Heska Corporation

and welcome to the HESCA Corporation fourth quarter and full year 2020 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to John Agard, Director of Investor Relations. Please go ahead, sir.

Thank you, and good morning, everyone. Welcome to HESCA Corporation's earnings call for the fourth quarter and full year of 2020. I am John Agard, Head of Investor Relations at HESCA. With us this morning, we have Kevin Wilson, HESCA's Chief Executive Officer and President, and Catherine Grassman, HESCA's Chief Financial Officer. Mr. Wilson and Ms. Grassman will provide details surrounding the results reported, as well as the company's 2021 outlook, and then we will open the call to questions. Prior to discussing HESCA's results, and before I turn the call over to Kevin, 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 this morning's earnings release, ESCA Corporation's annual and quarterly filings with the SEC, and elsewhere. Any forward-looking statements speak only as of the time they are made and HESCA does not intend and specifically disclaims any obligation or intention to update any forward-looking statements or reflect events that occur after the time such statement was made. To facilitate broad participation in the question and answer session this morning, we ask that each participant limit their questions to one or two with follow-up as necessary and as time permits. We appreciate your interest and consideration in this regard. With that being said, it is now my pleasure to turn the call over to Kevin Wilson, ESCA's CEO and President. Kevin? Hey, thanks, John, and good morning, everybody. I was telling John this morning I'm thrilled that people are listening to me instead of Chairman Powell. So hopefully we have some good information for you today. Before I begin, I'd like to encourage callers to review this morning's release data and our written comments. I think you'll find them helpful. And as you do, as you'll see, we'll please report an exceptional fourth quarter and full year. TSCA delivered record revenue and universal strength across all key metrics. Fourth quarter sales rose 90.5%. Full year sales rose 16.9%. Subscriptions for the year grew 25% from good gains in market share and retention. I encourage callers to look at the subscriptions details in this morning's release. In the fourth quarter, North American POC lab consumables grew nicely at 15.5%, a continuation of the 15.2% we captured in the third quarter, bringing the year-to-date performance to 11.2%, which is above our full-year guide of 8% to 10%. We again captured solid international segment performance with exceptional results from our Spanish, Australian, and German teams in particular. In summary, throughout 2020, All of our HESCA teams executed well to deliver results in which it is hard to find a bad metric. While Catherine will cover the specifics of the quarter in greater detail, I wanted to highlight a few things in advance of our Q&A time today, starting with our people. HESCA teams have worked well throughout a difficult year from a remote and hybrid posture. Morale is good in large part because winning in a healthy way is motivating. We've raised our game in all areas. While it's been more difficult to visit customers and possible customers in person and to do installs of new equipment in 2020, we do see that dynamic shifting to a more normal situation towards the end of the second quarter of 2021, just in time for our element A ramp-up to begin. Even as this opens up, we intend to retain our newly built remote posture skills as we return to the benefits of more normalized in-person customer business and installations. Regardless, based on our demonstrated flexibility to execute in all manner of macro environments, we're convinced that we can perform well as we move forward with the new year. Similarly, the pet health care market is doing great. The industry continues to reaffirm its decades-long resiliency. Pet visits and veterinary trends continue to outpace most prior forecasts. to create increasing demand across an industry that has been broadly benefited by recent trends, which, in our view, are an enduring tail end to a long-established underlying trend. Veterinarians are doing great, and end-user demand from pet families remains strong. Specific to HESCA's focus on point-of-care diagnostics, the trends are similarly encouraging and are leading to increases in utilization of our tests. Some increase is from brand-new testing from end-user pet family demand. Some of the increase is from our new efforts to educate and promote utilization. Some smaller portion of the increase at the point of care is testing that is migrated from central reference laboratories. And perhaps most encouragingly, some of our recent increase in subscriber utilization is being driven by new HESCA education efforts and new HESCA tests and analyzers that are just now making their way into the installed base. Regardless of the weighting of each of these factors, the net result is that the underlying demand for plenty care diagnostics by veterinarians was very strong in the fourth quarter and for the full year. And we continue to see that those supporting trends remain strong and sustainable. In our international efforts, integration is also progressing well. Products rationalization and launches are moving on pace with my goals. And we continue to see margin expansion as a major opportunity in 2021 and 2022. We also continue to see a clear path to subscriptions conversion in our international installed base at a rate that is faster than our experience in North America circa 2013 through 2015. We begin the international effort at roughly the same position we began a similar effort in North America in 2013, and we have today a tested playbook and experience that is better supported by a superior infrastructure, team, installed base, market share, market condition, existing products and margin, and new products and margin. Our goals for this effort are detailed in this morning's release. And finally, to conclude my prepared remarks, I'd like to remind you of how we are prepared for the future. For those listeners who have not yet viewed our Investor Day presentation last November, I'd encourage you to do so. We're following it very closely. ESCA has articulated a five-year plan and pilot of Act II, And we're executing to that plan while receiving support from positive and broad-based market dynamics. Our research and development initiatives have progressed and continue to progress in line with our previously shared timelines, even as we've added new bonus launches, including our new effort in digital psychology professional services. Our balance sheet is in great shape. Our position in the markets we serve has never been stronger. Our teams are better than at any time in our history. Our end markets are doing great, and our specific diagnostics markets within them are perhaps the best place to grow. For these reasons and more, we remain confident in our ability to deliver on the three core tenets of our active strategic plan to double the geographies we serve, which we have done, to double the products and addressable revenue lines we offer, which we have done, and to continue to grow our core business, which we have done throughout 2020 and and we anticipate continuing to do in 2021. The multiplier effect of these three major accomplishments leads me to anticipate a great performance in 2021 and 2022. There is substantial opportunity in pet healthcare and HESCA intends to win in that opportunity aggressively in 2021 and beyond. With that, I'll turn the call over to Catherine to detail the quarter and full year performance and provide you with additional information on our 2021 combined outlook. Catherine?

Thanks, Kevin, and good morning, everyone. As Kevin noted, we are pleased to report exceptional financial performance for the fourth quarter and full year of 2020, in which we met or exceeded our 2020 outlook in all metrics previously communicated. At the conclusion of our discussion around our performance, I will take you through an overview of our financial outlook for 2021. Now for the results. Underpinned by expanding global demand and the companion animal healthcare market, HESCA delivered excellent performance. During 2020 and in the midst of a global pandemic, HESCA closed on the single most transformational transaction in our company's history, the acquisition of skilled animal care, which contributed to our consolidated net revenue growth of 60.9%. Continued strong performance in legacy HESCA businesses and products also contributed to our growth for the quarter and for the year. We report our results geographically in two segments, North America and international. Our North America segment includes the U.S., Canada, and Mexico, while our international segment consists of all countries outside of North America and is comprised primarily of Europe as of today. North America segment revenue grew 29.3% for the fourth quarter and 13.6% for the full year. Contributing to this was growth of 15.5% in consumable sales for the fourth quarter and 11.2% for the full year. We also experienced growth in PVB, which includes sales of TriHart, a contract manufacturer product from Marks. The international segment exceeded our expectations with strong consumable sales and capital equipment placements relating to point-of-care imaging for the full year of 2020. This segment largely represents our inorganic growth. Consolidated gross margin declined approximately 560 and 320 basis points to approximately 41% for the fourth quarter and full year. As anticipated, impacting consolidated gross margin on a comparative basis is the consolidation of skill, which is a lower margin profile business. We are hard at work bridging this margin gap and recognize it as a financially meaningful synergy opportunity for health guests. The North America segment experienced lower gross margin in the fourth quarter when compared to the prior year due to the mix. but finished the year at 46.5%, about 120 basis point increase due mainly to higher sales of consumables and PVD, as well as increased sales in product mix and our other contract manufactured products within OVP. The international segment gross margin was 30.8% for 2020, which was in line with our expectations. Total operating expenses in the fourth quarter and full year of 2020 were $25.9 million and $89.5 million. $89.5 million, an increase of 72% and 65.3% over the fourth quarter and full year 2019, respectively. In both periods, the increase is driven primarily by the consolidation of our acquisitions, operating activities, and increases in stock-based compensation, one-time acquisition and other related costs, and depreciation and amortization expenses resulting from purchase accounting. Adjusted EBITDA for the full year of 2020 was $22.3 million, or an adjusted EBITDA margin of 11.3%, exceeding our full year 2020 outlook. Higher sales, higher gross margin, and leveraged operating costs were all contributing factors. EPS in the fourth quarter was a gain of $0.25 per share. EPS for the full year 2020 was a loss of $1.66 per share. Adjusting for certain items which are detailed in our GAAP to non-GAAP reconciliation included with our release, non-GAAP EPS was $0.72 per share in the fourth quarter, an increase of $0.62 per share from the fourth quarter of 2019. Non-GAAP EPS was $0.74 per share for the full year, an increase of $0.25 per share from the full year of 2019. Full-year non-GAAP EPS is positively impacted by increased operating leverage of the revenue growth experienced throughout 2020. Our balance sheet is strong and our liquidity position remains solid as we ended 2020 with cash of $86.3 million. Turning now to the financial outlook for 2021. On Investor Day this past November, we provided a multi-year financial outlook and outlined assumptions around element aim watch and continued transition of our newly acquired business to our reset model. At this time, we are updating our 2020 financial outlook. To summarize, Consolidated revenue of $225 to $235 million is expected for 2021. Growth in point-of-care laboratory is the key driver in top-line growth year-over-year. We estimate a range of $135 to $145 million in point-of-care laboratory, which is driven by global consumable growth as a result of continued market share gain, including the impact of the scale acquisition, positive industry trends of increased utilization, our pricing profile, and new tests. We estimate a range of 50 to 60 million in point-of-care imaging, which also incorporates the impact of the skill acquisition as well as continued steady growth. Our remaining product lines of PVD and OVP are expected to be relatively consistent to 2020. We anticipate approximately 60 to 65% of our full-year 2021 outlook consolidated revenue to come from the North America segment, which includes an estimated point-of-care lab consumable growth rate of more than 10%. Our international consumable growth rate is expected to be more than 35% on a reported basis. 2021 adjusted EBITDA margin is expected to be approximately 8%. Increased sales will be offset by an expected flat margin, which includes international reset subscription program transition, the continuation of product rationalization internationally, and higher instrument revenue recognition relating to element AIM in North America. Finally, the additional quarter of operating expense of skill in 2021, in addition to increased travel and sales-related expense as we anticipate increased mobility among our sales force in light of macro factors relating to vaccinations against COVID-19 are attributing to the compression of the margin as compared to 2020. Lastly, to assist investors and analysts on the profile of our GAAP income statement, but still difficult to forecast at this point due to some uncertainty, for the full year, we expect depreciation and amortization of approximately $11 million, and stock-based compensation of approximately $10 to $12 million. Due to a change in accounting guidance applicable to our convertible nurse instrument, which we adopted on January 1, 2021, we will no longer record non-cash interest expense other than a relatively small amount of amortization related to the debt issuance cost. Additionally, Due to certain investment decisions and the related accounting treatment benefiting HESCA, we expect net interest expense of approximately $1 million. Our full-year effective tax rate is expected to be between 0% to 5% expense, which excludes any potential future discrete items or any valuation changes in the realizability of our deferred tax assets in 2021. We believe we will have sufficient liquidity for ongoing operations and flexibility for smaller strategic initiatives. 2021 free cash flow projection defined as operating cash flow less capex is approximately 8 to 10 million. In sum, we are pleased with our financial performance in 2020 and look forward to the many opportunities afforded to us by the space in which we compete, as well as those which we are creating for HESCA specifically. With that, we would like to open the call for your questions. Operators?