Heska Corp (HSKA) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Heska Corporation second-quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode and following the presentation, instructions will be given for the question-and-answer session. (Operator Instructions). And as a reminder, this conference is being recorded today July 27, 2011.

I would now like to turn the call over to Brett Maas with Hayden IR. Please go ahead.

Thank you. My name is Brett Mass, I'm with Hayden IR, Heska's new Investor Relations firm. We're excited to work with Heska and we welcome everyone to the call. On the call with us are Heska Corporation's Chairman and Chief Executive Officer, Bob Grieve and Jason Napolitano, our Chief Financial Officer. We appreciate having the opportunity to review the results from the second 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 the 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 occurs after today's call.

I now like to turn the call over to Bob Grieve, Heska's Chairman and CEO to provide opening remarks.

Thank you, Brett. This was another quarter of strong execution for Heska, as we continue to position the Company for accelerated growth and profitability in the coming quarters. Year-over-year we generated over 15% revenue growth, substantial increases in both gross profit and gross margin percentage and year-over-year improvement of nearly $1.1 million at the operating income line, moving from a loss in last year's quarter to a profit in this year's quarter. This is our fourth consecutive quarterly profit.

On a trailing 12-month basis, we have generated operating income of nearly $3.5 million, $0.66 per diluted share and operating income and $0.36 of earnings per diluted share. Importantly, we've produced over $3.5 million in cash provided by operations since the beginning of this year. Our term debt was completely paid over a year ago and at the end of the second quarter we have zero balance on our line of credit. Our balance sheet is in great shape, with $1.09 in cash per basic share and $18.7 million in working capital.

During our last earnings call, I described the addition in early May of Joe Aperfine to our management team as Executive Vice President, Sales and Marketing. Joe has been hard at work filling vacant sales positions and reorganizing our commercial team. That work is still very much in progress, but we've already added impressive new talent that in addition to our outstanding long tenured sales people we expect we'll have a marked improvement in sales productivity, particularly as we introduce new products.

With regards to our increased focus on innovation, during our recent earnings calls, I noted that in addition to gaining more share with our current products wherever possible, we also remain committed to creating additional top-line growth with new products and that we were working on a number of new alliances and other opportunities to bring new products to the market.

I also said that we expect to launch at least one more new product prior to the end of this year. We remain committed to that goal. In addition, we expect to introduce upto four new products next year, including at least two new products from our recently announced alliance with Rapid Diagnostek. As we can talk with certainty about new product opportunities, we will keep you informed. In the mean time, be assured that we are focused on revenue growth.

We were very pleased to announce Ms. Sharon Riley's appointment to our Board of Directors earlier this month. We have had a long standing commitment to excellence in corporate governance. The Board with high quality independent directors is essential to our efforts in this regard. Sharon has had a distinguished carrier in hospital administration. Most recently she was CEO of UT Southwestern University Hospital in Dallas and she will bring our Board the perspective of unique experiences as a very successful leader in a complex and highly regulated business environment.

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, and thanks to everyone who joined the call. Our revenue in the second quarter increased 15.5% to $17.4 million, compared to $15.1 million in the second quarter last year.

Core companion animal health revenue grew 2.1% to $14 million from $13.7 million in the year ago quarter. Increased sales of instrument consumables somewhat offset by lower revenue from domestic sales of our canine heartworm preventive and our chemistry instruments were a key factor in the increase.

We had a significant level of vacancies in our sales force with only 19 of 30 territory manager positions filled at the end of the quarter, which we believe was a contributing factor towards sales performance this quarter. We've already filled several of these positions and our hard at work to hire talented individuals in all open positions. In addition, we continue to see indications of softness in our market, in particular related to the placement of new capital equipment.

In the three months ended June 30, 2011 our other vaccines, pharmaceuticals and products or OVP revenue increased by over $2 million to $3.4 million, as compared to $1.4 million in the prior-year period. The largest factor in the increase was greater sales of cattle vaccines under our contract with AgriLabs. We had no sales of these products in the second quarter of 2010 due to [now resolved] regulatory problems. In addition, cattle vaccine sales to new customers were a factor in the increased revenue in this area.

In the second quarter of 2011, our gross profit was $7.5 million, compared with a gross profit of $5.8 million in the second quarter last year. Gross margin, that is gross profit divided by total revenue, was 42.8% in the second quarter of 2011, a significant increase from 38.7% in the prior-year period. The largest factor in the increase was a significant improvement in gross margin related to our OVP segment.

In the second quarter of 2010, the regulatory issue we have discussed led to a large idle plant charge, whereas we had strong revenue and throughput in this segment in the second quarter of 2011. Comparatively we experienced a 411 basis point improvement compared to the second quarter last year and a 27 basis point sequential improvement compared to the first quarter of this year in gross margin.

SG&A expense was $5.9 million, or 33.7% of sales, compared to SG&A expense of $5.7 million, or 37.5% of sales in the second quarter last year. We remain focused on carefully managing our operating expenses and we have demonstrated an ability to control costs even while growing our revenue.

Selling and marketing expense was $3.6 million in the second quarter of 2011, a decline of 2.4% as compared to $3.7 million in the prior-year period. Sales force vacancies were a factor in the decline.

In the three months ended June 30, 2011, our general and administrative expense was $2.3 million, an increase of approximately $300,000 as compared to $2 million in the prior-year period. The large factor in the increase was an increased Management Incentive Plan accrual. We had zero accrual under our 2010 Management Incentive Plan at June 30, 2010. We did not make any payments under this plan.

Research and development expenses were $703,000 in the second quarter of 2011, an increase of over $300,000 as compared to $388,000 in the prior-year period. The largest factor in the increase was a payment to a third party related to a product we are collaborating to develop with that Company. R&D expenses are rather lumpy from quarter-to-quarter though we expect to see increases in the coming year as we increase our focus on innovation.

Total operating expenses were $6.6 million or 37.7% of sales in the second quarter of 2011 compared with total operating expenses of $6.1 million or 40.1% of sales in last year's second quarter. In the second quarter of 2011, we reported operating income of $887,000 compared to an operating loss of $207,000 in last year's second quarter.

Interest and other expense, net was $142,000 in the three months ended June 30, 2011, an increase of approximately $20,000 as compared to the prior-year period. We experienced net interest expense of approximately $6,000 and a net currency loss of approximately $136,000 in the second quarter of 2011.

The currency loss primarily relates to the relative strength of the Swiss franc, the functional currency our Swiss operating subsidiary. This compares to net interest of approximately $55,000 and a net currency loss of approximately $67,000 in the second quarter of 2010. Lower loan balances is the primary reason for the decline in year-over-year net interest expense. In the second quarter of 2011, pre-tax income was $745,000, compared to a pre-tax loss of $329,000 last year.

Net income in the three months ended June 30, 2011 was $457,000, or $0.09 per basic and diluted share. This compares with a net loss of $165,000 in the prior-year period. I note, our second quarter 2011 net income is inclusive of a $235,000 deferred income tax expense, or $0.04 per diluted share. It is important to remember that this is a non-cash accounting charge only and primarily relates to our large domestic NOL deferred tax asset position, which provided a tax shield for most federal income taxes we would otherwise pay. Year-to-date revenues increased 12.7% to $37 million compared to revenue of $32.8 million last year. Core companion animal health revenue grew 3.2% to $30.5 million from $29.5 million in the prior-year period. OVP revenue grew 9.8% to $6.5 million from $3.3 million last year.

Gross profit was $15.8 million, or 42.7% gross profit margin compared with gross profit of $12.1 million, or 36.7% gross margin last year. SG&A expense was $12.3 million, or 33.3% of sales compared to SG&A expense of $11.9 million, or 36.3% of sales in the first six months last year.

R&D expense increased 22.4% to $1 million, up from $845,000 for the first six months last year. Total operating expenses were $13.3 million, or 36.1% of sales compared with total operating expenses of $12.7 million, or 38.9% of sales last year.

Depreciation and amortization was $1.1 million in the six months ended June 30, 2011, down slightly from $1.2 million in the prior-year period. For the six months ended June 30, 2011, the Company reported operating income of $2.4 million compared to an operating loss of $695,000 last year. Pre-tax income was $2.3 million compared to a pre-tax loss of $990,000 last year.

Net income in the six months ended June 30, 2011 was $1.4 million, or $0.26 per basic and diluted share. This compares with a net loss of $495,000 or $0.09 per basic and diluted share last year. Our net income in the first six months of 2011 is inclusive of a $730,000 deferred income tax expense, or $0.14 per diluted share.

Turning to the balance sheet, we had $5.7 million in cash and working capital of $18.7 million as of June 30, 2011. Our cash from operations resulted in zero debt at the end of the reporting period.

This is the first time Heska has reported a debt-free quarter since the Company's 1997 initial public offering and is an important milestone for our Company.

Let me turn to the outlook for the third quarter. I want to remind investors, our business remains a difficult one to project, in particular in times of economic uncertainty. Our guidance for the third quarter of 2011 is for revenue of approximately $19 million including approximately $3.25 million in OVP revenue, gross margin of approximately 40%, a little under $7 million in operating expenses, operating income of around $625,000, no material impact from interest and other expense and net income of approximately $375,000.

We are also raising our revenue and profitability guidance for 2011. Our guidance for full-year 2011 is for revenue of approximately $74 million including approximately $12.25 million in OVP revenue. Gross margin of a little over 41%, operating expenses, a little about $27 million, operating income of approximately $3.5 million, interest and other expense of approximately $165,000, and approximately $2 million in net income.

Based on yesterday's closing stock price and currently outstanding shares and stock option, which I will refer to as current diluted shares, this guidance translates into approximately $0.37 in earnings per diluted share. I note that this net income figure is inclusive of approximately $1 million in deferred income tax expense, which as I mentioned earlier, is a non-cash accounting charge primarily related to our large domestic deferred tax asset. Based on current diluted shares, this translates to approximately $0.18 per diluted share.

In summary, the first six months of the year have resulted in a significant year-over-year improvement and we are well on our way to a strong year. These results demonstrate what our Company is capable of and provide optimism for further improvement as we introduce additional products and solidify our sales force.

I would now like to turn the call back over to Bob.

Thank you, Jason. I would like to close our comments by making a few summary points about our financial performance. We reported strong year-over-year growth in revenue, gross margin, gross margin percentage and at the bottom line. Our balance sheet is in great shape, no term debt, no balance on our line of credit, with ample cash and available borrowings to fund our operations and be opportunistic with potential M&A activity.

We have introduced one new product already in 2011 and intend to launch one more this year. We are actively working on new growth opportunities. We expect to introduce upto four new products next year.

Our guidance for 2011 includes double-digit revenue growth, gross margin percentage improvements, and earnings growth. Cash from operations will continue to benefit from our NOL asset. Specifically, our guidance of $0.37 per diluted share in 2011 includes a substantial deferred tax expense of approximately $0.18 per diluted share. These deferred tax expenses are essentially non-cash accounting charges, primarily related to our large domestic deferred tax assets.

We would like investors to understand that we are very pleased with our financial performance to this point in 2011. Very importantly, we would also like you to know that we think of this year as a time when many things are falling into place for growth in 2012 and beyond. Our reorganized commercial infrastructure should be the most robust and productive it has ever been by the end of this year.

We are adding to our R&D budget, even while accelerating profitability with the goal of increasing our innovation and delivering several new product launches into next year and beyond. And we are constantly seeking unique value adding other product in commercial partnerships, we intend to grow.

During our last two calls, we described that from an economic performance standpoint in a single metric, our management team is focused on achieving trailing 12-month earnings of $1 a share while we are simultaneously making underlying investments towards sustained long-term growth.

The results of our second quarter and the various activities we've reported today provide insight into how we get there. At the end of the second quarter, our trailing earnings were $0.36 per share. In order to nearly triple that result, we need to grow revenue with both current and new product offerings. We will do that with the most capable sales force we've ever had and with renewed focus on R&D and product development.

Our consolidated gross margin percentage should continue to trend more favorably as we sell additional higher margin products including a greater [relative] volume of consumables or analyzers. While we will see some expansion of R&D expense for innovation and growth and SG&A expense, as we expand our commercial infrastructure, we expect much more leverage out of our current operating expense base. Specifically, revenue growth should greatly exceed expense growth resulting in accelerating profitability.

In aggregate therefore, we are confident about the $1 per share target and of course remember that I'm describing an after tax GAAP target and because of NOL carryforward we pay significantly less cash tax for the tax expense reflected in our financial statements.

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

Thank you. (Operator Instructions). And our first question does come from the line of Jonathan Block with SunTrust.

Great. Thanks. Good morning, guys and a really nice quarter.

Thank you.

Maybe just on the first question, Bob, you talked a lot about new products and this seems like a nice strong pipeline for new products. I've heard you, I believe, allude to some rapid assay initiatives in the past and can you provide with what you can, an update there? Will you have additional rapid assays? Are they all going to be sort of single assays or do you do have the ability to go ahead after the parts of the multi-NOI business? Thanks.

Right. I think that -- and just trying to recap and set context. We said that we would do -- that we intend to introduce four new products next year, upto four new products. And two of those products will be from our Rapid Diagnostek alliance. That Rapid Diagnostek alliance is associated of course then with the rapid point-of-care immunodiagnostic assays. And I would say that -- so, therefore the answer to your question is, yes, we will be doing point-of-care rapid, point-of-care immunodiagnostic assays through that platform.

And just to your further question, I believe that when we introduced this technology to investors, we noted that this technology had the capability of multiplexing and doing several (inaudible) the same format.

Okay, great. Very helpful. And then just to shift gears, you mentioned some of your SG&A initiatives. Clearly you're still going to be able to derive a lot of leverage from the revenue growth, but when you take a step back and sort of with the current investigation going on in the industry into the distributors, how does that weigh on or influence some of your decisions around rep count? I mean are you just moving forward assuming nothing comes out of the FTC, because again if the channel was open I would think that might play with how many reps that you decide to go with and the timing behind it? Thanks.

I would say, good question and a [stud] question. I would say that that investigation and its outcome has no bearing at all on how we're planning the build out of our commercial infrastructure. We can't plan around the waggeries of such things or its timing. And I would say also that all the progress that we've made has been against the, sort of, headwind of not having access to national distribution.

So we're going to continue to march along independently assuming, making no assumptions about the outcome of such an investigation. And I would say that further as I've said, I think in public forums we don't see -- that outcome dictates that more people have access to national distribution. We don't see that as a life switch event either. This large competitor has a lot of other ways to gain share.

Okay, great. Now that's very helpful. And then maybe just a last question. I don't have all the numbers in front of me. I believe you referenced about 3%, 3.2% growth from the companion animal business versus our checks where we were sort of showing growth at the hospitals of around zero to 1%-ish and change. Maybe any light that you can shed on what's going on out there, do you believe you're taking some slight share to give you a growth rate that's slightly north of what I believe the industry is growing? Do you see the industry picking up at all? Any color would be great. Thank you

Again, your analysis is probably more thorough than mine would be in this regard. I know you do a lot of work in this area. I would say that as Jason indicated, a lot of our growth came consumable growth out of installed base and it's hard to track that contemporaneously with the economic conditions. I would say that invoking others language, the economic conditions haven't been of any help here. And I think we would see ourselves continuing to execute though and to do well and to grow as we've said and as we forecast. But it is -- I think it's a rough economy and we'll continue to be generally that way until there's improvement in unemployment and some of those other metrics that encourage pet owners to spend more time going to the veterinarian. But, again, much of our view would be tough economic environment, we're making progress despite that, growth is coming from consumables from our installed base, Jon.

Okay. Great. Thanks very much and nice quarter guys.

Thank you, again.

And our next question does come from the line of John Nelson with the State of Wisconsin Investment Board.

Hi, guys, it is John Nelson, by the way. Great quarter, way to go. You're following your game plan and executing exceptionally well. Congratulations.

Thank you, John.

Thanks, John.

My question is related more to -- is related to the, if you can give us some additional details on the sales force that you mentioned. You had, I believe, was 19 of 30 slots filled and you had filled some additional ones since the end of the quarter, but what exactly has been -- you haven't talked that much about the sales force -- in the last couple of calls, can you give us a little more color on what's going on with that?

Certainly, John. I think we described in May that we hired a new Executive Vice President over Sales and Marketing. And that position, that leadership position has been vacant since early in the fourth quarter. We separated from the [prior leader] in that position at about that time. That time there were sales openings and I would say the separation was precipitated by performance. And in the intervening months there wasn't much traction gain in filling vacancies and in fact other folks left. So in May we started with -- our new person started and started rebuilding that sales force and adding physicians as we've described. So we've made a lot of traction. We've made traction since the end of the quarter. We've done a lot of sales trainings and we're going to continue to do that.

Do you think you've lost much business during that time period because of this transition that's occurring?

I would say that it hasn't been helpful. Even if we go back to the metric that Jason talked about 19 of 30, that's less than two-thirds of your sales force active. So it points to two things. One is you can -- we could have done even better with more effective headcount. And also it points to the fact that those that we have -- that have remained in position have done a darn good job.

Okay. Excellent. Well, thanks very much. Keep up the good work, to you and your team.

Thanks, John, we will pass that along.

Thank you.

(Operator Instructions). And I'm showing no further questions in the queue. I would like to turn the call back over to Dr. Bob Grieve for any closing comments.

Okay, great, thank you. I want to just say thank you again all of your interest in Heska and for taking the time to join us today. Good bye.

Thank you. Ladies and gentlemen, this does conclude the conference call for today. We do thank you for your participation, you may now disconnect your lines, at this time.