Heska Corp (HSKA) 2013 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Heska Corporation's Third Quarter 2013 Earnings Conference Call. (Operator Instructions).

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

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, Dr. Bob Grieve; and Jason Napolitano, Heska's Chief Financial Officer.

We appreciate having the opportunity to review the results for the third quarter of 2013 and provide an update on the first nine months of 2013. 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 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 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.

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

Thank you, Brett. I'd also like to thank everyone for joining the call today. Overall, we are very pleased with our third-quarter results. The results are consistent with what we've told shareholders, investors and other interested parties. As we indicated, the last few quarters were a transition period for the Company.

In the first quarter, following the acquisition of a majority interest in Cuattro Vet USA in February, we took a hard look at our commercial infrastructure, sales leadership, strategy and tactics. This led to a series of reorganization initiatives in the second quarter. We indicated that the changes from this reorganization and the charges would begin to drive improved operations in the second half of the year. We are beginning to see that in the third quarter results.

Revenues improved year over year, gross margin percentages expanding, returning to a more normalized historical range following a significant drop in gross margin percentage in the second quarter, a drop associated with one-time charges. We also continued to closely control expenses and we returned to positive earnings per share.

During the third quarter, we continued to focus on the evolution and enhancement of our entire organization, following our combination with Cuattro Vet USA. As that effort steadily progresses, we look forward to more growth and a more predictable business.

Let me reiterate where we've been, our transitional steps and the milestones that demonstrate that we are successfully executing the transformation of Heska.

We had one month left in our first quarter when we closed the acquisition of a majority interest in Cuattro Vet USA, an imaging and Cloud veterinarian medical data hosting technology company. We acquired new product lines, new bundling opportunities, new technologies and significant new talent. This acquisition prompted us to fully reassess how best to structure the Company for the long term and what the strategy and scope of the new Heska would be.

As I described in our last call, because of the acquisition, Heska now has a best-in-class digital radiography, ultrasound and Cloud-based veterinarian medical data archival product suite. These products are complementary to Heska's own current advanced diagnostics products.

Importantly, these products are key to acquiring the interest and loyalty of the veterinarian market's most-coveted high-volume veterinarian practices. By combining what Heska's existing line of chemistry and hematology technologies as well as our latest blood, gas and electrolyte entry; we believe we now have bundling and cross-selling opportunities.

The power of robust and complementary product areas should give us better access to even better customers. Given that one of our key competitors lacks this opportunity and entry point, we believe the opportunity can be very meaningful.

In March through May of 2013, our new President and Chief Operating Officer, Kevin Wilson, began a comprehensive review of our sales strategies, costs, structure and go-to-market offerings; followed quickly with a commercial integration and turnaround plan.

At our second quarter of 2013 conference call, we identified the following fundamental changes we had made. Cuattro Vet USA's imaging sales and management personnel became Heska employees. Cuattro Vet USA's imaging sales team was trained on Heska's analyzer offerings. Likewise, Heska's sales teams were introduced to Cuattro Vet USA's imaging and data archival products.

We initiated bundling programs an opportunity sharing between the product lines in June. The combination of the two companies' marketing and sales efforts resulted in the identification of annual savings of approximately $1.9 million through synergies and reprioritization.

Let me take a moment to review our operational progress during the last 90 days. The integration plan has gone extremely well and quickly. It is essentially complete. A key part of the integration is the combination and reorganization of our newly strengthened sales team. The two sales forces have no duplication. Our current sales team includes a direct field sales force of 23 professionals selling blood analyzer and related products and 14 selling imaging products, 18 people in inside sales focused on lead generation, consumable sales and the sales of non-analyzer products.

Finally, there are various management positions over outside and inside sales, distribution channels and corporate accounts. With the right culture of focus on measurable performance, personal customer contact and a culture to win in sales; we turned our attention to our go-to-market strategies in blood analyzers in June.

While we continue to [plate] these products with a variety of strategies, we have added entirely new sales programs including our rental reset approach that we launched in late May. This approach includes aggressively priced consumables, service, support and analyzer usage for one low monthly payment. This method has shown significant promise and you can effectively think of this as a subscription model which now provides Heska with recurring revenue stream, and hence a more stable, ultimately more predictable financial model.

There's no upfront cost to the veterinary customer for the analyzer or the warranty, simply a monthly payment and access to discounted consumables. This approach is resonating with potential customers and due to our comprehensive integrated offering, we are seeing our opportunity pipeline expand and we are experiencing increased momentum with our analyzer placements.

This improvement is being achieved with fewer field sales positions. The more focused sales staff is extremely effective in capital equipment sales. In Q2, we placed through various programs 153 total analyzers, including 109 chemistry analyzers and 44 hematology analyzers. In Q3, we placed 236 total analyzers including 151 chemistry analyzers and 85 hematology analyzers. These are all direct sales placements from Heska to the end user.

Year over year, our productivity and outside sales was strikingly improved in Q3. We had approximately twice the analyzer placements per outside sales person, compared to the third quarter of 2012.

At the end of Q2, we performed a complete review of our MWI veterinary supply strategy and the associated results for the first half of 2013. In brief, we had limited success with some products, yet very good results with others. We and MWI continue to work closely together to optimize the Heska product mix that flows through their sales channel.

In mid September, we launched a new rapid blood analyzer called the Element POC. This latest-generation handheld wireless analyzer delivers rapid blood gas, electrolyte, metabolite and blood chemistry testing to the North American veterinarian healthcare market. It is a product that we have been working on for some time and it is an exciting entry in the handheld point-of-care market.

The new Element POC is a point of care device that offers superior data managements, Wi-Fi and Bluetooth connectivity and a broad testing menu that includes the critical care parameters valued most by practitioner in one comprehensive, easy-to-use, credit card style, test card that can stored at room temperature.

Compared to other handheld analyzers on the market, the Element POC may save the veterinarians up to 50% on the cost of testing, while improving the ease of use and patient outcomes.

We expect potential sales synergies as this Element POC complements our Element DC and HemaTrue analyzers that provide blood chemistry and hematology analysis, respectively. Since its launch a few weeks ago, this product has been extremely well received by the target audience of veterinarians.

I will now turn the call over to Jason. He'll provide detailed information on our financial results for the third quarter of 2013.

Thank you, Bob. Our consolidated third quarter 2013 revenue was $17.6 million, up 4.1% compared to $16.9 million in the prior-year period.

For the first nine months of 2013, our revenue was $54.8 million, up approximately 1% when compared with $54.4 million in the prior-year period.

Core companion animal health revenue was up 7.3% to $14.5 million in the third quarter of 2013, as compared to $13.5 million in the prior-year period. The largest factor in the increase was $2.1 million in revenue from Heska Imaging. Another factor was increased year-over-year revenue related to domestic sales of our heartworm preventive through Merck Animal Health.

These factors were somewhat offset by lower year-over-year revenue from domestic sales of our heartworm diagnostic tests and the impact of domestic placements of our chemistry instruments and our hematology instruments.

Consistent with our observations in the first half of the year, competition in the domestic heartworm diagnostic test area remains fierce. The factor in lower revenue recognized from our chemistry and hematology instruments was the success of our rental reset program, for which placements are generally being accounted for as operating leases and thus do not have the upfront revenue recognition affiliated with a sale.

For the third quarter, revenue from our other vaccines, pharmaceuticals and product segment or OVP declined by approximately 8.8% to $3.1 million as compared to $3.4 million in the prior-year period. Lower sales of cattle vaccines under our contract with AgriLabs, was a factor in the decline.

We generated $7.4 million in gross profit in the third quarter of 2013, including $726,000 in gross profit from Heska Imaging; compared to $6.7 million in gross profit in the third quarter of 2012.

Gross margin was 42.1% in the third quarter of 2013, compared to 39.8% in the prior-year period. A factor in the change was lower revenue and higher gross margins in our OVP segment, which tends to have lower gross margins than our core companion animal health segment.

Total operating expenses were $7.3 million in the third quarter of 2013 or 41.7% of revenue; compared with total operating expenses of $6.8 million or 39.9% of revenue in the prior-year period.

Selling and marketing expenses were $4.6 million in the third quarter of 2013, up 4.8% as compared to $4.4 million in the prior-year period.

For the nine month period, selling and marketing expenses were $14.6 million compared to $14 million for the same period in 2012. Heska Imaging sales and marketing expense of $905,000 recognized in the third quarter of 2013 but not 2012 was the key factor in the quarterly change.

This was somewhat offset by lower spending on salaries and benefits for members of our sales force in the third quarter 2013, as compared to the prior-year period.

Research and development expenses were $324,000 in the third quarter of 2013, including approximately $49,000 from Heska Imaging. This was an increase of $144,000 from $180,000 in the prior-year period. In addition to expenses affiliated with the consolidation of Heska Imaging, increased year-over-year expenses related to personnel as well as the recognition of costs related to other research and development projects were factors in the increase.

General and administrative expenses were $2.4 million in the third quarter of 2013, including $305,000 in expenses from Heska Imaging. This represents a 10.2% increase from $2.2 million in the prior-year period. The largest factor in the change was increased general and administrative expenses affiliated with the consolidation of Heska Imaging.

Operating income in the third quarter of 2013 was $75,000, compared to an operating loss of $27,000 in the prior-year period. Operating loss for the first nine months of 2013 was $4.2 million, as compared to operating income of $1.4 million in the prior-year period.

Depreciation and amortization for the nine months ended September 30, 2013 was $1.7 million, as compared to $1.3 million in the prior-year period.

We had $93,000 in interest and other expense in the third quarter of 2013 which consisted of $47,000 in net interest expense and $46,000 in net foreign currency losses. In the prior-year period, we had $16,000 in income from this line item which consisted of $16,000 in net interest expense and $32,000 in net foreign currency gains.

In the 2013 period, we had greater interest expense primarily related to interest on debt at Heska Imaging.

In the third quarter of 2013, we recognized $6,000 of current tax expense related to our Swiss subsidiary. We also recognized a deferred tax benefit of $6,000 so that we recognized no net tax expense for the quarter.

Total tax expense was $21,000, including $16,000 in current tax expense in the prior-year period.

Net loss in the third quarter of 2013 was $18,000, as compared to a net loss of $32,000 in the prior-year period. The net loss attributable to non-controlling interest relates to the 45.4% interest combined minority interest holders had in the financial performance of Heska Imaging.

Net income attributable to Heska Corporation in the third quarter of 2013 was $241,000 or $0.04 per diluted share. This compares to a net loss attributable to Heska Corporation of $32,000 or $0.01 per diluted share in the prior-year period.

Net loss attributable to Heska Corporation for the nine months ended September 30, 2013 was $2.4 million or $0.41 per diluted share. This compares to net income attributable to Heska Corporation of $814,000 or $0.15 per diluted share in the prior-year period.

As on our most recent earnings calls, we will not be providing guidance nor commenting on future financial results beyond the statements in our prepared remarks today.

In summary, this quarter demonstrates progress in our business. Our recent efforts at improving our business are showing in our financial results. We look forward to future improvements.

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

Thank you, Jason. As we transform Heska over the remainder of 2013, continue to optimize our sales force for greater efficiency and expand our product line to increase sales, we have not lost sight of the fact that our primary goal is to provide diagnostic and specialty products to help veterinarians embrace change and develop their practices.

Market dynamics remain generally positive with favorable trends in pet ownership and care and we are providing increasingly robust solutions for the veterinarian market with a superior and growing product portfolio. We are realigning the organization to take advantage of our particular strength in advanced diagnostics and allergy and our Cuattro Vet USA majority acquisition has added talent and products that will allow us to accelerate our growth with bundling and cross-selling opportunities.

Our recently announced relationship with Eli Lilly's Elanco organization provides us with a blue chip vaccine partner, aiding us in our OVP business. We will continue to consider small, strategic acquisitions that fit with our current product lines and sales channels. However, we do not want investors assuming that we are spending a great deal of time actively looking for acquisition candidates. We have plenty to do with the continuing integration of Cuattro Vet USA and operational execution, but we would consider a great opportunity.

At this time, I would like to turn this over to the operator for purposes of conducting the question-and-answer session.

Thank you, sir. (Operator Instructions). Jon Block, Stifel.

Great, thanks and good afternoon, guys. Bob, maybe the first question- you know you gave some pretty compelling numbers on chemistry placements in the second quarter and the third quarter. I'm just running those metrics against some of the statistics that we compile and it looks like the 109 chemistry units were about 6% to 7% of new placements in the second quarter and the 151 units actually accounted for about 10% of new placements in the third quarter.

So can you speak to the momentum? Do you think that's sustainable and do you think you can actually sort of capture high single-digit 10% share going forward of new chemistry units?

Yes. I think, on some broad level Jon, and again thanks for your participation and your question here; but at some broad level we've been saying that you're beginning to see the first evidence of our commercial traction as we reported the third quarter. I don't think we're anywhere close to getting to maximum velocity, if you will. There's a lot of great traction. It feels good. I think these sales programs have been very effective. They're great products.

But I'd also hasten to point out there's probably (inaudible) in your analysis, again. I'd emphasize these are direct sales from Heska to customers. There's no selling into distribution here that counts in these numbers. This is very straightforward.

Okay, okay. No, that's certainly very helpful. And then you talked about bundle and how it's strengthened and cross training the Cuattro guys and the Heska guys. When we think out to 2014, is that bundle going to be further strengthened by a rapid [as an] offer? You've alluded to that in the past. Is that still tracking towards the 2014 market introduction?

Right. At this particular point, our guidance, we were referencing the rapid diagnostic alliance. At this particular point, I'm staying consistent with past remarks and saying that that particular partner has said that we could timeline something in 2014 to be developed but we are not modeling that, we're not budgeting it. We need to wait and see because there's certainly risk there.

And as far as bundling is concerned, I think as I described earlier, we've got a lot of momentum with imaging sales folks generating momentum with the people in the legacy diagnostic analyzer business generator momentum, but we are far from even achieving the opportunities in bundling across those product lines. That remains to come, so what you're seeing now again is just beginning days.

Okay, great. And last question is a little bit more big picture rather than Heska specific; but sitting here and reporting the first week of November and of course all the fun political dysfunction that seemed to take place in mid to late October. Can you just speak-- you spoke to some compelling, again big picture trends but being a little bit more granular on what you've seen going into Washington dysfunction coming out of it; how have trends been when you look back at the past four or five weeks? Thanks, guys.

Yes, Jon, again and I hate to sound repetitious to past calls or flip here; but we're so small, that I think anything that we would have seen we would imagine we'd be saying it may not be reliable with respect to those trends. And I think the way we think about the business is rather than imagining being whipsawed by those macro effects, we just take a lot of responsibility for executing, doing things right and growing regardless of the macro environment; it's our mentality.

Okay. Thanks a lot for your time.

Ben Haynor, Feltl & Company

Good afternoon, gentlemen. Just a couple of quick ones; Jon covered on a lot that I was going to get at. Now it looks like the G&A came down pretty handily sequentially. Is this a sustainable level going forward or would you expect that to tick back up a little bit?

Do you want to comment, Jason?

Well, I think there's a lot of leverage available, as the business grows, Ben, you're going to see pressure on all operating expenses. But I don't see a lot of short-term need for expansion in general and administrative expenses.

Okay, that's helpful. And then I apologize if I missed this. Did you give out the Cuattro or Heska Imaging revenue?

Yes. Let me get the exact figure. $2.1 million, yes.

And what was the comparable last year if you don't-- if you have that.

Yes, we generally don't disclose that. It's up significantly of course, it's consistent with the first two quarter trends.

Okay, great, that's all I had. Thank you.

(Operator Instructions). Paul Nouri, Nobel Equity Fund

Hey guys. Can you talk about how your relationship with MWI has evolved into the third quarter and where you are with your inventory with them?

Sure. I'll comment generally. It's much the same as I indicated here in comments; generally consistent with where we were 90 days ago. We're still evolving together, understanding what's best to go through their sales channels and what's best for us to manage directly. We haven't settled on a final mix. We're working very well together. They're a great organization and we're intending to optimize both of our respective businesses.

From an inventory standpoint, there's nothing here material, nothing significant; nothing to be concerned about in the way of excess inventory into channel. It hasn't been recognized, accounted for in other ways.

Okay, that's it for now. Thanks.

Joe Munda, Sidoti & Company

Good afternoon, guys. Thanks for taking the questions. First off, I guess I want to start off- Jason, you talked about gross margins and then normalizing at this 42% level here. Is that a gross margin level that will continue to ramp a little more smoothly? Is there room for expansion? And I know you don't give guidance but on that expectation, do we expect this to continue to ramp into 2014?

We did state, Joe, we're not going to give guidance and I don't want to give closet guidance in response to questions. So--

You can't blame me for trying.

Joe, what Jason talked about was our normalized historical levels and there wasn't any reference to the future there.

Obviously, Joe, we have the Roche flowing through in the second quarter; we had that adjustment for the Roche product line that we've now exited and that had a big impact on gross margin in Q2 and obviously in the 9-month result.

Okay, so there really-- there was no one-time events when it comes to cost of goods that improved the gross margin to this level?

Yes, I wouldn't say anything material in there Joe, there's always little things, but nothing material.

Okay, let me go through here. Can you give us a little bit more color on the new analyzer? You talk about ease of use and better patient outcomes and I was wondering- were there any placements of this new analyzer in the quarter? I know you launched it in September.

The analyzer actually shipped in October for the first time. So, on our next call you'll be getting a lot more insight into the measurement around the early success that I described.

Okay. And I'm sorry; just a little bit more color on why it's a better analyzer than-

Certainly. There's a multitude of reasons. One is it's wireless, Bluetooth and Wi-Fi enabled. It's ergonomically exceptional for use in the veterinary practice. The consumable is basically a single card, credit-card size as I described; where there is no cold chain requirement. This can be stored at room temperature. The principle competitive handheld analyzer has-- you have to use multiple cartridges for different tests. There is a cold chain. There are shelf-life concerns. And then again, pricing is pricing; we're able to do it at a substantial discount to the leader.

Is there any fear of cannibalization to your other analyzers or--?

Just the opposite; we think there are positive synergies as we put these together in bundles to go to the customer; very positive synergies and as I indicated in my provisional remarks here about the launch; it's gone very well. But I would say we're already seeing those synergies at the point of the customer.

Okay, just a few more here; as far as the placement model that you guys-- I like that you guys have gone that route, but can you give us a sense of the length of time on these leases to the docs as well as maybe what on average a monthly payment would be? I know you're bundling consumables along with the product here. So is there-- if you could, is there a sense of what an average monthly payment would be?

Well, let me just start off by saying that the typical term here, prevailing term is a five-year term. And the typical cost is going to be someplace substantially less than a $1,000 a month, depending on the bundle and the arrangement.

Okay. And how did you arrive at that? I mean was there some I guess feedback from doctors what they were willing to pay as far as a monthly fee? How did you arrive at the term and as well as monthly payment?

I'd say that was our President's studying some of the data from the deals we'd done in the past and making a judgment where he felt it would be most attractive in the marketplace, Joe.

Generally here the economics here for us our good. The economics for the customer are good. So if you'll forgive the colloquialism, it's a win-win. And it's again, greatly enhanced our placement activity.

Okay. And then I guess my final question; I know this might be a little bit off kilter here; but there's a lot of talk about the lone star tick and what's it doing to animals. Are you seeing any uptick in I guess utilization by some of these docs when it comes to testing the blood for dogs and cats in relation to this tick problem that's occurring and spreading?

Right; I don't think that particular epidemic or epizootic I guess if you prefer, is really germane to our current business. It's where you would expect to see consequences of an increase in tick-borne diseases that may be relevant to veterinarians sorting through that differential diagnosis. We're not in that market at this point. It also may be relevant to neurologic diseases associated with the tick and then finally of course those people that provide ectoparasiticides or insecticides to kill or work in the area of fleas and ticks and so forth; they may see some type of impact. But that's again, outside of our business.

Okay. Thank you.

Nicholas Jansen, Raymond James.

Hey guys, most of mine have been answered but thinking about the Heska Imaging business; is there any seasonality we should be thinking about going into the fourth quarter with capital equipment placements as we kind of look at revenue generation off of the $2.1 million you did this quarter?

Yes, Nick. In short, this is a seasonal business and we expect a very robust fourth quarter in that business area.

Okay, and then kind of thinking about going back to one of Jon's questions; thinking about this kind of rental model that you're doing. When should we think about cycling through the headwind from instrument sales from the prior year as to think about maybe a recovery into more robust growth on the top line heading into next year?

I think-- we launched the program, Nick, late May or early June so I'd say when we've rolled through Q2 of 2014 you're going to have a fairly normalized comparison, assuming the programs continue the same way that we've got them set up.

And can you maybe remind us how much revenue from instrument sales were in the last couple of quarters or in 4Q and 1Q of last year so we make sure we kind of model that appropriately?

I don't think we generally break it out by quarter. We generally give a running 12 in the Qs. Rough numbers, that's been about 10% of revenue. Off the top of my head- I just haven't brought the previous Qs in the room with me here. But that's the way I think of that segment of our business.

Thank you much.

There are no more questions at this time. I'll turn the call back over to management for closing remarks.

Thank you, Calvin. As we wrap this call up, I'd like to reemphasize some points. I'd like to stress how encouraged we are as we begin to see the benefits in this commercial transition as well as growth potential going into 2014.

Companion animal revenue in the quarter was up 7.3% year over year, gross margin percentage expanded by 2.3 percentage points year over year and earnings per share shifted positive by $0.05. We've just recently here discussed around questions our new Element POC handheld blood gas electrolyte handheld analyzer that we began shipping last month. We're very excited about this product. We expect it to compete very favorably with our former i-STAT product line which was for Heska about an $11 million consumable business in North America in 2008, the final full fiscal year we supported that product.

Early indications on the launch are positive as we've just discussed and we'd also say that most of the sales of this new Element POC are upgrade replacements of competitive systems.

Our revenue pipeline is strong going into the end of the year and we expect the seasonally strong imagining business, as we've just discussed, to make a meaningful contribution in Q4.

Thank you all for your interest in Heska and for joining our call today. The call is now concluded.

Thank you, ladies and gentlemen. This concludes the conference call. Thank you for your participation. You may now disconnect.