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?

Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing Star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach your equipment. And that's, again, Star 1 to ask a question. The first question comes from David Westenberg of Guggenheim Securities. Please go ahead.

Hi. Thank you for taking the question, and congrats on a great year. So I just want to start with you gave out new data, like instrument revenue in Q4 was definitely great, and then it looks like there's an acceleration in terms of new accounts and subscription wins, but you've also given commentary that says market share is tough when you can't go in to see the clinic. So can you help us reconcile why those numbers that are going so far up suggesting acceleration of market share, but your commentary is kind of – a little more muted there. Yeah, I think you want to be as realistic as you can. Nobody has a crystal ball. And you have to assume that you have really, really strong competitors. I think everybody understands that about our space. So I think maybe but for some of the challenges of getting into clinics, maybe we would have done better. We do see that opening up a little bit. We do see that as a tailwind maybe for imaging, which is more difficult just by the nature of just the size and the installation process. But yeah, I just think it's a realistic number given that you don't know what the future holds and you have really strong competition. Yeah, I mean, let me take a step back. I mean, it looks like, I mean, maybe even just from a kind of a retrospective view, the subscription growth was great. And, again, new account growth was great. But you also kind of said it's hard to get into accounts. So maybe if you can conceptualize, you know, were you, like, signing the subscription but not necessarily installing the instrument? Because, again, the numbers look really great in terms of that. But I know that there's a pandemic going on, so I'm just trying to conceptualize that difference. I don't know if that makes sense. Yeah, no, no. I mean, installations have continued. It's just harder. It's harder to schedule. It's harder to travel. But installations, I think, have continued for everybody in the industry. You just spend more time trying to figure out whether you can get in there on Tuesday or if it's going to be two Tuesdays or three Tuesdays from now. But that has opened up a little bit since kind of the March-April timeframe when people were a little bit frozen in place. So it's not like what you would see just in a general – In the general market, you know, restaurants aren't as busy, but they're still open, and some are doing better than others. And so I think, you know, we've still been able to progress. It's just been a little bit more difficult than it otherwise would have been. Got it. Okay. Well, thank you. You have a lot of new equipment coming out in the near term. Can you talk about your willingness to maybe win a fraction of the diagnostic pie rather than the entire diagnostic pie? I mean, I know your business is built on the subscription concept, but there's a lot of new products. You know, is something where winning a small fraction could be something just really interesting as, you know, you're rolling out digital cytology, fecal analysis, urine analysis, all these kind of new products? Yes. Yeah, there's no question. We're trying to serve customers' diagnostic needs. And if they currently get those diagnostic needs at a reference lab, we still want to serve that need if we have the technology to do so. So digital psychology for us is not a defensive play, or it might be a defensive play for folks who are in the reference lab business. For us, it's the ability to offer our customers more services. And so we like that. We like that trend. We think technology is bringing things more to the point of care. We think that, I'll start with the current example, it's inefficient to take a slide, a sample, and drop it in an envelope and have somebody drive a car to pick it up, drive a car to the airport, drop it into a box, put it on an airplane, fly to Los Angeles or New York, and drive it from the airport to a central lab and then have it looked at. We think that's not green, it's not efficient, and we think technology can make the experience better for the pet, the pet owner, and the veterinarian. So I think that's a perfect example of getting a small piece of the very large pie. If there's $500 million a year in free cash flow happening at the central reference lab, we would be thrilled to get a smaller piece but to get some of that. And so I think entering those types of businesses for us is definitely on the menu, and we'll begin in that process. Similarly, the element AIM, if you look at the lab business, you have blood and plasma testing, which we've been in now for quite a long time, but you also have urine and fecal, and then you have pathology-type services, specialty-type services. And HESCA's largely just been in the blood and plasma side of the business for the last decade or two. And we're now moving into the other half of what you would call laboratory testing with urine and fecal and blood slides and smears and things like that. And then also adding the third leg of that stool, which is professional services. So I think that's in line also with getting a small piece of a much bigger pie. We just haven't been at that table. And in 2021, we're at that table in a big way. And we think we can do better than zero. We've shown our ability to gain market share in a really competitive space in point-of-care blood and plasma, and I think we can do the same thing in the other segments. Great. You gave a nice long answer, so I'm going to hop back into you and give the other analysts the opportunity. Thank you. Thanks, David.

Thank you. Next question comes from Andrew Cooper of Raymond James. Please go ahead. Andrew Cooper of Raymond James, please go ahead. You might be muted, sir.

Sorry, I was on mute. I appreciate the question, guys. Maybe starting with just a little bit sort of higher level one, but, Kevin, you snuck in a comment in regards to some efforts on driving utilization, which is something, if we think back, you know, longer term, we haven't heard HESTA talk about a lot. So maybe just can you give us some context of sort of what you're doing, how that's been received, you know, and, you know, certainly we've seen competitors do a lot of that. So it's interesting to see HESTA sort of make that shift. Any color there would be really helpful. Yeah, we think that's a game-changing milestone. Look, you don't invest lots of effort and money trying to drive utilization in an installed base that's 500 or 1,000 or even 2,000. You just don't get the leverage. But when you get over a couple thousand, and we're well over that number now in North America, and then you add several thousand outside of North America, driving utilization in that installed base can move the needle. And so we've got a much bigger a competitor who's just been a wonderful example of that. They're extraordinary at it, and that's just a lever I haven't really been willing to pull until the end of 2020. But by way of example, I'll say last week we had a web seminar. I guess they call them a webinar. And I want to say we maxed it out, and I don't know if that was 500 or 1,000 participants or But we haven't traditionally done those things at Heskone, so we do think we can drive utilization in our installed base. The installed base itself is growing, so it's kind of that multiplier effect. So, yes, that is something that we're actively pursuing in the second half of 2020, and it's going well. Okay, great. And then maybe on the international business, you know, the growth, I think, especially in the consumables is a good number. But could you help us unpack a little bit? You know, obviously there's lapping when the deal came in. So what's the sort of underlying same-store consumables growth that you're sort of looking for, whether you want to adjust out for the, you know, some product rationalizations or not? Just anything to help us get a flavor for how you think that market's growing and what your sort of share gains are. might look like there through 21? Yeah, I don't think today we're prepared to dive a whole lot deeper on that. We've only owned the business since April of 2020, so we have one more quarter before we lap it. And I do think we'll be able to share a little bit more data, but three quarters, which is really two quarters, if you factor in some of the delays with COVID after April 1st, is really just not enough of a timeline to give you the level of data that we're confident in. So I think we're going to pause on that. We try to be transparent. We think it's good. We think it's positive. It's part of our consolidated outlook. But we need another quarter or two before we dive into more detail.

Okay, fair enough.

I'll stop there. Thanks for your time. Okay, thank you.

Thank you. The next question comes from Steven of Piper Sandler. Please go ahead.

Great. Hi, Kevin and Catherine. Thanks for the questions and congrats on the quarter. Thank you. I want to dig in on the international subscriptions. Can you give us a sense or some color on the number of skilled customers that you've converted and are part of that 335 international subscriptions and Give us some color on if that conversion rate is what you've been expecting. I've been trying to get a sense for how the subscription model conversion is going and maybe when that will be completed and when we should expect gross margins to improve. Yeah, so 2020's international subscriptions, we ended 2020 at about 335. And we ended 2013 in the North America efforts. If you go all the way back to 2013, we ended 2013 at about 370. And in 2014 in North America, we ended at 730. And so we've put a forecast together this year that we'll start at 335, so a little bit less than we started in 2013 in North America. But we'll take that to 835 internationally. in kind of our first year, which is obviously better than the 730. So to put it another way, we do see a faster adoption rate with the international customer base. And international for us isn't just skill. So part of that 330 has been work before we really got busy with skill. So CBN companies in Spain, we've since put those two businesses together, the skill business and the CBN business. So they've been active in subscriptions during the second half, and they've done well. And then Australia has done well also. So that 330, I view, is largely a baseline number. That's kind of our starting number, that 335. And I view that as very similar to the 370 that we started in North America in 2017. But I do think it's going to be a faster adoption rate. So we're calling out 835 for this year, which is faster than what we did in North America. Okay, great. Thanks. I appreciate the color. And maybe just sneak one last one in. On the point-of-care lab consumables increase of 15.5%, is there any element of a backlog catch-up, or do you think that's more durable going forward? We didn't really have a backlog in there, and Q3 was 15.2%, I recall. Okay. So we don't see any of that really as snapback. I think that's just a strong market, and I think we did well within a strong market. Okay, got it. Okay, so it's not like a backlog hangover from Q3 that maybe didn't get pushed into Q3 but trickled into Q4. Do you think it's more durable then? We do, yeah. I think the whole second half was one big Nice period. Okay. All right. Well, fantastic. Thanks for the questions.

Thank you. Next question comes from Chris Schott of J.P. Morgan. Please go ahead.

Great. Thanks so much for the questions. The first one for me was, I was looking at the guidance for 21 for North America contract subscription value growth, and I think it's about 7% over 2020. I'm sure it kind of bridges a little bit Given the new product cycle you're seeing, it does seem like it's a bit of a slowdown forecast and guidance and just some color there. And maybe in a similar vein, just the growth you're expecting in new subscriptions versus contract value in 21, can you talk a little bit about the dynamics that we're seeing there of the 9% subscription growth versus 7% contract growth expectation and the follow-up after that? That's a great question. So what I would point out is contract subscription value is the minimum that the customer signs up for. And we're quite confident in utilization, especially with some of these new products, that if we ask for a lower contract subscription value but we get a longer term, we would make that trade because we're confident in utilization and we don't really want to cause any angst in adoption by asking for higher monthly dollar commitments. We'd rather keep that friction as low as possible and obtain longer-term contracts that people are comfortable with. And we believe that their utilization, the value, the utility of the products that we're selling will exceed that anyway. So that's a big piece of our thinking in that gap between minimum contract subscription value maybe not growing exactly in line with the number of subscriptions but you'll also see some really nice growth in months under subscription as well. So anyway, we think it all works out. Okay, great. So no trend in there, just the contract value size. That makes sense. And then my second question, I think you addressed a little bit of this in the remarks, though. You've had EBITDA margins in the low to mid-teens over the past few quarters. Just help us abridge a little bit from those recent trends versus the 8% target that you're expecting for this year. So I'll take a first stab at it, that if we're doing better than that, we have so many things to grow, so many things to invest in, that we will probably accelerate investment in some of those product rollouts. And then maybe I'll let Catherine, if there's any other color that she wants to add.

Yeah, no, I think that's a good point in addition to, We have experienced that, and this year especially, you know, we had some reduced costs within our legacy business as just a result of, you know, immobility among the group, which, you know, we've built back into to encourage and enhance sales in 21. So that's, you know, it's obviously going to pull that down a bit, as well as expand it a bit in Europe as well. So, yeah. there are some additional costs going in there that are bringing that margin down on a competitive basis.

Great. Thanks so much.

Thank you. The next question comes from Ben Heiner of Alliance Global Partners. Please go ahead.

Good morning, guys. Thanks for taking the questions.

First for me, just kind of following up on one of the earlier questions on international point of care, lab consumable growth of 35% plus. You know, just thinking about, you know, having a full Q1 this year versus not having anything last year plus the COVID impact in Q2, I mean, it seems like the way to read that to me is that to emphasize the plus a little bit more, You know, just with the snapback from COVID plus a full Q1, you know, is that fair? I know you said you don't want to get into it too much, but just any thinking on that that would be helpful. Super broadly. You got it, Catherine? Go ahead.

Yeah. Yeah. I mean, Ben, I think you're right on point. I certainly see that there's potential for upside on that percentage. and Q1, Q2 evaluations spot on. But just keeping in mind that, you know, one of our strategies, right, that we're in process and throughout 21 working on is that transition of an existing base onto our WeSET program. That's, you know, typically you're getting utilization plus new customer growth, and we're going to be very focused on transitioning our customer base. I mean, obviously looking and still being aggressive in the new customer acquisition space internationally, but really protecting that base is a key priority for us.

Great.

And then just also I guess kind of following up on an earlier one, you know, I understand the desire to remove friction on the installs and that impacting, you know, kind of the minimum ESV. But

My recollection is over time as the existing accounts add new equipment, re-up for various reasons, that should go up at the existing accounts. And it's always hard to kind of figure out which metrics to emphasize because you can always give a dollar away for 90 cents and you get one side of the equation to move up rapidly you know or you know try and maximize revenue you know there's some trade-offs there but you know i guess when you look at it and uh understanding that friction removal makes sense in your case should we be looking at it as you know month up months under subscription is the main thing to be looking at or Subscriptions total, I mean, what's going to give us the best evidence that you guys are kind of executing the plan, if that makes sense? No, it's a great question. So here's kind of how I roughly look at it. Active subscriptions leads me to look to retention and market share gains. So when those go up, that's roughly the bucket that I look at. Months under subscription leads me to say, are we achieving our main goal? If the premise in our market is veterinarians, pet health care, veterinarians in particular are going to do wonderfully over the next couple decades, and they're going to do more point-of-care testing, more diagnostics testing, so 20%, 30% of their revenues as they continue to grow, then our mission is to be as close to the veterinarian for decades. That's our mission. And so months under subscription gives me a little snapshot there to say, are we meeting that mission of having long-term proximity being closest to the veterinarian? And so that's how I look at that metric, and that's a key success metric. And then minimum CSV for me is more about just a check to make sure that we're not giving a dollar away for 90 cents, that you're maintaining some discipline there, that you're achieving that long-term goal, relationship with the customer and you're getting more customers, the first two metrics, and you're doing it in a way that the customer is confident to commit to spending a certain amount of their spend with Hesco. So that's kind of how I look at those three just in terms of the dashboard. I don't know if that helps.

No, that was very helpful and exactly what I was looking for.

That's all from me. Thanks for taking the questions. Great. Thanks, Ben.

Thank you. As a reminder, ladies and gentlemen, that's star one to ask a question. The next question comes from Jim Sidoti of Sidoti and Company. Please go ahead.

Hi, good morning. Can you hear me? Good morning, Jim. We can. Good, good. Hope you're all well. Two questions for me. I did hear you update Anything about the rollout for urine and fecal? Should I assume that the timelines that you put out previously are still okay? They are. Okay. And then the second one, I know this is the first time in my career that we're facing an inflationary environment in life and interest groups. Have you factored that at all into your guidance? And if so, how do you think it would impact the top argument of origins?

So we haven't factored that into our guidance. We feel like we're reasonably well protected in our subscriptions. Our subscriptions have a CPI, get out of jail free card. So if for some reason we woke up at, you know, Jimmy Carter, 15% interest rates, our pricing would adjust by contract. And so we feel like we're protected there. We don't see that happening, by the way, but we have looked around the corner and baked that into our contracts. And our customers view that as reasonable. They too would then be inflationary with their pricing. So I think we're protected there. We don't see that macro event. We're not huge capital driven. We don't have large debt payments that are subject to variable interest rates. and those types of things. And I think largely inflation driven by, you know, gigantic balloons of cash being sprinkled on consumers, large is probably a good thing for pricing in things like pet health care because it sits right between, you know, kind of consumer cyclical, but it's also a health care requirement. So I think we're probably positioned fairly well for that environment.

Okay, and I think I heard Catherine say that she expects net interest expense for 2021 to be $11 million. Is that correct? That's correct. I'm sorry, I didn't hear you.

I'm sorry, I was just confirming that.

Okay. Okay, thank you. Thanks, Gene.

Thank you. Thank you. Our last question comes from Andrew Cooper of Raymond James. Please go ahead.

Hey, guys. Just figured I'd jump in for a follow-up since nobody else asked it. But just on the AIM, you know, I know the rollout's on track, but any color you can give on sort of the back wall continuing to build, how you're feeling about some of the goals you talked about in November in terms of rolling out to the existing install base, and just the level of excitement you're hearing from customers. Any updates there? Yeah, we just can't go fast enough. So we continue to build backlog. Every quarter goes by, we're confident that demand is more than there to get to where we want to be. So really, it's an execution question. It's just getting a wonderfully working product out to as many customers as fast as possible. So needless to say, our sales team is chomping at the bit, but so are a lot of our customers. I don't want to get into specifics. I don't want to update our backlog in public, but it's good. Great. I appreciate it.

Okay.

Thank you. It appears there are no further questions at this time. I'd like to turn the call back to Kevin Wilson for any additional or closing remarks.

Well, thanks, Operator. Thanks to everybody who joined the call. Obviously, HESCA, we did great last year, and we continue to expect that we'll accelerate momentum in 2021. We think we'll execute well in the second half of our five-year strategic plan, and I look forward to updating you guys next quarter. Until then, thanks for your interest and your support in our work, and be safe, count your blessings, and take your pet to the vet. So we appreciate you, and... Have a good day out there. Okay, thanks. Bye.

Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for your participation. You may now disconnect.