Heska Corp (HSKA) 2009 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Heska Corporation second quarter 2009 earnings call on the 10th of August, 2009. Throughout today's recorded presentation, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

I will now hand the conference over to Bob Grieve. Please go ahead sir.

Thank you Juan. 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 second 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 occurred after today's call.

Before I turn the call over to Jason, I want to make a few general comments. We were very pleased to have generated over $1 million in operating income for the second consecutive quarter. The macroeconomic environment is very difficult and we have described that we anticipated much lower year-over-year revenue results in our other vaccines and pharmaceutical segments. That was certainly the case. Yet, we were able to produce good results.

As 2008 was coming to a close, we clearly understood that 2009 would be a challenging year and we took decisive, sometimes painful steps to adjust our operating expense base and to manage our balance sheet as rigorously as possible. The result of these efforts, you will note significantly lower operating expenses year-over-year, both in the second quarter and the first half of the year. There were head count reductions, salary freezes, a mandatory furlough policy at our Des Moines manufacturing site and extremely disciplined operating behavior day to day.

Turning to our balance sheet, you can see our revolving line of credit has the lowest quarter-ending balance that we have reported for sometime. Also, our long-term debt, both current and net of current portions combined has been reduced to $765,000, the lowest balance in well over a decade. Finally, in terms of financial performance, we've been managing inventory as aggressively as possible. The results of those efforts and our operating results have produced over $5 million in cash from operations in the first half of 2009.

I want to turn from financial performance and make a few comments about products. First, we were disappointed to report the loss of access to the i-STAT product line. This is a product we have supported for many years, a franchise that we made successful. However, we faced similar issues in the past and managed successfully through those transitions. This is a product area which offers slightly below average margins. We've been taking a slight loss or at best essentially breaking even on new instrument placements for sometime. The product line, which we've been selling back to 1996 is aging, with connectivity issues, presenting an increasing challenge. This was the last of our old major instrument contracts negotiated without a five-year tail -- that is a contractual provision for a five-year consumable supply post-termination.

We do not expect to enter into any future major instrument supply agreement without such a tail. We've actually experienced a decline in i-STAT cartridge volume in 2008 and year to date 2009. We believe it would have been difficult to reverse this trend and would likely have required increases in commercial operating expenses and decreases in margin. Given the economics, our sales time and other resources may be best spent elsewhere. In some ways, it was always possible there would come a point where we would no longer deliver the growth our supplier expected. We believe we could have continued to add value to the product line, but the supplier decided not to continue the long-standing relationship following our initial proposal.

I would also note that we have been aware of this risk for sometime and while the business decision on the part of this partner was surprising, we have been actively disclosing the risk. And, while there's no perfect replacement today, we have thoroughly been considering alternative products and changes in this market for some time. In the very near term, we are determined to complete our current responsibilities in support of the i-STAT product line. I would add that among our major competitors, we believe [Abacksis] carrying the product line will have the least competitive impact on us in the future. As you might expect, investors will learn of our alternative strategies and products at roughly the same time our competitors learn the information.

We continue to make progress toward the full launch of our new Dri-Chem 7000 chemistry analyzer that we expect to begin selling prior to year end. 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 higher throughput capability than any analyzer currently offered by our major competitors. And we hope to benefit from the market interest and clinical chemistry generated by recent competitive product launches. We are very -- we are collaborating with FUJIFILM on the Dri-Chem 7000, which we expect again to be selling before year end. We will be providing more detail by our next earnings call.

In addition to emphasizing other current products and the introduction of yet another new analyzer, we are continually exploring new sales channel opportunities. We've 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. We are successful in these discussions. Investors may expect to see a positive impact in the future. Given the potential sensitivity of this subject, we will have no further comment at this time.

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 second quarter in 2009, which exceeded our guidance. We reported $18.6 million in total revenue for the second quarter of 2009, down from $22.6 million in the prior year period. For the six months ended June 30, 2009, we reported $38.8 million in total revenue, down from $44.5 million in the six months ended June 30, 2008.

Revenue from our Core Companion Animal Health segment was $16.9 million in the second quarter of 2009, a 4% decline as compared to the prior year period. Key factors in the decrease were lower sales of our chemistry instruments and our hematology instruments, somewhat offset by increased sales of our heartworm diagnostics tests internationally. We were quite aggressive in sales offers for a diagnostic instruments this quarter. But the economic environment continued to present a challenge in placing capital equipment in veterinary clinics.

Revenue in our Other Vaccines, Pharmaceuticals and Product segment, or OVP, was $1.8 million in the second quarter of 2009, a 65% decline from the second quarter of 2008. More than half of the decline was the result of a change in fish vaccine revenue from Aqua Health, a unit of Novartis. In addition, lower revenue under our contract with [Agrilands] and lower sales of bulk bovine biologicals contributed to the decline. As we have previously disclosed, Aqua Health informed us last year that they were taking the manufacturing of these fish vaccines in-house. The second quarter of 2008 was the last quarter we recorded revenue from Aqua Health, so the difficult year-over-year comparison caused by this customer should not occur in future quarters.

Gross margin, that is gross profit divided by total revenue, was 37.7% in the second quarter of 2009, a slight decline from 37.9% in the second quarter of 2008. We experienced significantly lower margins in our OVP segment, where our fixed costs were spread over a significantly lower revenue base. This effect on consolidated gross margin was somewhat positively offset by product mix.

In the second quarter of 2009, our total operating expenses were $6 million, a 16% decline from the second quarter of 2008. Selling and marketing expenses were $3.6 million in the second quarter of 2009, a 22% decrease as compared to $4.6 million in the second quarter of 2008. Lower expenses related to product launches and lower commissions were key factors in the decrease. In the second quarter of 2009, research and development expenses were $405,000, a decline of 3% as compared to $417,000 in the prior year period. General and administrative expenses were $2 million in the second quarter of 2009, down 6% from $2.1 million in the prior year period. Savings resulting from our year end restructuring was a factor in the change.

In the second quarter of 2009, we generated operating income of just over $1 million, a decline as compared to $1.4 million in the prior year period. For the six months ended June 30, 2009, we generated over $2 million in operating income, up from $1.2 million in the prior year period. Depreciation and amortization was $1.3 million in the six months ended June 30, 2009, down from $1.6 million 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.

Interest and other expense net was $41,000 in the second quarter of 2009, down from $181,000 in the prior year period. This line item can be broken down into two components. Net interest expense and net foreign currency gain or loss. We experienced a net foreign currency gain of $61,000 in the second quarter of 2009, an $85,000 change from a net foreign currency loss of $24,000 in the prior year period. Net interest expense was $102,000 in the second quarter of 2009, down $55,000 from $157,000 in the prior year period.

Lower loan balances and lower market interest rates were key factors in the decline. These were somewhat offset by the increase in interest rate spread we negotiated with Wells Fargo in signing the latest amendment to our agreement with them last December. Income tax expense was reported as $390,000 in the second quarter of 2009, down from $539,000 in the prior year period, primarily as a result of lower income before income taxes. It is important to note our income tax expense is primarily noncash, due to the large net operating loss position we have in the United States, which shields us from most cash taxes.

We generated net income of $579,000 in the second quarter of 2009, down from $666,000 in the prior year period. For the six months ended June 30, 2009, we generated over $1 million in net income, up from $440,000 in the prior year period. You will note that our line of credit balance was under $7 million on June 30, 2009, a reduction of over $4 million since year end. We've also repaid over $350,000 in long-term debt since year end.

As we enter 2009, our Company leadership agreed to make concerted effort to reduce inventory levels and I'm glad to say this has yielded positive results. Our employees have continued to show thoughtful discipline in pursuing operating expenses, capital expenditures, and inventory purchases. This has been a key to our profitable operations and lower line of credit borrowing in 2009.

Our guidance for the third quarter of 2009 is for revenue of approximately $19.5 million, including approximately $2.5 million in OVP revenue. We are guiding for gross margin of 34%, approximately $6.25 million in operating expenses, operating income of around $375,000, about $100,000 in interest and other expense, and net income of about $150,000 for this period. For the full year 2009, our guidance is for approximately $75 million in revenue, including approximately $9 million in OVP revenue. We are guiding for gross margin of between 35% and 36%, approximately $25 million in operating expenses, operating income of around $1.65 million, about $400,000 in interest and other expense, and net income of about $700,000 for the full year 2009.

You will note our guidance implies a slight loss for the fourth quarter. Historically, the fourth quarter has tended to be the strongest quarter for instrument placements. As I noted earlier, our experience through the second quarter is that the current economic conditions make instrument placements a challenge. We cannot assume we will have a frothy market in the near future and our guidance represents our current best thinking in this regard.

We also cannot ignore that we will likely be exiting the i-STAT business in this quarter, as Bob has mentioned. This will almost certainly have an effect on the fourth quarter result, although the affiliated financial pressure and difficult year-over-year comparisons resulting from this situation really begin when we answer 2010. Of course, we are working every day to improve our prospects for not only the upcoming two quarters, but also for 2010 and beyond. We hope to generate results that are better than the guidance I have given today, as it takes steps to significantly improve our Company's outlook beyond 2009.

Our business has always been difficult to project, and the current economic uncertainty and the alternatives we are considering only make it more difficult. As a result, we will have no further comment on the fourth quarter of 2009, 2010, or any period beyond that. In summary, we are proud to report a second consecutive profitable quarter in this difficult economy. We've continued to demonstrate the disciplined operating behavior necessarily to generate these profits and plan to continue to do so in the future.

With that, I'll turn it back over to you, Bob.

Thank you, Jason. While we've known the uncertainty associated with the overall external economic conditions and how these 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 the first two quarters of 2009 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.

Juan, could we proceed to the question and answer session?

Thank you, sir. (Operator Instructions) Sir, the first question comes from the line of John Nelson. Please state your company name followed by your question.

Hi, good job on the managing the quarter, you guys.

Thank you, John.

Thank you, John.

Question is related to the cost of revenue, down sharply, much more so than the drop in revenues. What do you attribute that to other than the obvious volume changes?

Yes, the, the percentage was I think gross margin, John, was 37.7% versus 37.9%.

Okay.

And the key factor in the decrease was the lower margin in the OVP segment.

Okay.

But we've got a fixed cost that we're spreading over a significantly lower revenue base. And we had some product mix that offset that to some degree, but not quite -- not to get back to the same gross margin.

Okay. Did your raw materials drop much as far as -- or at all as far as their costs?

We didn't see a material drop in raw material costs, I would say, John.

Okay. All right. Very good.

And the -- as far as the instrument line for the 4000, I don't know if you can make any comments about that as far as the high end versus low end, because you've got the 7000 coming in near the end of the year and do you expect that to be much more complimentary or cannibalizing?

John, I would say we would expect those to be complimentary. Again, the Dri-Chem 4000 is an outstanding analyzer. It's been just great.

If you turn to certain veterinarians, certain practices where they expect -- where they would say prefer more volume, throughput, just for example, they would -- they may prefer the Dri-Chem 7000. And other veterinarians may as well, but we definitely see them as complimentary and not cannibalizing. Think of them as product line extensions, if you will.

Okay. And one other question related to the number of veterinarians that you're servicing, or if you can comment on the veterinary market in general. Are they seeing -- is the veterinary market in general increasing in numbers, or decreasing to any significant extent due to this severe recession?

Right, I would comment -- I would restrict my comments really at this time to the companion animal segment of the veterinary market.

Okay.

And we would exclude the livestock associated products.

Sure.

I would say that it's extremely variable. We've noted that capital equipment is a difficult sell in the current environment. That's for sure.

And other competitors who have talked about analyzer placements and particularly -- if you exclude replacement of their own products in those placement numbers -- you'll also see similar results in this difficult capital sale.

Then I think if you look at the broader animal health market, again, with emphasis on companion animals -- as people have reported in this most recent period, I would say there is -- maybe a spot or two here of brightness, if you sort out currency exchange effects and so forth. But in general, it's a fairly down market.

Okay. Thanks very much.

Yes, John. You're welcome. Thanks for your support.

Thank you, John.

You're welcome.

(Operator Instructions) At this point, sir, there appear to be no further questions. Please continue with any other points you wish to raise.

In the face of no further questions, I would like to thank you all for your interest in Heska and for taking the time to join us today. Good-bye.

Ladies and gentlemen, this concludes the Heska Corporation second quarter 2009 earnings call. Thank you for participating. You may now disconnect.