Corey Manchester - Director, Finance & IR Jeffrey Duchemin - President, CEO & Director Robert Gagnon - CFO and Treasurer

William March - Janney Montgomery Scott Raymond Myers - The Benchmark Company Lisa Springer - Singular Research Matthew Campbell - Laridae Capital

Thank you, Brandon, and good afternoon, everyone. Thank you for joining us for the Harvard Bioscience Fourth Quarter 2017 Earnings Conference Call.

Leading the call today will be Jeffrey Duchemin, President and Chief Executive Officer; and Robert Gagnon, Chief Financial Officer of Harvard Bioscience. We plan to spend some time this afternoon discussing our results for the fourth quarter, but also the impacts to our business and future results from the acquisition of DSI and sale of Denville, both of which took place in January.

Please be reminded that any fourth quarter results, which we discussed this afternoon will include the results of Denville and exclude the results of DSI, unless explicitly stated for pro forma modeling purposes. 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 in our annual report on Form 10-K for the period ended December 31, 2017, and our other public filings.

Any forward-looking statements, included -- 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 represent the ongoing economics of the business, reflect 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. Good afternoon, everyone, and thank you for joining us for our Q4 earnings call.

I am pleased to share a number of highlights since our last earnings call, including strong fourth quarter results, some color around exciting product launches in the first quarter of 2018 and an update on our recent acquisition of DSI. Our CFO, Rob Gagnon, will provide detail on our fourth quarter financial results and our 2018 outlook.

And after that, we look forward to taking your questions. During the fourth quarter, we produced solid business results, including the third consecutive quarter of top line organic growth, and continue to execute against our strategic objectives.

Fourth quarter revenue was $27.5 million, reflecting 1.6% organic growth, excluding the impact of currency translation and the disposition of AHN. Most importantly, revenue from continuing legacy businesses, excluding Denville, grew approximately 2.3% organically.

As Corey mentioned, our results this quarter include operations of Denville, which we sold in January. We are encouraged by these results and believe we will continue this progress into 2018, especially in light of the acquisition of DSI and the sale of Denville.

Taking a look at our revenue from a geographic standpoint. Our U.S.

business grew approximately 3% in the fourth quarter. Much like Q3, our electrophysiology brands were the key driver in our growth this quarter.

Electrophysiology continues to be a key market for us, a market where we've invested heavily through acquisition, including Triangle BioSystems, Multi Channel Systems and HEKA Electronik. Along with our Warner legacy brand, these acquisitions have performed well, especially as we continue to cross-sell systems and gain market share in the U.S.

This portfolio of product makes Harvard Bioscience a leading provider of electrophysiology products for our customers on a global basis. We also see significant upside in synergies with DSI customers -- customer base and the opportunity to sell electrophysiology product offerings into their existing biopharma and CRO customer base.

We have begun the work of pulling the legacy Harvard Bioscience and DSI commercial teams, together, to work closely to develop a global go-to-market strategy that captures the synergies of selling legacy Harvard Bioscience products into DSI -- into the DSI customer base and selling DSI products into our customer base. Our revenue in China ended this year up approximately 15%.

Based on the results, the Chinese market is now approaching 7% of our overall revenue. I recently spent 10 days in Asia, speaking with our team there, as well as had the opportunity to meet the DSI team.

We are well positioned to continue to outperform the overall market, and adding DSI to our portfolio should only increase our competitive advantage in this growing market. Revenue in Europe rebounded nicely in the quarter.

As we indicated during our last earnings call, our results were improving during the year, as we work closely with our commercial teams in Europe on initiatives to grow our business across all brands. Excluding the impact of foreign currency and the impact of AHN, our Q4 European revenue grew approximately 7% year-over-year.

The positive trend throughout the year culminated in a solid finish to the year. Our European commercial teams have worked hard this year to stabilize our business as the market strengthened, as our results demonstrated this quarter.

We are confident this quarter is the start of a positive trend, especially with DSI on board. Before handing the call off to Rob, I want to spend a few moments updating everyone on key initiatives in the first quarter, including new product launches and our acquisition of DSI.

Our BTX brand has launched a new product in January. The BTX ECM 2001 Plus is a multifunctional electrofusion and electroporation instrument, which has applications for both cell fusion and cell transection.

Additionally our MCS brand launched a new product in January. The MEA2100-Mini-System is used to record multi-electrode arrays inside an incubator, allowing for long-term monitoring of cell cultures and brain slices.

The first units for both products began shipping in January, and we expect for both the BTX and the MCS launches to be incremental growth drivers in 2018. As for DSI, the acquisition closed on January 31.

The integration of commercial organizations is already underway, as we work to realize top line synergies. I've spent time with many of the functional groups at DSI and worked closely with Kristen Knox, our new General Manager for DSI.

I have met some tremendous DSI employees, who are as excited about DSI joining Harvard Bioscience as we are. We blend -- plan to draw on that enthusiasm, as well as the knowledge and expertise of DSI's employees, to strengthen the overall company moving forward.

As we dig in and chart out a course for the new Harvard Bioscience, the rationale to join these two companies together has been reinforced. The diversification of the customer base and the increase in the company's profitability will create sustained long-term shareholder value.

With that, I'll turn the discussion over to Rob Gagnon, who will provide more insight into our financials. Rob?

Okay. Thank you, Jeff.

Beginning with the top line. Revenue for the third quarter was $27.5 million, a 4% increase year-over-year, as reported.

Fourth quarter revenues were negatively impacted by the divestiture of AHN, which included approximately $156,000 of nonrecurring revenue during the fourth quarter of 2016, while currency translation positively impacted revenues by approximately $800,000. Excluding the impacts of currency translation and AHN, revenues on an organic basis grew 1.6% in the quarter.

Additionally, excluding Denville, our revenue would have increased 2.3% for pro forma modeling purposes. I'll now turn to cost and expenses.

Cost of revenues on a GAAP basis were $14.3 million for both Q4 of this year and last year. As a result, our non-GAAP gross profit was $13.2 million this quarter, an increase of $1.1 million compared with $12.1 million in the fourth quarter of 2016.

Gross profit margin was 48% in Q4, a 210 basis point increase compared with 45.9% in Q4 of last year. This meaningful improvement was largely due to the contributions of our electrophysiology brands.

Non-GAAP operating expenses for Q4 were $10.8 million, an increase of $310,000 compared to $10.5 million in Q4 last year. A portion of this increase is due to the ramp-up of costs for the new product launches Jeff mentioned.

While the cost increased in the fourth quarter, full year operating expenses were down $750,000 compared to 2016. Operating income on a non-GAAP basis in Q4 was $2.4 million, an increase of $760,000 compared to $1.6 million from Q4 of last year.

And our non-GAAP operating margin in Q4 was 8.7%. This compares to an operating margin in Q4 of last year of 6.2%.

Our non-GAAP effective tax rate was approximately 22% in Q4 compared to approximately 26% in Q4 of last year. The decrease in effective tax rate was primarily the result of favorable mix of income across several tax jurisdictions.

Our non-GAAP net income for Q4 was $1.7 million or $0.05 per diluted share as compared to $1.3 million or $0.04 per diluted share for Q4 last year. Diluted weighted average shares outstanding were 36.1 million in Q4 as compared to 34.4 million in Q4 of last year.

I'll now turn to the balance sheet. We finished the quarter with approximately $5.7 million of cash.

And our debt at the end of Q4 was $11.9 million compared to $13.9 million at the end of Q4 last year. Our outstanding debt was paid in full using the proceeds from the sale of the Denville transaction this January -- this past January.

Our outstanding debt under the new credit agreement is approximately $67 million as of today or net debt of approximately $60 million. I'll now turn to our financial outlook.

We expect to report full year 2018 revenue of between $118 million and $123 million. On the bottom line, we expect to report full year 2018 non-GAAP earnings per share of between $0.19 and $0.23.

In the first quarter, we expect revenue of approximately $27.5 million and non-GAAP EPS of approximately $0.03. As a reminder, this only includes 2 months of the DSI acquisition and would represent an increase of 14% on the top line and 50% on the bottom line as compared to our reported results for the first quarter of 2017.

In the second quarter, we expect revenue of up to $31 million and non-GAAP EPS of $0.06, which reflects a full quarter of DSI's operations and the seasonality experienced by DSI in the second quarter each year. This would represent an increase of 23% on the top line and 100% on the bottom line as compared to our reported results for the second quarter in 2017.

We plan to provide an update on guidance on the second half of the year during our first quarter earnings call. We will now open the call to questions from participants.

Operator?

Jeff, so first question. Could you just talk a little bit more about the potential synergies you see between DSI and legacy Harvard?

I know that there's very little customer overlap. So kind of what are the opportunities in terms of products to cross-sell and maybe positions, either in CROs or academics to expand addressable market?

Yes, Bill. The idea around acquiring DSI was to position Harvard Bioscience into the biopharma market.

As you know, 70% of our business -- our legacy business was academic-based. With DSI, close to 80% of their business is biopharma.

So now, the balance of our total portfolio is 60/40, 60 academia, 40 biopharma. And it allows us to cross-sell not only Harvard Bioscience products into biopharma, but DSI products into the academic base.

We're really excited about this. We believe there is hardware, there is software, there is instruments, there is products that are used in surgical procedures that will allow synergies to take place.

We're in the beginning stages of pulling our commercial teams together, organizing actions that will allow us to drive these sales synergies. But with DSI's portfolio of implantable devices, our surgical suite of products, some of the software applications that they have around data collection that could not only to support Harvard Bioscience legacy products, but of many of our electrophysiology products, allow us to have a runway for great, great success in sales synergies moving forward.

Got it. And then maybe on China, could you just talk about what -- what's been driving growth in that market for Harvard?

And then what assets or products is DSI also selling into that region?

Well, I'm going to take a step back. Four years ago, we implemented a sales organization into China.

We went from 1 to 7 people representing the country of China. We've doubled our sales in the last four years there.

We continue to have great success. We have expanded our product portfolio.

And once again, our legacy Harvard Bioscience products, our electrophysiology products, most recently, and now with DSI, who also has a team of seven people in China, who I met when I was there back about three weeks ago, we're really excited to pull these two sales teams together, not only cross-sell products, but utilize the distribution relationships that we have in China and throughout the region, Japan, Korea, Southeast Asia. So the future is bright in Asia with the two teams coming together, the collection of products within both our portfolios and the distribution network that we share.

Got it. And then Rob, just a couple of quick questions on the model on financing.

For the acquisitions, should we expect most of the non-GAAP charges to fall here in the first quarter?

Yes, definitely. So I mean, there'll be some work that I imagine would spill over into the second quarter.

But majority of those costs will be reflected in Q1. And consistent with previous acquisitions, we'll pro forma the milestone.

We'll track them, so that we have a pretty good where they are.

Okay. And then just could you maybe speak to the seasonality that you highlighted with DSI in 2Q?

Yes, sure. So DSI has been a June 30 fiscal year-end business.

And I think because of that, and also just because of natural budget cycles, that quarter tends to be a high quarter for them, so higher than the quarter -- essentially, the first quarter of the year. So some of that is reflected in the guidance.

As they get absorbed into our business, that may change over time. But we're expecting to have a bit of a step-up in seasonality in the second quarter because of that effect.

And let me ask you first about gross margins. Congratulations on reaching 48% in the fourth quarter.

That was great to see. Can you describe the gross margin profile that you're expecting this year with Denville out of the business and DSI in?

Ray, it's Rob. Thank you.

And yes, so we're happy with the results of 48% this quarter. Like I mentioned, it's largely driven by the profitably the of some of our electrophysiology brands.

We continue, in terms of the legacy business, think about in the range of 46% to 47%. But with DSI coming on board now, they have very high gross margins compared to our legacy businesses.

And overall, the new blended gross margin is expected to be about 55% in Q1 and going forward.

That's fantastic. Great.

Can we talk a little bit more about launching more accretive products you announced, too, that you're launching in January? How much impact can that have on the business?

And talk about synergies possibly with cooperation between the R&D groups in Massachusetts and Minnesota.

Ray, the two products I mentioned, we're really excited about, one coming from our BTX portfolio, the other one coming from our electrophysiology portfolio. Those are only two products that I mentioned.

We also have product line extensions that were launched in Q3 and Q4 of last year. We're planning product line extensions that will be the launched this year.

Combined with new products and product line extensions, we are expecting incremental revenue coming from our new product process. Now that is incorporated into our guidance.

But as time goes on, we expect to launch more products. I mean, this is something we've been talking about for three years now.

Three years ago, we launched a new product development process. And our first order of business was basically deferred maintenance, so taking legacy products, existing products and updating those, products that had been somewhat neglected in years past and had not had the attention that they needed to compete in the marketplace.

Once we got through deferred maintenance, we started to focus on new product development. We're now at a point where we're launching new products almost on a quarterly basis.

This is really exciting for this business. It's something the business hasn't had in probably 5 or 6 years, and we expect it to drive incremental growth moving forward.

Yes, that's great. It's exciting.

Let me ask you about what you feel are your best synergies across various these areas, their sales synergies, potentially, distribution synergies. There's different customer types, geographic synergies.

What are the best synergies that you see?

All of the above, Ray. But one of the exciting things about DSI is DSI comes with a very strong management team.

It comes with a strong R&D team. And I think what we're going to do is we're going to look at everything.

We're going to look at products. We're going to look at data collection, software, take all of the aspects of their R&D process, products that are currently in development, products that are currently in development here at Harvard Bioscience and look to see where we can utilize best practices.

So we're in the early stages of that, Ray, right now. Our team is getting together next week for the first time.

But as time goes on, we'll keep everyone updated in terms of where we see synergies and what exciting technology will come out of these two companies coming together.

That's great. And one specific area that I was curious about is DSI has a customer base in clinical research.

And I think that's relatively new to the historical Harvard business. Is that an area where you see synergy?

Are your talking contract research organizations, Ray?

Yes.

Yes. So that's really exciting to us.

Once again, when we talk about biopharma, I would include CROs in that segment. As trends in R&D spend in biopharma shifts to CROs, the great thing with the go-to-market strategy from DSI is, as that R&D shifts to CROs, they pick up the business in CROs.

It's almost like a segment switch in terms of where revenue is going for the business. But it also opens the door for us to pull our legacy Harvard Bioscience products into some of these really difficult areas of science or departments within a CRO or pharma that are -- that have no access.

And it allows our salespeople now to get access to these scientists and present our portfolio of products.

That's great. And then last question is on the sales and marketing expense.

It was a little higher in the quarter and I was curious if that's where shadows increased investment. What are you doing there?

Ray, it's Rob. Yes, some of that is just timing related in the fourth quarter due to conferences.

But a piece of that is the investment made around some of the product launches. And so some of that will continue.

But also, like we've talked about on a previous call, there's some good cost synergies as well, which we haven't spoken about today, that will be reflected in 2018 and some opportunities with DSI coming in being integrated as part of Harvard Bioscience. So there'll be some benefits there as well.

Like we've talked about in the past, $2.5 million to $3.5 million of cost synergies in the first year, so that will more than offset that investment.

I was very pleased to see the improvement in Europe. Do you feel like you've kind of turned the corner with the European market?

Do you think it will contributing to revenues again in 2018?

Lisa, I'm glad you mentioned that because last year, starting in Q1, we saw a major decline in Europe. And we discuss this, I believe, every quarter, that we would see momentum shift towards the end of the year.

What we did was we put in place commercial initiatives. And I think our team over in Europe did a great job of implementing these initiatives and really driving a turnaround, and as you saw in Q4 was 7% growth.

We really like the trend in Europe today, and I believe it will continue into 2018. That's one of the great success stories in 2017 for us, really driving that -- those initiatives and turning around the declining business in Europe.

I was wondering if, Jeff, you could expand a little bit upon your business in Asia. I didn't realize your sales force is now going from 7 to 14 there.

Your Chinese business accounts for 7% of your overall business. So can you talk to us a little bit more about your thoughts about expanding throughout Asia a little bit more?

And how should we think about that over the next couple of years?

I think we're well positioned in Asia right now, Ray, I mean, sorry, Matt, with the number of sales people we have, both from Harvard Bioscience and DSI. One of the things that we're working on right now -- and I was there recently, as I had mentioned.

I spent some time in Singapore, China and Japan. Japan is a very interesting market.

It's a difficult market to access, but it's a large life science market. DSI has relationships with distributors in Japan that we don't have.

And so what we're going to try to do is utilize their relationships. I believe DSI will try to utilize our relationships throughout the region to really drive growth initiatives and expand our product portfolio throughout the region.

So we're in the beginning stages of that. I was fortunate enough to meet with some customers, meet with some distributors.

And the overall reception right now looks very positive in terms of driving growth of both product categories throughout the region within our current distribution base that we have.

And Matt, it's Rob. I just wanted to admit.

With DSI coming on board, that business is now up to $10 million. So it's becoming a meaningful book of business for -- a real meaningful book of business for us.

Great. That's helpful.

Rob, if you could, I missed it, if DSI's fiscal year is different, so how does that impact us on a seasonality basis? Can you just remind us?

So DSI's fiscal year will conform to Harvard Bio's fiscal year. But their legacy as a standalone business was June 30.

So there's a bit of a ramp-up, I think, just naturally in the business, as it's their fourth quarter, it's end of their fiscal year comp plans. All of that certainly has an effect.

So there'll be a little bit of a step-up in seasonality. We've reflected that in the guidance.

And as I talked about, we're expecting up to $31 million in sales for the combined company in the second quarter and [indiscernible] yes, yes.

Thank you, everyone, and the best of luck to all of us in 2018. We look forward to speaking to you at the end of Q1.

Thanks, everybody.