Heska Corp (HSKA) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Heska Corporation first quarter 2010 earnings conference call on the 6th of May, 2010. 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 would now like to turn the conference over to Bob Grieve, Chief Executive Officer. Please go ahead sir.

Thank you all for joining us today for our conference call. I'm joined today by Jason Napolitano, our Chief Financial Officer. We appreciate having the opportunity to review the results from the first quarter of 2010.

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.

If you've examined the balance sheet released this morning, you'll note that our cash exceeded the total of both our remaining term debt and our line of credit, now for the second consecutive quarter. While operating capital requirements will certainly cause our line of credit to fluctuate over the course of the coming year, our term debt is scheduled to be paid completely in the third quarter of this year.

These are important balance sheet milestones for us to have achieved, particularly in light of some short-term business challenges.

As we have been describing for some time and asked investors to anticipate, we've experienced difficult year-over-year comparisons in our core companion animal health business due to the loss of revenue from the handheld analyzer franchise that we had built over many years. In just the consumable supplies for that business, revenue was down about $2.7 million in the first quarter year-over-year. This will continue to be a difficult comparison through 2010.

Late last year we announced that Heska has entered into a partnership with a well-established and respected company, Roche Diagnostics. The first result of this collaboration is an analyzer in the blood gas and electrolyte category. The VitalPath blood gas and electrolyte analyzer is our alternative offering to the discontinued handheld analyzer, and it advances how the industry previously viewed this product area.

Among other key advantages, the VitalPath provides rapid results in only 50 seconds for over 35 parameters, a color LCD touch screen, simplified operation, and minimal maintenance. We believe this analyzer will offer solid solutions, particularly for high-volume practices.

We have presold a number of these analyzers and expect to be installing the first units as part of a complete launch within the coming weeks. As we gain traction with this product, you should think of this as a future offset to some of the revenue lost with the handheld analyzer.

Finally, as described in our earnings release earlier this morning, we took a $1 million reserve in the first quarter for certain cattle vaccine products manufactured at our Des Moines facility. As part of our regular control processes, we became concerned that we were experiencing problems in our manufacturing of those products, and we voluntarily took action to stop the further manufacturing and sale of those products until we could determine exactly what was happening and how to remediate any potential problem.

First principles dictate that we cannot jeopardize the quality reputations of either Heska or our customers.

Throughout the process we have remained focused on understanding the issue, in implementing process solutions, and communicating with our customers and the regulatory authorities at the USDA.

Our recent findings related to the resolution of this issue are encouraging, and we continue to work with our regulatory colleagues at the USDA and others to return these products to the market as soon as possible.

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 total revenue of $17.7 million in the first quarter of 2010, decline of 12% as compared to $20.1 million in the prior-year period.

This was not unexpected. Last May the supplier of our handheld diagnostic instruments informed us they were canceling our contract.

In contrast to our remaining instrumentation agreements, which generally have a five-year, nonexclusive tail of consumable supply following the placement stage of the contract to allow us to benefit from the installed base we have built, we had only a six-month tail under our agreement with the supplier of this instrument. As per the contract, our supplier bought most of our related inventory early last November, and we sold the last of our inventory related to this contract in the first quarter of 2010.

This is also likely the most difficult year-over-year comparison we will face in this area, as the coming three quarters will be compared to a quarter of partial exclusivity, a quarter of non-exclusivity, and a quarter of partial supply -- in that order.

Core companion animal health revenue was $15.8 million in the first quarter of 2010, a decline of $2.3 million compared to the prior-year period.

The largest factor in the decline was lower sales of consumables for our handheld blood analysis instruments I have just discussed, which declined by $2.7 million compared to the prior-year period. This decline was somewhat offset by increased sales of our heartworm preventive under our contract with Schering-Plough Animal Health Corporation, or SPAH, now a unit of Merck & Co., Inc. -- or Merck.

On March 9, 2010, Sanofi-Aventis and Merck announced that they intended to combine Merial Limited, currently 100% owned by Sanofi-Aventis, with the animal health business of Merck in a new 50/50 joint venture.

In 2009 Sanofi-Aventis had acquired the option to combine these two businesses into a 50/50 joint venture under another transaction. Merial Limited sells HEARTGARD, the market-leading heartworm preventive.

In any case, SPAH has canceled near-term purchase orders and significantly reduced their forecast for 2010. Whether this is a reflection of underlying weakness in demand for the product, distraction among key sales and marketing individuals related to the pending merger, or conservatism in light of the impending merger, dictated from above, or some combination of two or all three factors, is impossible to know.

We know from experience the turmoil a large merger can cause among individuals concerned about their job status. We also know that in the past, SPAH has been reluctant to divulge sensitive information to us, as they have been aware of our disclosure obligations as a small public company and the ability of competitors to gain competitive information by monitoring our disclosures.

The guidance I will give later anticipates SPAH purchases of our heartworm preventive at its current forecast for the balance of 2010 and returns to the higher 2010 forecast level discussed on our last earnings call for 2011. Implicit in this assumption is that our contract with SPAH remains intact or is ultimately assigned to a third party with even stronger distribution volume capabilities for our heartworm preventive.

Of course, this is a situation we intend to closely monitor for the foreseeable future.

In the first quarter of 2010, we generated $1.9 million in revenue in our other vaccines, pharmaceuticals and products segment, or OVP, a decline of just over $100,000, compared to $2 million in the prior-year period. Lower sales of our cattle vaccines under our contract with Agri Labs and in international markets were a factor in the decline. These were somewhat offset by greater sales of bulk bovine biologicals.

Gross margin, that is, gross profit divided by total revenue, was 35.1% in the first quarter of 2010, down from 36.6% in the prior-year period. The major factor in the decline was an approximately $1 million reserve taken for vaccines products in our OVP segment Bob mentioned earlier.

This is obviously a priority situation that takes precedence over less pressing matters. While we are doing our best to seek new business opportunities in our OVP segment, and we hope customer orders will remain intact as we work to fulfill them, we anticipate a revenue decline in this segment for 2010, as compared to 2009.

In the first quarter of 2010, selling and marketing expense was $4 million, an increase of 7% from $3.8 million in the prior-year period. Greater advertising expenditures were the largest contributor to the increase.

Research and development expenses were $457,000 in the first quarter of 2010, a 2% increase as compared to the first quarter of 2009. Increased salaries was a key factor in the change.

In the first quarter of 2010, general and administrative expenses were $2.2 million, a 2% increase from the prior-year period. An increase in patent expenses was a factor in the increase.

Depreciation and amortization was $589,000 in the first quarter of 2010, down from $662,000 in the prior-year period. The depreciation of rental units for our former handheld analyzer in the 2009 period but not in 2010 was a factor in the decline.

We generated an operating loss of $488,000 in the first quarter of 2010, down from $1 million in operating income in the prior-year period.

Interest and other expense net was $173,000 in the first quarter of 2010, up about $8,000 from $165,000 in the prior-year period.

Net interest expense was actually down over $100,000 from $139,000 in the first quarter of 2009 to $36,000 in the first quarter of 2010. The largest factor in the decline was lower loan balances, as we have actually closed our last two quarters in a net cash position.

The lower net interest expense was more than offset by a wider foreign currency loss in 2010 as compared to 2009, $137,000 in the 2010 period, as opposed to $25,000 in the 2009 period.

After tax effects, which is primarily a non-cash accounting entry, we experienced a net loss of $331,000 in the three months ended March 31, 2010, versus net income of $460,000 in the three months ended March 31, 2009.

Before I turn to guidance, I want to emphasize how the past few months have demonstrated the difficulty in accurately predicting our business results. While we will still give guidance as best we can, investors should keep this in mind.

We know we face a difficult year-over-year comparison related to our former handheld instrument discussed earlier. In addition to the reserve related to cattle vaccine issues we have discussed, we do not expect to begin shipment of these products again until at least the third order of 2010. This is assumed in our guidance. Of course we anticipate this will lead to a significant idled plant charge which will put pressure on our gross margin in the second quarter of 2010.

Our guidance for the second quarter of 2010 is for revenue of approximately $15 million, including approximately $800,000 in OVP revenue. Gross margin of around 36%, operating expenses, a little over $6 million, and operating loss of approximately $750,000, approximately $50,000 in net interest expense, and a net loss of approximately $350,000. Based on current shares outstanding, this is approximately a $0.01 loss per share.

Our guidance for full-year 2010 is for revenue of between $65 million and $70 million, including approximately $6 million in OVP revenue, gross margin of approximately 39%, operating expenses between $25 million and $26 million, operating income between $1.0 million and $1.5 million, net interest and other expense of around $300,000, and net income, around $500,000. Based on currently outstanding shares and options and yesterday's closing stock price, which I will refer to as diluted shares, this translates into approximately $0.01 in earnings per share.

Although it is even more difficult to predict that far out, we are giving preliminary guidance for 2011 -- for revenue, a little over $80 million, approximately 42% gross margin, approximately $27 million in operating expenses, operating income, a little over $7 million, approximately $7 million in pretax income, and approximately $4.4 million in net income. Based on diluted shares, this translates into approximately $0.08 per share.

Our guidance is for deferred income tax expense, which relates primarily to our net operating loss position, of approximately $2.5 million in 2011. Based on diluted shares, this is approximately $0.05 per share.

While we face some challenges in 2010, we remain excited about our future prospects.

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

Thank you Jason. While we acknowledge the uncertainty associated with the overall external economic conditions and those conditions persisting, we remain enthusiastic for the business opportunities over the long term. As Jason has just described, we are resolved to produce the best possible results in 2010, despite the challenges we've just described, and we are particularly looking forward to returning solid growth in 2011.

We remain committed to efficient operation of our base business, future growth through new product introductions, and continual exploration of unique sales channel opportunities, all with a 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). Jonathan Block.

Maybe just first question, if you can just help us a little bit with the trends that you are seeing here maybe so far as we've entered the second quarter -- not necessarily the number obviously but just the choppiness in the market and the visibility that you feel you have, is it improving? Is it getting a little bit more consistent as we work our way throughout 2010?

It's very hard to get a handle on that, as you probably know. But I would say, as I've said in prior calls, it's inconsistent across the country. It's even inconsistent within municipalities based on the practice. But I would say generally I am not very upbeat or encouraged, and I call the attention to an earnings release you may have seen VCA Antech where they talked about same-store sales in their veterinary hospitals being down I believe around 1.6% year-over-year. So I am still concerned in the shorter term about the economy and its impact, and particularly its impact on the appetite for capital equipment expenditures.

Forgive me if I missed this, but in terms of the i-STAT business which you alluded to in terms of the tough comps, do you guys have your own new system in terms of quick blood gas that you have begun to roll out or may be rolling out soon?

It's not a replacement. It's an alternative product. It's not handheld, it's table-top based. But it's a very high throughput, high quality analyzer that's actually on a per-test basis less expensive to run. Quite rapid, very robust.

That's the analyzer that we referred to as VitalPath and that we are -- and have developed with Roche Diagnostics. And we will be -- we've presold many of those analyzers, and we will be installing the first of those analyzers in just a few weeks. And as we do, I want to assure shareholders that this is a complete launch. This isn't a staged launch, it will be complete, and we are confident that the product works great.

Maybe just last question, and it might seem a little bit like a silly question. But from a management perspective and even from an investor perspective, what do you think you look to as the most important variables to sort of reinvigorate growth in this industry? Is it just the typical unemployment rates that we allude to? Is it something more around consumer confidence? Are there other items you guys look to to give you sort of a better feel that we are turning the corner?

It's not a silly question at all, it's just a very complicated and difficult question to answer. And it's something that we think about all the time.

I think the simplest thing that I can say in this regard is that we watch unemployment numbers very carefully. This is a discretionary spend. Clearly a very, very small percentage of revenue in this industry is reimbursed, a minuscule, immaterial percentage. So it's a discretionary spend, and given our experience with our customers, the veterinarian, we generally feel that they are more conservative than even the pet owners themselves. So again, it's going to be -- the unemployment situation and its resolution may be a leading indicator to an improvement downstream.

But again, great question, complicated, and again, we are focused primarily on those unemployment numbers.

Great, thanks. I appreciate the time.

We appreciate your questions, they are very thoughtful.

(Operator Instructions). There appear to be no further questions at this time. Please continue with any other points you wish to raise.

I'd like to just say again thank you all for your interest in Heska and for taking the time to join us today. Goodbye.

Thank you ladies and gentlemen. This concludes the Heska Corporation first-quarter 2010 earnings presentation. Thank you for participating. You may now disconnect.