Heska Corp (HSKA) 2020 Q3 法說會逐字稿

Good day, and welcome to the Heska Corporation Third Quarter 2020 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jon Aagaard, Director of Investor Relations. Please go ahead, sir.

Thank you and good morning, everyone. Welcome to Heska Corporation's earnings call for the third quarter of 2020. I am Jon Aagaard, Head of Investor Relations for Heska.

Prior to discussing Heska's third quarter 2020 results, I would like to remind you that during the course of this call, we may make certain forward-looking statements regarding future events or future financial performance of the company. We need to caution you that any such forward-looking statements are based on our current beliefs and expectations and involve known and unknown risks and uncertainties which may cause actual results and performance to be materially different from that expressed or implied by those forward-looking statements. Factors that could contribute to such differences are detailed in writing in this morning's earnings release, Heska Corporation's annual and quarterly filings with the SEC and elsewhere. Any forward-looking statements speak only at the time they are made, and Heska does not intend and specifically disclaims any obligation or intention to update any forward-looking statements to reflect events that occur after the time such statement was made.

We have with us this morning, Kevin Wilson, Heska's Chief Executive Officer and President; and Catherine Grassman, Heska's Chief Financial Officer. Mr. Wilson and Ms. Grassman will provide details surrounding the results and then we will open the call to questions.

Before I turn the call over to Kevin, I would like to remind everyone of Heska's virtual Investor Day on November 18, 2020. Heska management will present the company's growth strategy at this special event, including key new product demonstrations, commercial and new geography integration update, and multi-year performance targets. To register for this event, please visit the Investor Relations page of the company's website. We are excited and we hope to see you there.

With that being said, it is now my pleasure to turn the call over to Kevin Wilson, Heska's CEO and President. Kevin?

Hey, thanks, Jon, and good morning, everybody. I know everybody is busy. It's a crazy news cycle. So I'm just going to jump right in.

So today, we're pleased to report an exceptional third quarter with exceeded expectations. As outlined in this morning's release, Heska teams delivered record revenue and near-universal strength across all key metrics. We saw strong growth of 15.2% in our North American POC Lab Consumables, bringing that year-to-date performance to 9.7%. We again captured solid international segment performance with exceptional results from our Spanish, Australian and German teams in particular. All Heska teams executed at a very high level to deliver results in which it is hard to find a bad metric.

In spite of macro uncertainty and strong competition, our strong performance across key metrics leads us to believe that we will perform at the top end of the ranges for most, if not all, of the full year targets we've shared publicly. While Catherine will cover the specifics of the quarter in greater detail, I do want to take a few moments to highlight a few things which would be helpful to investors.

Starting with our people. Heska's team is healthy and productive. We've continued to operate effectively from a flexible posture in each country in which we operate. I'm proud of our people and our investors should sleep well, knowing that our performance is underpinned by many hundreds of dedicated Heska employees that have worked extremely hard to quickly solve challenges in a positive and sustainable way regardless of any microenvironmental challenges. Heska is staffed by good people, leading good lives, doing great work with a wonderful attitude, and I'm honored to be part of this team and customers and investors could be proud of their association with Heska.

Similarly, the pet health care market broadly is doing great. The industry continues to reaffirm its decades-long resiliency. Pet visits and veterinary trends generally have outpaced most forecasts. The companion animal population is growing at all-time high rates, increasing demand across an industry that has been broadly benefited by recent trends which are more likely than not an enduring tailwind for long-established underlying trends. We are seeing an acceleration of long-term trends in pet ownership, pet-favorable housing, positive pet ownership demographics, increased human at home time and pet households, and an even stronger human-pet bond. Pet adoptions are up, breeders are managing waiting list, first-time visits to veterinarians are up, and end-user demand remains very strong.

Specific to Heska's focus on point-of-care diagnostics, the trends are similarly encouraging with curbside drop-off and same-day discharge procedures now firmly in place across most hospitals. We are seeing increased utilization in point-of-care testing. Some of the increase is from brand new testing. Some smaller portion of the increase is at the point of care with testing that has migrated from central reference laboratories. Some of the Q3 utilization performance at Heska was from Q2 catch-up, testing from pent-up demand for deferred wellness visits, elective procedures, and supply chain dampening that resulted from COVID-19 effects earlier this year. And some of our strong increase in subscriber utilization growth is being driven by Heska new tests and new analyzers that are now making their way into the installed base.

Regardless of the weighting of each factor -- and there are others, the net result is that the underlying demand for point-of-care diagnostics testing by veterinarians was very strong in the third quarter and the supporting trends continue to be strong and, we believe, sustainable. Diagnostics at the point of care remains central and critical to growing veterinary services.

From the veterinarians' perspective, consumer goods sales, diet sales, and boarding revenues continued to decline while being more than offset by increased diagnostics, surgeries, price and other professional services that require licensure. It turns out that there are more pets than ever, pet families are more focused on their pets, people at home with their pets more regularly see pet health symptoms, and households now have increased scheduled flexibility to take their pets to the veterinarian. Veterinarians are very busy and so is Heska. Veterinarians are so busy in fact that they presently are less able to take time to make major decisions for technology in their practices. In North America in particular, companies such as Heska continue to experience delays with in-clinic access by sales and installation teams, which has reduced opportunities for competitive blood instrumentation takeaways and new imaging solutions installations.

This dynamic has also increased retention by the incumbent, whether the incumbent is Heska or another company. While we see this trend moderating over time, it is likely to continue at some level over the next several quarters. However, the markets outside of North America with much more first-generation stage adoption, we anticipate increased and accelerating demand to adopt new point-of-care diagnostics for the first time and to capture first major upgrade cycles for early adopters specifically in core Europe and Australia. International veterinarians are now more likely to adopt point-of-care diagnostics enthusiastically for the first or second time for exactly the same reasons as North American veterinarians are increasing their utilization and percentage of profitability from point-of-care testing. The international race for veterinary diagnostic is certainly in full swing and is likely to largely unfold quickly over the next 5 to 10 years. As a top 3 competitor in most of the markets we are targeting, it is a race that Heska intends to compete in and to win.

And finally, to conclude my remarks, I'd like to remind you of how we are preparing for the future. In Q3, research and development initiatives progressed in line with our time lines. Our commercial launch plans further solidified across several key projects, also in line with our goals. Integration with our recent international acquisitions progressed as expected, and we are confident we can meaningfully grow and improve the profitability of these businesses over time. For these reasons and more, we remain confident and resolute in our ability to deliver on the 3 core tenets of our 2018 through '23 strategic plan: to double the geographies and customers served, which we have done; to double the products and revenue lines which we offer, which we are very, very close to accomplishing; and to continue to grow our core business, which we have done and anticipate continuing to do. By adding and multiplying in and amongst these 3 major accomplishments, we anticipate a great performance in the back half of our 5-year plan.

With that, I'll turn the call over to Catherine to detail the quarter's performance. Catherine?

Thanks, Kevin, and good morning, everyone. As Kevin mentioned, we are pleased to report a strong performance for the third quarter of 2020. Consolidated revenue grew 81.3% while largely benefited by our recent acquisitions of scil and CVM. Solid performance during these uncertain times and our legacy Heska business also contributed to growth on a year-over-year basis.

We report our results geographically in 2 segments, North America and International. Our North America segment includes U.S., Canada, and Mexico; while our International segment consists of all countries outside of North America and is comprised primarily Europe as of today. North America segment revenue grew 16.4%. Contributing to this growth was -- contributing to this was growth of 15.2% in consumables sales and growth in PVD with the expected return of sales of Tri-Heart, a contract manufactured product for Merck which experienced reduced customer demand in the comparative period and throughout 2019. The International segment performed at the high end of our expectations with strong consumables sales and capital equipment placement.

Consolidated gross margin declined approximately 240 basis points to 41.3%. As anticipated, negatively impacting consolidated gross margin on a comparative basis is the consolidation of scil, a lower margin profile business. We continue to see bridging this margin gap as a meaningful synergy opportunity for Heska. The North America segment had a higher gross margin at 48.3%, about a 430 basis point increase from prior year due mainly to product mix within our OVP product line as well as increased sales of consumables.

Total operating expenses in the third quarter of 2020 were $23.2 million, an increase of $9.7 million from the third quarter of 2019. The increase was driven primarily by the consolidation of our acquisitions' operating activities of $6.5 million, an increase in stock-based compensation of approximately $3 million, and onetime acquisition and other related cost of $800,000. We managed and continue to manage operating expenses carefully.

Adjusted EBITDA for the second quarter -- for the third quarter of 2020 with $8.7 million or an adjusted EBITDA margin of 15.3% compared to $2 million or an adjusted EBITDA margin of 6.4% in the third quarter of 2019. This increase is primarily attributable to our recent acquisitions as well as increased profitability from product mix and cost containment and our legacy business.

EPS in the third quarter was a loss of $0.57 per share. Adjusting for certain items which are detailed in our GAAP to non-GAAP reconciliation included with our release, EPS was $0.08 per share, a decrease of $0.06 per share from the third quarter of 2019. Third quarter non-GAAP EPS was positively impacted by increased profitability during the quarter but more than offset by an increase in our tax expense as a result of the decrease -- as a result of decreasing the carrying value of our deferred tax assets. Also, negatively impacting this measure is the cash interest expense associated with our convertible debt notes issuance.

Our balance sheet is strong, and our liquidity position remains solid with cash of $84.5 million, which continues to provide us the flexibility to advance our strategic plan.

Turning now to the 2020 guidance previously provided on May 5 and recasted on August 4 based on our new segment presentation. It is not our intention to update guidance quarterly nor will we provide quarterly guidance. Moving forward, we will provide update to our annual guidance based on events we deem significant to the understanding of our performance relevant to the expectations we set forth. However, given the uncertainty of macro environmental factors mostly related to the COVID-19 pandemic, we believe it is important to communicate with our investors and analysts on the health of our business, which is strong. As such and as Kevin indicated, we are reaffirming our previously provided 2020 full year revenue and adjusted EBITDA guidance. We believe we have opportunity to achieve performance near the top end of all ranges previously disclosed. On last quarter's earnings call, we communicated a full year effective tax rate benefit of 12% to 15%. Based on changes in our underlying tax and business strategy, we are rescinding our guidance at this time.

In sum, we are pleased with our financial performance in the third quarter, and I look forward to sharing our multi-year financial targets and other key considerations at our upcoming Investor Day.

With that, we'd like to open the call for your questions. Operator?

(Operator Instructions) The first question today comes from David Westenberg of Guggenheim Securities.

Congrats on a good quarter. So these lab instruments outperformed us, and I think the commentary in the space has really -- you kind of said it in your prepared remarks. There's something -- like half the practices are really not allowing sales force back in and it's probably not at a time that people install new instruments. Can you clarify whether that is -- actually you got that on instruments or is that a lot on the other? And then in the same kind of token, is this dynamic of all these practices not being open, is that impacting subscription renewal or thoughts on subscription renewal just given the fact that your sales force can't make the same touches, but there isn't capital purchase necessarily, just a little bit more commitment?

Yes. So I'll talk about it qualitatively and then Catherine, anything you want to add. It hasn't stopped. So the ability to get into clinics is not at a full stop. The ability to have your people travel is also not at a full stop. And we've altered how we approach customers as well. So it's more difficult in terms of installation of equipment, but the instruments line hasn't entirely stopped by any stretch. We leveraged remote specialty a little bit more. We've found ways to get the customers and have conversations. So I think that's really the answer. It's it hasn't stopped. It's really hard to put a pinpoint on it in terms of -- especially quarter-to-quarter variability of how many are going to be installed.

In terms of signing subscription renewals, that hasn't been a problem. Customers tend to transact, I think, more easily with the incumbent. There, they have a positive relationship with them, and extending that relationship for additional benefits has not been a problem. And so I think we've gotten a little bit of a bump from that dynamic in terms of when we extend the customer, we have the opportunity maybe to offer an additional analyzer or 2. And sometimes, that's also positive just in terms of the instrumentation portion of that contract as you put new equipment in on top of what's already in and being renewed. So Catherine, I don't know if you have anything to add.

No. I think that, that covers it.

Okay. And then in terms of greenfield accounts outside the United States, you highlighted that as a growth strategy. Can you help us to conceptualize what those accounts do right now? Is it analyzer, handheld analyzer or just kind of an old generation? Greenfield kind of has a lot of different accessibility and I guess that's a better market for you and probably a faster growing one. But just help us conceptualize what they look like right now so we have -- kind of have a sense on really you as a new player in those -- I guess scil is not that new, but on penetrating those markets.

Yes. And actually and you hit on it. We are well entrenched in that market still, has been servicing those customers as has CVM in Spain and our efforts in France. So we have good long-term relationships with them. I think you can divide it into a couple of buckets.

You can divide it into folks who would just do less testing. They do a more targeted approach to testing. They do less wellness testing. It's just not ingrained to the point where they feel like they have to have a full suite. So you will see people with nothing. They'll use a reference lab. They will use the local university, those types of things. And then we see some folks who have a very incomplete portfolio. So they might test for 1 or 2 parameters with an older machine, maybe uses a strip. It's more of a targeted approach but they're not running full panels and then not running them quickly so it's not really integrated into their practice. And then you will have a fair amount -- again, it's, let's say, half or more who have something, but they tend to be older generation. We see a lot more 3-part blood counts in Europe. I think that the North American market is largely 5-part and has been for many years.

So I would divide it into those 3 buckets. And then there is variability amongst countries, even a better adoption in Germany, let's say, than you might in Italy. So it's really difficult to just say Europe broadly. It is very much a country-by-country cultural question as well.

Got it. And then just maybe one on margin -- I mean margin expansion. You have significantly more revenue with the double business, and you now have a strong global footprint. In terms of being able to get more leverage with suppliers, is that a 2-, 3-, 5-year something lever that you might be able to pull in terms of getting more leverage in your P&L not just necessarily the mix shift to blood but also being able to use a bigger size to your advantage?

Absolutely, and that was one of the key underpinnings of my thinking about expanding into Europe with the acquisition of scil and CVM and the others. And it benefits the North America suppliers as well if they're able to earn our business in Europe and deal with us more as a consolidated global price and volume partner. So rationalizing those products in these different countries and picking fewer suppliers obviously means some suppliers lose and some suppliers pick up business that they wouldn't have otherwise gotten, and we think we'll get rewarded for margin and price with that increased volume. So yes, I think that's exactly right.

Okay. I have more questions, but I don't want to get in front of your Investor Day because I really want to talk about products, but I'll just hold off for 2 weeks.

Okay. Perfect. We'll see you at Investor Day.

Our next question comes from Andrew Cooper of Raymond James.

Maybe starting with Europe and scil. You said kind of at the high end of your expectations for the quarter. As we try to think about the trajectory there, I know there are some products that likely at some point get cold and some moving parts there and the transition to subscription. So just any flavor you can give on each of those dynamics to help us think about kind of where your positioning was in 3Q and what it might look like from there.

Yes. So we're doing those things and they're in process. I don't see big kind of cliff advance or big mountain climbing events in either direction because they won't all happen at the same time. But as -- we are doing subscription recognition in certain areas now and trying to go to that exclusive basis. And so that will have the effects that it had at scil in 2014 and '15 just in terms of dampened upfront revenue but better margin profile. And so we're doing those things.

The way I look at it is we got on the field largely at the very beginning of the second quarter. So we have the second, third quarter, and we're now largely into the fourth quarter, about halfway through. So we're putting that baseline here in place. And so the first quarter of 2021 will be the first full year of ownership for us. And so we're setting that baseline. And the expectations, especially given the COVID situation and then rolling lockdowns and those exist still. So a wonderful quarter we have and we've done wonderfully even with those dynamics in place, but there are now rolling lockdowns in Milan and Lombardy, for instance. So we keep those things in mind. So our first year will include all of that noise, I guess, is what I would say, Andrew, but for right now, we're just -- we're setting that baseline year and it's coming in nicely despite kind of the dangers that lurk out there. So that's kind of how I look at it.

Okay. That's helpful. And then maybe just one on margin. I think the North American number was impressive obviously and that's kind of a new way for us to think about it, but the gross margin was a nice number from our perspective. And when I think about other players, not necessarily in the animal health space but in general, we've heard call-outs for shipping costs and things like that being elevated, but is there anything to note in the margin other than, "Hey, there are some shifts around mix in the quarter," but anything else to sort of point out for us to think about. I know you mentioned OVP I think had a strong mix component there. So I would love some insight.

Yes. I think it's OVP mix. I think it's consumables mix, which is key to our gross margins. Now if you go all the way back to the -- to our 2013, '14 plan, you will recall we'd say, "Hey, we've got to get product right." And part of getting product right, then you got to get margin right, then you got to get people right, and then you have to get the model right, so the subscription SaaS type or model, and then you scale it. So I've never been a huge believer in scaling things that aren't profitable. So I think we just had a really positive peak at what we hope will be the future, where the higher margin businesses that we emphasize that we put our shoulder behind represent a higher percentage of our business and our growth, and we have positive margin result from that. And I think that's gross margin, and eventually that flows down through your adjusted operating margin. So I don't think it's anything more than what it looks like. We had good mix and we had good top line growth of things that have good margin.

Okay. Great. And then maybe just one last one...

Yes. I would...

Sorry. Go ahead.

Yes. I would just add though that I don't think we're coming off of what we talked about on the second quarter at all on a full year basis, just to kind of clarify that on a consolidated full year gross margin.

Okay. Great. And then maybe just one last one and appreciate if you say, "Let's defer," but just as we think about the quarter and some of the traction in the instruments that you've already at least brought to market, whether it's the DC5X or the RC and kind of how to think about any trajectory there, any traction that you saw in the quarter, what adoption has looked like, would be great.

I would say they've both been good and I would defer to Investor Day just in terms of more that's in the pipeline, but customers always like to adopt new products. That's the name of the game. So both of those are now shipping and they're being received well. And the sales force, also, enthusiasm is really important. And new products for sales force is a shot in the arm as well. So in terms of analyzers, it's a little bit of a downer to be launching sometimes when they can't quite get into the clinics as aggressively as they'd like to, but the adoption has been very good.

Our next question comes from Steven Mah of Piper Sandler.

Congrats on a great quarter. A lot of -- covered a lot of ground already but maybe digging a little bit more Andrew's question. I know you mentioned you're setting a baseline for the scil integration and I understand the travel restrictions, but could you maybe give us a little bit more color or maybe sort of early synergy or traction in terms of moving scil over scil subscription model and when we should expect to see an effect on gross margins?

It's more of a multi-year question. I do think we will cover it at Investor Day just in terms of how much can we move gross margins over the next 3 years and then what those stair steps look like. So I think I will defer. It's only 13 days and I -- so to take one number out of context, I think it'll be better if we present kind of the future in context in the next 13 days.

Okay. No. That's fair enough and I appreciate that. All right.

So my next question is you had a really nice rebound in Q3. I know you talked about the reshaping of backlog in that business in Q2, but do you think that backlog can thoroughly flush through or if there's going to be some residual effects through the end of the year?

Yes. It's a great question. So I look at it 2 ways. I think Q2 is maybe a little low, and we called out some supply chain transitions that we were making. So I think it was maybe a little bit low, and we called it out because it had the benefit of being true. And so we've resolved those issues. And so we have a full performance in Q3 without the drag of a point or 2 of just backlog, our own backlog, so our own supply chain created. And then I suspect there was a help of a couple of points, the 15.2%, to just put it into context. I suspect it was around 2 percentage points, and I think it's largely flushed through. So I don't really expect that path to continue as it really is kind of a catch-up tailwind. But to put it into context, the size, I think it's probably a couple of points, not -- it's not 5 or 10. And we don't see a supply chain drag like we saw in the second quarter returning in the fourth quarter. So we feel pretty good about underlying demand. It's real and it's not really a snap back with the exception of maybe a couple of points that didn't come in Q2 that came in Q3.

Okay. Great. And maybe just my last question, more sort of on a macro. Obviously, the global demand for companion animal health care has been very resilient, but could you compare and contrast sort of maybe where you're seeing in major regions in North America and Europe, especially in light of the very recent European lockdowns? And can you give us a sense of the trends you're seeing right now and talk on how that might translate to North America going forward?

Yes. And these are just more musings, I think, at this point. So North America, I think it's fairly straightforward and we don't anticipate lockdowns equivalent to what we had earlier in the year. But having said that, veterinary medicine pretty much worldwide in the markets that we operate is considered a necessary product. So even in Lombardy and Milan right now that have lockdowns, you can take your animal to a veterinarian. And we also find sometimes in lockdown areas, not that people are looking for excuses to get out of the house, but they have the time. And if their animal needs to go to the veterinarian, even if it's for wellness, they would rather do it now while they don't have the ability to do other things.

So I do think there will be rolling challenges. Madrid is another hotspot that flares periodically, and I don't think we're out of the woods on that. You don't need my commentary on what's going to happen to COVID. I'm not an epidemiologist, but I do anticipate kind of these rolling lockdowns, partial or otherwise, but I think we've seen the movie and we've seen that veterinary health care is a necessary service that holds up really pretty well. And I called out some of those themes. People who at home with their pets see health care issues and then they have all the flexibility and the extra time. They're not running kids to sports. They're not going to the pubs. They're not -- whatever it is, they picked up that extra time. They have flexibility in their schedule. They're working from home. They have people to watch the kids, all of these things.

And then the model, the fact that veterinarians are doing curbside check-in but they're also doing generally same-day curbside check-out, that leads really pretty well towards a point-of-care test because once the pet is in the back of the house, they get to do the full work-up, they get to do everything, they get to recommend everything, they get to set baseline diagnostics, all those things before they go back out to the curb. And that tends to lead pretty well to point-of-care testing as opposed to sending it out and having to wait a day or 2. So I'm fairly optimistic that underlying demand for point-of-care diagnostics is holding up fairly well in all the markets that we're operating in.

The next question comes from Ben Haynor of Alliance Global Partners.

Can you hear me all right?

You bet.

So just a couple of quick ones from me. Just on the International imaging, it's a bit bigger than we had anticipated. Is that fairly typical for what scil and the European firms might see in Q3? And then is there any seasonality we should be cognizant of for the European business as we go into the last quarter of the year?

Yes. Ben, so I think it was probably a little bit better than we thought. And I think in some regard, we are all flying a little bit in the fog, but I think it was probably a little bit better than we thought with the dynamics with clinics. That's a nice positive. And I don't know. Now you're just going to get my opinion again. I think F-150 trucks had a big spike in Q3 as well. So yes, I think people maybe have some pent-up demand in terms of capital equipment. Maybe there are certain incentives in certain European countries that are helpful to that in terms of investing in your business. But yes, it was a nice number. And it's just too early. We've only owned the business for a couple of quarters now to say that that's a firm baseline. We really would rather step back after 4 quarters of ownership and say okay, what is it under our ownership compared to historicals, but that was a positive number. It wasn't crazy, but it was -- it was definitely above my personal expectations.

Okay. That makes sense. I guess I got to add the F-150 sales figures to the model now.

Yes.

And then from the -- you mentioned the work from home, kind of the logistics flexibility that families and pet owners have now with obviously work from home. I guess in your sense, how big of a driver is that flexibility to the increased -- that there's increase in -- ultimately increased diagnostic usage?

So again, it's just personal commentary. I have been in the business since the early '90s. I think it's huge. We have always said that the single greatest limiter to everybody's business in the veterinary space is getting the pet to the hospital. Getting your cat in your car and driving into the veterinarian is the challenge. And then people tend to -- they have very high compliance. They trust their veterinarian a great deal and they should. So getting them there is the barrier. And I think it's real and I think it's lasting. I think the change is probably bigger frankly in North America, where flexible, work-at-home type of arrangements and mid-day schedules are less cultural than they are, say, in Spain. So I think it's probably a bigger shift for North America, but I personally think it's a lasting point. I think it will be in play for quite a while.

Okay. I guess that makes sense now that everyone has the new F-150. So I'll leave it at that.

Thank you, Ben.

(Operator Instructions) The next question comes from Jim Sidoti of Sidoti & Company.

Kevin, can you hear me?

We can, Jim.

Two quick questions, if you look at what you've done so far this year, the guidance for the year, it indicates a downturn sequentially in revenue from the third quarter to fourth quarter, which historically, fourth quarter is usually the strongest quarter of the year. So are you just being conservative and rather not update your guidance at this point? Or was there something pulled into Q3 that you don't think will be in Q4?

Yes. I don't think it's a pull-forward question as much as -- it's a scary place out there. And so when we look at it, we really have done a very thoughtful job of challenging the numbers and what to do with that. And we think the full year guide and the upper range of the full year guide is probably a correct place to be given uncertainty. So I think we're going to stick with that, but there is no -- there's nothing really I can give you that's a large mover to say, "Hey, $10 million of this showed up in the third quarter and we expected it in the fourth." I think it's really -- we started the year with a full year guide, and I think we're probably trending to the upper end of that, but we don't really want to move that up at this stage especially given the fact that most of the spaces just refusing to say anything. So we're trying to communicate as best we can. So I think we'll leave it where it's at.

Okay. So I mean in this environment, there's no reason to get aggressive. Being a little conservative is not a terrible thing, I don't think.

And then the other thing, Catherine, what's going on with the tax rate, why the big charge in the quarter? And how should we think about that going forward?

Yes. So Jim, we just effectively reduced the carrying value of our deferred, which is primarily related to the net operating loss. Now it's driven by some very strategic tax and business strategies that have been coming to fruition. So if you think about it going forward, we're really only -- I'm going to use the word, we're only really carrying about $7 million growth that's not -- does not have a valuation allowance assigned to it. The volatility going forward is pretty minimized in that regard.

So going forward would be...

I guess said another way...

Yes. Are you going to report what you pay going forward? Or are you going to report -- you're not going to report a full year tax number but pay smaller going forward? Is that right?

Right. So we're going to -- so yes. So what we'll do going forward, I mean we'll certainly provide full year 2021 expected tax rate as part of the multi-year as well.

Okay. But I'm guessing that tax rate is going to come down in '21 and '22 from what you thought it was going to be at the beginning of this year?

Yes.

As there are no further questions at this point, I would like to turn the call back to Mr. Wilson for any additional or closing remarks.

Thank you. Thanks, everybody, for joining the call. I think it's pretty clear that Heska has accomplished a great deal this year. And the results for the quarter, I think, are wonderful. I'm as pleased or maybe even more excited about the work inside of our business, and I think we're in a pretty good place as we enter the second half of our 5-year plan. So I'm super excited. Stay tuned. We're working hard. We expect to continue to execute for the second half of our strategic plan, and I will update you, with Catherine and the team, further 13 days from now at our Investor Day, which is, again, November 18. So I hope to virtually see everybody there. We think it's going to be a great day, a fun day, a big day for Heska. And yes, we hope to see you there. So until then, be safe, count your blessings, and don't forget to take your pet to the veterinarian as we've discussed. We know you have work-at-home time. So take your pet to the vet. All right. Thanks, everybody. Have a good day. Bye-bye.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.