Heska Corp (HSKA) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Heska Corporation's first-quarter 2014 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Thursday, May 8, 2014.

I would now like to turn the conference over to Mr. Brent Maas of Hayden IR. Please go ahead, sir.

Thank you all for joining us today on this conference call. On the call today with us are Bob Grieve, Heska Corporation executive chair; Kevin Wilson, Heska's President and Chief Executive Officer; and Jason Napolitano, Heska's Chief Financial Officer.

We appreciate having the opportunity to review the results for the first quarter of 2014 and update shareholders on the Company's progress and competitive position. 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. The forward-looking statements speak only as of today and, except as otherwise required by law, Heska does not intend have to update any forward-looking statements to reflect events that occur after today's call.

I would like to now turn the call over to Bob Grieve, Heska's executive chair, to provide opening remarks. Bob, the floor is yours.

Thank you, Brent. I would also like to thank everyone for joining the call today. As we noted in the press release that summarized our results, this was a strong quarter and a solid start to 2014 for Heska. The team did a great job by selling more, spending less, and earning more per share for our shareholders.

While there is still much more to do, we are pleased at this stage to have made measurable progress in the 13 months since the joining of Heska and Quattro Veterinary USA. Today with new products, a reinvigorated focus on details, a new CEO and President, strict attention to expense and value management, and battle-proven commercial leadership, we are encouraged that Heska is on the right path.

For the first quarter of 2014, Heska achieved double-digit top-line growth. We delivered a $0.10 swing on earnings per share from a $0.07 loss in the first quarter of last year to a $0.03 profit. Even as we achieved double-digit revenue growth, we maintained exceptional expense discipline.

In the first quarter of 2014, we continue to see positive momentum in analyzer placements and consumable usage by end-user veterinarians. Reaction to our new subscription-type sales model has been very strong. Enthusiasm throughout our refreshed sales team has taken root, and customers are taking notice of Heska's message that by switching to Heska veterinarians can get better performance and lower costs day in and day out. Again, I would like to complement our entire team on delivering this message with their newfound passion and on these results.

Now I would like to turn the call over to our CEO and President, Kevin Wilson, for some additional color on our recent work.

Thanks, Bob. I would also like to take this chance to thank everybody for joining the call. We appreciate it.

As Bob indicated, we appear to be on track, but it is early and we have a lot of work to do. Our focus on improving our costs is beginning to show in our numbers, which is encouraging. As importantly, our sales model and our value proposition in each of our product categories is beginning to harmonize into a consistent and compelling message. With Heska, veterinarians get more, they pay less, and they are treated fairly. That is our message, and it seems to be appreciated by hard-working veterinarians.

While we fine-tune costs and our value proposition, our teams are focused on proving to each and every hospital that we have the best offerings in each and every category in which we compete. Heska appears to be making progress on this front, and some of our new product introductions and refreshes have begun to get some more attention.

In the fourth quarter of 2013, we launched the new Element POC blood gas electrolyte metabolite and basic blood chemistry analyzer. Element POC marks our long-planned reentry into this important handheld segment. Since its introduction, we have grown more confident that it is the best analyzer in its category due to its connectivity, single, ease-of-use test card that can be stored at room temperature, easier workflow, and meaningful overall operational savings as compared to older legacy systems. Based on their growing purchases of Element POC, veterinarians seem to agree. Element POC is on the right track and provides a clear reason to invite Heska into the hospital and to switch to Heska.

In the first quarter of 2014, we began a limited release of our new E-Wrap for our chemistry systems. For years, chemistry users have appreciated the ability to build their own panel of tests suited to the needs and the cost requirements of the patient by using our very flexible mix of individual slides. Now, with the addition of E-Wrap, Heska users can continue to customize their own panels when it is better for the client, and they may also order single-pack E-Wrap panels that come pre-bundled in the comprehensive and pre-surgical options. As compared to our competition, its flexibility for savings and targeted testing, along with the ease-of-use of the new E-Wrap panels, is being seen by many as being the best of both worlds. By combining our new reset subscription model with new innovations such as E-Wrap, Heska is giving veterinarians more clear reasons to switch to Heska.

Late in the fourth quarter of 2013, Heska imaging launched two new products, the Slate 4 and the Slate 4 Mini. Slate 4 is of the market's first fully wireless, all-touch, tablet-style digital radiography system in two sizes. It has been very well received.

At the end of 2014 -- in February 2014, Heska Imaging released for the small-animal market the new cloud [DRHD]. In contrast to standard-definition digital radiography systems, the new cloud DRHD delivers a visible and distinct imaging advantage to the most discriminating small-animal hospitals and to specialty centers. These centers of excellence are often looking to upgrade their digital x-ray units and their blood testing, so leading in this new HD segment is a top priority for Heska. Since its introduction, roughly 60% of customers have opted for HD over our standard-definition offering. As the pioneer in this segment, Heska's leading HD digital radiography offers a clear reason to choose Heska for imaging and for imaging in blood diagnostics bundles.

Taken in the aggregate, Heska's ability to deliver proven products, new products, product refreshes, and bundled imaging and blood diagnostics throughout the hospital, along with cloud data storage, at fair prices, has proven to be effective in switching customers from competitors into Heska.

As we work forward, we are intensifying our focus on providing the absolute best value for the veterinarian by operating at a higher efficiency with lower total expenses. As we do so, we continue to deliver new products and refreshes to existing products. In these ways, we aim to earn and to keep more customers for Heska's next leg up in higher revenues, improving profits, and accelerated positive free cash flow. I am encouraged by the very early indications of the past two quarters. We will keep at it, and we will report back to you soon on our progress.

With that, I would like to turn the call over to Jason. He will provide more detailed information on our financial results for the first quarter of 2014. Then Bob will provide some final thoughts before we take your questions. Jason?

Thank you, Kevin. The first quarter of 2014 was a solid quarter for Heska. Revenues for the quarter were $20.8 million, compared to $19 million in the year-ago quarter, an increase of 10%. Core companion animal health revenue was $17.4 million, an increase of 11%, compared to $15.7 million in the prior-year period. Factors in the increase were greater revenue from our heartworm preventive and our instrument consumables, somewhat offset by lower revenue from our heartworm diagnostic tests. Competition in the heartworm diagnostic test market remains fierce. We face the relatively easily comparison in the instrument consumable area.

As in the first quarter of 2013, our GAAP reported sales were significantly lower than end-user sales due to the impact of a stocking order to a distributor in the fourth quarter of 2012.

The ordering pattern in the first quarter of 2014 is much more normalized. Heska Imaging reported revenue was $2.1 million in the first quarter of 2014 as compared to $1.9 million in the prior-year period. Revenue in our other vaccines, pharmaceuticals, and product segment were -- or OVP -- were $3.4 million in the first quarter of 2014, an increase of 3%, $3.3 million in the prior-year period. Increased revenue from both bovine biologicals was the factor in the increase, which was somewhat offset by lower research and development revenue.

We generated $8.3 million in gross profit in the first quarter of 2014, an increase of 6% compared to $7.8 million in the prior-year period. Heska Imaging reported $286,000 in gross profit in the first quarter of 2014 as compared to $683,000 in the prior-year period. Gross margin was 39.8% in the first quarter of 2014, compared to 41.1% in the year-ago period. A key factor in the decrease was gross margin reported at Heska Imaging.

We have previously discussed the volatility we expect in quarterly gross margin in this area and maintain our outlook that 35% is a reasonable annual target for Heska Imaging's gross margin.

In the first quarter of 2014, selling and marketing expenses were $4.9 million, a decrease of approximately 4% from $5.1 million in the prior-year period. Key factors in the decline were lower spending on wages due to lower headcount as well as lower spending on fleet auto sales. Heska Imaging reported selling and marketing expenses were $981,000 in the first quarter of 2014 as compared to $417,000 in the first quarter of 2013.

In the first quarter of 2014, research and development expenses were $388,000, down slightly from $390,000 in the prior-year period. A key factor in the change was a reserve for equipment that had been previously used in a project that was discontinued in the first quarter of 2013. This was somewhat offset by recognized research and development expenses at Heska Imaging, which were $60,000 in the first quarter of 2014 as compared to $17,000 in the prior-year period.

In the first quarter, we had $3 million in general and administrative expenses, an increase of 3% as compared to the prior-year period. A factor in the change was $233,000 in general and administrative expenses recognized at Heska Imaging in the first quarter of 2014 as compared to $153,000 in the prior-year period.

Depreciation and amortization was $729,000 in the first quarter of 2014 as compared to $474,000 in the prior-year period. Depreciation and amortization from Heska Imaging was a key factor in the change.

Operating loss was $101,000 in the first quarter of 2014, compared to an operating loss of $682,000 in the prior-year period. Net loss was $273,000 in the first quarter of 2014 as compared to a net loss of $352,000 in the prior-year period.

We generated net income attributable to Heska Corporation of $192,000 as compared to a net loss attributable to Heska Corporation of $386,000 in the prior-year period. In the first quarter of 2014, we actually generated operating income excluding Heska Imaging which was more than offset by the operating loss at Heska Imaging.

We still had income before income taxes attributable to Heska Corporation, the owner of only 54.6% of Heska Imaging, which is why we recognized a tax expense this quarter.

Cash and cash equivalents at March 31, 2014 totaled $6.2 million, compared to $6 million on December 31, 2013. Total debt at March 31, 2014 was $1.1 million, compared to $4.9 million at December 31, 2013. A $3 million milestone payment we received in the first quarter of 2014 is a key factor in the change.

Let me reiterate our position on future financial performance and guidance. As we stated during the last quarterly call, we will have no further comments about anticipated future financial performance or guidance beyond what we have already stated today.

In summary, this quarter we delivered solid revenue growth while reducing our operating expenses, which resulted in improved net income. This is the type of steady progress we hope to continue to report to our investors.

With that, I will turn the call over to you, Bob.

Thank you, Jason. Before we conclude our prepared comments, I would like to spend a few moments providing an update on our strategic partnerships. In 2013, Elanco, the animal health business of Eli Lilly, purchased from Heska certain cattle vaccine seeds essential to the development and maintenance of cattle vaccines. Heska's relationship with Elanco has broadened, with Elanco having recently purchased the rights to distribute Heska's proprietary cattle vaccines from our previous distributor, AgriLabs. The expansion of our relationship with Elanco underscores the commitment of Elanco to the cattle vaccine business and the importance of Heska's Des Moines manufacturing facility to manufacture those vaccines for the foreseeable future. We remain very enthusiastic about this relationship, and we expect to expand the areas of mutual interest at our OVP business.

In the fourth quarter of 2013, we announced a 10-year extension to the agreement with Merck Animal Health where they will continue to market and sell the Tri-Heart Plus pharmaceutical that we registered with the FDA and manufacture in Des Moines. We anticipate steady growth in that product line over the 10-year term.

We at Heska are pleased to have been selected by Elanco and by Merck, and we remain opportunistic optimistic in our future together in these markets as they grow in visibility and importance.

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

(Operator Instructions) Ian Corydon, B. Riley and Company.

I wonder if you could just elaborate on some of the things you are thinking about when you talk about expanding that partnership with Elanco.

Certainly. I think -- as I indicated, again, the first step was their purchase of those assets through the core -- or the beginning of how you make those cattle vaccines. Then secondly, they bought out the distribution rights from AgriLabs.

Because these products are licensed to the facility in Des Moines, we would imagine, as we said here in the prepared remarks, that we would continue to see continued commitment to the manufacturer of those vaccines for the foreseeable future.

We'd also see ourselves broadening the relationship with potentially other vaccine and biological-type products in collaboration with Elanco. And we'd insert in those relationships at different points from -- anything from process development, R&D, and all the way up to manufacturing. Don't have specific products to call out right now, Ian, but you might imagine that we could well do that in the future.

Great. And I apologize if I missed this. Could you provide the gross margin rate on Heska Imaging in the quarter? And then you talked about some lumpiness in gross margin. What is kind of the right range to think of on a quarterly basis if 35% is right for the year?

Yes, as you mentioned, we expect that 35% will be the annual. I believe at year-end it was over 50%. This quarter, it was more like 15%. I will give you an exact figure in a moment, Ian -- 13.7%. So we expect quarterly variations that large, 15 or 20 points either way, but over the longer term we expect it is going to average out at 35%.

Got it. And can you just refresh me on why there is that wide range by quarter?

Well, there is a certain fixed-cost component to that business that, at relatively small revenue numbers, is quite pronounced. As that business grows, we expect the variance in gross margin to start to become less.

Ian, it is Kevin as well. There is a product mix variation as well. If you follow a rental model more in one quarter than another quarter, the rental model shows earlier lower gross margins. And as those customers convert or extend their rental, it begins to show greater gross margins. And so sometimes it depends on which types of programs we emphasize in a quarter -- depending on, A, what we think of market needs and, B, what we think the Company needs overall.

Got it. That's very helpful. And then the last question was just on the general and administrative expenses. About $3 million a quarter in Q1; is that a good run rate to use going forward?

You know, we don't give the guidance (inaudible).

Okay. Thank you.

Nicholas Jansen, Raymond James & Associates.

I am not sure if you will answer this, but in terms of, I think, last quarter, you talked about you are budgeting a certain level of EBIT in 2014. I was wondering if that has changed at all.

That is a great attempt, Ian. I don't think we are going to break our guidance rule here. We did try to give everyone a sense at year-end what we thought this business would do in 2014, but I don't see us updating it.

Maybe a different way to ask it, is there anything changed since the end of March that would suggest different relative to that figure?

This is Kevin. We feel like we are on track, and I guess we are cautiously confident.

That's helpful. And then, I think last quarter and in previous quarters you have given out some analyzer details. And I am not sure if you wanted to consistently give those numbers out, but just trying to get a sense of how instrument placements were in the quarter and where you think you are taking the most share.

Nick, it is Kevin again. We discuss this a lot, actually, in management of our day-to-day business, and one of the things that occurs to me is that analyzer numbers are probably not the best metric, at least in my opinion, to be focusing on for a number of reasons. There is a mix of rentals, of free placements, of sales of existing customers as opposed to sales to competitor upgrades. There is replacement business and all those types of things.

And so we really don't think it is that reflective of market share. So we are looking at other metrics that I think we will try to roll out here in coming quarters that we think are far more indicative of the health of the business and actually will tie a little more closely to what is going on in the profit-and-loss statement and the other financials. So I hope that answers the question, but it is a purposeful change in direction. Other companies may find it useful, but I don't think it is really directionally accurate.

Okay. And then on Heska Imaging, I think you said $2.1 million of revenue in the quarter. Last year, I believe it was $1.9 million, if my model is correct, but that was only for roughly six or seven weeks. So I'm just trying to get a sense of the -- I know it is inherently volatile, but just trying to get a sense of true organic apples-to-apples revenue growth in that segment. And if that was in line or if there is anything we should be considering about the revenue growth at Heska Imaging this quarter.

If you look at last year's Q, we had a pro forma in footnote 3, and that was for about $19.9 million of revenue versus $18.9 million, with Heska Imaging only in the financials from February 24. So it was about $1 million. So it is kind of a flattish-type quarter. I don't -- Kevin, you might want to comment on trends. I don't feel like this is a business that I am highly worried about performing.

No. We feel like we had a good quarter. And I think I mentioned new product introductions late in the fourth quarter and early in the first quarter. And so some of that -- it is a smallish, lumpier business, and some quarters will report better than others. But I think in the aggregate over the year, we are comfortable with where we are at.

Okay. And then last one for me. I know you guys have -- you shy away from talking about new product introductions, but I know you have partnered with Rapid Diagnostic in the past. I'm just trying to get a sense of any major announcements we should be expecting over the next year or so. Or is this more status quo from you? We will hear about it when they're launched?

It is probably a little bit of the second -- a little more status quo. I will say that one of the big things that we continue to focus on is getting product right. And so I elaborated on a couple, two or three of those initiatives that we have done over the last quarter or two. And we constantly have those types of things in the pipeline. But to focus on any one, especially a future one, is really not something that we are able to do.

Okay. Thanks for the color. Nice quarter.

(Operator Instructions) Ben Haynor, Feltl and Company.

It sounds like you got some new things out on the market. Did I hear correctly ERAV -- E R A V?

Wrap, as in Saran Wrap -- trademark.

Okay. I got you. So can you maybe provide some key scenarios or scenarios where the vet can save money there or provide better care and then just talk maybe a little bit more about how that has been received so far?

Yes. It is really pretty -- a pretty neat feature. Heska has always had the ability to do one slide at a time. So, again, we are in a price-competitive market, but the veterinarian is probably under more price pressure than we are with the consumer. And so for a recheck, for instance, for the veterinarian to be able to run just a kidney study or just a BUN or just one specific analyte, it is faster, it saves that client money, and they get the specific information they need without being forced to run 12, 15 numbers at a much higher cost to the consumer. So they have always liked that about the Heska products.

The downside to that is if you do want to run a full panel. The customers who are building their own comprehensive and pre-surgical panels, essentially by combining those slides in a particular order, the E-Wrap gives them the ability to open one packet, drop the whole wrap in, hit run, and get, for instance, on a comprehensive panel 12 numbers without any additional effort. We think it is important, and our clients -- the veterinarians -- seem to think it is really important to have the flexibility to easily do both. They really don't like to be jammed into purchasing something for $25, when what they really want is a $3 test.

Conversely, if they want to do 10 pre-surgical panels before they do surgery, they want to do it very quickly, and the E-Wrap is what allows them to do that.

Okay. That's helpful. And then on the Heska Imaging side, you said 60% or so of the accounts have opted to go to the HD side. Do you think that will tend to expand over time to 80%, 90%, 100% as it has? Or HD televisions? Or is it kind of a consumer or veterinary preference to have the better imaging?

Yes, that is astute. Again, all you can do is speculate. My sense in being an imaging for a long time -- my sense is that when better image quality comes on the market, the early adopters tend to be the premium adopters. Fortunately for Heska, we want to target the premium adopters. And with the HD, we feel very confident that we have the best in breed in terms of just the broad digital radiography category.

We do think that, as people start to see -- just like in consumer electronics retina displays, (inaudible) better displays on cell phones, HD, and now Ultra HD on television, people want better image quality regardless of what image it is. And so we do think that the market will migrate towards that. We think we have definitely a leg up and certainly a head start.

Yes. It sounds like quite the product. And then on the split on the Heska imaging side between the rental models and capital sales, maybe not necessarily in the quarter -- although that would be helpful, I suppose, if you give that as well. But just historically, how do those kind of shape out since you have become part of Heska? Is it half and half? Is it skewed one way or the other? What does that look like?

You know, I don't have the data in front of me. I don't think it is quite half and half in terms of rentals to sales. It varies also with the program pricing quarter to quarter. It also varies with the calendar. What we find in the fourth quarter is people have -- they have the need to spend the CapEx. Some of that is tax-driven buying for Section 179. So they would prefer to go ahead and just have a $60,000 expenditure, at which point we have a sale. And then other quarters during the year, they prefer to have operational expenses over a longer period of time, and then they start thinking about CapEx again in the fourth quarter.

So there are a lot of inputs, some of which we can control and some of which we don't. So I am not being purposely evasive on it. It is just that it's a moving target quarter to quarter, and probably not that instructive to break it out at this stage. I think, at some point in the future, providing maybe a regular update on that model will be helpful, but we are not quite ready to do that.

Okay. That's understandable. That's all I had. Nice quarter, guys.

Dr. Bob Grieve, there are no further questions at this time. Please continue with any closing remarks.

Thank you. And thank you -- 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 quarters. Goodbye.

Ladies gentlemen, this concludes the Heska Corporation's first-quarter 2014 earnings conference call. Thank you for your participation. You may now disconnect.