Heska Corporation

Good day and welcome to the Heska Corporation second quarter 2021 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to John Agard, Vice President, Investor Relations. Please go ahead, sir.

Thank you and good morning, everyone. Welcome to Heska Corporation's earnings call for the second quarter of 2021. As a reminder, today's conference is being recorded. I am John Agard, Head of Investor Relations at HESCA, and with us this morning we have Kevin Wilson, HESCA's Chief Executive Officer and President, and Katherine Grassman, HESCA's Chief Financial Officer. Mr. Wilson and Ms. Grassman will provide details surrounding the results reported, and then we'll 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 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 cause or contribute to such differences are detailed in writing, in this morning's earnings release, HESCA Corporation's annual and quarterly filings with the FDC, and elsewhere. Any forward-looking statements speak only as 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. To encourage broad participation in the question and answer session this morning, We ask each participant to exercise discretion with the number of questions and to follow up as time permits. With that being said, it is now my pleasure to turn the call over to Kevin Wilson, HESCA's CEO and President. Kevin?

Hey, thanks, John, and good morning to everybody. I know you've got a full day, and I appreciate that you're taking the time with us this morning. Just like last quarter's call, the SparkNotes version of HESCA's quarter is simple today. HESCA had a great second quarter, both year over year and sequentially. Our underlying markets are doing very well, and we believe this is sustainable. Performance specific to HESCA is also doing very well. We believe HESCA is a great place to be for the remainder of 2021 and well beyond. I encourage listeners to fully review the results and the data published in this morning's release. I think you'll find it helpful and informative, and I'll avoid as much as possible inefficiently reading it to you this morning. Rather, with the remainder of the time this morning, Catherine and I will keep our prepared remarks brief to allow for more Q&A time to go a bit deeper into the areas that interest you. But before we get there, I would like to highlight a few points, some of which will echo our recent calls. Broadly, as I said, the overall market situation is great. Specific to HESCA in the second quarter, the results are a strong follow-through on the first quarter, with solid sequential and year-over-year performances to be found almost everywhere one looks. In our North American international segments, I'll just say thank you to our teams. They're expert and they work hard. In today's release, Catherine will detail their scoreboard. It was a great result and everyone at Heska should be proud of their accomplishments. Specific to our international segment gross margins, our international products rationalization and upgrade cycle is well underway. And that is simultaneously accelerating our already rapid conversion to subscriptions and a greater future margin capture. Despite the low margin drag from accounting for a wonderful 80.7% growth in initial subscriptions lab equipment placements internationally, our teams in Germany, France, Italy, and Spain are moving so fast and doing so well with our programs that year over year international gross margins have improved 170 basis points as installed customers use higher gross margin consumables. When we acquired these international assets in early 2020, we believed there was substantial opportunity to bridge their margins close to the North America margins, and we're well on our way to doing so. In our operations, I was again pleased to see that when Heska sells more of the right mix, we see operating leverage. I guess I'll just leave it at that this morning. We intend to do more of that while managing our business well. Operationally, the team did a great job. And our R&D launches, we're moving at warp speed. Our many announced analyzers, test menu, and new services expansions continue their launches in rapid-fire succession, and we continue to see strong demand for what we're launching. There are so many projects launching. I encourage investors to review our latest investor presentation for more information. Our most highly anticipated project launch for 2021 is for Element AIM, our transformative artificial intelligence microscopy platform aimed at revolutionizing urine and fecal testing at the point of care. ElementAIM continues to make solid progress for manufacturing at scale and for installation of general release to our anxiously awaiting subscribers on schedule in the fourth quarter. With a very limited number of prerelease ElementAIM units on hand and in hospitals today, Early indications are positive and appropriate for our timeline. While we did experience some supply chain disruption and delays for things like advanced computer chips and displays and general freight delays, which moved out our installation volume ramp, these things are accounted for in our updated 2021 outlook, and we remain quite optimistic for a very successful reception at volume, and we continue to anticipate meaningful financial contribution for Element AIM in 2022 and beyond. our dry chemistry line at the end of june our team surprised the market with a major and unexpected launch of an all-new element dcx years in the making element dcx occupies the sweet spot between our economical element dc and our ultra high capacity element dc 5x our sales teams are thrilled our current subscribers are emboldened to extend their subscriptions and expand their utilization commitments and we believe new customers will be similarly motivated by Element DCX to make the switch to Heska. Moving on to our resources, our capital structure is well prepared to play offense. We have the capital, we have the domain expertise, and we have identified specific opportunities to properly put it to work. In the second quarter, we began by taking our initial step into the international reference laboratory space by acquiring Milan-based Biesia, which since 1978 has been one of Italy's leading veterinary central reference laboratories. We intend to knit together the ACF central laboratory and our trusted local skill point of care diagnostics teams and products to offer the best bundle of diagnostic subscriptions available to veterinarians in Italy. While the 2021 financial contribution of the ACF will be quite modest, This first effort in Italy will serve as an important model for launching, optimizing, and scaling bundled offerings in our key international markets. To summarize, we finished our two laps of four laps in 2021 very strongly and are now competently raising our outlook for 2021. We are a whirlwind of positive activity, results, and opportunity. The first half of 2021 has been fun. I think the rest of 2021 and all of 2022 will be fun. I could talk for hours about how and why, but as I promised at the beginning of the call, I'm not going to do that. And I'm going to turn the call over to Catherine to detail the quarter before we move into Q&A. Catherine.