Heska Corp (HSKA) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you so much for standing by. Welcome to the Heska Corporation first-quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). As a reminder, the conference is being recorded today on Tuesday, the 28th of April, 2009. I will now turn the conference over to Bob Grieve. Please go ahead.

Thank you, Michael and thank you all for joining us today for our conference call. I am joined today by Jason Napolitano, our Chief Financial Officer. We appreciate having the opportunity to review the results from the first quarter of 2009.

Prior to discussing our 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 cause or contribute to such differences are detailed in our press releases or in our annual quarterly or other filings with the SEC. These forward-looking statements speak only as of today and except as otherwise required by law, Heska does not intend to update any forward-looking statements to reflect events that occur after today's call.

Before I turn the call over to Jason, I wanted to make a few general comments. We were very pleased to have generated over $1 million in operating income in the quarter. It is no secret that we are doing business in a very difficult macroeconomic environment, yet we were able to produce good results. We had communicated in our last call that we expected revenue to be down year over year in our other vaccines, pharmaceuticals and products segment and that was clearly the case.

Importantly, however, we generated year-over-year growth in our companion animal health segment. We also improved our gross margin percentage and we reduced our operating expenses. Our operating expense reductions have been important to our bottom-line results. Headcount reductions that we described in our last earnings call, salary freezes and extremely disciplined operating behavior day to day have all contributed to this lower expense base. We have a seasoned operating team and a great employee base. It has proven again the ability to manage through difficult and uncertain times.

As we look forward in our business, there are a number of encouraging opportunities. Of course, we will be operating off a lower operating expense base, but in terms of growth, I would note a couple of important things. As we described in our fourth-quarter 2008 earnings call last month, with a diversified group of products, we have the advantage of being able to actively promote products other than capital equipment. For example, we enjoyed good growth in the first quarter with our Solo Step heartworm diagnostic test. We will continue to work towards selling a diverse productline, particularly in this environment where there is a reluctance to purchase or otherwise commit to diagnostic analyzers.

We continue to make progress toward the full launch of our new DRI-CHEM 7000 chemistry analyzer that we expect to have available later this year. Again, this is a high-end extension to our current DRI-CHEM 4000 analyzer and should compete very effectively with the highest end of any competitive offering in the marketplace today. We believe this product will have a higher throughput capability than any analyzer currently offered by our major competitors. And we hope to benefit from the market interest in clinical chemistry generated by recent competitive product launches. We are collaborating with Fujifilm on the DRI-CHEM 7000, which we expect to formally launch before year-end.

In addition to emphasizing other current products and the introduction of yet another new analyzer, we are continually exploring new sales channels opportunities. We have had extensive discussions with a number of partners, all toward leveraging other sales channels and growing our revenue accordingly. We continue to believe that our product quality and value is competitively outstanding, yet we need to continue to explore other ways to penetrate our target market. If we are successful in these discussions, investors may expect to see a positive impact on the future.

I would now like to turn this over to Jason. He will provide detailed information on our financial results and future financial expectations.

Thank you, Bob. We had a strong first quarter in 2009, which exceeded our guidance and internal expectations. Revenue in our core companion animal health segment grew by 3% compared to the prior year period and was $18.1 million. Our heartworm diagnostic tests generated significantly higher revenue than in 2008.

Other key factors in the year-over-year growth were increased sales of our instrument consumables, in particular for chemistry testing and increased sales of our heartworm preventive. We launched a new chemistry instrument in November 2007 and the placements of this unit throughout 2008 contributed to the year-over-year increase in chemistry consumable usage.

Somewhat offsetting gains in these areas was lower revenue from instrument hardware sales, from our chemistry instrument and our hematology instrument in particular. We believe a large contributor to slower sales here was the poor economy, which we believe is disproportionately affecting instrument sales. In addition, both units were introduced in the second half of 2007 and we believe benefited from our initial launch spend.

Although it was not a large change, sales of the original i-STAT handheld clinical analyzer increased compared to 2008. Our supplier of this instrument has not yet responded to our proposal to continue production of this product and on our longer-term relationship with them. We intend to continue discussions with them in the near future to continue to work together for our mutual benefit.

As we anticipated on our last call, revenue from our other vaccines, pharmaceuticals and product segment, or OVP, was $2 million. This represents a decline of $2.3 million, or 54% from the prior year period. The largest factor was a $1.2 million decline in revenue from Aqua Health, a unit of Novartis.

As we have previously discussed, last year, Aqua Health informed us they would be taking their production in-house, so they ordered no product from us in the first quarter of 2009. Lower revenue under our contract with AgriLabs also contributed to the year-over-year revenue decline in this segment.

Total revenue was $20.1 million in the first quarter of 2009, a decline of 8% compared to the first quarter of 2008. Gross margin -- that is gross profit divided by revenue -- was 36.6% in the first quarter of 2009, an increase of 1.3 percentage points as compared to 35.3% in 2008. Product mix and more disciplined higher pricing were key factors in the margin increase.

This was somewhat offset by significantly lower margins in our OVP segment where we had significantly lower revenue to spread our fixed costs over. Selling and marketing expenses were $3.8 million in the first quarter of 2009, a 24% decline compared to the prior year period. Key factors in the decline were lower spending related to product launches and lower commissions.

Research and development expenses were $446,000 in the first quarter of 2009, a decline of 17% compared to the first quarter of 2008. A key factor in the decline was lower spending on research and development resources such as laboratory supplies.

In the first quarter of 2009, general and administrative expenses were $2.2 million, a 14% decline compared to the prior year period. A factor in the change was savings resulting from our year-end restructuring.

In the first quarter of 2009, our total operating expenses were $6.4 million, a decline of 20% compared to the prior year period. We maintained disciplined expense control in the first quarter of 2009 and this was a key factor in our profitability. Our people were exemplary in carefully considering spending decisions to only allow those that were truly critical to occur.

Depreciation and amortization was $662,000 in the first quarter of 2009 as compared to $775,000 in the prior year period. A key factor in the decline was lower depreciation from demonstration units of products launched in 2007. As demonstration units are generally depreciated over one year, related depreciation occurred in 2008, but not in 2009.

We generated just over $1 million in operating income in the first quarter of 2009 as compared to an operating loss in the first quarter of 2008. Interest and other expense net was $165,000 the first quarter of 2009, down very slightly from the prior year period.

Lower loan balances and lower interest rates somewhat offset by the increased interest rate spread negotiated with our bank in December were responsible for the decline. Actually, net interest expense declined by $49,000 year over year from $188,000 in 2008 to $139,000 in 2009. This was almost exactly offset by a $48,000 swing in currency loss from a $22,000 gain in 2008 to a $26,000 loss in 2009.

We recorded income tax expense of $392,000 in the first quarter of 2009 as compared to a benefit of $163,000 in the prior year period. The latter was due to an anticipated future tax benefit from the loss occurring in 2008. You will note the implied tax rate is relatively high in the first quarter of 2009. This is a result of the impact of permanent tax and book differences at relatively low income levels. The largest item is intensive stock options. Others include expenses such as meals.

A company cannot generally deduct any expense related to an intensive stock option unless the associated employee has a disqualifying disposition of the underlying shares, which is generally beyond the company's control and therefore cannot be assumed for accounting purposes.

Similarly, only 50% of meals and certain other expenses are generally tax-deductible. In both cases, the nondeductible assumed permanent differences are added back to income before income taxes prior to calculating income tax expense. We anticipate both of these items would be relatively flat on increased income levels and therefore, their impact should be diminished as income increases.

We estimate our tax rate on taxable income to be 38.25% in the United States and lower in Switzerland. I think it is important to note that most of our tax expense is a non-cash accounting entry as we have a large net operating loss position in the United States. We are likely to break out net operating loss usage at higher income levels as we have done in the past, but we did not feel it was a useful exercise at lower income levels.

On the bottom line, we have $460,000 of net income in the first quarter of 2009 as compared to a net loss of $226,000 in the first quarter of 2008. We are proud to report a profitable quarter in such a difficult economic environment.

Before I discuss formal guidance, I think it is worth noting that our business has proven difficult to project even in less tumultuous economic times. We expect the overall economic environment, as well as veterinarians' expectations and reaction to it, to remain important factors in our relative success. These items, of course, are extremely difficult for a small company to forecast. Investors should keep this in mind when considering our guidance.

Our guidance for the second quarter of 2009 is for revenue of $18.5 million, including approximately $1.5 million in our OVP segment, gross margin of approximately 34%, approximately $6.5 million in operating expenses, an operating loss of approximately $200,000, approximately $150,000 in interest and another expense and a net loss of approximately $200,000.

I note that this level of OVP revenue is extremely low for our business. In comparison, we had approximately $5 million in OVP revenue in the second quarter of 2008, including approximately $1.6 million in revenue from Aqua Health.

For the full year, our guidance is for revenue of approximately $80 million, including approximately $9 million in OVP revenue, gross margin of approximately 35%, between $26 million and $27 million in operating expenses, approximately $1.7 million in operating income, approximately $575,000 in interest and another expense and net income of approximately $600,000. We anticipate we will generate a slight profit in both the third and fourth quarters of 2009.

In summary, we are pleased we were able to steer our Company to a profitable performance in a difficult economic environment this quarter. We intend to continue to maintain disciplined expense control and are hopeful of better economic times returning. With that, I'll turn it back over to you, Bob.

Thanks, Jason. While we acknowledge the uncertainties associated with the overall external economic conditions and how those conditions may affect our business, we remain enthusiastic for the business opportunities over the long term. We are committed to efficient operation of our base business, [changing] emphasis in product mix, future growth through new product introductions and exploration of unique sales channel opportunities, all with the goal of creating value for our shareholders. And we believe in this first quarter that we have demonstrated an ability to actively manage toward an optimal bottom line in a tough economy.

Thanks for your attention today. We appreciate your continued interest and support of Heska. At this time, I would like to turn this over to our moderator, Michael, for purposes of conducting our question-and-answer session.

(Operator Instructions). Jonathan Block, SunTrust.

Thank you and good morning, guys. Nice quarter. Just maybe a quick question on trends and I realize that we're only three or four weeks into the second quarter, but curious if you are seeing things get better? We have done some work out there, which shows that first quarter was still tough, but maybe things started to change in March into early April and just wondering if you are witnessing a similar effect?

Again, that's a great question. It is a sort of riveting and relevant question, but we wouldn't -- I wouldn't be comfortable speculating on trends right now that are any different. There just simply hasn't been enough data in the recent past. So I couldn't support that thesis, not yet.

Okay and maybe just one more on the rapid assay side. I think in January, you had a new competitor come into the rapid assay market, at least specific to the single heartworm. So did anything change there? Are you seeing any of your customers look at the -- I guess I should just say Abaxis' technology, any share shifts that you have been able to identify?

(inaudible) Abaxis is basically out there competing on price. They advertise heavily $4 a test. If I understand, they have already broken that and we have built a real reputation for quality and brand. So we have seen some impact on our customer base, but it is really at the lower end and frankly, the customers you are less concerned about holding because they tend to be less profitable customers and they tend to be looking for the absolute lowest price. That product area was our largest growth area in the first quarter and the heartworm product, which competes directly with the Abaxis product, was up 35% year over year. So I think that gives you some sense for the relative impact we are seeing from the Abaxis product.

Okay, great. Thanks so much, guys.

(Operator Instructions). John Nelson, State of Wisconsin Investment Board.

Hi, guys. Good job on the quarter and controlling the costs in a very tough environment. Kudos to you and all the employees of the Company. A couple of questions. First one is related to -- why do you think your heartworm product is doing so well versus the competition?

Certainly, there are different competitors in this market, John. We have got some higher-priced competition that have multiple assays on the same -- that run with the same blood sample and it is a more expensive product. Certain customers are turning away from that because of the lack of necessity for routine screening for those other tests relative to higher expense.

On the bottom end, as we have just discussed, is the price competitor. Heartworm screening is extremely important medically. A false answer can lead to very deleterious medical outcomes and we have a product and a brand that has been out there for a decade now and recognized for quality. So I just think the customers come to that same view.

Okay, good. The DRI-CHEM 7000 analyzer, you mentioned that you thought that it was the highest throughput of any analyzer on the market or would be when it is introduced, launched before year-end. Could you talk about any of the other characteristics of the DRI-CHEM 7000 that you think are advantageous or strong selling points to use against the competition?

John, I am going to be coy about this, consciously so. We wanted investors to know that we had something coming, but we are not anxious to outline our benefits and features here now and give the competition any advantage in the marketplace ahead of that launch. You can be certain they are either on this call or a reported facsimile of this call in the next couple of weeks.

Okay. Do you think that with the 7000 coming, does it deter from your salesforce's ability to continue to sell the 4000?

No, I think they are different customers both here in the US and abroad. They are going to be different customers with the 7000 arguably more suited to the higher volume, higher throughput hospitals, multiple doctor hospitals. The 4000 more suited again arguably to single doctor practices or smaller volume practices. Of course, individual personalities, practice trends and so forth are going to cause exceptions to that. But in general, you think of them as alternative offerings to different customers, product extension, productline extension if you will.

Okay. And the -- well, no, I don't want to ask you about the pricing because I am sure that that can't be discussed yet.

That's right, John. Good guess.

Future of -- I know you have had the drop-off of the other vaccines, pharmaceuticals and products segment due partly to the Aqua Health production in-house. What are your plans for that division going forward as far as continued development or customer penetration?

Right. Well, we continue to have discussions around attracting other customers to that business and facility. It is a situation where it is more complicated than just Aqua Health. We sell -- we manufacture for third parties a number of vaccines there. Most of which now are cattle vaccines and these are -- this is a very, very difficult environment. The cattle industry or cattle business right now is very difficult in the current economy.

We have seen -- or at least I have seen in the recent past data that would suggest that inventories of cattle where these vaccines would be applied are at their lowest level in around 40 years. So certainly, you're hoping for underlying macro trends to change as they surely will in course; we just don't know when. And then in the meantime, we work to attract additional customers and manage expense extremely rigorously there.

I will just add, John, that obviously that is putting some pressure on our gross margin and our financial results, but in a slow economic time, I imagine a lot of other manufacturers are finding the same thing. I imagine some of those will be cutting back and when good economic times return, we will have hopefully some good capacity that they can come use without trying to sort of rebuild it in-house.

Okay, very good. Thanks again and really good job on the cost controls.

Thank you, John. We appreciate the comments and the questions.

Thank you.

All right, thank you. And management, there are no further questions at this time. Please continue with any closing comments you may have.

Well, if there are no further questions, again, I would like to thank everyone for your interest in Heska and for taking the time to join us today. Goodbye.

All right, thank you. This concludes the Heska Corporation first-quarter earnings conference call. If you would like to listen to a replay of today's conference, you can do so by dialing 800-405-2236 or 303-590-3000 and put the access code 11130549. Heska would like to thank you very much for your participation today. You may now disconnect. Have a pleasant rest of your day.