Heska Corp (HSKA) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Heska Corporation first-quarter 2011 earnings conference call on today, May 5, 2011. Throughout today's 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 your host, Mr. Bob Grieve. Please go ahead, sir.

Thank you, Danny, and 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 2011.

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.

We are very pleased to report this first quarter of 2011. Results exceeded our expectations and our guidance. Year over year, we generated double-digit revenue growth, substantial increases in both gross margin and gross margin percentage, and $1.5 million in operating income, all with less than 1% growth in operating expense.

These results are entirely consistent with what we have been managing toward -- namely, revenue growth with concurrent gross margin improvement and continuing leverage from our operating expense base.

We were very excited to announce the addition of Joe Aperfine to our management team. We have been telling investors that a search was underway for the past few months and that we were determined to make the right hire.

Earlier this week, Joe assumed the role of Executive Vice President, Sales and Marketing. He has overall responsibility for all of our sales and marketing activities in companion animal health in North America, as well as management of third-party distributors ex-US.

Joe has enjoyed a very successful career in the animal health industry, with prominent commercial leadership roles in well-known companies including Banfield, Novartis and, notably, the market share leader in diagnostics, IDEXX. We believe he is an ideal fit right now for Heska. I cannot think of another individual who would make the impact that we expect from Joe's leadership.

Yesterday, we announced an important new alliance with Rapid Diagnostek, an alliance that will result in an entirely new next-generation platform for the development of a series of new diagnostic products. We have looked literally for years for such a platform, and we are very enthusiastic about the potential.

Our product development people will be working together with their counterparts at Rapid Diagnostek to create new products. In turn, Heska has worldwide exclusive commercial rights to the resulting products in companion animal health.

This new platform uses biosensors with a battery-operated instrument to detect pathogens, proteins and other biomolecules in 60 seconds. Samples may come from blood, urine, saliva or other liquids. As we get closer to our initial product launch with this platform, we will provide much more detail.

During our last earnings call, I noted that, in addition to gaining more share with our current products wherever possible, we also remain committed to creating additional topline growth with new products and that we were working on a number of alliances and other opportunities to bring new products to the market. This alliance is one of those that I was referring to at that time.

I also said that we expect to launch at least one more new product this year. We remain committed to that goal. As we can talk with certainty about new product opportunities, we will keep you informed. In the meantime, be assured that we are focused on growth.

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 $19.5 million of revenue in the first quarter of 2011, a 10% increase from the first quarter of 2010. Core companion animal health revenue was $16.4 million, an increase of 4% compared to the prior-year period. Key factors in the increase were higher sales of our instrument consumables and sales of our heartworm diagnostic tests internationally, somewhat offset by lower sales of our heartworm preventative domestically.

While we were able to grow revenue from consumables related to our instruments, the market for new instrument placements remains soft. The increase in international sales of our heartworm diagnostic products primarily relates to sales to Japan, where a unit of Novartis, which I will refer to as Novartis Japan, has exclusive marketing rights.

Novartis Japan tends to give us orders which do not consistently occur at the same magnitude in the same month year over year. This can introduce a certain lumpiness into our financial results when reviewing quarter-over-quarter results.

We did not have a large shipment of our heartworm diagnostic tests to Novartis Japan in December 2010 as we did in December 2009. We had larger shipments of the product in the first months of 2011 as compared to 2010.

If you were to look at total sales in this area for the six months ended March 2011 as compared to the six months ended March 2010, sales to Novartis Japan have increased. Schering-Plough Animal Health Corporation, or SPA, a unit of Merck, has an exclusive contract to sell and market our canine heartworm preventive in the United States.

As we have publicly disclosed in the past, we received a very high growth forecast for domestic sales of this product in 2010, which was apparently too aggressive, as SPA placed purchase orders below its original forecast later in the year. Related purchase orders in the first quarter of 2010 were tied to the original forecast, which presented us with a difficult comparison this quarter.

In March 2011, there was a public announcement that a planned merger involving Merck's animal health business had been terminated. This should serve to remove any uncertainty regarding the efforts of SPA to market and sell this product in the near term.

Revenue in our other vaccines, pharmaceuticals and products segment, or OVP, was $3.1 million in the first quarter, an increase of [61%] as compared to the first quarter of 2010. Greater sales of cattle vaccines under our contract with AgriLabs into two new customers were factors in the increase.

Despite our strong revenue growth, our cost of revenue actually declined in the first quarter of 2011 as compared to the prior-year period. Gross profit for the first quarter of 2011 was $8.3 million, an increase of 34% as compared to the first quarter of 2010. This was the result of greater sales and higher margins.

Gross margin -- that is, gross profit divided by total revenue -- was 42.5% in the first quarter of 2011, up over 7 percentage points as compared to the prior-year period and the highest quarterly level in three years.

The largest factor in the increase was a reserve of approximately $1 million in our OVP segment for product produced and under review for destruction and replacement recognized in the first quarter of 2010 and not in the first quarter of 2011.

Selling and marketing expenses were $4 million in the first quarter of 2011, a decline of 2% compared to the prior-year period. Lower advertising expenditures were the largest factor in the decline.

Research and development expenses were $331,000 in the three months ended March 31, 2011, a decline of $116,000 as compared to the three months ended March 31, 2010. A greater level of sponsored research and development related to cattle vaccines in our OVP segment in the 2011 period was a major factor in the decline. We expect this line item to increase significantly in the second quarter of 2011 as compared to the first quarter of 2011, as we have already made a $300,000 payment related to our research and development activities to a third party.

Third-quarter 2011 general and administrative expenses were $2.5 million, an increase of 12% compared to $2.2 million in the prior-year period. A greater accrual related to our management incentive plan in the first quarter of 2011 relative to the first quarter of 2010 was a factor in the increase.

Capital expenditures were $97,000 in the first quarter of 2011, down slightly from the first quarter of 2010. For full year 2011, we expect capital expenditures to be greater than in 2010.

We currently have just over $1.5 million in active capital expenditure requests, although all projects may not be approved and we retain flexibility to defer certain projects based on cash needs, as we have done in the past. This does not include planned noncash transfers of inventory to property and equipment, which often occurs when we capitalize demonstration units, as an example.

Depreciation and amortization was $608,000 in the first quarter of 2011, a slight increase from the prior-year period. For the full year, we expect depreciation and amortization to decrease compared to the 2010 level. If we were to make no further capital expenditures, our 2011 depreciation and amortization would be between $1.9 million and $2 million.

If we were to make all capital expenditures already discussed on the timetables currently contemplated, our 2011 depreciation and amortization would be between $2.1 million and $2.2 million.

Despite our strong revenue and gross margin improvements, total operating expenses for the first quarter of 2011 were $6.8 million, an increase of less than 1% as compared to the prior-year period. We expect operating expenses, particularly in research and development and commercial operations, to increase in the last nine months of 2011 as compared to the last nine months of 2010.

Our first-quarter 2011 operating income was $1.5 million, an improvement of over $2 million as compared to an operating loss of $488,000 in the first quarter of 2010. Our first-quarter 2011 operating income is the second-highest quarterly operating income in our Company's history.

Interest and other expense, net, can be broken into two components, net interest expense and foreign currency gains or losses. First-quarter 2011 net interest expense was $20,000, a decline of $16,000 as compared to $36,000 in the prior-year period. Lower loan balances was the largest factor in the decline.

The larger change in this line item relates to foreign currency losses. We had a net currency loss of $3000 in the first quarter of 2011, down from a loss of $137,000 in the prior-year period.

Income tax expense or benefit is primarily a noncash item, as we have a large domestic net operating loss position that we use to offset most federal income taxes. First-quarter 2011 net income was $916,000, improved from a net loss of $331,000 in the first quarter of 2010.

Our balance sheet remains strong as we again closed the quarter in a net cash position and have $7.8 million of borrowing capacity under our revolving line of credit.

Before I turn to formal guidance, I want to remind investors our business remains a difficult one to project, in particular in times of economic uncertainty. Our guidance for the second quarter of 2011 is for revenue of approximately $18 million, including approximately $3.25 million in OVP revenue, gross margin of between 41% and 42%, a little under $7.5 million in operating expenses, operating income of around $25,000, interest and other expense in line with the most recent quarter we just reported, and a slight bottom-line profit, [a] net income of around $1000.

I note that our guidance for our profit compares to a loss in the second quarter of 2010. We are also raising our revenue and profitability guidance for 2011. Our guidance for full year 2011 is for revenue of approximately $73 million, including approximately $11.5 million in OVP revenue, gross margin of around 41%, operating expenses a little below $28 million, operating income of approximately $2 million, interest and other expense of approximately $100,000, an accounting income tax rate of approximately 40%, and approximately $1.25 million in net income.

Based on our share price as of yesterday's close and shares and options currently outstanding, this guidance translates into approximately $0.23 in earnings per share for full year 2011.

It is important to remember that we expect most of our tax expense to be noncash due to the utilization of our large domestic deferred tax asset. Based on our share price as of yesterday's close and shares and options currently outstanding, our guidance translates into approximately $0.12 in tax expense per share for full year 2011.

In summary, we had a very strong quarter in the first three months of 2011. These results demonstrate what our Company is capable of when things break our way. We look forward to working toward future quarters like this one.

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

Thank you, Jason. To recap some of our points, we reported strong year-over-year growth in revenue, gross margin, gross margin percentage and at the bottom line. Growth was achieved with less than 1% growth in operating expenses.

We have introduced one new product already in 2011, and we will launch at least one more this year. We are actively working on new growth opportunities. This was illustrated by yesterday's announcement of a new diagnostic product platform.

Our guidance for 2011 includes double-digit revenue growth, gross margin percentage improvements and earnings growth. And we have just updated our guidance to a higher level of revenue, as well as more operating and net income. Cash from operations will continue to benefit from our NOL asset. Specifically, our guidance of $0.23 per share in 2011 includes substantial noncash tax expense.

Finally, as we noted on our last call as well, from an economic performance standpoint in a single metric, our management team is focused on how fast we can get annual earnings to $1 a share while we are simultaneously making underlying investments towards sustained long-term growth. In the intermediate term, we believe our earnings per share will grow at least the rate of the other animal health companies of interest, as we discussed at our Annual Meeting of Stockholders on Tuesday. Beyond that, we are hopeful our $1 per share goal is looming on the horizon.

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

(Operator Instructions). Jonathan Block.

This is Jonathan Block over at SunTrust. Nice quarter, Bob. I just wanted to run a couple things by you.

I just don't have all the math in front of me. The earnings-per-share expectations of $0.23, that seems to include significant noncash. Do you just have an approximate number of what sort of a cash 2011 EPS goal is for you guys?

We don't have anything like that. There are some pretty strict SEC regs about disclosure requirements when you get into non-GAAP metrics, I think, as I'm sure you know, Jonathan. But I think you can get a pretty good sense just by looking at the deferred tax expense on the cash flow statement in the K. The majority of our tax expense is noncash and just an accounting convention.

Okay, great. Thank you. And then maybe just to shift gears, you guys definitely sounded, to me at least, a little bit more upbeat, launching new products, some good earnings growth here. Maybe if you can just speak to what you are witnessing in the overall environment? I think for 1Q, it seemed to be pretty tepid growth for the overall industry, but it was tough to tease out how much of that was weather related versus the underlying fundamentals.

And so maybe if you could speak to what you guys saw in 1Q, and now maybe what you are seeing in early 2Q to try to get an understanding of what's really going on now in the peer fundamentals? Thanks.

Sure, Jonathan. Again, we appreciate your questions. I would say -- you used the word tepid. Jason earlier in this call, I think, used the word soft, at least for analyzers. It's still -- it's hopeful. And as, I think, as we took our guidance up just a little bit, I think we are very cautiously optimistic. At the same time, capital equipment sales remain sluggish, and veterinarians, I think, remain generally -- again, generally -- reluctant to make capital equipment purchases.

So we still see it as fairly sluggish. We are looking for sort of those green shoots that have been described in the past. We think the veterinary industry is probably lagging the broader economy in general. But, again, that's by no means any sort of excuse. As I said, as you observe, we are more upbeat, cautiously optimistic. And this is an environment where the Company needs to hustle, be creative and make it happen.

Absolutely. Okay. And maybe last one -- you mentioned one new product launch. Did you guys ever disclose a goal for the year of how many new product launches you are trying to get out there in 2011?

Always said in the past, after we introduced our new handheld lactate analyzer, was that we intended to introduce at least one new product by the end of this year. And that's all we've committed to at this point.

Okay, great. Thanks, guys. Nice quarter.

John Nelson.

Great quarter. Congratulations to you and your team on a terrific effort. And I as a shareholder appreciate it.

I have a couple questions. The first one is related to, can you discuss a little bit more the specifics of why you are so excited about and the meaningfulness of the Rapid Diagnostek alliance?

Certainly; I'll try to expand on that a little bit, and ask more questions if my response is not adequate.

This is -- we have been looking for a modern point-of-care rapid immunodiagnostic platform for some time. I referenced years, and that's literally true, of trying to find a robust economic product offering that really trumps the current generation. So I think we've found it in Rapid Diagnostek. It's an exciting technology, an exciting early-stage company with really great technology.

The idea would be, again, to restate, a new platform where you can create additional new products and greatly extend our product offerings in point-of-care diagnostics. And we would see this as a product where, frankly, we would see some of our first growth from that product even in 2012, John, but then a stream of products to go in the years that follow that.

And do you have -- is this agreement, alliance with Rapid Diagnostek exclusive?

It's exclusive to our field of interest, companion animal health. And it's exclusive worldwide in that field.

Okay, good.

Yes; very excited, John.

And will it require, when -- you mentioned the first product sometime in 2012. Will that change your CapEx or SG&A substantially in 2012 due to launching this in a significant way?

Well, I wouldn't think of anything in terms of CapEx or, really, SG&A. We will see -- I'm sure we will see some incremental costs associated with market launches. And we will also, hopefully, see great commission and bonus payouts from sales reps as they are successful with it in the field.

I think, other than that, you could anticipate milestone payments that would come, depending on what -- the form of the payment, it will either be amortized over the term of the deal or it will be a one-time R&D expense in the operating expense line, John.

Okay. And then has there been any significant change in the level of competition or new product intros from competitors that you are either concerned about or just paying a lot of attention to?

I think my impression would be status quo since the last time we have talked. There's nothing looming in terms of new product introductions that we are particularly concerned about. But that -- I don't intend to understate our daily concern about the products that exist out there with competitors and trying to get that share back from them.

Okay. And then can you give just a few extra comments on the Merck failed efforts on their -- on selling or merging their animal health division?

That's correct. Well, it's only as an outsider. I can just tell you only as an outsider and an interested party with respect to Tri-Heart. They've spent approximately one year in trying to accomplish a merger. And then that was, as we said, just recently those efforts were dissolved, presumably because of regulatory complexity. That's the way it's been described, very large -- two very large entities. And you can imagine the product overlaps and the global issues from a regulatory standpoint.

From our -- from Heska's view, we have been saying over that entire year to investors that this is an uncertainty. This creates an uncertainty because they undoubtedly will not be able to market the Tri-Heart product. We had other interested parties. But, just the same, it wasn't a settled issue; it was a pending merger.

So we were anxious to make sure investors knew that through those disclosures. Now we are saying it's back to business as usual with the Intervet/Schering-Plough marketing and distribution agreement.

Okay, very good. Thanks again, and great quarter.

Thanks for your support, John.

(Operator Instructions). We do not appear to have any further questions at this time.

Fine, Danny. Well, then at this point, I would just again thank you all for your interest in Heska and for taking the time to join us today. Goodbye.

Ladies and gentlemen, this completes today's Heska Corporation third-quarter 2011 earnings conference call. Thank you for your participation, and you may now disconnect.