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?

Thank you. Ladies and gentlemen, if you'd like to ask a question, please take note by pressing star 1 on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. The first question today comes from David Westenberg of Guggenheim Securities.

Hi, thanks for taking my question, and congrats on a good quarter. So, land instruments outperformed us, and I think the commentary in the space is really, and you kind of said it in your prepared remarks, that something like half of practices are really not allowing Salesforce back in, and, you know, it's probably not at a time that people install new instruments. Can you clarify whether that is actually you got that on instruments, or is that a lot on the other? And then in the same kind of token, is this dynamic of all these practices not being open, is that impacting subscription renewal or thoughts on subscription renewal, just given the fact that, you know, your Salesforce can't make the same purchase, but, you know, there isn't capital purchase necessarily. just a little bit more commitment.

Yes, I'll talk about it qualitatively, and then, Catherine, anything you want to add. It hasn't stopped. So the ability to get into clinics is not a full stop. The ability to have your people travel is also not at a full stop. And we've altered how we approach customers as well. So it's more difficult in terms of installation of equipment But the instruments line hasn't entirely stopped by any stretch. We leverage remote specialty a little bit more. We've found ways to get to customers and have conversations. So I think that's really the answer is it hasn't stopped. It's really hard to put a pinpoint on it in terms of especially quarter-to-quarter variability of how many are going to be installed. In terms of signing subscription renewals, that hasn't been a problem. Customers tend to transact, I think, more easily with the incumbent. They already have a positive relationship with them, and extending that relationship for additional benefits has not been a problem. And so I think we've gotten a little bit of a bump from that dynamic in terms of when we extend the customer, we have the opportunity maybe to offer an additional analyzer or two, And sometimes, that's also positive just in terms of the instrumentation portion of that contract as you put new equipment in on top of what's already in and being renewed. So, Katherine, I don't have anything to add.

No, I think that covers it.

Okay, thank you. And then, in terms of greenfield accounts outside the United States, you highlight that as a growth strategy. Can you help us conceptualize what those accounts do right now? Is it, you know, no analyzer, hand-hold analyzer, or just kind of an old generation? You know, Greenfield kind of has a lot of different accessibility, and now I get that that's a better market for you and probably a faster-growing one, but just kind of help us conceptualize what they look like right now so we kind of have a sense on really, you know, you as a new player in those, I guess skill's not that new, but penetrating those markets?

Yeah, actually, and you hit on it, we are well entrenched in that market. Skill has been servicing those customers, as has CVM in Spain and our efforts in France. So we have good long-term relationships with them. I think you can divide it into a couple of buckets. You can divide it into folks who just do less testing. They do a more targeted approach to testing. They do less wellness testing. It's just not ingrained to the point where they feel like they have to have a full suite. So you will see people with nothing. They'll use a reference lab. They will use the local university, those types of things. And then you see some folks who will have a very incomplete portfolio. So they might test for one or two parameters. With an older machine, maybe it uses a strip. It's more of a targeted approach, but they're not running full panels, and they're not running them quickly, so it's not really integrated into their practice. And then you will have a fair amount. Again, it's half or more who have something, but they tend to be older generation. We see a lot more three-part blood counts in Europe. I think that the North American market has largely died part and has been for many years. So I would divide it into those three buckets. And then there's variability amongst countries. You know, even a better adoption in Germany, let's say, than you might in Italy. So it's very difficult to just say Europe broadly. It is very much a country-by-country cultural question as well.

Got it. And then just maybe one on margin and margin expansion. You have significantly more revenue with the double business, and you now have a strong global footprint. In terms of being able to get more leverage with suppliers, is that a two-, three-, five-year lever that you might be able to pull in terms of – of getting more leverage in your P&L, not just necessarily the mid-shift of blood, but also being able to use a bigger size to your advantage.

Absolutely. And that was one of the key underpinnings of my thinking about expanding into Europe with the acquisition of Skill and CVM and the others. And it benefits the North America suppliers as well if they're able to earn our business in Europe. and U.S. more as a consolidated global price and volume partner. So rationalizing those products in these different countries and picking fewer suppliers obviously means some suppliers lose and some suppliers pick up business that they wouldn't have otherwise gotten. And we think we get rewarded for margin and price with that increased volume. So yeah, I think that's exactly right.

I have more questions, but I don't want to get in front of your investor day because I really want to talk about products, but I'll just hold off for two weeks.

Okay, perfect. We'll see you at investor day. Thank you. Our next question comes from Andrew Cooper of Raymond James.

Hey, guys. Thanks for the questions. Maybe starting with Europe and skill, you said kind of at the high end of your expectations for the quarter, as we try to think about the trajectory there, you know, I know there's some products that likely at some point get culled and some moving parts there and the transition to subscription. So just any flavor you can give on each of those dynamics to help us think about kind of where your positioning was in 3Q and what it might look like from there.

Yeah, so we're doing those things and they're in process. I don't see big kind of cliff or big mountain climbing events in either direction because they won't all happen at the same time. But as we are doing subscription recognition in certain areas now and trying to go to that exclusive basis, and so that will have the effects that it had in 2014 and 2015 just in terms of dampened upfront revenue but better margin profile. And so we're doing those things. The way I look at it is we got on the field largely at the very beginning of the second quarter. So we had the second, third quarter, and we're now largely into the fourth quarter, about halfway through. So we're putting that baseline year in place. And so the first quarter of 2021 will be the first full year of ownership for us. And so we're setting that baseline. And the expectations, especially given the COVID situation and rolling lockdowns, and those exist still. So we had a wonderful quarter. We've done wonderfully even with those dynamics in place, but there are now rolling lockdowns in Milan and Lombardi, for instance. So... So we keep those things in mind. So our first year will include all of that noise, I guess is what I would say, Andrew. But for right now, we're setting that baseline here, and it's coming in nicely despite kind of the dangers that work out there. So that's kind of how I look at it.

Okay, that's helpful. And then maybe just one on margins, you know, I think, the North America number was impressive obviously. And, and that's kind of a new way for us to think about it. But, um, you know, that the gross margin was, was a nice number from our perspective. And, you know, when I think about other players, not necessarily in the animal health space, but in general, we've heard call outs for, you know, shipping costs and things like that being elevated, but is there anything to note in, in the margin other than, you know, Hey, there's some shifts around, around mix in the quarter, but, uh, Anything else to sort of point out for us to think about? I know you mentioned OVP, I think, had a strong mix component there, so would love some insights.

Yeah, I think that it's OVP mix. I think it's considerables mix, which is key to our gross margins. Now, if you go all the way back to our 2013-14 plan, you know, you'll recall they say, hey, we've got to get product right. We've got to get product right, and then you've got to get margin right. and you've got to get people right, and then you have to get the model right, so the subscription SaaS type of model, and then you scale it. So I've never been a huge believer in scaling things that aren't profitable. So I think we just had a really positive peak at what we hope will be the future where the higher margin businesses that we emphasize and we put our shoulder behind represent a higher percentage of our business and our growth and we have positive margin result from that. And I think that's gross margin, and eventually that flows down through your adjusted operating margin. So I don't think it's anything more than what it looks like. We had good mix, and we had good top-line growth of things that have good margin.

Okay, great. And then maybe just one last one. Oh, sorry, go ahead.

Yeah, I would just add, though, that I don't think we're coming off of what we talked about on the second quarter call on a full-year basis. Just to kind of clarify that on the consolidated full-year gross margin.

Okay. Great. And then maybe just one last one, and appreciate if you say let's defer, but Just as we think about the quarter and some of the traction and the instruments that you've already at least brought to market, whether it's the DC5X or the RC and kind of how to think about any trajectory there, any traction that you saw in the quarter, what adoption has looked like, would be great.

I would just say they've both been good, and I would defer to Investor Day just in terms of more that's in the pipeline. but customers always like to adopt new products. That's the name of the game. So both of those are now shipping, and they're being received well. And the sales force, also enthusiasm is really important, and new products for sales force is a shot in the arm as well. So in terms of analyzers, it's a little bit of a downer to be launching sometimes when they can't quite get into the clinics as aggressively as they'd like to, but the adoption's been very good

Great, I appreciate it. Thanks for the time.

Thanks, Andrew. Our next question comes from Steven Ma of Piper Sandler.

Hi, guys. Thanks for taking the questions, and congrats on a great quarter.

Thank you.

Yeah, so a lot of... Covered a lot of ground already, but maybe digging a little bit more on Andrew's question. I know you mentioned you're setting a baseline for the skills integration and, you know, I understand the travel restrictions, but, you know, could you maybe give us a little bit more color on any sort of early energy traction in terms of moving scale over here for the future model, you know, and when we should expect to see an effect on gross margins?

You know, it's... It's more of a multi-year question. I do think we will cover it at Investor Day just in terms of how much can we move gross margins over the next three years and what those stair steps look like. So I think I will defer only 13 days. So to take one number out of context, I think it will be better if we present kind of the future in context in the next 13 days.

Okay, no, that's fair enough, and I appreciate that. All right, so my next question is, you know, you had a really nice rebound in Q3, and I know you talked about there was a backlog in vet visits in Q2, but do you think that backlog can thoroughly flush through, or do you think there's still going to be some residual effects during the end of the year?

Well, that's a great question. So, I look at it two ways. I think Q2 is maybe a little low. And we called out some supply chain transitions that we were making. So I think it was maybe a little bit low, and we called it out because it had the benefit of being true. And so we've resolved those issues, and so we have a full performance in Q3 without the drag of a point or two of just backlogging. Our own backlog, so our own supply chain created. And then I suspect there was a help of a couple of points of the 15.2 to just put it into context. I suspect it was around two percentage points. And I think it's largely flushed through, so I don't really expect that pop to continue. It really is kind of a catch-up tailwind. But to put it in the context of size, I think it's probably a couple of points. It's not 5 or 10. And we don't see supply chain drag like we saw in the second quarter returning in the fourth quarter. So we feel pretty good about underlying demand that's real and it's not really a snapback with the exception of maybe a couple of points that didn't come in Q2 that came in Q3.

Okay, great. Thanks for the call. And maybe just my last question, more sort of on a macro. You know, obviously, you know, the global demand for companion animal health care has been, you know, very resilient. You know, but, you know, could you compare and contrast sort of maybe what you're seeing in major regions in North America and Europe, especially in light of, you know, the very recent European lockdowns, and maybe give us a sense of the trend you're seeing right now and and thoughts on how that might translate to North America going forward.

Yeah, and these are just more musings, I think, at this point. So North America, I think, is fairly straightforward. We don't anticipate lockdowns equivalent to what we had early in the year. But having said that, veterinary medicine... pretty much worldwide in the markets that we operate, is considered a necessary product. So even in Lombardi and the lot right now that have lockdowns, you can take your animal to the veterinarian. And we also find sometimes in lockdown areas, not that people are looking for excuses to get out of the house, but they have the time and if their animal needs to go to the veterinarian, even if it's for wellness, they would rather do it now while they Well, they don't have the ability to do other things. So I do think there will be rolling challenges. You know, Madrid is another hot spot that flares periodically, and I don't think we're out of the woods on that. You don't need my commentary on what's going to happen with COVID. I'm not an epidemiologist. But I do anticipate kind of these rolling lockdowns, partial or otherwise. But I think we've seen the movie. and we've seen that veterinary health care is a necessary service that holds up really pretty well. And I called out some of those themes. People who are at home with their pets see health care issues, and then they have all the flexibility and the extra time. They're not running kids to sports. They're not going to the pub. Whatever it is that they picked up that extra time, that flexibility in their schedule, that working from home, they have people to watch the kids, all of these things, And then the model, the fact that veterinarians are doing curbside check-in, but they're also doing generally same-day curbside check-out, that leads really pretty well towards a point-of-care test because once the pet's in the back of the house, they get to do the full workup. They get to do everything. They get to recommend everything. They get to set baseline diagnostics, all those things, before they go back out to the curb. And that tends to lead pretty well to point-of-care testing as opposed to to maybe sending it out and having to wait a day or two. So I'm fairly optimistic that the underlying demand for point-of-care diagnostics is holding up fairly well in all the markets that we're operating in.

Okay, great. Yeah, that's some great additional co-op. Appreciate it. All right, thank you so much.

Thank you. The next question comes from Ben Hainer of Alliance Global Partners. Good day, guys. Can you hear me all right?

Good morning, Ben.

Good morning. So just a couple of quicker ones for me. Just on the international imaging, it's a bit bigger than we had anticipated. Is that fairly typical for what skill in the European firms might see in a Q3? And then is there any seasonality we should be cognizant of for the European business as we go into the last quarter of the year?

Yeah, Ben, so I think it was probably a little bit better than we thought. And I think in some regard we're all flying a little bit in the fog, but I think it was probably a little bit better than we thought with the dynamics with the clinics. And that's a nice positive. And I don't know, now you're just going to get my opinion again. I think F-150 trucks had a big spike in Q3 as well, so... I think people maybe have some pent-up demand in terms of capital equipment. Maybe there are certain incentives in certain European countries that are helpful to that in terms of investing in your business. But yeah, it was a nice number. And it's just too early. We've only owned the business for a couple quarters now to say that that's a That's a firm baseline. We really would rather step back after four quarters of ownership and say, okay, what is it under our ownership compared to the historicals? But that was a positive number. It wasn't crazy, but it was definitely above my personal expectations.

Okay. That makes sense. I guess I've got to add the F-150 sales figures to the model now. You mentioned the work from home, kind of the logistics flexibility that families and pet owners have now with obviously work from home. I guess in your sense, how big of a driver is that flexibility to the increased vet visits, ultimately increased diagnostic usage?

Again, it's just personal commentary, but I have been in the business since the early 90s. I think it's huge. You know, we've always said that the single greatest limiter to everybody's business in the veterinary space is getting the pet to the hospital. Getting your cat in your car and driving it to the veterinarian is the challenge. And then people tend to have very high compliance. They trust their veterinarian a great deal, and they should. So getting them there is the barrier, and I think it's real, and I think it's lasting. I think the change is probably bigger, frankly, in North America, where flexible work-at-home type of arrangements and midday schedules are less cultural than they are, say, in Spain. So I think it's probably a bigger shift for North America, but I personally think it's a lasting one. I think it'll be in play for quite a while.

Okay. I guess that makes sense now that everyone has the new F-150s. I'll leave it at that. Thanks a lot, guys.

Thank you, Ben. As a reminder, ladies and gentlemen, please press star 1 to ask a question. The next question comes from Jim Sidoti of Sidoti & Company.

Good morning, Kevin. Can you hear me?

We can, Jim. How are you?

I'm well. I'm well. I still drive an old Subaru, but other than that, I'm well. Two quick questions. If you look at, you know, what you've done so far this year, the guidance of the year, you know, it indicates a downturn sequentially in revenue from third quarter to fourth quarter, which historically, you know, fourth quarter is usually the strongest quarter of the year. So you're being conservative and rather not update your guidance at this point. Or was there something pulled into Q3 that you don't think will be in Q4?

Yeah, I don't think it's a pull-forward question as much as it's a scary place out there. And so when we look at it, we really have done a very thoughtful job of challenging the numbers and what to do with that. And we think the four-year guide and the upper range of the four-year guide is probably a correct place to be given uncertainty. So I think we're going to stick with that. But there's nothing really I can give you that's a large mover to say, hey, $10 million of this showed up in the third quarter and we expected it in the fourth. I think it's really... We started the year with a four-year guide, and I think we're probably trending to the upper end of that, but we don't really want to move that up at this stage, especially given the fact that most of the space is just refusing to say anything. So we're trying to communicate as best we can. So I think we'll leave it where it's at.

Okay. So, I mean, in this environment, there's no reason to get aggressive, being a little conservative. Not a terrible thing, I don't think. Okay. And then the other thing, Catherine, what's going on with the tax rate? Why the big charge in the quarter? And how should we think about that going forward?

Yeah. So, Jim, we just effectively reduced the carrying value of our deferreds, which is primarily related to the net operating loss. That was driven by some very strategic tax and business strategies that have been coming to fruition. So, If you think about it going forward, we're really only – I'm going to use the word – we're only really carrying about $7 million growth that's not – does not have a valuation allowance assigned to it. So, the volatility going forward is pretty minimized in that regard.

So, going forward, we – you're not going to report a fully taxed number, but pay a smaller number. Is that right?

Right. So we're going to, yeah, so what we'll do going forward, I mean, we'll certainly provide full year 2021 expected tax rate as part of the multi-year as well.

Okay, but I'm guessing that tax rate's going to come down in 21 and 22 from what you thought it was going to be at the beginning of this year.

Yep.

Okay. All right. Thank you.

You're welcome. As there are no further questions at this point, I would like to turn the call back to Mr. Wilson for any additional or closing remarks.

Hey, thank you. Thanks, everybody, for joining the call. I think it's pretty clear that PESCA has accomplished a great deal this year. And the results for the quarter I think are wonderful. I'm as pleased or maybe even more excited about the work inside of our business. And I think we're in a pretty good place as we enter the second half of our five-year plan. So I'm super excited. Stay tuned. We're working hard. We expect to continue to execute for the second half of our strategic plan. And I will update you with Catherine and the team. further 13 days from now at our Investor Day, which is, again, November 18th. So I hope to virtually see everybody there. We think it's going to be a great day, a fun day, a big day for HESCA. And, yeah, we hope to see you there. So until then, be safe, count your blessings, and don't forget to take your pet to the veterinarian, as we've discussed. We know you have work at home time. So take your pet to the vet. All right, thanks, everybody. Have a good day.

Bye-bye. Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.