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Edited Transcript of HSKA earnings conference call or presentation 6-Aug-19 3:00pm GMT

Q2 2019 Heska Corp Earnings Call

LOVELAND Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Heska Corp earnings conference call or presentation Tuesday, August 6, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Catherine I. Grassman

Heska Corporation - Executive VP & CFO

* Jason A. Napolitano

Heska Corporation - COO & Chief Strategist

* Jon Aagaard

Heska Corporation - Director of IR

* Kevin S. Wilson

Heska Corporation - CEO, President & Director

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Conference Call Participants

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* Andrew Harris Cooper

Raymond James & Associates, Inc., Research Division - Senior Research Associate

* Benjamin Charles Haynor

Alliance Global Partners, Research Division - Analyst

* Bruce David Jackson

The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst

* David Michael Westenberg

Guggenheim Securities, LLC, Research Division - Analyst

* James Philip Sidoti

Sidoti & Company, LLC - Research Analyst

* Mark Anthony Massaro

Canaccord Genuity Corp., Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Heska Corporation Second Quarter 2019 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jon Aagaard. Please go ahead, sir.

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Jon Aagaard, Heska Corporation - Director of IR [2]

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Thank you, and good morning, everyone. Welcome to Heska Corporation's Earnings Call for the Second Quarter of 2019. I am Jon Aagaard, Director of Investor Relations for Heska. Prior to discussing Heska's second quarter 2019 results, I would like to remind you that during the course of this call, we may make certain forward-looking statements regarding future events or future financial performance of the company. We need to caution you that any such forward-looking statements are based on our current beliefs and expectations and involve known and unknown risks and uncertainties, which may cause actual results and performance to be materially different from that expressed or implied by those forward-looking statements. Factors that could cause or contribute to such differences are detailed in writing in places, including this morning's earnings release and Heska Corporation's annual and quarterly filings with the SEC. Any forward-looking statements speak only as of the time they are made, and Heska does not intend and specifically disclaims any obligation or intention to update any forward-looking statements to reflect events that occur after the time such statement was made.

We have with us this morning Kevin Wilson, Heska's Chief Executive Officer and President; Catherine Grassman, Heska's Chief Financial Officer; and Jason Napolitano, Heska's Chief Operating Officer and Strategist. Mr Wilson, Ms. Grassman and I will provide details surrounding the results reported, and then we'll open the call to questions.

At this time then, it is my pleasure to turn the call over to Kevin Wilson, Heska's CEO and President. Kevin?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [3]

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Thanks, Jon, and good morning to everybody. I know it's a topsy-turvy market out there and everybody is very busy. So I want to thank you for your interest in spending the time that you spend on Heska. With that, we'll jump right in.

We are reporting a nice solid quarter. The second quarter remains in line with the outlook that we presented on the fourth quarter of 2018 call, and that we reiterated on the first quarter call as well. Our business initiatives for product development and geographic expansion are on track. And operationally, the second quarter met or exceeded our goals in nearly all the key areas. Particularly, we showed very strong core companion animal lab diagnostics, where lab consumables rose 14.6% over the prior period and confirmed a nice healthy trajectory that we established in the first quarter where active subscriptions, months under subscription, contract subscription value and subscription retentions for the first and second quarter are progressing well in line with our full year outlook. Our first half sales campaigns continue to drive new placements, renewals and retention. Margins are good, and perhaps most importantly utilization capture, over the full term of the 6-year contracts, continues to be higher than our traditional contract subscription value.

So bottom line is a nice, good quarter, very competitive marketplace, as everybody knows, but the overall market in veterinary health care continues to be very robust and healthy. And we continue to execute well within that space.

So with that, I'll turn the call over to Jon. He's going to make some comments related to the release, and I'll be back with you shortly. Thanks.

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Jon Aagaard, Heska Corporation - Director of IR [4]

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Thank you, Kevin, and thank you again to everyone who has chosen to join us this morning. We presented a lot of good information in the release this morning, and we wanted to take a moment just to go through it here quickly, starting with Heska's position and strategy in the marketplace.

Heska has built a full portfolio of POC lab and imaging diagnostics that are critical to the modern veterinarian and their patients. Because pets can't speak about their health care challenges, real point-of-care diagnostics act as the voice of the pets, and are relied upon by families and veterinarians to drive care. POC diagnostics providers like Heska occupy a unique position that is much closer to veterinarians than other category providers. As a result, veterinary diagnostics continue to trend higher and faster than legacy services and products from which veterinarians are being disintermediated. Because diagnostics requires licensure and professional capabilities, only found in veterinary centers, the modern veterinary model increasingly relies on diagnostics as its indispensable medical outcomes and financial growth foundation.

Heska is honored to claim one of a very limited number of coveted positions within this accelerating trend. To maximize Heska's value creation within this globalizing and consolidating market, Heska is rapidly multiplying its target audience through geographic expansion, while at the same time launching Heska exclusive, owned, developed and manufactured innovations that put Heska closer to clinicians, pets, and pet families by solving their most important health care problems. Heska believes this strategy creates a strong multiplier effect that is scalable for decades into the future.

In the first half of 2019, Heska's product development and geographic expansion, again, advanced each of these objectives. Expected launches of key products and international markets have begun and announced upcoming products and geographic expansion time lines have continued to track closely with the time lines given.

Regarding the current platform expansion, Heska continues to introduce new tests on existing platforms, such as progesterone, BUN and

e-Wrap additions to Heska's immunoassay, blood gas and chemistry analyzers, respectively. Early feedback remains positive for each of these first half launches, and increasing utilization and satisfaction amongst Heska's thousands of current users is evident. We are also attracting new customers along the way. In addition to expansions to Heska products already on market, entirely new platforms hit the starting line in June of this year. Among those new analyzers, the Element i+ is Heska's next-generation multiplexing immunoassay platform for global veterinary and animal health applications. Element i+ was introduced to select sites in limited release in June of 2019, with full market release continuing to be on schedule for the third quarter. Element i+ leapfrogs Heska's current leading immunoassay platform with several important new advantages. Those being multiplexing test cards, superior analyzer design, low-cost profile, expansive assay road map for the first and only POC analyzer testing exclusive to Heska and global position within Heska's full POC diagnostic suite.

Next, the Element RC is Heska's new rotor-based chemistry platform. Element RC is targeted directly to Heska's international expansion efforts as Heska's core chemistry solution for the international portfolio. Element RC was introduced to the European market in June 2019, at the France Vet Trade Show in Paris, and we believe it was met with strong enthusiasm in advance of international end-user shipments expected in the third quarter.

And last, but certainly not least, and following closely on the calendar is the Heska Element UF urine and fecal analyzer platform. Research and development investments for this invention continued to yield on-target results. Significant progress has been made toward on-schedule alpha and beta instrument milestones expected in the second half of 2019 and the first half of 2020, followed by targeted commercial release and revenues soon thereafter. Element UF is expected to be a major first-mover invention from Heska that solves big and important problems for many thousands of veterinarians across the globe. A successful Element UF launch has exciting impact for potential veterinarians and patients in Heska's thousands of current subscriber hospitals and in competitive and greenfield locations. While risks around precise timing and costs are always inherent in initiatives like Element UF, current Element UF time lines, market opportunity and feasibility remain achievable.

Turning now to the international geographic expansion front, integration of Heska's 2019 acquisition of Optomed in France is progressing well. The preparations for launching Optomed endoscopy products in North America and Heska POC Lab Diagnostics into France and broader European markets are developing well, with small, early indications pointing towards greater long-term opportunity and scale than what was originally anticipated. New key talent hires in France as well as our perceived positive reception at the France Vet Trade Show continue to affirm Heska's direction and investment into France.

On the other side of the globe, and in closing, Heska Australia is up and running in POC Lab Diagnostics, representing a major commercial milestone that is also now a detailed road map for Heska's other expansionary targets. Operational systems have been integrated, and the team has shown early competitive prowess with several new subscription accounts successfully won away from the competition in Australia. Early results continue to strengthen Heska's conviction for winning and retaining Australian POC Lab Diagnostics customers with Heska technologies and subscription models.

Having covered a lot of information there, I will now turn the call over to Catherine to go over the details of the quarter. Catherine?

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Catherine I. Grassman, Heska Corporation - Executive VP & CFO [5]

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Thanks, Jon, and good morning, everyone. We are pleased to report a strong performance for the second quarter of 2019, which as Kevin mentioned, was in line with our previously communicated full year outlook. Offsetting strong consumable growth in our point-of-care lab product line was expected lower revenue from contract manufactured heartworm preventative, which resulted in a consolidated net revenue decrease of 5.1% to $28.1 million as compared to the second quarter of 2018. Revenue in core companion animal or CCA segment was $24.7 million for the second quarter of 2019, a 7.2% decrease over $26.6 million in the second quarter of 2018. Revenue from point-of-care laboratory consumables grew 14.6% in the second quarter of 2019 compared to the second quarter of 2018, which is in line with our full year outlook of 12% to 17%. Offsetting this increase was expected lower revenue from sales of pharmaceuticals and vaccines of 52.8%, specifically, Tri-Heart, a heartworm preventative manufactured for Merck.

Revenue from our Other Vaccines and Pharmaceuticals, or OVP, segment increased 13.7% to $3.4 million in the second quarter of 2019 as compared to the second quarter of 2018. Consolidated gross margin in the second quarter of 2019 was 44.1% as compared to 44% in the second quarter of 2018. In the second quarter of 2019, gross margin in our CCA segment grew 10 basis points to 49.6% as compared to the second quarter of 2018, due to the increase in consumable revenue. OVP segment margin grew 830 basis points to 4.6% in the second quarter of 2019 as compared to the second quarter of 2018, resulting from favorable product mix. Operating income decreased 125.7% to a loss of approximately $600,000 as compared to the second quarter of 2018. The decrease in operating income is primarily due to increased operating expenses resulting from an increase of $1.7 million in research and development related to new product initiatives, and an increase of $800,000 in selling and marketing due to expanded domestic headcount in the latter half of 2018 and expanded international operations. These increases were partially offset by $300,000 of lower general and administrative expenses, mostly due to lower consulting fees in the quarter.

Depreciation and amortization was $1.3 million for the second quarter of 2019 compared to $1.1 million for the second quarter of 2018. Stock-based compensation was $1.2 million for the second quarter of 2019 compared to $1.3 million in the second quarter of 2018. The company's effective income tax rate for the second quarter of 2019 with a tax benefit rate of 72.5% compared to a tax rate of 10.2% for the second quarter of 2018. The second quarters of 2019 and 2018 include approximately $300,000 and $400,000, respectively, of discrete tax benefits associated with stock compensation activity.

Net loss attributable to Heska Corporation for the second quarter of 2019 was approximately $200,000 or a loss of $0.03 per diluted share compared to income of $1.9 million or $0.24 per diluted share in the second quarter of 2018. As of June 30, 2019, Heska Corporation had approximately $10 million in cash compared to $13.4 million as of December 31, 2018. Cash flow from operations was a use of $5.4 million for the first half of 2019, largely due to a litigation settlement payment of $6.8 million as compared to cash provided by operations of $4.5 million for the first half of 2018.

Pertaining to our outlook beyond 2019. As indicated previously, with my appointment to the role of Chief Financial Officer, we are currently updating our May 15, 2018 Investor Day, multiyear outlook to incorporate new initiatives and data updates. While we believe investors and the markets are aware of and have included these updates in their models, we currently plan to share updated details from our own projections during our fourth quarter and full year 2019 earnings release. These updates will largely focus on and incorporate impacts announced -- sorry, from already announced updates from our May 2018 outlook, such as the effects from the acceleration of Element UF development into a unified urine and fecal platform as compared to the less optimal May 2018 road map, which contemplated 3 separate product schedules to arrive at the current Element UF's more advanced design. Additionally, we will include the effects of announced changes surrounding Tri-Heart heartworm preventative impacts on a go-forward basis; impacts from business development, such as our acquisition of Optomed, which was unknown in May of 2018, and other items, which again, we believe investors and analysts following Heska have largely already modeled.

Finally, we will include the effects of our actual 2019 results and our planned activities for the second half of 2019, which will impact 2020 and beyond.

With that, I will turn the call back to Kevin before we open up the call for questions. Kevin?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [6]

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Thanks, Catherine. 2019 is shaping up to be the most transformative period in our history. We're doing a good job operationally. Subscriber growth is good. I think we're hitting our outlook targets, and we think the second half is on track for that. But while we're doing that we stay focused on what our core strategy is. We're driving internationally to double, and in some cases, possibly triple the potential customers that we serve. At the same time, we're developing and launching major first-to-market and best-in-class innovations. We're deploying capital to accelerate our growth, and we're scaling our capabilities. If we do these things well, we aim to create this multiplier effect, and we think that can be scaled for decades. We face big competitors. They're well funded. They execute very well. But they also encourage us. They validate the health of the market. They validate that the customers can be reached with successful innovations and scale. So that's what we're pursuing. So we think we can win meaningfully, and we think we can do that in a way that will benefit shareholders, pets, veterinarians and pet owners.

With that, I'd like to open up the call for your questions, and we'll go to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Mark Massaro with Canaccord Genuity.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [2]

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Maybe for you, Catherine. Can you maybe provide an update as to why you're providing the updated 2018 outlook later this year as opposed to on this call? Are there any moving dynamics related to either timing or potentially costs of development of some of the pipeline?

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Catherine I. Grassman, Heska Corporation - Executive VP & CFO [3]

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Not so much the costs on the pipeline. I think we feel fairly confident in our projection pertaining to those that we currently have. Those are pretty lockdown, we believe, at this point. It's more a lot of moving parts. Like Kevin mentioned, we're -- this is a pretty transformative period for us, new product launches, expansion geographically. I want to make sure we give a holistic picture and want to take the time to do that thoughtfully.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [4]

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That's a fair point. Yes, go ahead.

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [5]

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I think our timing for the major product launches, I think, we try to reiterate that in 3 or 4 different ways this morning. So I think that's on track as well. And the second thing I would add to Catherine's comment is, a lot of these things are largely modeled by analysts such as yourself already. So I don't know if there's a huge urgency to update May of 2018 number outside, kind of, the ordinary course of business. We would normally update our annual outlook at our annual date. And we think if there were massive moves that the market hadn't digested, maybe that would push that forward. But we think it's largely been modeled.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [6]

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Got it. I hate to ask about the non-core stuff, but the Tri-Heart has been under pressure for some time now. Can you just give us a sense for maybe some of the reasons why the demand for that product is maybe lower than you would hope? And can you just give us a sense for how long that product is likely to continue declines for? Or do you anticipate some type of recovery in the out years?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [7]

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Yes. I think under pressure is probably the wrong characterization. We basically will get 0 new sales from Tri-Heart this year, largely, due to an overstocking situation at Merck. So I'll kind of refresh, we're a contract manufacturer. We receive purchase orders from Merck and we manufacture the volumes and the quantities at the dates that they ask us to. And I think over a 2-ish year period, they had a product management that overstocked the product. And so at the very beginning of this year, end of last year, I think we were approached and said, "Hey, we've got a year's worth of inventory plus sitting on the shelf, we really don't want to order anything in 2019, what do you want to do?" And so we basically took that number down to 0 this year. And then part of the update that Catherine mentioned will model what, we think, its return to sales will look like in '20 and '21. But this year, it's basically 0. So it's pretty hard -- I think we can call the floor.

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Jason A. Napolitano, Heska Corporation - COO & Chief Strategist [8]

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Yes. This is Jason, Mark. I recently spent some time with the people from Merck, and the latest information I have is the end-user demand for that product, what's going into veterinary clinics, is up a hair for year-to-date on their side. So we're not concerned about the customer demand, what's going on in that side so much, as Kevin mentioned, it's the inventory situation that you're seeing flow through our financials.

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Mark Anthony Massaro, Canaccord Genuity Corp., Research Division - Senior Analyst [9]

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Got it. And then maybe I'll just ask a balance sheet question, if you don't mind. You certainly have a lot of R&D ahead of you. You just posted an operating loss for the quarter. Your cash balance is now slightly below $10 million. How are you thinking about financing some of your growth initiatives, given that there does seem to be a little bit of a strategic shift towards internally increasing your own development?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [10]

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Yes, I'm just going to say, we monitor it closely. We have credit line that we put in place with JPMorgan. And we think we have access to capital to meet our goals. We're largely through a number of the larger spends. And the balance of those spends, I think, are known to us that the lead times on these development projects are pretty clear milestones at this point in the project cycle. So I think we've got a handle on It.

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Operator [11]

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And we'll take our next question from Andrew Cooper with Raymond James.

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Andrew Harris Cooper, Raymond James & Associates, Inc., Research Division - Senior Research Associate [12]

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I guess first, start with kind of gross margin. I think it was a little bit below sort of what we were looking for. I know some of it is timing in OVP and kind of -- are you still sticking with the roughly 10% for that bucket of revenue in terms of gross margin? And then how should we think about, especially with the i+ starting to roll in at least a little bit this year, the margin for the rest of the year and especially relative to the guide? I just want to make sure that, that aspect of it is unchanged as well.

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Catherine I. Grassman, Heska Corporation - Executive VP & CFO [13]

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Yes. We're not changing our full year guide on consolidated gross margin at all. Element i, I think, we even said during our Q4 call, incremental to this year, both revenue and margin. So the full year guidance is intact.

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Andrew Harris Cooper, Raymond James & Associates, Inc., Research Division - Senior Research Associate [14]

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Okay. Any update you could give on -- I know you said the installs were on track. But anything you could provide in terms of even just qualitative on the corporate accounts and how that's progressed relative to expectations would be helpful.

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [15]

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I think broadly, the corporate accounts bucket for us is doing very well. Some are doing more well than others. But as a group, we're very happy with the progress that we're seeing in those accounts; Ethos, in particular, I think has done a fantastic job converting over to our products and we're pretty tickled with that. They are large hospital users, almost exclusively. I believe they're all on our DC5x for chemistry. So yes, I mean, broadly, the category is doing well.

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Andrew Harris Cooper, Raymond James & Associates, Inc., Research Division - Senior Research Associate [16]

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Okay. That's helpful. And I'll stick with just 1 more before we maybe follow up off-line, if anything else. But in terms of imaging, again, I think it was a little bit less than we had thought. Is there any -- to some degree, I think there's some FX, but anything else in the quarter in terms of any disruption on Optomed or any changes there? Any kind of product updates because I know there's some things as well, but anything kind of in imaging that you would call out as outside the norm or kind of on track with internal views and maybe The Street just missed models and timing or at least we did.

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Catherine I. Grassman, Heska Corporation - Executive VP & CFO [17]

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We were -- as it relates to imaging, we were for the quarter on -- in target with our internal projections.

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [18]

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I don't think anybody on the whole team have got a naughty no for the quarter. I think everybody was pretty much right where we hoped they would be. So yes, I think we're pretty much in line.

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Operator [19]

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We'll now take a question from Ben Haynor with Alliance Global Partners.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [20]

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It seems like a pretty straightforward quarter and update here. Also nice to see the i+ and RC out there on schedule. Just with regard to the i+, known you guys are manufacturing that yourselves both on the instrument and consumable portion of it, any hiccups or any surprises there that you've seen thus far?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [21]

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No. So to clarify, we won't be manufacturing the analyzer. So we're not tooling up with injection molds and things like that. The test cards initially, we will utilize our partner who is the original licensure of the product to do the initial run of test cards until we transition that to our Des Moines facility. So in terms of product launch and risk and those types of things, we think we've got a really good handle on that. And then we'll migrate that over to a production line that we'll establish in Des Moines is the plan. But currently, there's really no risk to disruption or execution in regards to manufacturing capability.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [22]

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Okay. And then do you have a kind of a time line in terms of when that might migrate over?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [23]

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Yes, I think what we're looking at is sometime in 2020. The effect of that really is -- just to put it into context, maybe $2 million to $3 million capital spend to set up the production line. It's offset by lower cost per test card. But this cost per test card in our current manufacturing solution is still much more favorable cost profile than our current Element i. So I think we're capturing what we need to capture now. But I see that probably as a second half of next year, go live then.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [24]

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Okay. Fair enough. And then it sounds like one of your larger competitors is making some -- or putting some emphasis on preventative care program that they've developed. I know it's similar to the stuff that you've talked about in the past, particularly, I think with the -- strategy with the Element i+ menu. Do you have any commentary there on how that might help you the emphasis on preventative care down the line? And any thoughts there would be helpful.

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [25]

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Yes. I mean I applaud those efforts. Antech has done them in the past with reference lab. IDEXX has done them in the past. Zoetis -- I think we've all agreed that utilization in general in diagnostics is probably underutilized, especially in terms of wellness and preventative and predictive care. So I'm tickled to death when I see large competitors educating the market. And I think we see the benefits of that. We support that. So we hope they charge on down the field with preventative care, and we'll cheer them along and do what we can to get the message out as well.

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Operator [26]

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We will now take a question from David Westenberg with Guggenheim Securities.

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David Michael Westenberg, Guggenheim Securities, LLC, Research Division - Analyst [27]

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So this's a little bit of a continuation of Andrew's question. So just in terms of the instrument placements, I mean, are the instrument revenue, it missed us? And I think you already kind of said that it did hit on your projections. Is that the same? Should we expect instruments to be growing along with consumables on kind of a go-forward basis? And if you maybe give a little bit more color on that particular bucket relative to expectations in this quarter and kind of on a go-forward basis?

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Catherine I. Grassman, Heska Corporation - Executive VP & CFO [28]

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Yes. I think as far as -- as it pertains to instrument revenue, that's under capital lease treatment. We've asserted that to be on par with last year. So all of these were flat, if you will. So we think we're on target for full year. We are on a year-to-date basis on target for that.

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [29]

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Yes. And I'll add just a little color on that. Until new models meaningfully hit, basically new platforms that are -- they don't have year-over-year comps urine and fecal Element RC in national basis, as those start to pick up steam. And I don't think you'll see pull-through really until you get to early 2020 on those in terms of picking up steam. Our model really isn't designed to show year-over-year incremental growth. If we've been a 2% market share gainer in 1 year, and we say we're going to be a 2% market share gainer in the current year, the revenue recognition on the instrument portion is going to be the same by design. And what's going to grow is going to be the consumable pull-through, which is growing. The last quarter, it was 14.6%. So the consumables are where you get the layered cake effect. But what we've never said is we would go from 2% market share gainer against very strong competitors and see that grow to 2.5% market share gainer. We think 1.5% market share gain that we've guided to this year is solid. If -- 2% is fantastic and anything above that, I don't think we've really ever guided in the last 6 years.

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David Michael Westenberg, Guggenheim Securities, LLC, Research Division - Analyst [30]

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Got it. Okay. So going back to the Optomed platform, I think you said it's going to launch. But I did get to play with it a little bit at AVMA, found it fairly fascinating. So I know it is actually out there. So can you talk about maybe some of the feedback that you've gotten from reps so far? And can you maybe help us size that market, just generally, of what that could look like?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [31]

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Yes, I don't think the size of the market is huge. It strikes me more like an ultrasound market. It can be in that $5-ish million range. But that's going to take time. I think the most important thing that we're trying to build out is, Jon's comments, hit the nail on the head. Pets don't speak, and we expand the vocabulary of pets every time we launch a new diagnostic. And we think we have the largest vocabulary in the industry, bar none. Endoscopy is part of that. So if you bring your pet in and your pet has terribly dirty ears with mites and infections, and you can't look in that ear and you can't see what's in that ear, that pet loses the ability really to communicate that issue and how severe it is. So we think endoscopy is a value add. We have, what's called a, Daily Scope, and we believe it can be used daily, thus the name. But that's a piece of vocabulary that we think is important to be able to offer our customers. And broadly, then, our model is, is to go to those customers and say, look, if you have a urine, fecal, chemistry, hematology, blood gas, electrolyte, coagulation, immunoassay, infectious disease, ultrasound issue with kidneys, liver, cardiology, endoscopy issues and x-ray issues, so imaging is part of that vocabulary that we think is important to build out because it's good for our customers, even if it might be a $5 million revenue stream, which isn't earthshattering, it's important for our customers.

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David Michael Westenberg, Guggenheim Securities, LLC, Research Division - Analyst [32]

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Meaningful. Yes. Got it. All right. Yes. And then maybe sticking with the potential fecal platform now. Fecal imaging is a big marketing effort with IDEXX. And this has traditionally been sort of an inside the -- inside lab kind of concept and your platform is going to attack that inside the lab concept. Are you seeing maybe any broader shifts due to that competitive launch that maybe there is maybe a building preference towards reference lab with the IDEXX effort? Or -- I mean, obviously, it's a big enough market for you to both play in, but I just would be interested in potential changes in the way the market looks like today.

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [33]

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David, I think our underlying premise remains firmly intact. Fecals have been done at the central reference lab for as long as I've been in the industry, I think. So I don't think that's a new concept. And the friction and the barrier to entry is, if you bring your dog or cat in and you need a fecal answer and you need to then make a treatment recommendation, whether that be diet, whether that be medication, whatever the case might be, getting that answer immediately, especially, if you have a stain on your carpet probably feels fairly urgent to you, and waiting a day or 2 is probably not going to drive compliance. I don't think any of those factors change. So again, I am favorable to anything that raises the awareness of testing to veterinarians and pet owners, whether you do a fecal antigen test at a central reference lab or you choose to get an answer for us in 12 minutes. I like my odds, and I think the veterinarian will choose point-of-care testing when it works, and they may continue to send it out to the reference lab. We think, as many or more, maybe by a couple of factors, fecal exams, reviews of fecal get done manually point-of-care, then they get sent to the reference lab and that's without automation. And so we think if we fully automate that process and we improve the results of that process, it probably pushes more to the point-of-care, which is favorable to us. All that is to say, I'm not betting against them. I think it's great. I think it raises awareness. But I don't think it, at all, undermines our premise.

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David Michael Westenberg, Guggenheim Securities, LLC, Research Division - Analyst [34]

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Got it. Okay. And then maybe just last one in terms of placements outside of corporates actually into the individual hospital. You -- how are you thinking about the opportunities outside of corporate? I mean how did vet replacements do relative to your expectations? Do you believe there's any potential with new products to maybe gain in that individual vet or noncorporate kind of corporate practice? And that's the last one.

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [35]

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We appreciate. New products always give you entry into competitive accounts. And so -- and we're hopeful. And we're reasonably confident that a quality urine and fecal launch will give us a meaningful conversation in the 80-plus percent of the market that doesn't have our product. So yes, in terms of 2019, I think what we've tried to do since the beginning of the year is, right down the middle of the fairway, I think the first 2 quarters have been pretty much right down the middle of the fairway while we remain on track for these product launches and the geographical expansions. So we see kind of meaningful pickup in 2020 in competitive accounts and individual accounts once we launch some of these kind of major new, I call them, beachhead products.

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Operator [36]

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(Operator Instructions) We'll go next to Jim Sidoti with Sidoti & Company.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [37]

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Can you hear me?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [38]

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Jim, yes.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [39]

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Great. You talked about your international plans a little bit with the new product launches. Can you just update us on your distribution there? And do you think you have enough internal staff to support that? Or will you be hiring more people for the international businesses?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [40]

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So I think in Australia and [France], we're staffed appropriately, so we will not see large build up there. We just hired a couple in the last couple of quarters, already in our numbers. So we think we're there in Australia. And then the Optomed acquisition, we think, is staffed properly as well. So I think we have enough people to get to the market and do fulfillment and customer service and those types of things. Yes.

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James Philip Sidoti, Sidoti & Company, LLC - Research Analyst [41]

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Okay. And then, same question for the U.S. You have some pretty significant new product launches planned for the next 18 months or so. Do you wait to see some of those sales develop before you bring people on? Or do you bring the people on first?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [42]

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I think the goal is always to time it the day of. And hopefully, we get that timing exactly right. It wouldn't surprise me to see a kind of first quarter 2020 build. But I think the outlook already contains what we think we need for 2019. So I don't really see any changes in 2019. But once you get imminent, you're past alpha, you're into beta, you're starting premarketing. I think then it starts to become prudent to start increasing your sales force and training those people on the new products. But I don't think that's a 2019 question yet.

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Operator [43]

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We'll take our next question from Bruce Jackson with The Benchmark Company.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [44]

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If we could talk about the revenue progression for the rest of the year. Basically, looking at the new product launches, how close are you to being ready to go for a full commercial launch? And are we going to see some of that in the third quarter? Or would it be a case -- more of a case where there's still work to be done on the new product launch, and we should be thinking about more revenue falling into the fourth quarter?

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Catherine I. Grassman, Heska Corporation - Executive VP & CFO [45]

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Yes. I'd say, the new product launches are mostly geared towards fourth quarter revenue. But keep in mind, again, the full year outlook included that assumption, and also Element i+ is incremental to this year. As that menu expands, it becomes more of a stuff function for us in later years. So it really is incremental in this year.

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [46]

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And then in terms of commercial, the RC and the Element i are for sale, with salespeople going in and showing its value and asking customers to sign up and use tests in the third quarter. But the way our model normally works is that becomes an extension opportunity for existing customers. And in the case of a new customer, that becomes a subscription that will have a certain amount of revenue recognition based on the instrument, but it's not going to be large. The bigger value is, again, the layered cake where you acquire that customer's testing business for 6 years. So again, by the time that starts to spin up, it really starts to hit more in the fourth quarter and then it continues going from there. So I think we answered your question.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [47]

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Yes, that's great. That's helpful. And then have the new product launches had any effect on the new contracts that are under consideration? Have vets decided they're going to hold off on signing a contract because they know that these new instruments are coming and they want to incorporate that into what they're talking about with your salespeople?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [48]

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They really haven't. And the nice thing about our model is that it's a menu. So you can go in order hamburger, fries and coke, and if you want to add a shake later, you can. And so I think customers understand that. And these products are tangible enough that they can kind of build it into their thinking. But I don't think we're really seeing a big kind of stall-out while people are waiting for the next big thing that's going to obsolete the current thing, that we're not really seeing anything like that.

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Bruce David Jackson, The Benchmark Company, LLC, Research Division - Senior Healthcare Research Analyst [49]

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Okay. Then last question from me. Can you tell us where your sales force headcount is right now?

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [50]

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Off the top of my head, it hasn't changed. We did a build towards the end of last year. And off the top of my head, I want to say it's mid 60s. But I'd have to check that. We'd have to get back to you on the exact number. Part of the reason I wiggle a little bit is, it depends on how you count sales force. So some people count the inside sales team, some people count the field service team, some people count only direct salespeople who then use those teams. So we can get you the detail, but it hasn't meaningfully changed during the year.

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Operator [51]

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And it appears there are no further questions at this time. I'd like to turn the conference back to Kevin Wilson for any additional or closing remarks.

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Kevin S. Wilson, Heska Corporation - CEO, President & Director [52]

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Thank you, and thanks to everybody who logged into the call. We had a good solid quarter, and we're reaffirming our outlook for 2019. We think our product releases are on schedule, Element i+, Element RC in the market; incremental releases to our chemistry, hematology and immunoassay products in the market. And importantly, our urine and fecal launch, which we think is probably our biggest focal point continues to be on track and in budget and on-time as best we can tell. So we'll keep up that work. We'll be back to you in another 90 days or so to report on our progress, and we'll be 90 days closer to some of those things that we're looking forward to in 2020. So thanks, and we'll talk to you soon. Bye-bye.

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Operator [53]

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This concludes today's call. Thank you for your participation. You may now disconnect.