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?

Thanks, Kevin, and good morning, everyone. As Kevin mentioned, overall macroeconomic uncertainties, including rising inflation, increasing interest rates, foreign currency fluctuations, labor constraints, as well as geopolitical strife, especially in Europe, were all headwinds experienced broadly over the past quarter and continuing into the third quarter. The animal health industry, not immune to the news, was certainly affected with declining vet visits, albeit compared to a very high prior year comparison, the impacts of which have been widely discussed this earnings season. For perspective, the prior year comparative period was one of the highest growth quarters in HESC's history and record revenue at that time. With these factors in mind, I will take you through our second quarter financial performance and will update our outlook for 2022. We reported total revenue of $64.7 million, relatively consistent with the prior year, and approximately 4% growth on a constant currency basis. Our North America segment revenue was $40.9 million for the second quarter, in line with 2021 performance, which included record North America point-of-care lab consumable revenue, the highest quarter sales of all quarters in 2021. Our point of care diagnostic laboratory products grew in the reported period, driven by 5.4% consumable growth. Our consumable growth included uplift from price favorability, partially offset by utilization declines, which were directionally correlated with the decline in clinical visits, but held up slightly better, as is the case with point of care diagnostics historically. As we have consistently communicated, the acceleration of demand experienced during the pandemic is expected to normalize and return to historic levels of growth in the post-pandemic period. Offsetting the quarter performance for this segment was lower capital sales of our digital radiography and ultrasound equipment. Our international segment reported quarterly revenue of $23.8 million, a decline of 2.5% on a reported basis. This represented growth of 8.4% on a constant currency basis. Contributing to growth is the acquisition of VET-Z earlier this year, which established our presence in the practice management information software market. Continued transition of our customers to the reset subscription program within POC Lab also contributed to growth. To remind you, the conversion to subscriptions is targeted at existing customers and will at times dampen reported sales dollars from consumables as discounts are shared with new subscriber activations. Additionally, our European markets experienced similar trends as in North America with a decline in vet visits, which resulted in lower utilization. As a result, our POC lab consumables declined modestly by approximately 130 basis points. Consolidated gross margin expanded approximately 30 basis points to 42.3%. The North America segment delivered gross margin of 46%, an approximate 200 basis point decline due to unfavorable product mix and idle plant within our OVP products. All other product categories continue to demonstrate strong margin contribution. International segment gross margin was 35.9%, an improvement of 370 basis points. HESCA's international product rationalization and conversions to subscriptions continue to progress well. The expansion in gross margin is indicative of that success. Also favorably impacting the international gross margin is our acquisition of VET-Z. Total operating expenses were 32.9 million. The increase of approximately 4.9 million was predominantly non-recurring and extraordinary charges. Occasionally, HESCA will invest in third parties for product development, which can take different forms, including equity investment or debt with coupon and equity components. In the second quarter, as we do every quarter, we evaluated the carrying value of one such debt investment and concluded that a $3.5 million reserve was necessary based on a number of factors, including the deterioration of the overall macroeconomic environment. This reserve represents half of the carrying value of that investment. Adjusted EBITDA was $7 million, or an adjusted EBITDA margin of 10.8%, a 220 basis point decline. This was driven by increased investment in recent acquisitions for the development of new software, technologies, and products, as well as short-term compensation as we continue to invest in talent. We had a loss of 51 cents per share in the second quarter. Adjusted earnings per share was 34 cents, a decrease of 16 cents. Our balance sheet is secure with cash of approximately 172 million. Consistent with our stated strategy, we continue to actively evaluate capital deployment opportunities. Turning now to our updated financial outlook for 2022. While we continue to be very excited about our second half commercial initiative and the momentum Kevin outlined earlier, The second quarter trends and clinical visits, macroeconomic concerns, especially relating to labor constraints in veterinary hospitals, as well as geopolitical worry in Europe, all necessitate a need for prudency. We are updating our guide as follows. Consolidated revenue of $273 million to $277 million, representing reported growth of 8% to 9% and constant currency growth of 12% to 14%. POC lab and consumable range of $160 to $170 million, including a consumable growth rate of 11% to 14% for North America, which is in line with historical growth rates. We expect our international consumable revenue to be consistent with the prior year on a reported basis and approximately 9% to 12% growth in constant currency. Both growth rates reflect expected price gains. Recall, we are only halfway through our programmatic price increases for the year. Additionally, benefits from commercial launches of HESCA's newest innovations, including Element AIMS, and rapids benefit this growth rate. Finally, acknowledging the overall macroeconomic uncertainty, we are lowering our expectations for premium capital equipment placements into our already active existing customer base, but we believe we will be net positive for market share gains on new subscribers and subscriptions. Our profit-related expectations have improved. Our gross margin guide of 100 to 200 basis point expansion is now expected to be near the higher end of the range. and our adjusted EBITDA margin improved to 11%. In sum, we believe this updated outlook adequately reflects the near-term factors impacting our industry and the confidence we have in our position, the factors driving our unique strategy, as well as our ability to execute. With that, we would like to open the call for your questions. Operator?

Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your touchtone phone. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We pause just for a moment to assemble the queue. We take our first question from David Westenberg with Piper Sandler. Your line is open. Please go ahead.

Hi. Thank you for taking the questions. All right. So, so let's start with the consumables in North America. It did miss your long-term targets and, you know, prices, price increases that you have are tied to CPI. I know that it does on, on it, the increases come on renewal date. So, you know, that hasn't came fully through the P&L, but can you give us any more color around volume dynamics and, you know, versus that price increases? And are maybe customers only going slightly over their minimums versus maybe before where they're going way over their minimums? I'm just trying to think about how we think about that consumable lines in the light of price increases.

Great question, David. So, Catherine, do you want to start? And I've got a thought or two.

Yeah, sure. You know, David, I would say that Like we stated, we saw similar trending related to that VizX decline was similar in our utilization, obviously notwithstanding net subscriber gains. So we did obviously pick up some new subscribers in the process. But we did see the price improvement that we have built in place largely obviously overtake that decline. Yeah, I mean, I think there's really nothing else to that other than similar trend as the North America vet visit decline overcome by price. As far as minimums, maybe some impact there as well, but certainly nothing concerning from our perspective. I think our monthly minimums for our customers are set fairly well, and so we continue to see strong utilization in that regard.

Yeah, and David, I look at it pretty simply. If visits are down just, say, four, our quantities are down between two and three. We're not capturing 100% of the downtrend in visits, so diagnostic utilization is holding up a little bit better than visits. Yeah. price is only about halfway baked into the year so far, as you noted, you know, we, we annualize every month. So, so, so only about half of those are in that number. Um, so we're not having to play pricing games and changes, but we have some people who are, you know, in their month 11 and they're paying last year's pricing. And obviously there's an uplift from that, that kind of a snowball effect. Uh, and then in terms of just broad quantities, um, We continue to launch a menu into that and that menu acceleration in the back half starts to make it so that we capture less of that downtrend. And I see it continuing probably at about the same rates on a year over year comparison in the back half. And so we've kind of adjusted our thought process for the full guide to say that it's not magically just going to get better overnight. Look, there are 41,000 veterinarians shortage. I think is the latest number that I saw. It's a big number. There's capacity constraints in staff. A lot of hospitals that were open on Saturday and Sunday have cut back on weekend hours. Hospitals that were doing curbside drop-off this time last year, which in some cases is more efficient, but certainly less personal with pet owners. Some hospitals have stopped curbside pickup. People have gone back to work. So the Tuesday at 10, 15 in the morning appointment is a little more difficult to fill. Staff is retired. Veterinarians have retired. So all of these things are real. And I think on a year-over-year basis from a high watermark of last year, for vet visits, foot traffic to be down about 4%, I think is really encouraging, to be honest. And I do see some of that moderating as things normalize. So I don't know, maybe that's helpful. Yep.

No, no, we definitely, I think, appreciate the comps and, you know, a normal stable animal health market, you know, went bonkers the last year and a half. So anyway, I'll just stick with another one around this, the same kind of consumables in North America. Can you talk about maybe price increases and long-term customer reaction and I know everyone around the market is increasing prices. I mean, from drugs to diagnostics, you're seeing, you know, an increase in prices all around. But just can you kind of think about maybe some of the customer reactions from like maybe a 7%, 8% pricing increases relative to your ability to maybe get 4% in the next year? I don't know if you know, like my question's clear here, but I'm just wondering, you know, is there going to be some, you know, longer-term impact on prices in and kind of the way we think about it in 2023, 2024. I know you're in contract and everything. I'm just kind of thinking more about the way veterinarians think about it. I hope that question was clear.

No, it is. I would say two things. We have a large competitor who has a higher price today, and they're taking over 10%. if we factor in their first quarter price increase and the price increase that customers are starting to see this month. So they're 10, 10.5% on the primary test that we compare on off of a higher starting number. So relative to our competitor, and I don't think the market's pushing back, our value proposition actually has expanded while we're taking 8, 9% on an annualized basis. So I'm really not concerned about that. And I remind people, too, that veterinarians make money on diagnostics, and they generally use a multiplier effect, right? So if they pay $10 for a test, they generally will sell it for around $25 to $30. That's the margin that they operate their business on. So when they pay $12 a test, they're going to charge up to $36 for that test. So on a dollar basis, there's lots of inflation there. We're not seeing pet owners push back, right? So the ultimate consumer is pet owners and pet families. We're just seeing veterinarians servicing higher dollar pet interactions, right? They're doing more tests. They're getting more dollars per test. There's price inflation. So I think the root of your question is, is there demand destruction coming? And will people push back on price? And we're just not seeing that. And I don't know anybody in the industry that's seeing any evidence of that.

That's great to hear. Just given that I'm first, I'll hop off and let the others ask. Thank you.

Thank you, David.

Thank you. We take our next question from Chris Shaw with JP Morgan. Your line is open.

Hi, this is Ekaterina. I'm from JP Morgan. Thank you for taking your questions and two from us. So first, On economic sensitivity, you've touched upon this in the prepared remarks, but can you just elaborate on the dynamics that you're seeing in Europe versus the United States? Are you seeing different trends between those markets when it comes to both pet owner and veterinarian behavior? And the second question is, you know, we're obviously in this environment with capacity constraints and macroeconomic challenges, and I'm just wondering, is placing new devices like Element Aim and some of the other innovations you'll be rolling out, is it more difficult in this environment? Or are you finding that veterinarians are still pretty receptive to, you know, adopting, you know, new products and technologies? Thank you.

So, I'll start, and I'll take them in reverse order. And then, Catherine, if you have thoughts on the European dynamic. I think the European dynamic, well, so element aim, digital radiography, anything big, people will think more about they read the same newspapers that we read when there's uncertainty. And I think we spoke to that on our prepared remarks that we've factored that in in terms of just premium placements in our own subscriber base. We're assuming that there's just kind of a natural defensiveness that will occur. We're not seeing lots of evidence of that, but that makes sense. So I think we factored that into our guide. In terms of the European situation, it's a different situation than the United States. So we don't have necessarily as much of a veterinarian and a capacity constraint as the main driver, as much as you have currency, geopolitical risk, people worried about whether or not they're going to have gas in Germany in the winter. There's just a lot of different uncertainty in those markets. So they're not exactly the same. constraints that you're seeing in the U.S., but the net effect is the same. So just you have to acknowledge those potential headwinds. And again, we factored that in when we updated our guidance and took the number down. I think we got those negative factors calculated properly. Catherine, did you want to add anything to that? I think it's pretty straightforward.

No, I think that's accurate. Thank you.

We take our next question from Elliot Wilbur of Remington. Your line is open.

Thanks. Good morning. First question for Catherine. I guess in light of what is now quite a few different adjustments and or moving parts in terms of your overall guidance, maybe some Additional color in terms of how you expect gross margin trends to progress over the course of the year. I think originally at the beginning of the year talked about, you know, something in the order of 100 to 200 basis points expansion. But I guess given the mixed shift now, lighter expected consumer goals performance, you know, how you're thinking about that. And in particular, if you could maybe give a little bit of insight into the gross margin trend in the international segment in the second quarter. and why we sort of saw the sequential decrease from the March period, how much of that was currency, how much of that was maybe mixed, light vet-vet versus other elements of the business, but just some overall kind of high-level views on gross margin performance in the quarter and then trends over the balance of the year. And I've got a follow-up for Kevin as well.

Yeah, okay, thanks. Catherine, definitely you. Yeah, okay, so let me just make sure and correct me if I missed the question, but from a gross margin consolidated standpoint for the remainder of the year, so as the, you know, as we indicated around the placements of element aim, a large percentage of our target is in the second half, so we will expect to see some COMPRESSION RELATIVE TO THE FIRST HALF GROSS MARGIN, BUT MIXED WILL HOLD UP WELL, WE THINK, WITH RISING CONSUMMABLE REVENUE AS WELL. SO SEE IT SLIGHTLY LOWER THAN WE SAW THIS FIRST HALF. FROM INTERNATIONAL STANDPOINT ON GROSS MARGIN RELATIVE TO THE FIRST QUARTER, IT'S DEFINITELY MIXED. WE SAW HIGHER SALES OF LOWER MARGIN EQUIPMENT WITHIN OUR IMAGING LINE, WHICH typically is kind of typically what happens, which is why you see that variation, but very solid contribution from the consumable revenue in the second quarter.

Okay, thanks. And then, Kevin, obviously a lot of uncertainty in terms of short-term in-market dynamics, and speaking specifically with respect to vet clinic visits. But maybe you could just talk about companies' execution against its key deliverables that you outlined at the beginning of the year in terms of subscription conversion and how you're tracking relative to four-year expectations in terms of months and dollars under subscription, both U.S. and EU, thanks, or international. Thank you.

You're welcome, Elliot. Yeah, so I noted earlier that our subscription gains, and we talked a little bit about on the first call of the year, were a little bit ahead of schedule and looked really positive just in terms of just more gains, more subscribers at the end of the year than we had initially targeted. So I think we're very competitive in the market, and sales teams are doing a good job in that regard. As we have a strong back half with some of these placements of LM&AIM and Hescoview and some of these other things, part and parcel of that is extensions with existing customers and increases in existing customer contract subscription value. And so we see some really good, strong drivers to finish the year well with that. So I like our subscription guide. for the year. We're only halfway through the year, but I like it. We only update that annually, but I do think we have an extraordinarily good, solid track record in that regard. I think for many years now of hitting or exceeding most of the numbers in that chart. So I like where we are as we enter the second half.

Thank you. Moving forward to Ben Hainer with Alliance Global Partners. Your line is open.

Good day, guys. Thanks for taking the questions. First off, a couple of bigger picture ones for me and then one clarification. Just thinking about the capacity constraints that we have ongoing What's your take on how it kind of alters the industry over time? I mean, it doesn't seem like there's a ton of levers you can pull at the practice level. You've got, you know, maybe improved workflows, maybe a greater reliance on diagnostics, both of which presumably could benefit you guys. But if it's, you know, the answer is more bodies, and you mentioned the 41,000 vet shortage, I mean, doesn't it ultimately come down to, you know, either pets not getting the care they need and, you know, does that available care ultimately get rationed by price? Or how do you think about how it alters the industry? Because it doesn't seem like this is something that just changes overnight and all of a sudden the capacity constraints are gone.

No, it's a fair question. And, you know, the AVMA program, And many other bodies in the United States have been wrestling with this question for over a decade. It's not a new question. It's like everything related to the last two years. It's been exacerbated, and it's a lot more visible just based on the peak and then the normalization. But there have been veterinary shortages for many, many years. I think we had accelerated retirement. I think veterinarians who were kind of towards the end of their career, maybe even over 60, I think a number of them just exited the space, which is a logical reaction in the last two years. So getting those folks back in, a lot of demographic things going on. So yes, I do suspect there will be rationing by pricing. But I also suspect that markets work and there will be more pop-up clinics in that maybe aren't entirely full serve, but they're dealing with, with, with wellness and things like that. So, so I think more kind of big box, um, stores, uh, with, with in hospital in clinic trends, I think is probably a, uh, a pattern. Uh, the market will discover efficiencies, uh, and we've been wrestling with it for years. I, I do think PIMS is really a key. Uh, you'll see investments amongst a handful of us in the industry, really investing in a cloud-based, uh, PIMS solution that, that makes, um, Registration makes communication, makes follow-ups. Every time we can reduce an interaction by a minute or two and actually improve the communication and experience for the customer, huge gains across millions of interactions. So I do think there are opportunities for companies to solve that problem. So net-net, it's not new. It's just got a bigger spotlight on it.

Okay. That's helpful. And then, you know, there's always kind of been that knockout there on, you know, how, you know, what sort of business acumen the average vet practice has. You mentioned kind of the pop-up clinics and, you know, maybe some more, you know, markets working and, you know, I guess more business-oriented management. Do you also think that that ultimately changes the people who decide to go into veterinary medicine? I mean, is it? Does it bring in a new kind of more mercenary breed of vet? Whereas previously they maybe had the calling of helping animals and now they're maybe regretting and saying, wow, I wish I would have been a dermatologist or a dental hygienist or what have you. But I guess I'm getting long-winded here. Does it also alter who goes into veterinary medicine in your view?

So I think this generation of employees, regardless whether they're veterinary doctors or whether they're nurses and technicians or front office staff, I think they're missional. And I don't think you can find a much better mission than pet health care. So I think the industry has a huge leg up in that regard. So tight labor market, eventually I think people start to find, as long as you're competitive wage wise, I think pet healthcare is a great place to be. I think we'll follow the path that you see in some shortages in human medicine. Nursing and technicians is a faster way to fill capacity constraints. So you have nurse practitioners in human medicine helping to fill some of those capacity constraints. So lots of levers to pull here. The big thing is pet health care, the demand for pet health care is intact. The bigger thing is, again, rationing by pricing and some of those things just create just some underlying societal issues, right? Pet health care shouldn't be for wealthy dogs. We shouldn't have those kind of dynamics, but it is a market. And so I think the market will respond. It won't affect 22 and 23. It's a 10-year trend. I think corporate groups also is a trend, and it will bring a sophistication and an ability to invest in software and efficiencies, internal residency programs, internal training programs with some of the corporates will relieve some of those capacity constraints. And you probably just need a couple more veterinary professionals hospital or veterinary training programs. I think we're stuck at 27 or 28 or something like that in North America for 30 years, somewhere in that range, and you probably just need to increase capacity of producing qualified veterinarians. So a lot of things at play here.

Okay. Thanks for the thoughts on those. And then lastly for me, in the press release, you mentioned the new test menu later this year on currently active analyzers, and you've got in parentheses the large and incremental. I mean, is that a description of large being the potential market sizes of the test menu additions that you're planning?

Yeah, so large, an example of a test that would go in that bucket would be the cancer screen. We think that's a huge fully new additive step-up type of test for us. Incremental would be things that go on existing analyzers, like an expansion of your hormone testing on the LMNI+, for instance. So we have both happening, building out menu in our rapids, building out menu that are incremental. So that's what I'm referring to. It's not large and incremental. It's large or incremental, but we do have both of those happening at the same time.

Okay. Great. Thanks for taking the questions, guys. Thank you.

We took our next question from Erin Wright of Morgan Stanley. Your line is open.

Great. Thanks. On Element AIM, where you can comment, I guess, where are you installed based now relative to your internal expectations at this point, and what's your updated targets for the year in terms of contributions, and how does How does the placement pipeline look at this point? And can you talk about the innovation progress here? You mentioned it in the previous remarks here, but is it really just element AIM that we should be focused on, or will the progress on RAPIDS and the other new product offerings and analyzers that you were mentioning be material for this year? Thanks.

Yeah, you're welcome.

So things like RAPIDS have a – definitely have a contribution for this year. And being late in the first half certainly is part of our first half performance. So I think we've largely resolved that and we'll have contribution from Rapids in the back half as we'd expected. So that's in our updated guide. In terms of element aim, we've called out 500 units for the year. I think on investor day, we reaffirmed that we expect about 70% of those to occur in the back half. And I think so we're sticking with those. We have a good strong pipeline and we have a good strong funnel. So I really do think we're tracking more than enough customer opportunity, both new but also in our existing subscriber base to hit that number for the year. But it's a lot of work, right? At the end of the day, you have to execute. in the back half and get those things installed. Um, the bigger thing for me is just the, just the, the positive reception and the performance of the product, um, to find that you, you launch and manufactured a product and supply chain and everything is just really performing just extremely well. Um, and then your performance in terms of just exam times and, uh, identification event of, of, um, of items and the samples and things like that is exceeding our expectations. So you have a really strongly performing product with kind of a good, nice glow halo around it. So I think we're in a really good position there. And similarly, I think with the HescoView telecytology, I think is also a good contributor for the full year and also for the back half. So all of those things, Aaron, are in our updated guide, kind of the puts and takes. And there's still a nod there to the premium placements Again, when the macro news cycle is negative and worrying, veterinarians are people too. And so you do have to overcome some of that. But these are profit centers and they're sales drivers and they're efficiency gainers. And so you really have a pretty compelling message. I think I answered the question.

Yeah, yeah, no, that's helpful. And then could you. An update on what you're seeing in terms of the competitive landscape in North America. Has anything changed, giving you more or less opportunity domestically, given some of, for instance, Salesforce disruption at Duetis? Any other kind of changes, price increases, et cetera, at IDEX? Just curious your thoughts on the competitive landscape here. Thanks.

You're welcome. I think that's right. You know, IDEX obviously is super competitive. with very aggressive bundling. And they've been that way for 20, 30 years. So they keep doing their thing and we keep trying to chip away at them. I think we'll be a net gainer of subscribers this year. So I think that's really a positive and a nod to our team doing a great job. But yeah, I think they're over 10, 10.5% total net price to most customers. So I think that provides us an opportunity in terms of just our value proposition. So that's good. The Zoetis build out of a Salesforce. We haven't seen a lot of trading. I mean, I think they're doing their own work. You know, we don't see an awful lot of trading back and forth of sales teams and marketing teams in the industry, just as a general rule. I mean, it happens in spots, but it's not a wholesale, a wholesale issue in the industry. So, so yeah, they're, they're big, they're good. They don't intend to lose. So we try to acknowledge all that stuff, but we haven't really seen a whole lot of pressure from their efforts yet. But, you know, we never bet on the failure of, I think, the world's largest animal health company. So we're cognizant that they're good at what they do, and it makes us be better at what we do. So a lot of platitudes in there, but, yes, it's very competitive. I guess that would be the short answer.

Okay. All right. Thank you. Appreciate it.

The next question comes from Jim Sidoti of Sidoti and Company. Your line is open.

Good morning, and thanks again for taking the question. Catherine, you know, G&A was up at 19 million. I assume that's largely due to the one-time write-down, and you would expect G&A to come down to, you know, one first quarter levels in the back half of the year.

Thanks, Jim. So for the remainder of the year, I see, yes, I do think it would come down and effectively be close to the first half of the year, albeit we are continuing to make investments in team and products.

Can you repeat the size of that write-down in the second quarter?

It was about $3.5 million included in the one-time investment. All right.

And with regard to the volition test, can you just give us a little more color on how that's going, the conversion to a point of care test? And what's the likely approval process for that? Is that a USDA approval similar to what you're going through for the rapid test?

So Jim, it's Kevin. We don't see an approval hurdle. It's a screening test. So I think we're in good shape there. And we've got increased R&D spend, which is in our numbers. And part of that is volition. The other driver of that would be cloud software development. And both of those we've accelerated. So once we get it working to a level where we feel like we can produce millions of them and get them out consistently, we would aim to go to market.

Okay. And you think that'll be late this year, early 2023? Is that correct?

I think that's right, Jim. It's really hard to pinpoint, but that's what we're pushing for. And that's what we thought we would do a quarter ago. And I think we're on track for that.

Okay. All right. Thank you. You're welcome.

If there are no further questions at this time, I'd like to turn the call back to Kevin for any additional closing comments.

Hey, thank you, operator. We appreciate it. And thank you, everybody, who joined the call. I look forward to updating you next quarter. We'll work hard to make that a good call. I think it's going to be a critical call, and I think it's going to be a strong back half. So until then, take your pet to the veterinarian if you can get an appointment. So with that, we'll sign off and everybody have a good day.

Thanks.

And this concludes today's call. Thank you for your participation. You may now disconnect.