Heska Corporation

Good day and welcome to the Heska Corporation first quarter 2022 earnings conference call. Today's conference is being recorded. Now at this time, I would like to turn the conference over to John Agard, Head of Investor Relations. Please go ahead, sir.

Thank you and good morning, everyone. Welcome to Heska Corporation's earnings call for the first quarter of 2022. I am John Agard, Head of Investor Relations at Heska. And with us this morning, we have Kevin Wilson, Heska's Chief Executive Officer and President and Catherine Grassman, HESCO's Chief Financial Officer. Mr. Wilson and Ms. Grassman will provide details surrounding the results reported and then we will open the call to questions. Prior to discussing HESCO'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 and opinions 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 this morning's earnings release, HESCA 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 to reflect events that occur after the time such statement was made. Also during this call, we will be discussing certain financial measures not prepared in accordance with generally accepted accounting principles or GAAP. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures is provided in our earnings release, which may also be found by visiting the investor relations section of our website. In reviewing our first quarter 2022 results, please note all references to growth refer to growth compared to the equivalent period in 2021, unless otherwise noted. And finally, before I turn the call over to Kevin, I want to remind our audience that HESCA will host its investor day on Tuesday, May 17th, 2022. At this event, members of HESCA management will discuss the company's growth strategy, recent acquisitions and product launches, new product and solutions pipeline, and multi-year outlook including key drivers and metrics. To register for this event, please visit the events page of the company's industrial relations website. With all that being said, it is now my pleasure to turn the call over to Kevin Wilson, Heska's CEO and President. Kevin?

Hey, thanks, Sean, and good morning, everyone. Before I begin, I'd like to encourage participants to review this morning's release. I think you'll find it helpful, and I will try to refrain from unnecessarily reading it to you here now. Catherine will cover the specifics of the quarter, so I'll take my time to highlight a few of my own thoughts that may be interesting to you. To begin, let's run down the list of what's been happening in Q1. First, HESCA's market share gains for subscriptions have been faster than they were in the prior year period. So we intend to again finish the year as we have for many, many years with more subscribers than we started the year with. On our last call for the full year, we shared these good growth goals. Second, veterinarians continue to rely upon point of care diagnostics. HESCA's consolidated revenue, point of care lab consumables, and gross margins are hitting targets nicely higher than last year's very strong baseline in the first half. Third, Our new innovation cycle is in high gear now. Primary examples of major new contributors include Element AIM, our highly anticipated HESCA NuQ Cancer Screen, HESCA TrueRapids, and our timely entry into the practice information management software business. We'll touch more on these initiatives and their associated growth walk at our Investor Day next Tuesday. Now, about supply and demand in pet healthcare. What we are hearing at the hospital level is that hospitals have flat to lower by about 100 basis points visit growth. Total hospitals revenue is up mid single digits with product sales down slightly offset by procedures and diagnostics, which are up mid to high single digits. And this makes sense. But let's go a little bit deeper. Demand, we all agree, saw a big step up in 2021. On the surface, if visits in the first half of 2022 are flat to down, demand must be softening. But that's wrong. There is nothing to indicate that demand for pet healthcare is weakening. We have said for many quarters now that the pandemic step-up in demand would be largely one time, and after that, pet healthcare would hold onto it with go-forward growth reverting to historical growth rates atop the new larger denominator. Historical growth rates for diagnostic-focused companies have been between 10% and 20%, which is nice, but not always linear, period over period, especially when matched to comps of 20%, 30%, or even 40% in the last year's first half. But let's get back to actual supply and demand. So if there's nothing to indicate demand for pet healthcare is weakening, we have a supply issue, which is more correctly a capacity issue. Veterinarians and their staff and their ability to see and treat pets, the supply capacity is being outstripped by demand. Veterinary hospitals in the core channel reached maximum capacity in 2021. And without efficiency gains, the constraints on workforce from fatigue, resignation, lower labor participation, and rolling COVID days off means that the availability of supply of hospital visit appointments will be capped in the existing channel. Pet families in 2022 are having a hard time making appointments this week or next week or next month or in some cases ever. Veterinarians in the core channel are turning away new or less profitable demand resulting in flat or slightly negative visits growth over last year's peak capacity. It's not that pet families don't want to visit, it's that they aren't allowed to visit So what we see then is that veterinarians want long-term clients and the best clients to visit, and they want the best procedures to visit, resulting in good growth support for higher value things like procedures and diagnostic utilization that goes hand in hand with them, both of which we see doing well along with price, which is inflationary. Now about the unserved, these pet families either make do without, they wait, where they find alternative channels like mobile, pop-up, big box clinics and the like. And those alternative channels don't show up in most industry measurements of visits. And that's important to remember. So going forward, supply will adjust to meet demand via efficiency and new supply. I believe that markets work. And for example, I'm seeing for the first time in many years, the first meaningful wave of new standalone traditional clinic formation alongside less traditional rollouts. These new capacity initiatives and efficiency gains will fix supply and visits constraints. Some supply constraints will be relieved with efficiency through things like practice and customer software and automation. A business that Heska has now entered in time to capture the upcoming upgrade cycle to cloud and mobile centric solutions that incorporate much more automation and predictive medicine from big data learning. As a provider of efficiency solutions, HESCA loves high demand that cannot be served by current supply and efficiency. We will help solve these problems for new capacity providers, and we will help better efficiencies occur for current capacity providers, and we will be rewarded for doing so. We will make hospitals, staff, pet owners, and interactions between them more efficient. We will remove frictions and speed up time to actionable results by bringing them to the point of care, and we will automate the communication of those results. HESCA will make each interaction more profitable while realizing better pet health and better business outcomes. In short, we will empower veterinarians who will service growing pet health care demand rather than turn it away. This is the opportunity, and HESCA is wonderfully positioned to grab it. I hope you will attend our upcoming investor day next week, where we will begin to share and overview as much as is competitively prudent, how HESCA is delivering on this opportunity. And now a little bit about the macro backdrop. Pet healthcare is in good shape. We're in the middle of a decades long super cycle, and we see that demand for pet healthcare is not slowing in 2022. For a couple of years now, we have communicated that pet healthcare was great before, will be great during, and will be great following the pandemic. Today, I'll expand that list. The same is true for macroeconomic periods of quantitative tightening, inflation, higher interest rates, and lower money supply. And the same is true for periods of geopolitical decoupling and tension between democratic society and authoritarianism. We are not a stay at home play. We're not a return to work play. We're not an inflation, reflation, or deflation play. We are not a geopolitical Game of Thrones play, but what we are is a really well-positioned investment in North America, core Europe, and Australia, New Zealand pet healthcare in what we think is the best part of pet healthcare. Diagnostics and informatics under HESCA's bundled subscription model is really well-positioned. HESCA has secured the capital, people, portfolio, supply chain, end markets access, and contract terms in and out to grow in both sunny and unsettled times. We're a good, solid investment with really strong and clear growth prospects in our five-year plan and beyond. And while the entire pet space has seen valuations come down due to factors not necessarily correlated with business and prospects, taking most of us back to the fall of 2020 in terms of share price, I think the market and the systems are working, if not perfectly, directionally. And I think that gap between perfectly and directionally is an investment opportunity, especially as investors sort between the discrete and not necessarily correlated prospects of the companies directly or indirectly serving the pet market. Investors have correctly formed capital around Heska, and Heska is investing this growth capital in support of our human capital, strong capability, hard work, good market, and great prospects to solve problems for veterinarians and pet families, and we will be rewarded for doing so. I'll leave it to much smarter people to figure out if and when we are a good trade, but I'm very, very confident we are a great investment. Today's HESCA has created one of only two unified offerings to serve all of a veterinarian's diagnostic and informatics bundled subscription needs. We expect to achieve our full-year outlook, including reported sales growth of 13% or more and North America POC lab consumables growth of 15% or more. Despite being nudged to the low end of our range by prudent acknowledgement of a more unsettled macro backdrop and by a more variable quarterly peer set sentiment than normal, net-net, we see strong fundamentals for pet health, point-of-care diagnostics, informatics, our new product cycle, pricing, and Heskett's positioning, especially as we indicated on our last call, in the back half of the year when our newly releasing products recurring utilization begins to show more fully in our results. Now, I'll turn the call over to Catherine to detail the quarter before we move into our Q&A time. Catherine?