Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Abaxis Inc (NASDAQ:ABAX)

F1Q14 Earnings Conference Call

July 25, 2013 4:15 PM ET

Executives

Joe L. Dorame – Lytham Partners

Clinton H. Severson – Chairman, President and Chief Executive Officer

Martin Mulroy – Chief Commercial Officer-North American Animal Health

Rick Betts – Director-North American Medical Marketing

Analysts

Jim Sidoti – Sidoti & Company, LLC

Ross Taylor – C.L. King & Associates, Inc.

Ben C. Haynor – Feltl & Co.

David Clair – Piper Jaffray

Jeffrey Frelick – Canaccord Genuity

Ethan Roth - Stifel, Nicolaus & Co.

Operator

Good afternoon, and welcome to the Abaxis First Quarter of Fiscal Year 2014 Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Joe Dorame of Lytham Partners. Please go ahead, sir.

Joe L. Dorame

Thank you, Denise. Good afternoon, and thank you for joining us today to review the financial results for Abaxis for the first quarter of fiscal year 2014 ended June 30, 2013. As Denise indicated, my name is Joe Dorame. I’m with Lytham Partners, and we are the Investor Relations consulting firm for Abaxis.

With us today, representing the company are Mr. Clint Severson, Chairman and Chief Executive Officer; Mr. Donald Wood, Chief Operations Officer; Mr. Martin Mulroy, Chief Commercial Officer, North American Animal Health; and Mr. Rick Betts, Director of North American Medical Marketing. At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session.

Before we begin, I would like to remind everyone this conference call includes statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to statements related to the company’s cash position, financial resources, and potential for future growth, market acceptance of new or planned product offerings, future recurring revenues and results of operations.

Abaxis claims the protection of the Safe Harbor for forward-looking statements contained in the Reform Act. These forward-looking statements are often characterized by the terms may, believes, projects, expects or anticipates or words of similar import and do not reflect historical facts. Specific forward-looking statements contained in this conference call may be affected by risks and uncertainties, including, but not limited to, those related to transitioning medical sales to Abbott, losses or system failures with respect to the company’s facilities or manufacturing operations, fluctuations in quarterly operating results, dependent on sole suppliers, the market acceptance of the company’s products and the continuing development of its products required FDA clearance in other government approvals, risks associated with manufacturing and distributing its products on a commercial scale free of defects, risks related to the introduction of new instruments manufactured by third-parties, risks associated with competing in the human diagnostic market, risks related to the protection of the company’s intellectual property or claims of infringement of intellectual property asserted by third parties, risks related to the condition of the United States economy and other risks detailed under Risk Factors in the Annual Report on Form 10-K and other periodic reports filed from time-to-time with the United States Securities and Exchange Commission. Forward-looking statements speak only as of the date the statements were made. Abaxis does not undertake and specifically disclaims any obligation to update any forward-looking statements.

With that having said, I would like to turn the call over to Mr. Clint Severson, Chairman and Chief Executive Officer of Abaxis. Clint?

Clinton H. Severson

Great. Thank you, Joe, and good afternoon, everybody. I’ll spend a few minutes here and review the accomplishments and the challenges for Q1 FY14 and then some of the goals for Q2. And then after my short presentation, I’ll ask Marty Mulroy, our Chief Commercial Officer for North American and Animal Health, Rick Betts, our Director of Marketing for the North American Medical market to give an update on their respected businesses.

Yeah, one of the major challenges in Q1 was working through our transition for mostly direct sales especially instruments to working with partners MWI and Abbott. The processes are different and this change in market coverage means our focus of our sales and marketing people is to work more with our partners instead of mostly working directly with our customers, while MWI is doing an excellent job with sales up quarter-over-quarter from three quarters. Our smaller distributors are experiencing slower growth as our direct sales force has more time with the MWI team and less time with our smaller partners. MWI has also picked up business from their customers that were previously buying Abaxis’s consumables from other distributors prior to January of this year, when our distribution went into effect.

While we believe this movement from one distributor to the other is mostly complete, this change has led to some of our smaller partners to see lower sales and to more conservatively manage their inventor build, which led to slower sales of some of Abaxis’s products this quarter, both year-over-year and quarter-over-quarter.

As our sales and marketing team becomes both more proficient in working through distributors and gets more experience with MWI, you’ll allot more time to working with our smaller partners and expect overall sales performance per rep to improve, which will result in higher sales per salesperson and lower marketing and selling costs as a percentage of sales to Abaxis.

Even with these challenges, our worldwide Vet sales grew by 12% compared to Q1 last year to finish at $36 million, and more from Marty in a few minutes. Now, while Abbott is doing a good job of integrating the Piccolo into their organization, they still don’t sell as many Piccolos as our direct team did. Their performance continues to improve and we expect that over the next couple of quarters, we’ll see Piccolo sales surpass the performance we had with our direct team, and more to follow-up from Rick in a few minutes.

Our Q1 last year, we closed our first CRO account, which totaled about $1.6 million in medical sales mostly instrument sales. While we are focused on closing our second account with two Abaxis’s people working on for potential products, this is yet to materialize leading to difficult comparisons year-over-year for our Medical business. While our expectations for Q1 met our internal forecast, our total medical sales were down 29% compared to Q1 last year due to lower Piccolo instrument sales, which totaled 126 instruments for Q1 this year versus 324 Q1 last year. Piccolo did sales, however, were up year-over-year and quarter-over-quarter finishing Q1 2014 at 580,000 units versus 551,000 Q1 last year and 541,000 last quarter, that’s 541,000 last quarter.

Over the next couple of quarters, we expect to close new CRO accounts, which along with the continued improvement of Abbott’s performance should lead to higher medical sales in the following quarters. These challenges also negatively affected our gross margin, which went from 54.4% Q1 of last year to 48.4% Q1 this year.

Sales mix that is higher sales and lower margin other Vet consumables, Vet instruments, and AVRL lab services contributed to our lower gross margins. In addition, we have lower gross margins with our medical products sold to Abbott. And sales to the CRO market last year had significantly higher gross margin than medical sales to other markets.

Now, even with these challenges, we finished Q1 2014 with modest growth in sales of $43.2 million, up 3% versus Q1 last year. Domestic Vet sales finished the quarter at $29.5 million, up 11% year-over-year, but down about 18% over last quarter’s record levels, more from Marty in a few minutes.

As I indicated before, we have worldwide medical sales that totaled $6 million Q1 this year and we are down 29% year-over-year mostly due to lower instrument sales.

We did have strong international sales for Q1 FY2014, totaling $8.5 million and excluding the CRO deal closed Q1 last year, international sales were up 17% versus Q1 last year and up 6% quarter-over-quarter. European sales at $6.6 million were up 17% excluding that $1.6 million CRO deal we closed Q1 last year. And if you include the CRO deal, European sales were down about 9%. Pacific Rim sales for the quarter totaled $2 million, up 20% versus Q1 last year and up 5% versus last quarter.

Earlier this month, we received clearance from the Chinese FDA to market our Piccolo products in China. This has been a multi-year project with a lot of complexities and we are now working with Abbott on a plan to start selling in China. While some market segments in certain provisions have reimbursements that are not attractive, others appear to have rates that are more conducive to our Point-of-Care solution. We believe this is a great opportunity for Abaxis and we’re looking forward to working with Abbott to finalize the plan for our focus launched sometime this fiscal year.

Now, total North American sales finished Q1 at $34.7 million and were up 4% versus Q1 last year. Domestic medical sales totaled $3.7 million and were down about 21% year-over-year and 13% quarter-over-quarter mostly due to lowered Piccolo instrument sales to Abbott, more to follow from Rick in a few minutes.

Vet disc sales had 1.2 million units for Q1 were down 2% year-over-year and down 20% quarter-over-quarter, mostly due to lowered disc sales to our smaller distributors. In dollars, Vet disc sales totaled $18.3 million, also down about 2% versus Q1 last year.

Total disc sales for Q1 totaled 1.7 million units and were flat year-over-year and down about 13% quarter-over-quarter, due to lower disc sales to our smaller Vet distributors. In dollars, total disc sales for Q1 totaled $22.8 million, down 3% year-over-year and 16% over last quarter’s record. Other Vet consumable revenues that include i-STAT and COAG Cartridges, rapid test in hematology reagent packs finished Q1 2014 at $7.8 million and were up 32% versus Q1 last year.

Instrument sales in Q1 finished at $1,229 instruments, down from 1,303 instruments Q1 last year, mostly due to lower Piccolo instrument sales. In Q1, we sold 475 VetScans versus 446 Q1 last year and 473 last quarter. We sold 271 hematology instruments versus 233 Q1 last year and 341 last quarter. And as I mentioned before, 126 Piccolo instruments versus 324 Q1 last year and 183 last quarter. And finally, we sold 357 i-STAT and COAG instruments versus 300 Q1 last year and 488 last quarter.

AVRL sales totaled $2.2 million, up 157% year-over-year and 22% quarter-over-quarter, with losses down both year-over-year and quarter-over-quarter. 20% of the sales for the quarter were capital, while 80 were consumable and other, this compares with 24.76 Q1 last year and 21.79 last quarter.

20% of total sales were international sales, while 80% North America. This compares with 21.79 Q1 last year and 16.84 last quarter. 14% of sales were medical sales and 84% were Vet sales and 2% other. This compares with 20.782 Q1 last year 13.861 last quarter. The disc average selling price for Q1 this year came in at 13.08 down $0.47 versus Q1 last year and down $0.45 versus last quarter due to lowered Vet disc sales.

Disc costs for the quarter came in at 3.90 up $0.01 versus Q1 last year and $0.14 last quarter also due to lower volume. Disc gross margin finished at 70%, down from 71% last year. As I mentioned before, gross margin finished both lowered quarter-over-quarter and year-over-year finishing the quarter at 48.4% versus 54.4% Q1 last year, and 52.4% last quarter, mostly due to sales mix.

Operating expenses for Q1 2014 totaled $16.3 million, down 10% year-over-year or 37.7% of sales, down 530 basis points versus Q1 last year, but higher than the 34.4% of sales last quarter.

Sales and marketing expenses for Q1 2014 at $10 million or 23.2% of sales were down from 28% of sales Q1 last year, but up from 22.6% of sales last quarter. R&D expenses for Q1 at $3.2 million or 7.4% of sales were up 7.1% of sales Q1 last year and up from 6.5% of sales last quarter. Admin expenses for Q1 at $3.1 million or 7.1% of sales were down from 7.9% of sales Q1 last year, but up from 5.3% of sales last quarter.

Operating income for Q1 finished at $4.6 million, down 3% year-over-year and 48% quarter-over-quarter mostly due to lower gross margin and lower sales due to product mix.

Our pre-tax income for Q1 totaled $5 million, up 10% year-over-year, but down 44% quarter-over-quarter. Net income for Q1 2014 at $3.2 million was up 13% year-over-year and was down 52% compared to last quarter, and finished at $0.14 a share of $0.01 compared to $0.13 a share Q1 last year.

Now, in the R&D side of the business, we have (inaudible) in clinical trials that expect to submit to the USDA sometime next month. The other rapid tests are on schedule and be completed over the next two quarters. We have an agreement in principle with the partner that has the technology, we believe will allow us to produce high sensitivity immunoassays on our discs. Our attorneys are working on the details of the contract and once this is completed, we’ll start the feasibility work in the lab.

Also, Q2 include working with our smaller distributors to up their performance was still keeping a focus on making sure the momentum built with MWI stays positive. This is clearly our number one objective for Q2. We need to keep the focus on our AVRL business, the trans was very good and if we keep this momentum going, we have an excellent chance of hitting our aggressive sales goals and profitably this fiscal year.

Now, completing the development of our rapid test product line getting approval, then launching will be important to meeting our aggressive sales and margin goals for the fiscal year. On the medical side of our business, we’re working on four clinical research opportunities for the Piccolo, and we continue to focus on helping Abbott close Piccolo deals and expect Abbott’s sales to grow throughout the year. And on the retail side of our medical business, we’re close to closing our first PO for a pilot that includes instruments and discs, and we’ll hear more about this from Rick Betts in a few minutes.

With that, Marty, you are.

Martin Mulroy

Great. Thank you, Clin. Good afternoon. In my prepared remarks, I’ll provide some additional colors of adding the North American Animal Health business. The U.S. business is transitioning from primarily what is a very challenging direct sales effort combined with working along side local and regional distributors, holding an aggregate less than 10% market share. Today, in the U.S., there is less of a direct sales effort and we have moved to more of a traditional distributor mile with the addition of a national distributor, MWI itself having about 30% market share in the U.S.

We are now two quarters into the transition and while this past quarter’s revenue of $29.6 million and 11% or $3 million in revenue year-over-year growth may have been disappointing to us, it’s still a very, very exciting time this year and the future looks incredibly bright. The markets here are taking place in Iraq through local and regional distributors are making inventory adjustments and responds, but again, generally fully engaged now. We’re working hard with those distributors to get and back to their prior after door sales levels and records of purchase levels, and most again, most will contribute to our historically consistent double-digit growth.

Meanwhile, MWI continued to rapidly ramp up in the sales of the Abaxis products line, instruments, associated reagents, and rapid tests. And currently, our national account GPO business is beginning to trends up nicely with organization such as the association and Zoos and Aquariums, these are main society of the United States and others, and discussions are taking place with several other potentially significant national account opportunities. I’m also pleased to report Canada is now tracking at a $10 million business for us.

In addition to the 11% year-over-year growth in revenue and other highlights from our first quarter fiscal year 2014 include instrumental revenue up 18%, hematology reagent sales up 32%, Rapid Tests sales up year-over-year at 61%, and as Clint mentioned AVRL our commercial lab business up 157% versus a year ago.

Again, AVRL with net revenue of $2.2 million, up 22% or 400,000 in the prior is marching towards profitability and soon to be a $10 million annual business segment for Abaxis. Additionally, last quarter of 194 facilities combined insulin purchases with one or more of our AVRL programs, accounting for 278 instruments and $2.1 in instrument revenue.

Finally, I want to touch on some more innovational changes in the North American Animal Health business units. With the departure of our director for sales in late May, we have promoted Jeff Sumpters and Manager U.S. Distribution to National Sales Manager overseeing our first line of sales managers in the U.S.

Tom Beaver, our National Accounts Manager and John Therrien, Country Manager for Canada, all now reports directly to me, flattening somewhat the North American sales organization. With a coming soon of four new rapid assays, significant opportunity to balance for organic growth and are continuing to take market share. We continue to be very well poised for capitalizing on all the opportunities that lie ahead of us in the U.S. and Canada.

And with that, I will turn it back over to Clint.

Clinton H. Severson

Great. Thank you, Marty. Okay, now I would like to introduce Rick Betts, our Marketing Director for Medical. Rick, you are on.

Rick Betts

Thank you, Clint. Good afternoon all. For the quarter, the Domestic and Medical division finished with revenues of $3.71 million. The quarter yielded 109 Piccolo replacements and 447,000 reagent discs sold by Abbott for distribution in the U.S. POL market. The Abbott team continues to grow in a knowledge and efficacy of selling and marketing the Piccolo and they are coming up to speed with the sales traction. We expect the growth to continue as their team gains more experience with our product in the coming quarters.

In Canada, we successfully completed an extensive evaluation with Canadian Medical Laboratories, one of the nation’s largest laboratory service providers. Additionally, the interest in Piccolo use continues to grow in the regional provincial hospitals, physician offices, and retail pharmacies throughout Canada.

With the clinical trials initiative, we signed a key distribution agreement with MESM a UK clinical trial equipment supplier. With this partnership, the impressive clinical trials pipeline continues to accelerate with multiple pilots in the planning stages. The clinical trials team is on track to meet its revenue projections for the fiscal year.

And finally, as Clint mentioned earlier, we reached an agreement with CVS to begin an extensive pilot of Piccolo technology across an entire area of mini clinic sites. While we cannot discuss the details of the pilot, this is the second major step we’ve taken together and it does lead to national rollout. There is also proof that that Piccolo was reaching its potential to improve the efficacy of care in this new healthcare environment. We are excited to be working with CVS, and we believe that with the Piccolo, mini clinic is well positioned to handle the – patients who are about to hit the primary care market in early 2014, when Obamacare kicks in.

Thank you. And I will turn it back over to Clint.

Clinton H. Severson

Great. Thank you very much, Rick. And with that, we are open to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) The first question will be from Jim Sidoti of Sidoti & Company. Please go ahead with your question.

Jim Sidoti – Sidoti & Company, LLC

Good afternoon. Can you hear me?

Clinton H. Severson

We can hear you, Jim.

Jim Sidoti – Sidoti & Company, LLC

Great. A lot of the moving parts as usual. First, on the Vet side, from the way it looks to me, sales are down about $6 million quarter-over-quarter around the Vet side, but I’d just want to be clear, you said the NWI business was actually up. So that means the slow distributor business has mostly been down pretty significantly. Am I reading that right?

Clinton H. Severson

Yeah, I think quarter-over-quarter our orders from our smaller distributors were down, yeah. I think comparing quarter-over-quarter, when you are comparing Q1 to Q4, sometimes it’s not the best comparison, because Q4 is the end of our fiscal year. But year-over-year they were down about 2%, our total Vet disc sales. But clearly our smaller distributors are concerned with the competition and are holding less inventory, some of their sales in our Q1 were also down to the end-user market, I’m not sure, we’ve gotten all the end-user data in yet. But clearly, MWI is showing that they are clearly going to be our biggest distributor, yeah.

Jim Sidoti – Sidoti & Company, LLC

Okay. Are you surprised that it happened this quarter and not the previous quarter or is this more environmental that you could probably...

Clinton H. Severson

I think we are dealing with a lot of, we are dealing with a lot of new things here, Jim. Our sales people now, they are into their second full quarter with MWI, yeah and it’s different the way they work with their end-users is different or prior to the signing of MWI, most of our new Vet customers were direct sales. And now it’s different and now we’re working through distribution, so it’s a different approach.

The time that our sales people expand with our small distributors was much greater in previous quarters than it was last quarter. Last quarter, our sales people spent most of their time with MWI folks, because they see that as where most of the upside is. So, yeah, I think the and then clearly with some movement from one distributor to another. Now, while we think a lot of that has been complete, there is probably a little bit more to go. But I do believe that having a focus now on the smaller distributors now that we have some experience with what’s going to happen. A lot of them didn’t know what’s going to happen, now we have a much better idea what’s going to happen that they need to pick up their game and they need to be focusing on not only keeping their accounts, but going after the other 70% of the market that we don’t have, so this is the process.

Jim Sidoti – Sidoti & Company, LLC

All right. Now, I don’t expect you to give any kind of guidance, you haven’t done it in 10 years, I don’t expect it to start tonight, but can you just give us some sense do you think at the next couple of quarters are going to work more like this quarter as you get to this transition and they would look like let’s say the quarter that ended in March?

Unidentified Company Representative

I think the 2014 will be a record year, that’s what I think.

Jim Sidoti – Sidoti & Company, LLC

Okay, all right. Moving on the medical, you’ve mentioned the Piccolo received approval in China, so how should we think about that in terms of starting to roll that product out there?

Unidentified Company Representative

Yeah, so, this was an event that took many years. And every time we forecasted, we’re going to get a pull-over from the Chinese FDA next month based on the feedback we’re getting from the people that never happened. So, this was less of a surprise to us, probably more of a surprise to have it than happened this quick. And so, we’ve had one conference call with the (inaudible) team, we have reviewed the reimbursements like I mentioned before in the various provinces.

Clearly, there are provinces with reimbursement that are more conducive to point of care. I have asked them to focus on a proposal in those areas, where the reimbursement is more conducive to point of care and they agreed with me and they are putting sum together. So, once we get a proposal together, then we’ll start marketing and selling. So, I think it will probably take a quarter or so to get that going and then will start moving on.

Jim Sidoti – Sidoti & Company, LLC

So it sounds like we should see some business in China in maybe November, December that timeframe?

Unidentified Company Representative

Yeah, Q3 to Q4.

Jim Sidoti – Sidoti & Company, LLC

Okay. All right, the [CRO] as you mentioned there were two you were working with, can you gives us, are they about the same size is the one from last year or little bit smaller?

Unidentified Company Representative

Well, if we don’t know for sure, we don’t know for sure. It depends on how big these trails end up getting when they get formalized, but we’re working with the four different organizations that believe that point of care makes a lot of sense for what they’re trying to accomplish. It will speed up their, the time and takes to complete the trial which if the product has exceeded expected speed time to market, which saves Pharma a lot of money.

So again we are early in the game. We have two people that’s all they do, is work with that CRO staff. And we’ve got a forecast in the plan this year that I believe it is the same size or maybe a little bit bigger than what we did last year, and we expect to hit that forecast.

Jim Sidoti – Sidoti & Company, LLC

Okay, all right, and then on the retail opportunity in CVS, I know it’s about 12 to 18 months you started a power program and you ran 50, I think with 50 units through. Is this going to be a bigger scale than that program?

Unidentified Company Representative

Okay. So the regionally the objective was 50 units, we ended being three units that we did the pilot on and that was pretty much Abaxis donating instruments and I am not sure whether they paid much for this or not. This a formal pilot, this is their paying for the discs, they are renting the machines, and it’s an area, it’s a designated area, and it’s part of – first part of a much bigger pilot that we believe we will need to rollout. So this is very complicated process for any company starting Point of Care diagnostics for chemistry and in an environment that’s different from a clinical environment. So clearly their approach that they laid out for us makes total sense to us that, yeah you need to try it make sure in a smaller region that everybody does at the same way that protocols are all followed and their quality system they have in place is something that the people can work with. And so, yeah, so to us is a really big deal, in fact, that they are spending money. Yeah.

Jim Sidoti – Sidoti & Company, LLC

All right. So just to summarize, it sounds like the CRO is probably the nearest term opportunity and China and the CDS opportunity that could possibly be more into fiscal 2015?

Clinton H. Severson

No. I think we’ll get a purchase order for something from the retail opportunity this quarter. And clearly, there are never any guarantees and I think it will, I think we’ll see with a potential of seeing some CRO business this quarter as well, and I think China is probably a little bit later down the road this fiscal year.

Jim Sidoti – Sidoti & Company, LLC

All right. And then last question AVRL looks like that that really picked up again, what were the losses in the quarter from AVRL?

Clinton H. Severson

Yeah, so for Q1, the loss was $1.1 million.

Jim Sidoti – Sidoti & Company, LLC

Okay. And what we was it the previous quarter, do you remember?

Clinton H. Severson

1.2, and last year, 1.6.

Jim Sidoti – Sidoti & Company, LLC

All right. But what sales level do you need to get that to breakeven?

Unidentified Company Representative

Between $3 million and $4 million.

Jim Sidoti – Sidoti & Company, LLC

Per quarter?

Unidentified Company Representative

Yeah.

Jim Sidoti – Sidoti & Company, LLC

Okay. All right. Thank you.

Unidentified Company Representative

Thank you.

Operator

Our next question will come from Ross Taylor of C.L. King. Please go ahead.

Ross Taylor – C.L. King & Associates, Inc.

Hi, I will just start by asking some questions about sales, some of your distributors, but for MWI, can you, I just want to make sure I understand but your sales to them were actually higher than they were in March quarter. Is that correct, and if so, can you quantify what the amount is it all?

Unidentified Company Representative

Well, they let MWI just closed that one, but they were higher, I guess.

Ross Taylor – C.L. King & Associates, Inc.

Okay. And, our MWI’s inventory levels going down or I guess there were sales to end customers, you’re kind of higher than what they bought from you in the quarter?

Unidentified Company Representative

Okay. So we get MWI sales by the day, right Martin, by the day and what the highest day we’ve seen, highest day sales we’ve seen.

Unidentified Company Representative

I don’t say sales within.

Unidentified Company Representative

At the current run rate, at the end of this quarter, they should have roughly 30 days on hand.

Unidentified Company Representative

And in this quarter, they should have 30 days on hand which is safety stock in and we actually typically recommend 45 days on hand safety side.

Ross Taylor – C.L. King & Associates, Inc.

Okay. And just in terms of your smaller distributors, their sales to end users, can you quantify it all, you know how much they have declined, I’m just kind of guessing other rate of decline end users as quite as much as what you’re saying in terms of sales for those distributors?

Unidentified Company Representative

We don’t have that data in front of us here, we get the end-user data a little bit later in the month. But I mean clearly, there is some shift, but when you look at and that’s mostly on the roller side. The rollers are the most attractive products for the distributor, because they have a nice gross margin on them in the order to just kind of roll-in, once they get the machine in. I think a very good measure of our ability to grow the business through using our advantage now with MWI, you can see from the rapid test, the COAG and the i-STAT. That stuff was really fast last quarter.

So, I think we’re going to need a couple more quarters before you can really quantify what the switch is going to be, how much is going to be from the existing distributors versus new customers, but I think we’re seeing strong instrument sales through MWI, even though, we’re in this transition phase, and most of those are competitive trade-ups.

Ross Taylor – C.L. King & Associates, Inc.

Okay. And n terms of the sales calls, you’re doing with MWI, your productivity, per rep or per call kind of where it has been historically just been working with the smaller distributors are going direct yourself?

Clinton H. Severson

Yeah. So I think you can see and even though, we’re in a transition phase and we’re not really fully optimized yet with this whole new process. I focus mostly on that VetScan, and because VetScan is the lead product and getting the VetScan in the clinic is the most critical part of the sales process, because once the VetScan is in, then you can really add other things around it. So last quarter, we sold 475 VetScans, which is up from 446 Q1 last year and 473 last quarter. So that looks really good. And then, of course, hematology at 271 versus 233 last quarter and i-STAT’s at 357 versus 300. So clearly, we’re still growing the business, even though our sales people aren’t fully optimized with the new process of working with distributors there and directly with customers. But we’re in there.

Ross Taylor – C.L. King & Associates, Inc.

Okay. And last question I just ask about Abbott, it may just seem like that’s starting very slowly and given that you’ve just signed the deal eight or nine months ago, way back on Halloween, I mean, what’s kind of taking them so long to ramp up here. I would have thought, they would have been able to approach this business and get some pretty high sales level, fairly quickly given all their experience with i-STAT and the installed base of i-STAT?

Clinton H. Severson

I think signing the agreement has nothing to do with the implementation. I think we signed the agreement last October, November, but they didn’t really start selling till February. And so clearly, the process of integrating a new product as complex as the Piccolo into an organization that was fundamentally selling one product, the Point of Care people anyway – we’re fundamentally selling one product, now, they’ve got twice as many products they have to sell, and they just sold it, but they are improving just about every month. They seem to sell more.

So I think I’ve told everybody from day one that that is going to be a slower process than the process we have with MWI, because it’s a totally different organization and totally different market. And I’ll let Rick comment behind my comments here.

Unidentified Company Representative

Yeah, just to add to that, Clint, average sales team with the i-STAT has been primarily focused on the domestic small hospitals rather than the physician office laboratory, the doctor’s (inaudible). So that transition for them moving was depictable, which is perfect for doctor’s (inaudible) it’s a transition for their sales team and it’s going to take them a while. Just like any salesman, it takes them months to come up to speed on something new. So that’s what the end process would be.

Ross Taylor – C.L. King & Associates, Inc.

Okay. That’s helpful. Thank you.

Clinton H. Severson

Great. Thank you.

Operator

(Operator Instructions) The next question will come from Ben Haynor from Feltl & Company. Please go ahead.

Ben C. Haynor – Feltl & Co.

Good afternoon, gentlemen.

Clinton H. Severson

Good afternoon.

Ben C. Haynor – Feltl & Co.

You mentioned that the majority of Vet system sales will switch out. Has that continued at the historical competitive win rate you’ve enjoyed or has there been some type of step up there at all with [WI] being out there in the market?

Clinton H. Severson

So your phone connection kind of cut out on us in the last part of the question. Could you repeat it real quickly?

Ben C. Haynor – Feltl & Co.

Sure. So your competitive win, switching people out, has that stayed at the historical rate or has it stepped up a little bit with them to you the [WI] been out there in the market?

Clinton H. Severson

Yeah. The comparing switch out right now are still probably about at the same rate that they’ve historically been, but I think moving forward with them, [WI] we had access to a lot of clinics that we did not have access to in the past. Still I do anticipate the taking of the market share should increase.

Ben C. Haynor – Feltl & Co.

Okay, great.

Unidentified Company Representative

Meanwhile our local and regional distribution that’s been on board for 10, 15 years was an opportunity with them for quite a bit of organic growth.

Ben C. Haynor – Feltl & Co.

Okay, great. And then you said NWI is on track like, you have 30 days of safety stock on hand by the end of this quarter. Did you, maybe I missed it, did you give the figure where they are sitting at, at the end of this quarter?

Unidentified Company Representative

Okay. So we do mostly the way the system works when distributors order products from Abaxis other than instruments. Our consumable products need to be refrigerated. So the normal process is that they figure out how they can fill the trucks because if you can’t fill the truck these shipping cost per unit goes way up. So if you only fill the truck up half way it may cost you $0.30 an order to ship it or [$0.30 per gas.] But if you chose a truck all the way it might be $0.550 or $0.07 share per gas. So our distributors, our larger distributors normally have one order a quarter, okay. So they look at where the run rate is, where their sales are going to be for the next quarter and they say okay, this is how much we need for the next three months and then they put their order and usually ships the last month of the quarter in the truck. So towards the end of June, most of our distributors didn’t have hardly anything in inventory, then they put their June order in and then July 1, they have 2.5 to 3 months of inventory on hand. And so that’s how the system works.

Ben C. Haynor – Feltl & Co.

Okay. That’s helpful. That’s all I have, thank you very much.

Unidentified Company Representative

Okay great. Thank you.

Operator

And our next question will come from David Clair of Piper Jaffray. Please go ahead.

David Clair – Piper Jaffray

Yeah. Hi, guys, thanks for taking my questions.

Clinton H. Severson

You bet.

David Clair – Piper Jaffray

First one from me I was just curious, can you talk about the next steps with CDS, so how long is this kind of next phase of the pilot and then is it successful, is that like a full rollout nationwide, or how should we think about that and any kind of details on when a full rollout might happen?

Clinton H. Severson

So, we are seeing with this CDS, while we can’t discuss the details of this particular pilot, I can’t give you some relative term. So the pilot is short in relative terms. And what we have heard from a communication standpoint is, there is two results of the pilot. One, the result is – it’s an unsuccessful pilot and they basically abandon Point of Care in retail sites, which doesn’t seem likely. And two, there is a workflow pilot, the works are looking well and it goes out nationally. Now, how they do that, my guess is that, we are probably a stepped approach to a national roll-off, but that would be up to CDS.

David Clair – Piper Jaffray

And when you say a short pilot that’s shorter than kind of that 18 months period that we just did for those three instruments?

Clinton H. Severson

The three instruments were a feasibility test that were a, we are shorter than the 18-month period, while we still have a couple of those instruments and have been kicking the tyres from an IT standpoint with them. The use in the clinics have basically stock and now they are actually going to start using the Piccolos in the clinics in this area that we had mentioned previously.

David Clair – Piper Jaffray

Okay. And then a quick one on the Vet side, this has been asked a couple differently, is going to carry something different. It’s in terms of competitive takeaways with MWI, can you give us any kind of like percentages like in terms of you think one-third of the business is kind of gaining market share or any kind of clarity you can give there?

Clinton H. Severson

I would rather not report specific numbers for a partner, again MWI will disclose with they deem fit to disclose, but I think I can tell you that over half of the new business we’re realizing with MWI or in clinics for which we did not previously did business with.

David Clair – Piper Jaffray

Got you, thank you.

Clinton H. Severson

(Inaudible).

David Clair – Piper Jaffray

Yeah, that’s perfect, thank you very much. That’s all for me.

Clinton H. Severson

Okay, thank you.

Operator

(Operator Instructions) The next question will come from Jef Frelick of Canaccord. Please go ahead.

Jeffrey Frelick – Canaccord Genuity

Well thanks guys, good afternoon. Clin I missed the VetScan sales in dollars for the quarter. Can you repeat that?

Clinton H. Severson

Okay, so we sold 475 versus 446 Q1 last year and 473 last quarter, in dollars total VetScan sales were $3,646 million.

Jeffrey Frelick – Canaccord Genuity

Great, thanks. And then just a follow-up question on the kind of the distributorship from the small partners to MWI, I’m not sure if I’m following you guys correctly. So, on the reagent sales, the vets who’re buying these previously from the smaller partners, now MWI offers it. So why would the reagent sales be down this quarter or may just switch whom they buy it from?

Clinton H. Severson

Okay. So let me explain it one more time here. Okay, so like I mentioned before, the process is the distributor takes a look at what his sales were over the previous three quarters. They do a forecast of what they think their sales for discs are going to be over the next three quarters. They place one order a quarter generally. I mean they sometimes top it up during the quarter and they might run out of something, they’ll add something. But then they’re going to pay a high shipping price. So if we have to air freight it, it’s a $1 air freight is. So they are pretty careful on making sure that they get as many of the discs that they sell in their trucks. So the shipping costs are down to $0.01 not or even dollars. But anyway, so they run their forecast. They take a look at what they’re going to need, and then they put an order in usually the last month of our quarter.

Okay. So this quarter, we just finished. Our smaller distributors said, oh my goodness, what is this? Our sales are lower than what we thought. So we don’t think we’re going to sell as much in this next quarter coming up, which is the September quarter. So we’re going to order less. That’s fundamentally what happened.

Jeffrey Frelick – Canaccord Genuity

Okay.

Clinton H. Severson

Now MWI and the other handset, look at this, we’re selling more than we thought we’re going to sell. we can order more, they didn’t order as much more as the other guys, but because that’s adjusting the inventory level. So that’s why you see lower sales from us to our distributors because our smaller distributors expect to sell less of the adjusted their inventory level, they adjusted their run rate, so, we’re not going to know whether next quarter, they’re going to run out, we don’t know that yet, whether they’re going to save my goodness, we didn’t order enough, we got air freights and orders here or we’re going to loose business.

So, I think it’s going to only have been apt us with MWI for really two quarters. I mean, yes, they did an order in December to team everything up for January launch, but it’s only been two quarters. So I think the smaller distributors are probably getting a little gunshot and they have lost some of their business, which is to be expected especially, when their customers’ primary distributors MWI and they’ve only been doing business with our smaller guys because, hence the only way that they can get there is this.

But as this fiscal year moves on, you’ll see more of about, more understand like better. But I think our new business like Martin said, most of our new businesses, our new instruments sold are coming from accounts that, this is the hard work coming from accounts that we haven’t been doing business before and so, usually it takes about a three month lag phase before doing a trade-out with the competitive machine, we usually compensate the customer with some free gifts, also it take about ordering this from their distributor.

So, this is going to be up and down a little bit for a couple of quarters, until everything settles out. But next, it’s a big upside for us. Because we had a really strong year last year, I think instrument placements or unit sold roughly 28% last year, that’s what we are kind of expecting to see some pull through going through starting this quarter carrying through, but I gave you an explanation. Okay, so maybe a gross margin question and then I’ll hop off back in queue. Is the gross margins that end of the year gets a little bit higher than the smaller partners and is that so….?

Unidentified Company Representative

Yeah. Okay, so generally, they are the same except some of our smaller distributors that are exclusively Abaxis distributors. They don’t carry any other products, they have a little bit higher gross margins who somebody like to use competitive products. So MWI’s gross margin is the same gross margin as our smaller distributor that carries more than just Abaxis products.

Jeffrey Frelick – Canaccord Genuity

Okay. Got it. Thanks guys.

Unidentified Company Representative

Thank you.

Operator

Our next question will come from Jonathan Block of Stifel. Please go ahead.

Ethan Roth - Stifel, Nicolaus & Co.

This is Ethan Roth in for John Block. I just have a couple of questions on the AVRL business. The revenue ramp has been progressing well and I’m just curious to what extent this growth has been coming from new customers versus higher testing volumes among their existing accounts. And then just a follow-up to that, can you provide any general comments on customer retention of the web? Thanks.

Unidentified Company Representative

Once the customers either AVRL or the level of service, we’ll be taking it very high and then the second piece of your question mostly business is actually new customers not so much organic growth within the customer base, both that we are experiencing the latter as well.

Ethan Roth - Stifel, Nicolaus & Co.

Okay, that’s all I have. Thanks.

Unidentified Company Representative

Okay, thank you.

Operator

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Clinton Severson for his closing remarks.

Clinton H. Severson

Great. Okay, well, thank you all. I think the first quarter was lower than our Q4 is off to a great start with lots of good imitatives clearly with MWI, they still are performing very well. This potential on the retail side looks really good. We’re getting closer on the CRO opportunity and clearly with a complete menu of rapid tests, this will allow us to compete in the market that we’ve been only competing with on a PCO basis. So we have a lot of great things gone, and we’re looking forward to completing our Q2 and having this conversation with you in October.

So thank you all for tuning in, and we’ll talk to you in a few months. Thank you very much.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Abaxis Inc (ABAX) CEO Discusses F1Q14 Results - Earnings Call Transcript
This Transcript
All Transcripts