Heska Corp (HSKA) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Heska Corporation's Fourth Quarter and Year End 2012 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Monday, February 25, 2013.

I would now like to turn the conference over to Mr. Jeff Stanlis with Hayden IR. Please go ahead.

Thank you. Thank you all for joining us today on our conference call.

On the call today with us are Heska Corporation's Chairman and Chief Executive Officer, Bob Grieve, and Jason Napolitano, the Company's Chief Financial Officer. We appreciate having the opportunity to review the results of the fourth order and full year 2012 and the acquisition of Cuattro Veterinary USA.

Prior to discussing the results, I would like to remind you that during the course of this call, we may make certain forward-looking statements regarding future results, events, or future financial performance of the company. We need to caution you that any such forward-looking statements are based on current beliefs and expectations and involve known and unknown risks and uncertainties, which may cause actual results and performance to be materially different than what is expressed or implied in those forward-looking statements.

Factors that could cause or contribute to such differences are detailed in the press release or in the annual quarterly 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.

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

Thank you, Jeff.

I'd also like to thank everyone for joining the call today. Normally, I would lead off this review with a discussion of our operational and financial highlights for the fourth quarter and full year before turning the call over to Jason. However, in light of our announcement of the acquisition of 54.6% of Cuattro Veterinary USA, LLC, which we will refer to as Cuattro Vet, I will provide those highlights first.

Let me say that our acquisition of a majority interest in Cuattro Vet is a major event for Heska. It accelerates our growth, augments our product lines, and improves our talent. This combination allows us to grow our Business with a superior digital radiography product line that is complementary to Heska's own current advanced diagnostic product suite. In addition, it lets us bundle and therefore, compete very effectively. In fact, for the first time, Heska will be able to bundle outside of our core lab offerings.

One of our key competitors in the Analyzer business has neither ultrasound nor digital x-ray products. The other lacks an ultrasound product offering and now we believe we have a superior digital radiography offering in head to head comparisons. In addition, over time, we expect the potential for cost efficiencies, as well as an opportunity to develop and enhance pipeline products.

Each time a customer is touched, there are now more offerings to present, at approximately the same cost per touch to Heska. The sales forces have little to no duplication, but the opportunity to cross sell and sell everything to each potential customer is compelling. Cost efficiencies will unfold over time. A good example would be a consolidated presence at trade shows.

In 2012, Cuattro Vet generated approximately $11 million in revenue and was slightly profitable. Cuattro Vet has been growing rapidly and we believe we can accelerate the top and bottom line growth as we integrate their offerings and their strong sales organization with our own. Heska paid approximately $7.65 million in cash and stock for the 54.6% stake. I will emphasize that the trailing 12-month financials are not the prime motivator for our acquisition of Cuattro Vet.

We believe there is a compelling strategic value in this combination. The industry-leading product line we are acquiring, along with proven sales leadership, is exponentially valuable to us when we put in the context the organization we've already built. Similarly, Kevin Wilson and the Cuattro team recognize the value that Heska's organization, our installed base, and our sales support will provide it toward a foundation for accelerated growth. We firmly believe this is a synergistic situation where one plus one equals much more than two.

The Cuattro brand, including digital radiography, ultrasound, and cloud-based software to capture and maintain digital images for advanced diagnostic capabilities is well-known and well-respected in the marketplace and we will continue to leverage this strong brand recognition, while renaming the acquired entity Heska Imaging US, LLC. This digital x-ray offering has superior and consistent image quality. Cuattro has the most modern software code base in the market. The cutting edge software competes with software from competitors that is often derived from code and development tools that are more than 10 years old. To help put this in perspective, think about the performance of your mobile phone or laptop 10 years ago compared to those available today.

Cuattro provides a fully-architected, cloud-based PACS solution for long-term image storage with instant recall and cloud-based viewing on virtually any internet-connected smartphone, tablet, PC, or Mac. We can profitably store studies for years for veterinary customers with instant recall at a total ownership cost to customers that is often half their alternative offerings. Again, storage and access are all enabled with Cuattro's private cloud.

Cuattro's solution are stable and completely based on their FDA-cleared solutions that are sold into the medical market. In many cases, our veterinary competitors promote solutions that have not or could not pass regulatory standards for performance, consistency, and historical serviceability. Because of the cloud-connected architecture and the cutting edge code, the solutions from Cuattro have superior uptime and are instantly upgradable. They are also embedded with internet-based support tools for over 99% uptime experience and 24/7 connection to support from Cuattro.

All of this means that Cuattro's solutions are less expensive to support, even though the support is better. All this lends to better customer satisfaction and better economics for us and our customer. Not only does Heska acquire a best-in-breed and truly differentiated product line, it is also acquiring sales and marketing leadership. Cuattro Vet was founded by Kevin Wilson, an accomplished entrepreneur, approximately two years ago in the US. He has also had a successful career in building and managing sales forces, creating strategic alliances and in operating excellence overall. Since founding Cuattro Vet, he and his sales team have built a growing and profitable revenue stream.

Upon closing of the acquisition, Mr, Wilson joined Heska as President and Chief Operating Officer. Two Cuattro sales leaders, Steve Asakowicz and Rod Lippincott, have also joined Heska as Executive Vice Presidents and will continue to have commercial responsibility for digital radiography, ultrasounds, and software. Both are very experienced in the industry and will work with existing salespeople towards significant bundling opportunities. Joe Aperfine continues as Executive Vice President with responsibility for the current Heska-branded product line. He will report directly to Mr. Wilson.

We expect that the consolidation of sales resources and the broad ranging but complementary product lines will allow us to leverage Heska's sales and marketing expenditures more effectively. We are excited about our opportunity to grow with our expanded product offerings. Dr. Mike McGinley, who has served as Heska's President and Chief Operating Officer, will assume a new role as President, Biologicals and Pharmaceuticals for the Company. He will report to Mr. Wilson with direct responsibility for our operations in Des Moines and Fribourg, Switzerland. Additionally, he will have responsibility for products manufactured for third parties, expansion of global allergy efforts, and any regulatory requirements of company-wide product development efforts.

Heska gives Cuattro Vet immediate access to its business systems and processes and other operations infrastructure, as well as Heska's larger footprint in both an inside and outside sales force, with daily reach to thousands of clinics. This will enhance the ability of Cuattro Vet to focus on what it does best -- selling, marketing, and developing customers for diagnostic imaging products.

Because of the complex nature of this transaction, I would like to turn the call over to Jason Napolitano. He will provide a high-level explanation of the transaction, then turn to remarks on our financial performance. Jason?

Thank you, Bob.

On the transaction side, Heska paid approximately $7.6 million in cash and stock for its interest in Cuattro Vet, including slightly more than $4 million in cash. Immediately following the transaction, former Cuattro Vet unit holders will own approximately 7.2% of Heska's stock. The underlying shares are subject to a lockup agreement restricting their transfer until August 30, 2013. The 45.4% minority position in Cuattro Vet is subject to purchase by Heska under performance-based puts and calls following each calendar year 2015, 2016, and 2017. The three-year waiting period is designed to optimize our net operating loss change position. The minority holders in Cuattro Vet may put all or some of their units to Heska if they meet certain financial performance thresholds.

The highest level 2015 put is designed to become exercisable if Cuattro Vet essentially meets its forecast. The highest level 2016 put requires outperformance versus forecast in 2016 and the highest level 2017 put requires outperformance versus forecast in 2016 and 2017. If Cuattro Vet achieves these performance levels, but the minority holders fail to exercise any of these puts in full, Heska is entitled to a premium call to buy out the minority in full and obtain 100% ownership. Heska's position in Cuattro Vet is also subject to premium repurchase or discounted sale under calls and puts expiring 18 months following the closing of the transaction.

For additional information on the transaction details, we intend to file a Form 8-K later today or tomorrow with the Securities and Exchange Commission that our shareholders or other interested parties may review. We anticipate Cuattro Vet product sales efforts and existing Heska product sales will run in parallel in the near-term with attention to cross-selling and bundling opportunities.

We believe the addition of these new products plus the addition of proven sales leadership and management talent will be extremely helpful to growing Heska's business and we are greatly encouraged about the long-term growth potential and sustainable profitability of Heska. We expect the Cuattro Vet acquisition will be accretive in 2013. This is the first of the two potential acquisitions that we spoke about on our last call.

In the case of the other acquisition, a potential third party claim on one of the Company's assets has not been resolved to our satisfaction, so we have not proceeded to a formal offer at this point. While the dialogue is still open and this third party issue may still be resolved to our satisfaction, our period of exclusivity for negotiation has expired. Accordingly, we believe the likelihood of this acquisition closing is lower than when we last spoke.

We do not intend to provide any further updates on this or other acquisitions unless we sign a definitive agreement. Our recent experience has shown these things are difficult to predict and we don't want to introduce distractions into a serious and often stressful process. Investors should rest assured that we will be driven by thoughtful decision-making in this area and will not cut corners to meet artificial deadlines.

As we stated in our earnings press release today, our Board of Directors has suspended the quarterly dividend for the foreseeable future. The Board considers this a prudent strategy based on the current cash used to acquire 54.6% of Cuattro Vet, the potential cash necessary for acquiring the remaining 45.4% of Cuattro Vet and other acquisition opportunities that the Company is considering. We believe we can add more shareholder value by investing cash back into the growth of the business rather than distributing it through cash dividends, and attractive acquisitions will generally be the first call on any excess capital we have.

Turning to our financial results, our fourth quarter 2012 revenue was $18.5 million, up 19% compared to $15.5 million in the prior year period. Revenue for the full year ended December 31, 2012 was $72.8 million, compared to revenue of $70.1 million in the prior-year period. Core companion animal health revenue was $15.7 million in the fourth quarter of 2012, a 23% increase as compared to $12.8 million in the prior-year period. Core companion animal health revenue for the full year was $61.5 million, up 7% over $57.5 million for 2011. Greater revenue from instrument consumables was a factor in both cases.

In addition, we shipped an initial stocking order of approximately $3 million to MWI in the fourth quarter of 2012. For the fourth quarter of 2012, revenue for our Other Vaccines, Pharmaceuticals, and Product segment, or OVP, was $2.8 million flat as compared to the prior year period. For the full-year, OVP revenues decreased 10.2% to $11.3 million from $12.6 million in 2011.

Lower sales of cattle vaccines under our contract with AgriLabs and lower international sales of cattle vaccines are factors in the decline. Gross margin, that is gross profit divided by revenue, was 40.1% in the fourth quarter of 2012 compared to 42.5% in the prior year period. We recognized an inventory reserve of approximately $700,000 in the fourth quarter of 2012, related to slow moving inventory and dated inventory expected to expire. This was a key factor in the decline. The reserve was primarily related to hardware for our blood gas instruments.

For the full year 2012, gross margin was 42.7%, up approximately 1 percentage point when compared to 41.7% for 2011. Product mix, with the shift to relatively higher margin products including instrument consumables, was a factor in the increase.

Total operating expenses for the fourth quarter of 2012 were $6.7 million or 36.2% of sales compared with total operating expenses of $6.2 million or 39.9% of sales in the prior year period. Total operating expenses for the full year 2012 were $28.9 million or 39.8% of sales compared with total operating expenses of $25.9 million or 37% of sales in the prior year period.

Selling and marketing expenses were $4.3 million in the fourth quarter 2012, an increase of 11.2% as compared to $3.9 million in the prior year period. For the full-year, sales and marketing expenses were $18.3 million compared to $15.2 million for full year 2011. In both cases, higher costs related to increased sales force personnel contributed to the increase.

Research and development expenses were $241,000 in the fourth quarter of 2012; a decline of approximately $64,000 from $305,000 in the prior year period. The lack of a management incentive plan accrual in the 2012 period was a factor in the decline. For the full year, research and development expenses were $958,000, a decline of approximately $700,000 as compared to $1.7 million in 2011. The largest factor in the change was lower payments to third parties related to product collaborations in 2012 as compared to 2011.

General and administrative expenses were $2.1 million in the quarter, an increase from approximately $2 million in the prior year period. G&A expenses for the full year were $9.6 million compared to $9.1 million in 2011. A favorable arbitration ruling in the fourth quarter of 2011, where the other side was ordered to pay our legal costs along with increased legal spending in the 2012 periods was a factor in the increase, in both cases.

In the fourth quarter of 2012, operating income was $720,000 compared to operating income of $414,000 in the prior year period. In full-year 2012, operating income was $2.2 million compared to $3.2 million in 2011. For the full-year, depreciation and amortization was $1.7 million as compared to $2.1 million in the prior year period. The change relates to certain instruments for customer rental, which were fully depreciated in the 2011 period.

In the fourth quarter of 2012, we had $66,000 in interest expense and other items. This compares to the prior year period when we had $218,000 in income on this line item. 2012 interest and other expense was an expense of $135,000 as compared to income of $117,000 in the prior year period. The largest factor in the change for both the quarter and the year was $207,000 in interest income from a favorable arbitration judgment in the fourth quarter of 2011.

Income tax entries complicated, but a factor in year-over-year changes in the fourth quarter entries is the amount of tax recognized earlier in the year, based on the estimates of full year performance at that time. Net income in the fourth quarter of 2012 was $389,000 or $0.07 per diluted share. This compares to net income of $484,000, or $0.09 per diluted share in the prior year period. Net income for the full year 2012, inclusive of the $606,000 deferred income tax expense, was $1.2 million or $0.22 per diluted share.

The largest component of our 2012 tax expense is a deferred tax expense. In full year 2011, we had net income of $2.1 million or $0.40 per diluted share. 2011 net income is also inclusive of a $1.1 million deferred income tax expense. It is important to remember that this is a non-cash accounting charge only and primarily relates to our large domestic net operating loss deferred tax asset position, which provides a tax shield for most federal income taxes we would otherwise pay.

Turning to the balance sheet, we have $5.8 million in cash. This translates to approximately $1.09 per basic share in cash. Working capital was $18.6 million as of December 31, 2012. We had $2.6 million on our line of credit. Consistent with our last quarter, we will not be giving any guidance today beyond the information that we have already discussed.

With that, I'll turn the call back over to Bob.

Thank you, Jason.

On our last call, we announced the strategic new distribution relationship with MWI Veterinary Supply. This relationship gives us the first access to a leading national distributor of animal health products to veterinarians in the US and the UK. As a reminder, MWI sells more than 30,000 products, of which over 15,000 are stocked in its distribution centers. These are sourced from over 500 vendors and shipped to more than 20,000 veterinary practices nationwide from 12 strategically located distribution centers. Training at all locations has been accomplished. Again, we would emphasize that this is the first distribution relationship of this scale that we have ever enjoyed.

Our first stocking order shipped toward the end of December and we've been encouraged about early connections between Heska and MWI sales representatives, as well as the overall enthusiasm for a Heska relationship that has been frequently communicated by the MWI organization. It is entirely too early, however, to comment on how this relationship will enhance sales.

We continue to see an increase in chemistry analyzer placements. In the fourth quarter, year-over-year chemistry analyzer placements improved by more than 3 times the number placed in the fourth quarter 2011. For the full year 2012, we placed approximately 85% more chemistry analyzers then were placed during all of 2011. Notably, as we've discussed in the past, a significant percentage of chemistry analyzers were placed in three use deals. Momentum in chemistry analyzer placements is encouraging, as well as the profitability associated with chemistry consumables, which enhances our recurring revenue stream.

Our new Element DC veterinary chemistry analyzer has given our sales organization a strong, competitive product for the marketplace. As I just indicated, placements have been encouraging. We continue to believe blood chemistry represents the largest in-clinic testing market for Heska. This analyzer provides the speed and ease of use advantages, which we believe are exciting in this market. Also, cost per test is either comparable to or better than the direct competitors. Our commitment to customer service is second to none. We have a world-class service organization, and as a result, there is a lot of trust with our brand that wraps around both the speed and value attributes.

The Element DC analyzer is up to 40% faster than our base analyzer, the DC 4000. Multiple new samples may be introduced before the ongoing analysis is complete, which delivers a compelling convenience and efficiency boost for busy clinics. This new analyzer utilizes the same consumables as the 4000 and 7000. We are experiencing incremental recurring revenue with its introduction.

Early last year, we introduced a relationship with Velcera and it's marketing arm, FidoPharm, whereby we would manufacture PetTrust Plus under our FDA registration at our Des Moines facility and they would commercialize the product, principally through retail pharmacy outlets. This is a monthly heartworm-preventing pharmaceutical product. We were very disappointed in their commercial execution, with sales, ex-Heska, at a fraction of their initial forecasts. Their current forecast calls for a significant decline in 2013 as compared to 2012.

On the bright side, perhaps, it was announced earlier this month that Perrigo has signed a definitive agreement to purchase Velcera, and Perrigo would assume contractual rights for PetTrust Plus. Should that deal close, we are hopeful for upside to our current plan as the year unfolds. In addition to Velcera, Perrigo also acquired Sergeant's pet care products in October of 2012. It seems clear that they are committed to the space.

Our ALLERCEPT therapy drops product has done well since the launch in early 2012. We have seen growth in allergy immunotherapy overall, as well as growth with our ALLERCEPT diagnostic products in the US. Remember that ex-US introduction of ALLERCEPT therapy drops is dependent on separate future regulatory process.

Growth across our US allergy business, both diagnostics and therapeutic products, was approximately 15% during 2012, as compared to 2011. Allergy is an area where we have a preeminent brand and we expect to strongly leverage our brand recognition and our know-how into future product opportunities. As an update on our pipeline, product development with our rapid diagnostics alliance is proceeding. To be clear, we have not planned on 2013 revenue associated with this product platform. Rather, investors should think of this as a growth opportunity that should begin in 2014. This is an exciting new biosensor platform that enables highly sensitive measurement of various categories of biomolecules in a variety of fluids.

A small analyzer that will accommodate an array of different diagnostic tests, each test effectively serving as a consumable product for the same analyzer. We see this as a generational shift in diagnostic platform with the ability to import many different tests to the platform over the coming years. I would like to close our comments by making a few summary points about our outlook or 2013 and beyond. There are many reasons to be encouraged about the long-term growth and sustainable profitability of Heska. Not the least of which is our acquisition of a majority share of Cuattro Vet that we announced today, the national distribution agreement that was recently initiated with MWI veterinary supply, full-year sales of both allergy therapy drops and Element DC, and consumable growth secondary to growth in analyzer placements in 2012 and in the current year.

We are excited about the multitude of prospects in 2013 and remain committed to key investments and product development opportunities and appropriate acquisitions, all toward growth in the future. Thanks for your attention today and 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)

Jon Block, Stifel Nicolaus.

Congratulations on the acquisition. Just to start there, can you talk to us about maybe your selling strategy with the acquisition of Cuattro? In other words, it sounded to me, through the prepared remarks that you were certainly going to leverage the expanded bundle, if you would, and really lean on this as a way to take something to the customers that your competitors may not have. Would it be common to think that you're going to go them and offer a discount to [DR] to get your chemistry analyzer in the door? Can you speak to that?

In terms of the bundle opportunity, yes, in the prepared remarks and certainly here, I'd reaffirm that these bundle opportunities are exciting and we are often calling on veterinarians that have that rate, that need for digital x-ray or ultrasound and we'll be able to meet those needs. In terms of what those bundle economics will be, I think it'll be highly variable and completely subject to that individual clinic situation.

Okay. Got it. Maybe just to touch on the rapids, you laid out, hey, don't think about this as 2013, think more about 2014. But can you speak how it would work in 2014? In other words, I'm not used to an analyzer on the rapid side of things. Is it something where you first need to get the analyzer approved and then still obtain approval test by test for heartworm or (inaudible), et cetera? Or is it something that, once you bring this to market, most of those tests would be approved, so you've already got a broad array of offerings.

Excellent question, Jon. It's a very different paradigm, it's an analyzer that we described there in the prepared remarks. It's very small, effectively hand-held. It's not going to cost five figures like other analyzers will. It'll be relatively inexpensive.

It requires no approval for the analyzer standalone. There's no regulatory approval required there. Depending on the test, if you, for example, are doing a test against a biomolecule that relates to a disease claim, that will require regulatory approvals through the USDA. If we're developing and introducing tests where we're measuring a biomolecule without a direct disease claim, that will be unregulated.

Okay. Perfect, very helpful. Maybe the last one, a little bit more big picture, you called out the $3 million stocking order to MWI and thanks for being clear there. When you back that out, you get flattish growth maybe in the companion side of things. There was a lot of moving parts. Can you speak to a little bit what you've seen early on here in calendar 1Q, not week to week sales, but just big picture, have you seen some accelerating growth into 1Q, still choppy, however you want to categorize the market? Thanks, guys.

Sure, it's an accurate observation you've made. I would say I've been trying to get a handle on it myself, both directly and through the feedback that we've obtained in trade shows and other people that have made public comments, competitors and other people in the industry. What we're hearing is probably fairly consistent with what we're seeing ourselves and that's low double-digit-type growth rates anticipated. Optimism, but to this point, relatively unfounded optimism with the offsetting certainty that it shouldn't get any worse, if anything it'll get better. Again, it's a reflection of the things you hear about the macro-economy, it'll get better slowly, how much better is to be determined. I don't know if that's helpful. I hope so.

Okay. It certainly is, Bob, I appreciate the comments. Thanks, guys.

(Operator Instructions)

Nicholas Jansen, Raymond James.

Bob, quick question on MWI -- certainly, one of your competitors had kind of a fourth-quarter stocking and then they had kind of talked about a 1Q stocking, as well. I was wondering if you had anything to provide to help us on the modeling front there?

Yes, I would say, qualitatively, we attempted to be conservative in our fourth quarter stocking. We called it out in the fourth quarter, for the very reason of the observation that Jon Block just made, that it would have been relatively flat without that. We don't intend to update going forward what that's going to look like and frankly, Nick, I don't even know if we're going to know for a few months what steady-state will look like.

The goal in that order, Nick, was to have them sort of get a stocking order in and order at a fairly constant pace, thereafter. We'll see how well we meet that goal.

Okay. That's helpful. Thinking about the suspension of the dividend, just trying to get your sense of -- it seems like things are moving in the right direction for '13. Obviously, I understanding that another cash payment coming out the door in '15, '16, or 17. Just to think about, you are positive free cash flow, you still have access to the line of credit, theoretically, things should start to improve in '13 and '14 as you leverage these capabilities.

What was the thought process behind, and it seems like your M&A strategy, at least might be cooling over the near term, that second opportunity doesn't look like it might fall through or not. Maybe just your thoughts surrounding what was the decision to cut, except I think it probably could be sustainable even with doing M&A. Just your thoughts there. Thanks.

Certainly, I suppose you could make an argument in fact, we have those discussions internally, as you might imagine. I think there's a combination of different things. I go back and recap some of the things we address more formally and also, the question just raised by Jon Block. We have ongoing uncertainty about the macro-economy. We have uncertainty about achieving optimal leverage out of the sales investment that we've made over the past 18 months or so. We want to make sure that's leveraging.

We don't know exactly how MWI is going to turn out, if that's going to be an amplifier and we probably won't know that for just a little while, yet. We have to see how Cuattro Vet integrates. That is to say that our interest certainly isn't cooling on the M&A front, we'll be looking at smart acquisitions, but as Jason said, we're not going to be describing them in any more detail. It was looking at all those things and thinking it was the rational thing to do, the responsible thing to do for shareholders and we've chosen to say suspended the dividend, which, by implication would mean, if the situation changed radically, it could be reinitiated.

That's good color.

I'll just add to that, Nick. My expectation is that we'll be looking at buying out the remaining 45.4% of Cuattro Vet about three years from now and that will likely entail a significant payment. We want to be sure we've got the capital to meet that obligation. Secondly, it's true that the other acquisition we were looking at is less likely to happen than it was in November, but I've been impressed with quality of the acquisition opportunities that we're starting to see. I'm hoping it's a trend as we've gotten a little more success and become a little more established, better opportunities are finding themselves to us. If that's the case, I think part of the Board's thinking was, we want to keep our powder dry to take advantage of these opportunities when they come about.

Thanks for all the color there. Maybe just two quick ones, certainly FidoPharm, it's obviously been a disappointment relative to your initial expectations. Can you just help frame what you think their internal budget is for a big decline for 2013? I'm just trying to get a sense of the size of that decline. I know you talked a lot about the positives going on with '13, but what gets you nervous about '13 relative to where we sit today? Thanks.

I'd say the order of magnitude of the (inaudible) is very significant, it's approximately $1 million or more. I would say it's in that order of magnitude, between $1 million and $1.5 million, somewhere in there. It's pretty significant.

Is there anything else '13 that you're worried about? I know there was some pricing pressure on the heartworm in '12, what's your thought surrounding that returning to growth in '13?

I think we have our eye on that ball and we're working that regularly. We're looking at cogs, looking at pricing strategies, and other competitive strategies. But it's a good catch and a good memory, likely to remain a competitive market I'd say.

That is it for me. Thanks, guys.

Chris Armbruster, B. Riley & Company.

On the Cuattro sales, you guys said it was $11 million in revenue in 2012. I was just on the Cuattro site and it seems like they reported $21 million and $1.52 million in operating income. Is there something different between those two numbers?

Yes, I believe the $21 million is for all the Cuattro entities. They also have a human medical business that we don't have any interest in and they have an international vet business that we don't own any part of. We're acquiring the US vet business.

Okay. Does that include both the equine and companion animal business?

Yes. In the United States, yes.

Okay. Can you talk a little bit more about their market share? I know you said your two main competitors don't have perfectly comparable products, but what other companies are their best competitors in that space?

I would say, IDEXX certainly has digital radiography and also Sound-Eklin, which is a division of VCA Antech, has digital radiography and ultrasound. Those would be your closest direct competitors. There's a scattering of smaller entities.

What about the cost of the Cuattro solution. How does that compare with the competitor products and what's the revenue model, how does it price out to the customer?

I think it is comparable to the competitive offerings in the market, Chris. It's like a lot of the instruments we've gotten used to selling. It's a fairly significant capital expenditure. Most of these deals tend to be done on a capital lease arrangement where a leasing company will come in and provide the initial capital and the vet will pay a fixed amount per month and at the end of, usually a five year or so period, there's something like a dollar buyout. So, if you're thinking accounting, these would be capital leases. These products, particularly the digital radiography products, tend to be significantly more expensive than what we're used to seeing on the blood testing side. You can see price points of to $80,000, $85,000, depending how elaborate of a system you want to buy.

Okay. Is there any ongoing subscription revenue for them to have access to the data in the cloud?

Depending how they structure the deal, there are some deals they do with ongoing data storage. There are other opportunities, Chris, where they'll have a per use charge, potentially. Someone wanted to go a la carte and just get a charge per image. That's something they can do, but I think most customers prefer to have sort of a bundled solution where the imaging is built into the overall monthly payment. But I would caution you, that is a smaller revenue stream than let's say on the chemistry side, typically.

Okay. Are the vast majority of veterinary practices still using film or non-digital radiography?

I think film is a minority now. I think there is still a pretty significant chunk of the market that's using film, but I think more of the market has moved to either to CR or DR. The trend seems to be, as time goes on, more and more DR.

Got it. Then one more, do you have an estimate for Cuattro Vet on their GM or gross margin and what is that going to do to your overall R&D budget?

We think their gross margin is probably mid-30%s, so that might put a little bit of consolidated pressure on our gross margin. There's one caveat that, of course, we haven't integrated yet and as we integrate and get closer, we might have some movement in that. For now, that's my current estimate.

Okay. Any affect on your overall R&D for the firm? Are you expecting to ramp it up a little bit with the new acquisition or is it going to be an offset to something else?

No, we don't see this as a heavy R&D spend on our side.

Okay. Sounds good. That's all I have for now, guys. Thanks.

(Operator Instructions)

Ben Haynor, Feltl and Company.

Just a quick couple questions on Cuattro, it sounds like they're growing quite quickly. Any chance you could put a band around that for how quickly they grew, perhaps, in 2012?

2011 was a partial year. I believe they were only founded in April of 2011. I think they did about $2.8 million to $3 million of revenue in 2011, for what that's worth. It's a little difficult to draw a very solid trend line from that.

Sure. Then in terms of the sales force that you'll be taking on, do you have an idea of what that might cost you guys going forward?

Sure, it's going to be a group of about 14 or 15 highly talented, highly compensated salespeople. I'm not going to get into specific payments per individual, but that is baked into my thinking when I say, we think it'll be accretive this year. We think our earnings per share will be higher post this deal than pre- this deal.

Okay, great. Should we expect to see depreciation and amortization checked off and where might that fall with the acquisition?

Yes, we don't think there's a lot of heavy D&A involved in this business, so I wouldn't expect a large change in depreciation amortization expense post-deal.

Okay, great. Thank you very much, guys. Nice quarter.

Joe Munda, Sidoti & Company.

A lot of my questions have been already answered on Cuattro, but as far as, I guess I have some housekeeping issues. How much was CapEx in 2012?

$1.5 million, approximately.

And D&A?

I think I quoted that as $1.7 million in the comments.

Okay. When are these cost efficiencies that you guys are speaking of, when do you expect them to really take hold and for the operating leverage in this business, as a result of the addition of Cuattro, really going to show itself?

I would just say, first, we're way more focused on positive synergies here. With the lack of overlap of products and lack of overlap in the sales force talents, we're really focused on positive synergies, cross-selling, and bundling as we have described. As I've attempted to describe in the prepared remarks, we're not really focused on these expense synergies. We expect them to occur and the example I use would be one presence at these very expensive trade shows instead of two, that type of thing. But I don't think, in terms of your modeling, it should be a big focus.

I agree. I'd say, Joe, for the next year, the focus is going to be on bundling opportunities, cross-selling opportunities, revenue type of synergies. Just like anything else, you are often locked in a period six months out sometimes to things like trade show expenditures. After a year, you're going to see little bit more on the cost side.

Really, the cross-selling opportunities are going to be occurring at these trade shows and am I correct in saying that?

They're going to occur every day. (inaudible - multiple speakers)

That's my question. If you're going to keep their sales force and use your sales force, are you going to be sending two reps to the vet at any given time?

This is their baby and (inaudible) one rep will bring the other rep into an account and vice versa. The notion isn't to directly overlay them, but to create leads and demos and relationship opportunities that wouldn't otherwise exist.

I think it's important to remember, Joe, our sales force is a lot bigger than their sales force. We've about 40, they've got about 14 is the comparable number. So I could see, we'll see how it develops. But I could see reps building relationships regionally, as an example, and calling in a real good DR from Cuattro to close in some good, let's say, chemistry or heartworm accounts that we have.

What part of Cuattro's business really attracted to you to acquiring them? I know they have a suite of products here, but it seems like the private cloud is very interesting service that they have. It almost seems like a backbone for an EMR for pets. Am I correct in assuming that?

I'm not sure what you mean.

Like an electronic medical record for pets.

I get the point. But, I think, to get back to you, the foundation or the premise of your question, there were multiple attractions. You've got world-class hardware here in both ultrasound, but particularly, digital radiography is a competitive advantage. We described some of those benefits and features, but really software. Being sort of the modern player here in software management, image capture, storage, interpretation, that's huge. As you point out, accurately, the advantages of the cloud.

It isn't going to be a situation where it's awkwardly placed on a server in a veterinary clinic or that the veterinarian at some future period has to do a physical upgrade that requires an upgrade the server. This is all instantaneous, upgradable, and cutting-edge. Quality products, absolutely, and then we think, also, an extremely impressive group of people, both on the management side and the sales force side. These people know how to sell capital equipment. If you can imagine what they've done with the staff that we've just described in creating that kind of revenue growth in the short-term and profitability. Those are, it was all attractive. I would also probably hasten to add to those that follow M&A stories, great cultural compatibility as well.

Yes, Bob has definitely hit the high points, Joe. I'd also add one thing that was on my mind is we negotiated a deal with some of the relationships Cuattro's already established. We did some diligence and their customer satisfaction is off the charts. Some of these clinics are really the highest-end clinics out there. The clinics you really like to be doing business with. I think that's something that's important to remember is the real attractive asset that Cuattro brings to us.

Okay.

One last point, Joe, before letting go. Of course, the other piece was we've got a large net operating loss position. The way we've structure the deal, 54.6% of Cuattro's earnings go to offset that NOL.

All right. Thanks, guys.

(Operator Instructions)

I'm showing no further questions at this time. Please continue with closing remarks.

Thank you, Camille. Thanks to all of you for your interest in Heska and for taking the time to join us today. We look forward to sharing our progress with you in the coming months. Goodbye.

Ladies and gentlemen, this concludes Heska Corporation's Fourth Quarter and Year End 2012 Earnings Conference Call. If you'd like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 with the access code of 4603888. ACT would like to thank you for your participation. You may now disconnect.