on the products line rationalizations, I think the general idea was to migrate customers over to another product in the product line. How is that process going and do you have enough like sales and marketing people right now to sort of manage that process?

Yes, I think we do. I mean it was a smaller – it wasn’t a large revenue stream, but it was a fairly older technology, moving away from these external jacketed type of ways of measuring signals to more implantable devices, which is right in our wheelhouse with implantables and telemetry, but also with headsets and things that are used for neuro that comes out of our NCS and German facility. So that's more of a natural change, but I guess, I think on a longer run these implantables, that's where it is all going to go.

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

Thank you, Bruce.

This is all the time allotted for questions. I will now turn the call over to Mr. Green for final remarks.

Well, thank you everyone for joining us. I look forward to spending some more time with our investors. Really I again want to say I think we've got the right Board and the right management team. We're making the changes to turn this into a real profitable growth platform of a business. I came here to do this. I could appreciate your support and I look forward to be joining us on our next call for Q1. Thank you very much and have a good day.

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