Heska Corporation

Good day and welcome to the Heska Corporation Part Quarter 2020 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. John Agard, Director of Investor Relations. Please go ahead, sir.

Thank you and good morning, everyone. Welcome to Heska Corporation's Earnings Call for the third quarter of 2020. I am John Agard, Head of Investor Relations for Heska. Prior to discussing Heska's third quarter 2020 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 for 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 contribute so such differences are detailed in writing in this morning's earnings release, HESCA Corporation's annual and quarterly filings with the SEC, and elsewhere. Any forward-looking statements speak only of the time they are made, and HESCA does not intend and specifically disclaim 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, Huska's Chief Executive Officer and President, and Catherine Grassman, Huska's Chief Financial Officer. Mr. Wilson and Ms. Grassman will provide details surrounding the results, and then we will open the call to questions. Before I turn the call over to Kevin, I would like to remind everyone of Huska's Virtual Investor Day on November 18, 2020. Huska Management will present the company's growth strategy at this special event, including key new product demonstrations, commercial and new geography integration updates, a multi-year performance target. To register for this event, please visit the investor relations page at the company's website. We are excited, and we hope to see you there. With that being said, it is now my pleasure to turn the call over to Kevin Wilson, ESCO's CTO and President. Kevin? Hey, thanks, John, and good morning to everybody. I know everybody's busy. It's a crazy news cycle, so I'm just going to jump right in. So today, we're pleased to report an exceptional third quarter that exceeded expectations. As outlined in this morning's release, HESCA teams delivered record revenue and near universal strength across all key metrics. We saw strong growth of 15.2% in our North American POC lab consumables, bringing that year-to-date performance to 9.7%. We again captured solid international segment performance with exceptional results from our Spanish, Australian, and German teams in particular. All HESCA teams have computed at a very high level to deliver results in which it is hard to find a bad metric. In spite of macro uncertainty and strong competition, our strong performance across key metrics leads us to believe that we will perform at the top end of the ranges for most, if not all, of the four-year targets we've shared publicly. While Catherine will cover the specifics of the quarter in greater detail, I do want to take a few moments to highlight a few things which may be helpful to investors. Starting with our people, HESCA's team is healthy and productive. We've continued to operate effectively from a flexible posture in each country in which we operate. I'm proud of our people, and our investors should sleep well knowing that our performance is underpinned by many hundreds of dedicated HESCA employees They work extremely hard to quickly solve challenges in a positive and sustainable way, regardless of any micro-environmental challenges. Tesco is staffed by good people, leading good lives, doing great work, with a wonderful attitude, and I'm honored to be part of this team, and customers and investors can be proud of their association with Tesco. Similarly, the pet healthcare market broadly is doing great. The industry continues to reaffirm its decades-long resiliency. Pet visits and veterinary trends generally have outpaced most forecasts. The companion animal population is growing at all-time high rates, increasing demand across an industry that has been broadly benefited by recent trends, which are, more likely than not, an enduring tailwind to long-established underlying trends. We are seeing an acceleration of long-term trends in pet ownership, pet-favorable housing, positive pet ownership demographics, increased human at-home time in pet households, and an even stronger human-pet bond. Pet adoptions are up, breeders are managing waiting lists, first-time visits to veterinarians are up, and end-user demand remains very strong. Specific to HESCA's focus on point-of-care diagnostics, the trends are similarly encouraging. With curbside drop-off and same-day discharge procedures now firmly in place across most hospitals, we are seeing increased utilization in point-of-care testing. Some of the increase is from brand-new testing. Some smaller portion of the increase at the point-of-care is testing that has migrated from central reference laboratories. Some of the Q3 utilization performance at HESCO was from Q2 catch-up, testing from pent-up demand for deferred wellness visits, elective procedures, and supply chain dampening that resulted from COVID-19 effects earlier this year. and some of our strong increase in subscriber utilization growth is being driven by HESCA new tests and new analyzers that are now making their way into the installed base. Regardless of the weighting of each factor, and there are others, the net result is that the underlying demand for point-of-care diagnostics testing by veterinarians was very strong in the third quarter, and the supporting trends continue to be strong, and we believe sustainable. Diagnostics at the point of care remain central and critical to growing veterinary services. From the veterinarian's perspective, consumer goods sales, diet sales, and boarding revenues continue to decline, while being more than offset by increased diagnostics, surgeries, price, and other professional services that require licensure. It turns out that there are more pets than ever. Pet families are more focused on their pets. People at home with their pets more regularly see pet health symptoms. and households now have increased schedule flexibility to take their pets to the veterinarian. Veterinarians are very busy, and so is HESCA. Veterinarians are so busy, in fact, that they presently are less able to take time to make major decisions for technology and their practices. In North America in particular, companies such as HESCA continue to experience delays with in-clinic access by sales and installation teams, which has reduced opportunities for competitive blood instrumentation takeaways, and new imaging solutions installations. This dynamic has also increased retention by the incumbent, whether the incumbent is Heska or another company. While we see this trend moderating over time, it is likely to continue at some level over the next several quarters. However, in markets outside of North America, with much more first-generation stage adoption, We anticipate increase in accelerating demand to adopt new point-of-care diagnostics for the first time and to capture first major upgrade cycles for early adopters, specifically in core Europe and Australia. International veterinarians are now more likely to adopt point-of-care diagnostics enthusiastically for the first or second time for exactly the same reasons as North American veterinarians are increasing their utilization and percentage of profitability from point-of-care testing. The international race for veterinary diagnostics is certainly in full swing and is likely to largely unfold quickly over the next five to ten years. As a top three competitor in most of the markets we are targeting, it is a race that HESCA intends to compete in and to win. And finally, to conclude my remarks, I'd like to remind you of how we are preparing for the future. In Q3, research and development initiatives progressed in line with our timelines. Our commercial launch plans further solidified across several key projects, also in line with my goals. Integration with our recent international acquisitions progressed as expected, and we are confident we can meaningfully grow and improve the profitability of these businesses over time. For these reasons and more, we remain confident and resolute in our ability to deliver on the three core tenets of our 2018-23 strategic plan. to double the geographies and customers served, which we have done, to double the products and revenue lines which we offer, which we are very, very close to accomplishing, and to continue to grow our core business, which we have done and anticipate continuing to do. By adding and multiplying in and amongst these three major accomplishments, we anticipate a great performance in the back half of our five-year plan. With that, I'll turn the call over to Catherine to detail the quarter's performance.

Thanks, Kevin, and good morning, everyone. As Kevin mentioned, we are pleased to report a strong performance for the third quarter of 2020. Consolidated revenue grew 81.3%. While largely benefited by our recent acquisitions of scale and CVM, solid performance during these uncertain times, and our legacy HESCA business also contributed to growth on a year-over-year basis. We report our results geographically in two segments, North America and international. Our North America segment includes U.S. Canada, and Mexico, while our international segment consists of all countries outside of North America, and it's comprised primarily Europe as of today. North America segment revenue grew 16.4%. Contributing to this growth was growth of 15.2% in consumable sales and growth in PVD with the expected return of sales of TriHart, a contract manufacturer product from Merck, which experienced reduced customer demand in the comparative period and throughout 2019. The international segment performed at the high end of our expectations with strong consumable sales and capital equipment placement. Consolidated gross margin declined approximately 240 basis points to 41.3%. As anticipated, negatively impacting consolidated gross margin on a comparative basis is the consolidation of skill, a lower margin profile business. We continue to see bridging this margin gap as a meaningful synergy opportunity for Hesco. The North America segment had a higher gross margin at 48.3%, about a 430 basis point increase from prior year due mainly to product mix within our OVP product line as well as increased sales of consumables. Total operating expenses in the third quarter of 2020 were $23.2 million, an increase of $9.7 million from the third quarter of 2019. The increase is driven primarily by the consolidation of our acquisitions operating activities of $6.5 million, an increase in stock-based compensation of approximately $3 million, and one-time acquisition and other related costs of $800,000. We managed and continue to manage operating expenses carefully. Adjusted EBITDA for the second quarter, for the third quarter of 2020, was $8.7 million, or an adjusted EBITDA margin of 15.3%, compared to $2 million, or an adjusted EBITDA margin of 6.4% in the third quarter of 2019. This increase is primarily attributable to our recent acquisitions as well as increased profitability from product mix and cost containment in our legacy business. EPS in the third quarter was a loss of $0.57 per share. Adjusting for certain items, which are detailed in our gap to non-gap reconciliation, included with our release, EPS was $0.08 per share, a decrease of $0.06 per share from the third quarter of 2019. Third quarter non-gap EPS is positively impacted by increased profitability during the quarter but more than offset by an increase in our tax expense as a result of decreasing the carrying value of our deferred tax assets. Also negatively impacting this measure is the cash interest expense associated with our convertible debt notes issuance. Our balance sheet is strong, and our liquidity position remains solid with cash of $84.5 million, which continues to provide us the flexibility to advance our strategic plans. Turning now to the 2020 guidance previously provided on May 5th and recast it on August 4th based on our new segment presentation. It is not our intention to update guidance quarterly, nor will we provide quarterly guidance. Moving forward, we will provide updates to our annual guidance based on events we deem significant to the understanding of our performance relevant to the expectations we set forth. However, given the uncertainty of macroenvironmental factors mostly related to the COVID-19 pandemic, We believe it is important to communicate with our investors and analysts on the health of our business, which is strong. As such, and as Kevin indicated, we are reaffirming our previously provided 2020 full-year revenue and adjusted EBITDA guidance. We believe we have opportunities to achieve performance near the top end of all ranges previously disclosed. On last quarter's earnings call, we communicated a full-year effective tax rate benefit of 12% to 15%. Based on changes in our underlying tax and business strategies, we are rescinding our guidance at this time. In sum, we are pleased with our financial performance in the third quarter, and I look forward to sharing our multi-year financial targets and other key considerations at our upcoming Investor Day. With that, we'd like to open the call for your questions. Operator?