Heska Corporation (HSKA) CEO Kevin Wilson on Q1 2014 Results - Earnings Call Transcript

May.11.14 | About: Heska Corporation (HSKA)

Heska Corporation (NASDAQ:HSKA)

Q1 2014 Earnings Conference Call

May 08, 2014 11:00 AM ET

Executives

Brett Maas - IR

Bob Grieve - Executive Chairman of the Board

Kevin Wilson - President and CEO

Jason Napolitano - CFO

Analysts

Ian Corydon - B. Riley and Company

Nicholas Jansen - Raymond James & Associates

Ben Haynor - Feltl and Company

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Heska Corporation's Third Quarter 2013 Earnings Conference Call. (Operator Instructions) This conference being recorded today Thursday, May 8, 2014, I would now like to turn the conference over to Mr. Brett Maas, of Hayden IR. Please go ahead, sir.

Brett Maas

Thank you all for joining us today on our conference call. On the call with us today are Bob Grieve Heska Corporation's 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'd 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 from 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 otherwise as required by law, Heska does not intend to update any forward-looking statements to reflect events that occur after today's call.

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

Bob Grieve

Thank you, Brett. I’d also like to thank everyone for joining the call today. As we noted in the press release and summarized in 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’s 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 Cuattro 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 in EPS from a $0.07 loss in the first quarter last year to a $0.03 profit. Even as we achieved double digit revenue growth we maintained exceptional expense discipline. The first quarter of 2014 we continue to see positive momentum and analyze replacements and consumable usage by end user veterinarians. Reaction to our new subscription type sales strong 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’d like to compliment our entire team on delivering this message with our new found passion and on these results.

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

Kevin Wilson

Thanks Bob. And I’d 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’s early and we have a lot of work to do. Our focus on improving our cost 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’re treated fairly. That’s message and it seems to appreciate by hardworking veterinarians. While we fine tune our 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 in compete. Heska appears to be making progress on that 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 a new Element POC, blood gas electrolyte metabolite and basic blood chemistry analyzer. Element POC marks our long planned reentry into this important handout segment.

Since its introduction we’ve grown more confident that it is the best analyzer in its category due to its connectivity. Single ease of use test cards that can be stored at room temperature easier workflow and meaningful over operational saving system 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 to switch to Heska.

In the first quarter 2014, we began a limited release of our new E-Wrap for our chemistry system. 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 patients, by using our very flexible method individual slides. Now with the addition of E-Wrap Heska users can continue to customize their own panels when it’s 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 to the new E-Wrap panels is being seen by many as being the best of both worlds. By combining our new reset description 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 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 of 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 hospital and the specialty centers. These centers of excellence are often looking to upgrade the digital X-ray units in 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 is leading HD digital radiography offers a clear reason to choose Heska for imaging and for imaging and blood diagnostics bundles. Taking 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, is proving to be effective in switching customers from competitors and to 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 and 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 that 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 question. Jason.

Jason Napolitano

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 test. Competition in the heartworm diagnostic test market remains fierce. We faced a relatively easy comparison in the instrument consumable area as in the first quarter of 2013; our GAAP reported sales were significantly lower that end-user sales due to the impact of 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 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 the 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 with lower headcount as well as lower spending on fleet auto sales. Heska Imaging reported selling and marketing expenses of $981,000 for the first quarter of 2014 as compared to $417,000 in the first quarter of 2013.

In the first quarter of 2013, 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’s 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 was $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 that changed 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 for 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 the 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 offset by the operating loss at Heska Imaging. We still have income before income taxes attributable to Heska Corporation the owner of only 54.6% of Heska Imaging which is why we recognized the packed expense this quarter. Cash and cash equivalence 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 no further comment 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’ll turn the call over to you, Bob.

Bob Grieve

Thank you, Jason. Before we conclude our prepared comments, I’d like to spend a few more minutes providing an update on our strategic partnerships. In 2013 Elanco, the animal-health of Eli-Lilly purchased from Heska certain cattle vaccine seeds essential to the development and maintenance of cattle vaccines. Heska’s relationship with Elanco had broadened, Elanco having recently purchased the rights to distribute Heska’s proprietary cattle vaccine, 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 in our OVP business. 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 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 the operator for purposes of conducting the question and answer session.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). our first question is from the line of Ian Corydon with B. Riley and Company, please go ahead.

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.

Bob Grieve

Certainly I think, as I indicated again the first step towards the purchase of those assets through the quarter, beginning with how you make those cattle vaccines, and 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 as we said here in the prepared remarks that we will continue to see, continued commitment to the manufacture of those vaccines for the foreseeable future. We also would 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.

Ian Corydon - B. Riley and Company

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’s kind of the right range to think of on a quarterly basis if 35% is right for the year?

Jason Napolitano

Yes. As you mentioned, we expect that 35% will be the annual. I believe the 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’s going to average out at 35%.

Ian Corydon - B. Riley and Company

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

Jason Napolitano

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

Kevin Wilson

Ian, it’s 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 program do we emphasize in a quarter, depending on A, what we think the market needs and B, what we think the company needs overall.

Ian Corydon - B. Riley and Company

Got it. That's very helpful. And then 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?

Bob Grieve

You know Ian; we don’t give guidance I say.

Operator

Thank you. Our next question is from the line of Nicholas Jansen with Raymond James & Associates. Please go ahead.

Nicholas Jansen - Raymond James & Associates

Hey guys, 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.

Jason Napolitano

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

Nicholas Jansen - Raymond James & Associates

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

Kevin Wilson

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

Nicholas Jansen - Raymond James & Associates

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.

Kevin Wilson

Nick, it’s 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 replacements, of sales of existing customer as oppose to sales to competitor upgrades. There is replacement business and all those type of things and so we really don’t think it’s that reflective of market share. So, we are looking at other metrics that I think will try and roll-out here in coming quarters that we think are far more indicative of the health of the business and will actually tie a little more closely to what’s going on in the profit and loss statement and the other financials. So, I hope that answers the question but it’s a purposeful change in direction. Other companies may find it useful but I don’t think it’s really directionally accurate.

Nicholas Jansen - Raymond James & Associates

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, 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 there is anything we should be considering about the revenue growth at Heska Imaging this quarter.

Jason Napolitano

If you look at last year’s Q, we had a pro forma in footnote three and that was for about 19.9 million of revenue versus 18.9 with Heska Imaging only in the financials from Feb 24. So, it was about a 1 million, so it’s sort of a flattish quarter. Kev, you might want to comment on trends, I don’t feel like this is a business that I am highly worries about performing.

Kevin Wilson

We feel like we had a good quarter and I think I mentioned new product introductions late in the fourth quarter, early in the first quarter, so some of that it’s a smallish one tier business and sometimes will report better than others. But I think in the aggregate over the year, we are comfortable with where we are.

Nicholas Jansen - Raymond James & Associates

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?

Bob Grieve

You know I think, and probably a little bit, a little bit of the second, more status quo,

I will say that one of the big things that we continue to focus on in getting product right and I elaborated on a couple two or three of those initiatives that we’ve 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’re able to do.

Operator

(Operator Instructions) Our next question is from the line of Ben Haynor with Feltl and Company, please go ahead.

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.

Ben Haynor - Feltl and Company

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?

Bob Grieve

It’s really pretty, a pretty neat feature, Heska’s always had the ability to do not one slide at a time, so again we’re 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’s 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’ve always liked that about the Heska products, the downside of that is if you do want to run a full panel the customers were 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’s important that our clients, the veterinarians seem to think it’s 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 wanted to do 10 pre-surgical panels before the surgery they want to do it very quickly and the E-Wrap is what allows them to do that.

Ben Haynor - Feltl and Company

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?

Kevin Wilson

Yes, that is astute. Again, all you can do is speculate, my sense in being in Imaging for a long time, my sense is that if one better image product comes on the market, 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 broad digital radiography category. We do think that as people start to see just like in consumer electronics, retina displays, 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.

Ben Haynor - Feltl and Company

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?

Kevin Wilson

You know, I don’t have the data in front of me, I don’t think it’s 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’s tax driven by Introspection 179, so they would prefer to go ahead and just have a $60,000 expenditure at which point we have a sale, and then quarters during the year, they prefer, they have operational expenses over a longer period of time and then I start thinking about CapEx again in the fourth quarter. So, there are a lot of inputs some of which we can drill and some of which we don’t. So, I am not being purposely evasive on it. It’s a moving target quarter-to-quarter and probably not that instructed to break it out at this stage. I think at some point in the future, providing may be a regular update on that model will be helpful but we are not quite ready to do that.

Ben Haynor - Feltl and Company

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

Bob Grieve

Thanks, Ben.

Operator

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

Robert Grieve

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. Good bye.

Operator

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

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