Heska Corporation

Good day, ladies and gentlemen, and welcome to the Heska Corporation's second quarter 2022 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to John Agar, Head of Investor Relations. Please go ahead, sir.

Great. Thank you, Kyle and everyone. Welcome to Heska Corporation's earnings call for the second quarter of 2022. As a reminder, today's conference is being recorded. I'm John Agard, Head of Investor Relations at HESCA, and with us this morning is 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 will open up to questions. Prior to discussing HESCA's results, 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 looking statements regarding future events or future financial performance of the company. We need to caution you that any such opinions are based on 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's annual and quarterly filings with the SEC, and elsewhere. Any forward-looking statements speak only as to 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 course, we'll 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 directly comparable measures is provided in our release, which may also be found by visiting the investor relations section of our website. In reviewing our second quarter, To results, please note all references to growth refer to growth compared to the equivalent period in 2021, unless otherwise noted. All right. With that being said, it is now my pleasure to turn the call over to Kevin Wilson, ESCA CEO and President. Kevin?

Hey, thanks, John, and good morning, everyone. As normal, we'll try to keep things brief this morning to allow time for questions. If you haven't read this morning's release, I encourage you to do so. I will refrain as much as possible from retreading my release quote, which I'm hopeful is helpful to you and responsive to the moment. Katherine will cover the specifics of the quarter, so I'll take my time to share a few observations about our specific performance and my own thoughts on the industry. To start, I'd like to congratulate our teams for working so hard in the first half on important drivers for the second half, from accelerated R&D and marketing to online ordering and multinational logistics, from sales training and sales to accounting, operations, human resources, and business development. Heska teams have set the table for a strong second half while delivering 4% top line sales growth and constant currency compared to last year's very strong 42% Q2 sales growth. That's a big hurdle. This morning's full guide reflects these results and our expectations in light of the macroeconomic headwinds that are noted in this morning's release. Currency, inflation, the European situation, and a very tight labor market constraining veterinary hospital pet visits are all real, and they're in our outlook that has been updated this morning. Also real are many offsetting positives. HESCA market share gains for subscriptions continue to have good results at the half of the year. So we intend to again finish the year, as we have for many years now, with more subscribers than we started. Pet healthcare market conditions are holding up at healthy levels. Veterinarians continue to rely on point of care diagnostics. Pet families continue to have the funds and the firm commitment to pet healthcare spending. And we anticipate that demand, spending, and pricing power without demand destruction will all hold up well in the second half and into 2023. Veterinary hospital capacity constraints will continue at negative rates through the back half. Most industry checks show lower veterinary patient appointments of about 4%, while hospital sales from those appointments is positive due to mix and price interaction. Early numbers show that HESCA test consumables on a quantity basis are capturing between 50% and 75% of visits declines, which is more than offset by price gains. It's real and it can be seen in our numbers, but we see that as Hesco launches new platforms in 2022, we can overcome and grow quantities and mix of higher margin consumables in the face of this year's patient visits declines, which we do see moderating in the latter part of the back half of 2022 and into 2023. Concerning our product launches, we have several, too many to address adequately in our short time, so I will update on a handful this morning. To begin, Element AIM, the analyzer and consumables are performing wonderfully for veterinarians, clinically and financially. Our manufacturing, QA, operations, artificial intelligence, and user interface are all fantastic, And our user experience is even better than we had hoped, with new enhancements reducing exam time by over 70% to around four minutes in most cases. Element AIM inventory is now in place in our European locations to meet our full-year target, with European country launches planned for September. And in North America, our teams are fully trained and are executing in the market with a pipeline and funnel that is more than sufficient to hit our full-year target. Next up, our HescaVue telecytology is also doing well with a nice tailwind from the exit from the market of a smaller competitor. HescaVue telecytology is gaining traction with record installations, pipeline, and funnel, and we are encouraged that the technology and our dedicated team of boarded specialists will help veterinarians to meaningfully enhance their clinical and financial results. Moving on, Our new true rapid single-use tests were delayed in the first half, but inventory for an extensive and highly competitive menu is now manufactured and now in place in our European logistics locations, and European market release has begun. In North America, we have now completed our processes for USDA approval of the product line's regulatory anchor, which is Heartworm, and we expect to be on market in the coming weeks. And finally, our R&D efforts have accelerated. These investments are evident in our numbers this quarter. We're seeing rapid progress in our VET-Z software development for major new releases contribution in the first half of next year. Similarly, we remain super excited about our new Q cancer screen progress towards launches late this year or early next. To conclude my remarks, I'll borrow from my thoughts in last quarter's message. Demand for pet healthcare and spending is in good shape. We are in the middle of a decades-long super cycle. For a couple of years now, we've communicated that pet healthcare was great before, will be great during, and will be great following the pandemic. HESCA is really well positioned in North America, core Europe, and Australia, New Zealand, with a very strong value proposition in diagnostics and informatics that can be bundled under a secure and sustainable subscriptions model. Heska also has the enviable position of launching new products to drive utilization quantities higher than the underlying market, which is also quite fortunately supportive of price gains at the same time. Heska has secured the capital, people, portfolio, supply chain, end market access, and contract terms both in and out to grow in both sunny and unsettled times. We're a good, solid investment with really strong and clear growth prospects. and investors have correctly formed capital around HESCA to power our efforts to solve problems for veterinarians and pet families, and we will be well rewarded for doing so. With that, I'll turn the call over to Catherine to detail the quarter before we move into our Q&A time. Catherine?