Heska Corp (HSKA) 2009 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Heska Corporation third quarter 2009 earnings conference call on the 27th of October, 2009. (Operator instructions.)

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

Thank you, Vivian, and thank you all for joining us today for our call. I'm joined today by Jason Napolitano, our Chief Financial Officer. We appreciate having the opportunity to review the positive results for the third 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 that involve known and unknown risks and uncertainties which may cause actual results in 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 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 want to make a few general comments.

The macro-economic environment remains very challenging; yet we were able to produce very good operating results. Specifically, we were very pleased to have generated over $1 million in operating income for the third consecutive quarter. Operating income was higher year over year both in the quarter and year to date.

Turning to our balance sheet, you can see our revolving line of credit has the lowest quarter-ending balance we have reported for some time. Also, our term debt has been reduced to $573,000, the lowest balance in well over a decade. Our projections based upon payments schedules show that our current term debt should be paid to zero by August next year.

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 $6.7 million in cash from operation in the first three quarters of 2009.

As a result of our financial performance and our increasingly positive outlook for the remainder of 2009 and into 2010, we were very pleased to suspend all mandatory furlough activity at our Des Moines manufacturing site last month.

I want to turn from financial performance to make a few comments about products.

First, with regard to the iSTAT product line, we really do not have much beyond the information we provided in our second quarter earnings call. We've been selling this product line since 1996, and as the market has evolved, it has become clear that this handheld product line is not the solution for all veterinarians. We have a contract with the supplier through November 1, and we intend to comply with the terms of that contract. After November 1, we understand Abaxis is to be responsible for customer service for this product line. We wish customers to whom we have sold these products continued success and hope they continue to receive world-class support.

We continue to make progress toward the full launch of our new DRI-CHEM 7000 chemistry analyzer. Like the DRI-CHEM 4000, we are collaborating with Fujifilm on the DRI-CHEM 7000. This is a high-end extension to our current DRI-CHEM 4000 analyzer, which will compete very effectively with the highest end of any competitive offering in the marketplace today. We believe this product will have higher throughput capability for multipatient testing and unique automated features that are superior to those found on analyzers offered by our major competitors.

We hope to continue to benefit from the market interest in clinical chemistry generated by recent competitive product launches. We've received very positive feedback from field-based beta testing and have already received a number of purchase orders. We expect to begin shipping analyzers to customers prior to year end.

In addition, I am pleased to say that we are working on a new blood-gas analyzer. Like our other recent new analyzer products, we expect to provide our customers with a high-quality, high-value offering beyond the marketplace status quo. For competitive reasons, we will have no further comment on this new product at this time, including its potential time of release.

In addition to emphasizing our current products and the introduction of yet a new analyzer, we are continually exploring new and alternative sales channel opportunities as a means to potentially greater revenue growth. We've had extensive discussions with a number of potential partners, all toward leveraging other sales channels and growing our revenue accordingly. As we have developed these discussions over the past few months, we've been very pleased that potential partners recognize that we have built a very strong brand for Heska in the companion animal health market. Among the attributes associated with that brand are first-class customer service and support and product quality and value that is competitively outstanding. If we are successful in these discussions, investors may invest 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 operating performance in the third quarter of 2009, generating over $1 million in operating income for the third consecutive quarter. Our operating and net income results for the quarter exceeded those in the prior-year period, an impressive accomplishment when one considers that the third quarter of 2008 was the last strong quarter we had prior to the impact of the global economic slowdown.

Revenue for the third quarter of 2009 was $19.6 million, down about $2.1 million from the prior-year period.

Core companion animal health revenue was $16.9 million, down approximately $2.4 million from the prior-year period. The factors in the decline were lower revenue from our heartworm diagnostic tests, cartridge sales for our handheld diagnostic instruments, our heartworm preventive, our chemistry instruments, and our IV pumps. These were somewhat offset by greater sales of consumables for our nonhandheld instruments.

Our heartworm diagnostic test sales were impacted in part by less discounting and forward-booking programs than we have offered in the third quarter of 2008.

Lower cartridge sales for our handheld diagnostic instruments was due in part to increased competition in this area as our rights under our contract with Abbott became nonexclusive on May 1st. This contract is to expire on November 1st, and we expect to sell our remaining inventory of cartridges in this timeframe.

We anticipate a corresponding effect on our fourth quarter results, although the affiliated financial pressure and difficult year-over-year comparison resulting from this situation will really begin when we enter 2010. Of course, our anticipated fourth quarter effect is built into the guidance I will give later on the call.

Revenue in our other vaccines, pharmaceuticals and product segment, or "OVP," was $2.7 million in the third quarter of 2009, up about 9% from the prior-year period. Greater sales of our cattle vaccines in international markets, somewhat offset by lower revenue under our contract with AgriLabs, was a key factor in the increase.

Revenue for the nine months ended September 30, 2009, which I will refer to as the "nine-month period," was $58.3 million, down approximately $7.9 million from the prior -year period.

Gross margin -- that is gross profit divided by revenue -- was 38% in the third quarter of 2009, up 0.2% from 37.8% in the prior-year period. Lower costs on sponsored research and development projects in the 2009 period was a factor in the increase.

For the nine-month period, gross margin was 37.4%, an increase of 0.4% from 37% in the prior-year period.

In the third quarter of 2009, sales and marketing expenses were $3.7 million, a 17% decline from the prior-year period. Lower commissions and lower spending on market research were key factors in the decline.

Research and development expenses were $457,000 in the third quarter of 2009, down $49,000 from the prior-year period.

In the third quarter of 2009, general and administrative expenses were $2.1 million, down 1% from the prior-year period. Savings from our year-end restructuring were a factor in the decline.

Total operating expenses in the third quarter of 2009 were $6.3 million, down about 12% from $7.1 million in the prior-year period.

For the nine-month period, total operating expenses were $18.6 million, down about 16% from the prior-year period.

In addition to the expense reductions I have just described, depreciation and amortization was about $2 million in the nine-month period, down from $2.3 million in the prior-year period. A key factor in the decline was lower depreciation from demonstration units of products launched in 2007.

Operating income for the third quarter of 2009 was $1.2 million, up 6% from $1.1 million in the prior-year period. This is particularly impressive given the difficult year-over-year comparison we faced.

For the nine-month period, operating income was up 3.2 -- was $3.2 million, up 41% from $2.3 million in the prior-year period.

In the third quarter of 2009, interest and other expense net was actually $13,000 of income, a $78,000 in current gains more than offset $65,000 in net interest expense. For the third quarter of 2008, $109,000 in net interest expense and $44,000 in currency losses combined for an expense of $153,000. A key factor in the year-over-year decline in net interest expense is significantly lower borrowings under our revolving line of credit.

Income tax expense was $429,000 in the third quarter of 2009, up $61,000 from $368,000 in the prior-year period. This change is primarily due to greater income in the 2009 period. It is important to remember that our tax expense is primarily a noncash accounting charge, as we use our significant US NOL to shield us from cash taxes.

In the third quarter of 2009, our net income was $743,000, an increase of 29% from $577,000 in the prior-year period.

For the nine-month period, our net income was $1.8 million, an increase of 75% from $1 million in the prior-year period.

Before I turn to guidance, I think it is worth a comment on 2010.

We have been through three budget turns at this point, and each of these budget turns has shown a profit for our company in 2010. We have received information from the field that certain of our competitors have reverted back to their old habits of trying to question our future financial performance and position with our customers, despite the fact that such claims have been proven false in the past.

Luck has it that our competitors also tend to listen to our earnings calls. I think it is worth putting those competitors listening today on notice that Heska expects to be profitable in 2010 and to prosper in the future. We would much prefer to compete on the basis of product quality and service for our customers. If our competitors have the same confidence in their product offering we do in ours, we would expect they would prefer the same approach.

We expect to provide full guidance on 2010 on our next earnings call following our year-end 2009 results and the formal completion of our budget process, and, as has been our practice, we will not comment further on 2010 or the years beyond today.

Our guidance for the fourth quarter of 2009 is for revenue of approximately $17.5 million, including approximately $2.5 million in OVP revenue.

We are guiding for gross margin of 35%, operating expenses a little over $6 million and in line with our second quarter results, operating income of a little over $100,000, about $100,000 in interest and other expense, and a slight amount of net income, say on the order of $1,000.

I note that this guidance represents a significantly better performance than we posted in the fourth quarter of 2008. If one adds this guidance to our nine-month results, you obtain just under $76 million in revenue, gross margin a little below 37%, operating expenses of a bit over $24.5 million, operating income of approximately $3.3 million, approximately $300,000 in interest and other expense, and net income of approximately $1.8 million for 2009 full-year results.

In summary, we have reported another solid quarter of results, carefully managing our expenses and slightly growing our margins to continue to increase our profitability as compared to a strong corresponding performance in 2008. We are excited by our future prospects.

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

Thanks, Jason.

While we acknowledge the ongoing uncertainty associated with the overall external economic conditions and the difficultly in predicting when these conditions will significantly improve, we remain enthusiastic for our future business opportunities. It is clear that companion animal health is not recession resistant, but our outlook is more positive than it was just a quarter ago. As Jason has just commented, we see a more positive outlook for the fourth quarter than we described on our last earnings call.

Potential for long-term growth in the companion animal health diagnostic products our strategic focus is widely recognized. We've established an efficient operation of our base business with the lowest level of operating expense run rate in more than a decade, and we believe enthusiastically in our growth potential through new product introductions and exploration of unique sales channel opportunities, all with the goal of creating value for our shareholders.

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 for purposes of conducting our question-and-answer session.

(Operator instructions.)

Thank you. The first question is from John Nelson. Please state your affiliation followed by your question.

Hi. This is John Nelson with the State of Wisconsin Investment Board.

Good morning.

Just wanted to congratulate you guys on excellent control of costs, and good job for the quarter under pretty tough circumstances.

What -- my question is related to what can you tell us about what's going on, any significant trends in both the core companion animal health market and then also the other vaccines and pharmaceuticals and products market.

Certainly. John, good morning, and, again, thanks for the question.

I think that, again, it's been very difficult to predict a forward trend with any kind of certainty just yet. And about the only thing that I think I could say responsibly would be that -- as I've just noted, that our performance was better than we forecast at our last earnings call in the third quarter, and we've just taken our forecast for fourth quarter up from that same time -- from that same call. So we're -- we see a little bit of improved business conditions for ourselves, but I don't know how to trend line that.

And I think it also would emphasize again that the companion animal health segment has not been recession resistant, but to some extent it's been resilient compared to, say, other industries that are completely dependent on discretionary spending. I think it feels tentatively like we may be seeing some improvement, but, again, I wouldn't want to -- I'm at a loss (inaudible), John.

Uh-huh.

I think with the OVP business, again, we've had a tough down year this year, as we've said, but we are seeing some reasonable opportunities in the future that we don't expect to see a dramatic spike in improvement revenue there, more just steady improvement in this coming period.

Okay. Is the competitive factor -- competition -- any significant change in the competition or the players in those various markets?

Competitors are generally the same. I think the mode of competition, again, as Jason would have indicated in some of his comments, has become a little different, perhaps a little more desperate on the part of some, turning from product features and benefits to, sort of, other imaginative ways to try and position yourself, but I think, in general, it's the same -- same players and very same situation.

Okay. And have you -- has your customer base been growing or shrinking over this period of time?

What?

That is the number of customers?

I think maybe it's possible that we're seeing -- it's hard to say in terms of total sort of total customers at this point.

Uh-huh.

But I would say for sure in some cases, and some parts of the country we're seeing less traffic and less veterinary -- less traffic through the veterinary hospital. Some it's still quite strong. Some have gone out of business. Some have grown their business. I think net it's very, very soft when you net it all out across the country.

Uh-huh. Okay. And then one more. You did comment on the -- a brief comment in your press release on the DRI-CHEM 7000 chemistry analyzer and the -- is that actually being marketed now at this time?

Yes, it has been, and we actually -- sales training has occurred and is in process. We have a number of purchase orders, and as I believe I indicated in my remarks, we expect to begin shipping and installing into customers' veterinary clinics and hospitals this quarter.

Uh-huh. And could maybe just briefly go over the pluses and minuses versus IDEXX's competitive product?

I'll just say for -- let me just say -- confine my comments to this product for now, and I'll still be just a little oblique, John, because we'd rather the competitors actually see this in the field before they understand what they're up against.

Uh-huh.

But I would say that, for the most part, it's very, very, very accurate. Its precision, particularly, is quite high. It's very good with processing multiple patients at one time, up to five or so patients at one time --

Uh-huh.

-- ability to interrupt that patient flow. The ability to do a number of presurgical simultaneously. So net of all that, it's extremely fast. So speed, reliability, accuracy, with a focus on precision, I would say, are the main things.

Okay. And cost competitive?

Very definitely.

Okay. Great. Thanks very much.

Thanks, John.

And good luck in the future.

Thank you very much. Really appreciate your support, John.

Thank you.

Thank you. The next question is from Gary Giblen. Please state your affiliation and then your question.

Hi. Good morning. From Quint Miller.

Just to clarify, you guys have nicely accelerating revenues here in the third quarter and based on what you indicated for the fourth quarter, so I note you say the industry conditions for core companion animal are still soft and sort of unchanged. So is that due to -- strictly to your own execution and products or -- I mean, or is there some sequential improvement in the industry? In other words, how can we reconcile all this?

I would say -- just let me be sure that we're clear. In what we've reported today and as described in the call, we've described a situation where operating income results have been, we think, quite good and very remarkable given the conditions, and those results are -- have not been generated by revenue growth, but rather by actually improvements in operating expenses and to some lesser extent gross margin improvements. So that's the trend that we've described today. We see -- we continue to see a relatively soft macro-economic dynamic, and we've responded to this at the end of last year by readjusting operating expense basis and being mindful of inventory and so forth. In essence, that's what we've tried to describe here.

Okay. I was looking at sequential quarter revenue, but maybe I wasn't taking into account seasonality properly so the -- in terms of looking at that but -- and then just to expand upon the creative competitive activity there, the -- does that activity include intensified pricing competition, or could it do so? Is that contemplated in your guidance?

Well, I don't think we expect that. There are some instances -- and we even described on our last call that one competitor's introduced a competitive disposable diagnostic product, and they fight on price with that product, but that's more the exception. The largest competitor in the space hasn't at this point competed on price. But important question. It's not something that we are seeing right now as a trend, nor do we anticipate that in our guidance.

Okay. Thanks very much. Good luck in the current quarter.

Thank you, sir.

(Operator instructions.)

There appear to be no further questions at the moment. Are there any further points you wish to raise?

Well, thank you, Vivian.

I'd just like to repeat my -- our gratitude. Thank you all for your interest in Heska and for taking the time to join us today, and good-bye.

And this concludes the Heska Corporation third quarter 2009 earnings conference call. Thank you for your participation, and you may now disconnect.