Q2 2022 Heska Corp Earnings Call

Good day, ladies and gentlemen, and welcome to the Heska Corporation second quarter 2022 conference call. Today's conference is being recorded at this time I would like to turn the conference over to John Egan 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, Johnny Guard head of Investor Relations at Heska and with US. This morning, Ben Wilson, Heska, as Chief Executive Officer, and President and Catherine Grassman, <unk> Chief Financial Officer.

Mr. Wilson and MS. Grassman will provide details surrounding the results reported and then we will open up questions.

Prior to discussing Heska 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, our current beliefs and expectations and involve known and unknown risks and uncertainties, which may cause actual result.

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.

<unk> annual and quarterly filings with the SEC and elsewhere.

Any forward looking statements speak only as of the time. They are made and Heska 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 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 directly comparable measures is provided in our release, which may also be found by visiting the investor Relations section of our website.

Reviewing our second quarter two.

Two results. Please note all references to growth refer to growth compared to the equivalent period in 2021, unless otherwise noted.

Alright with that being said it is now my pleasure to turn the call over to Kevin Wilson, <unk>, CEO and President Kevin.

Hey, Thanks, John and good morning, everyone.

As normal we'll try to keep things brief this morning to a lot of 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 it's helpful to you and responsive to the moment.

Catherine 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 an important drivers for the second half from accelerated R&D and marketing to online ordering and multinational logistics from sales training and sales till accounting operations human resources and business develop.

Okay.

Heska teams have set the table for a strong second half, while delivering 4% topline sales growth in 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 in a very tight labor market constraining Veterinary hospital pet visits are all real.

And they are in or out.

Outlook has been updated this morning.

Also real are many offsetting positives.

Heska market share gains for subscriptions continue to have good results at the half of the year.

So we intend to again finished the year as we have for many years now with more subscribers than we started.

Pet health care market conditions are holding up at healthy levels.

And in areas continue to rely on point of care diagnostics pet families continue to have the funds in a firm commitment to pet health care spending.

And we anticipate that demand spending on 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 Heska test consumables on a quantity basis are capturing between 50% and 75%.

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 heska 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.

Which we do see moderating in the latter part of the back half of 2022 and enter 2023.

Concerning our product launches, we have several to many to address adequately in our short time, so I'll update on the handful. This morning to begin element aim the analyzer and consumables are performing wonderfully for veterinarians clinically and financially our.

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 aimed 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, where the pipeline and funnel that is more than sufficient to hit our full year target.

Next up our Heska beutel of cytology is.

It is also doing well with a nice tailwind from the exit from the market of a smaller competitor.

Heska <unk> cytology is gaining traction with record installations pipeline and funnel.

And we are encouraged that the technology and our dedicated team of Boardman specialists will help veterinarians to meaningfully enhance our 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 in European market release has begun.

In North America, we have now completed our processes for USDA approval of the product lines regulatory anchor which is heartworm and.

And we expect to be on market in the coming weeks.

And finally, our R&D efforts have accelerated these.

These investments are evident in our numbers this quarter we're.

We're seeing rapid progress in our bet Z software development for major new releases contribution in the first half of next year.

Similarly, we remain Super excited about our <unk> cancer screening 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 health care 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 health care was great before will be great. During what will be great. Following the pandemic.

Heska is really well positioned in North America core Europe , and Australia, and New Zealand.

It's 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 and market access and contract terms, both enter now to grow in both Sony and unsettled times, where a good solid investment with really strong and clear growth prospects and investors have correctly formed capital around heska.

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 fluctuation labor constraints as well as geopolitical strife, especially in Europe , where 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 but does it, albeit compared to a very high prior year comparison, the impact of which have been widely discussed this earnings season.

For perspective, the prior year comparative period was one of the highest growth quarters in Heska 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 five 4% consumable grew.

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. It 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 with lower capital sales of our digital radiography and ultrasound equipment.

Our international segment reported quarterly revenue of $23 8 million a decline of two 5% on a reported basis. This represented growth of eight 4% on a constant currency basis contributing to growth as the acquisition of that'd be earlier, this year, which established our presence in the practice management information software Mark.

<unk> continued transition of our customers to the reset subscription program with N. P. S. T lab also contributed to growth to remind you the conversion to subscription is targeted at existing customers and we 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. The 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 OBP product.

All other product categories continued to demonstrate strong margin contribution.

International segment gross margin was 35, 9% an improvement of 370 basis point Heska as international product rationalization and convergence to subscriptions continued to progress well the expansion in gross margin is indicative of that success.

Also favorably impacting the international gross margin is our acquisition of XE.

Total operating expenses were $32 9 million the increase of approximately $4 9 million was predominantly nonrecurring in extraordinary charges occasionally heska will invest in third party product development, which can take different forms including equity investment or debt with coupon an equity component.

In the second quarter as we do every quarter, we evaluated the carrying value of one such debt investment and concluded that a three and a half million dollars 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.

Driven by increased investments in recent acquisitions for the development of new software technologies and products as well as short term 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 <unk> 34, a decrease of 16 said 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 initiatives and the momentum Kevin outlined earlier, the second quarter trends in clinical visits macroeconomic concerns, especially relating to labor constraints and veterinary hospitals as well as geopolitical worry in Europe , all necessitate the need for prudency, we are updating our guide as follows.

Consolidated revenue of 273 million to $277 million, representing reported growth of 8%, 9% and constant currency growth of 12% to 14% POC lab, and consumable range $160 million to $170 million, including our 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, reflecting expected price gains.

Recall, we are only halfway through our programmatic price increases for the year. Additionally benefits from commercial launches the past because newest innovation, including element Ain and rapid benefit that's 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 subscription.

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 the question. Please see note by pressing star one on your Touchtone phone, if you're using a speaker phone. Please make sure your mute function Houston also allow us to reach our equipment again press star one to ask a question you pause just for a moment to assemble.

Well the Q.

We have to go first question from David Rustenburg with Piper Sandler. Your line is open. Please go ahead.

Hi, Thank you for taking the questions.

Alright, so so let's start with the consumables in North America. It did Miss your long term targets and prices price increases that you have are tied to CPI I know that it does on.

The increases come on renewal date, so you know that hasn't fully through the P&L, but can you give any more color around volume dynamics and versus that price increases and or maybe customers only going slightly over their minimums versus maybe before where theyre going way over their minimums I'm just trying to think about how we think about that consumables.

Lines in the light of price increases.

A great question, David So Catherine do you want to start and I've got a thought or two.

Yeah sure.

No David I would say that.

Like we stated we saw similar trending related cause that decline with similar in our utilization, obviously, notwithstanding net subscriber gains so.

So we did obviously pick up and some new subscribers in the process, but we did see them 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 is on the north American vet visit decline overcome by a price as far as minimum.

Maybe some impact there as well, but certainly nothing concerning from our perspective, I think our our monthly minimums for our customers that are fairly well and so we continue to see strong utilization in that regard.

Yeah, David I I, just I I look at it pretty simply.

Business are down just say four.

Our quantities are down between two and three right, we're not capturing 100% of the of the downtrend in visits so diagnose.

Diagnostic utilization is holding up a little bit better than visits.

Price is only about halfway baked into the year. So far as you noted we annualize every month. So so so only about half of those are in that number.

So we're not having to play pricing games and changes, but we have some people who are you know when their month 11, and theyre paying last year's pricing and obviously there is an uplift from that that kind of a snowball effect.

And then just in terms of just broad quantities.

We continue to launch menu into that that menu acceleration in the back half starts to make it so that we capture less of that of that downtrend and I see it.

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 for the full guide.

To just say that it's not magically just going to get better overnight.

There are 41000.

Veterinarian shortage I think is the latest number that I saw.

It's a big number.

There's capacity constraints and staff.

A lot of hospitals that were were.

We're 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 with pet owners.

Some hospitals have stopped curbside pick up.

People have gone back to work so.

So the the Tuesday at 10 15 in the morning.

Appointment is a little more difficult to fill them.

Staff is retired veterinarians have retired.

So all of these things are real and I and I think on a year over year basis from a high watermark of last year.

This 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 if maybe that's helpful. Yeah.

No no. We we we definitely I think appreciate the comps and you know a normal stable animal health market.

Went bonkers, the last year and a half so anyway, Oh I'll just stick with another one around this the same kind of consumables and in North America.

Can you talk about maybe your price increases and long term customer reaction I know everyone around the market is increasing prices I mean from drugs to diagnostic you're seeing it increase in prices all around but just can you kind of think about maybe some of the customer reactions from like maybe a seven 8%.

Pricing increases relative to your ability to get maybe get 4% in the next year.

I I don't know if you know what I like my question is clear here, but I'm I'm just I'm. Just wondering is there going to be some you know longer term impact on prices in 2022, and and and kind of 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 the way veterinarians to think about it.

I hope that question was clear.

No. It is I would I would say two things.

R R.

We have a large competitor who has a higher.

Price today so.

And they're taking.

Over 10%, if we factor in there their first quarter price increase and that the price increase that customers are starting to see this month.

So theyre 10, 10, 5% on the primary tests that we compare on off of a higher starting number so so relative to our competitor and I don't and I don't think the market's pushing back.

Our value proposition actually has expanded while we're taking eight 9% on an annualized basis, so I'm really not concerned about that.

Ill remind people too that veterinarians make it make money on diagnostics and they generally use a multiplier effect right. So.

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 hours for that test. So on a dollar basis, there's lots of inflation there.

We're not seeing pet owners pushed back right. So the ultimate consumers pet owners and pet families.

We're just seeing veterinarians servicing.

Higher dollar.

Pet interactions right Theyre doing more tests are getting more dollars per test there's price inflation. So I think the root of your question is is there demand destruction coming.

And when 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.

Hmm.

That's great to hear.

Just given that at first.

I'll hop off and let the others ask thank you.

Thank you David.

Thank you we take over next question from Chris Schott with JP Morgan.

Your line is open.

Hi, This is a cat arena entre.

Morgan. Thank you for taking our questions and two from US. So first on the 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, we're 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.

It's just placing new devices like element aim until the other innovation that you'll be rolling out is it more difficult in this environment or are you finding that they were in areas are still pretty receptive to adopting a.

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 AME 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 was just kind of a natural.

Defensiveness at Walker, our we're not seeing lots of evidence of that but that that makes sense. So I think we factored that into our guide.

In terms of the European situation, it's a different situation in the United States. So we don't have necessarily as much of a veterinarian in a capacity constrained 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 like Theres, 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 so just you have to be.

You have to acknowledge those potential headwinds and again, we factor that in when we updated our guidance took the number down I think we got those.

Those negative factors calculated properly Kathryn did you want to add anything to that or I think it's pretty straightforward.

No I think that that's accurate.

Okay.

Thank you we take our next question from Elliot Wilbur.

Raymond James Your line is open.

Thanks, and good morning first question for Kathryn I guess in light of.

What is now quite a few different adjustments and are moving parts in terms of your overall guidance, maybe some <unk>.

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 year talked about something in the order of 100 to 200 basis points expansion, but I guess given the mix shift now.

A lighter than expected to consumables 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 you know why are we sort of saw the sequential decrease from from the March period. If that was you know how much of that was currency how much of that was maybe mix light light.

That debt versus other.

There are elements of the business, but just you know some some overall kind of high level views on gross margin performance in the quarter and then trends over the balance of the year and then I've got a follow up for Kevin as well.

Yeah, Okay. Thanks, Katherine desk definitely use.

Yeah.

Okay. So.

Let me just make sure and correct me if I if I missed the question, but from a gross margin consolidated standpoint for the remainder of the year so as.

As the as we indicated around the placements of element aimed a large percentage of our target is play 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 a rising consumable revenue as well so see it slightly lower than we thought this this first half.

From an international standpoint on gross margin relative to the first quarter, it's definitely Nick.

We saw higher sales of lower margin equipment within our imaging line, which typically is kind of typically what happens is which is why you see that variation, but very solid.

Contribution from the consumable revenue.

And the in the second quarter.

Yeah.

Okay. Thanks, and then Kevin obviously, a lot of uncertainty in terms of.

Short term and market dynamics and speaking specifically with respect to that clinic visits, but maybe you could just talk about company's execution against its key to Liberals that you outlined at the beginning of year in terms of subscription conversion and how you're tracking relative to.

Full year expectations in terms of months in dollars under a subscription.

The U S and EU banks or international Thank you.

Youre welcome Elliot.

Yeah. So so I noted earlier that our our subscription games and when we we talked a little bit about on the first call of the year.

We're a little bit ahead of schedule and and look really positive.

Just in terms of just more gains more and more subscribers at the end of the year than than we had initially targeted so I think we're very competitive in the market and our sales teams are doing a good job in that regard.

As we have a strong back half with some of these.

Placements of element name and Heska view.

And some of these other things part and parcel of that is.

As 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 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.

And that chart, so I like where we are as we enter the second half.

Yeah.

Thank you moving forward to Ben <unk> with Alliance Global Partners. Your line is open.

Hey, guys. Thanks for taking the questions just first off a couple of kind 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 is a total levers you can pull at the practice level, you've got you know maybe improved workflows.

Maybe a greater reliance on diagnostics as both which presumably could benefit you guys, but it fits.

No. The answer is more bodies and you mentioned the 41000 vet shortage.

I mean, it doesn't mean it doesn't really ultimately come down to either not getting the care they need and does the available care ultimately get.

Ration by price or how do you how do you think about how it alters the industry because it doesn't seem like this is not just changes overnight and also the capacity constraints are gone.

No. It's a fair question and the AVMA and many other bodies in the United States have been have been wrestling with this question for Kurt over a decade like it's not a new question. It's just it's 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've been veterinary shortages for for many many years I think we had accelerated retirement.

I think veterinarians, who are kind of towards the end of their career or 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.

So 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 that maybe arent entirely full serve but they are dealing with with with wellness and things like that so so I think more kind of big box.

Stores with within hospital and clinic trends I think is probably up.

A pattern the market will discover efficiencies.

And we've been wrestling with it three years I do think terms is really a key you'll see investments amongst a handful of us in the industry, we're really investing in a cloud based.

Tim solution that that makes.

Registration makes communication makes follow ups every time, we can reduce and interaction by a minute or two and actually improve the communication and experience for the customer.

Huge gains across across millions of interactions.

So I do think there are opportunities for for.

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 theres always kind of been the knock out there on how what sort of business acumen. The average best practice has.

You mentioned kind of the the pop up clinics and maybe some more.

Market's working and.

You know I guess more business oriented management do you also think that that ultimately changes the people who decided to go into that.

Veterinary medicine, I mean is it.

Does it bring in a new kind of more mercenary brito off of that.

Yes.

Whereas previously they maybe.

The calling of helping animals and now Theyre just now.

Sure.

Maybe regretted and saying Wow I wish I would've been a dermatologist or.

Dennis or what have you.

But.

I guess long winded here, but.

It does it does it ultimately alter who goes into the veterinary medicine in your view.

So I I think I I think this generation.

Of employees, regardless, whether they are their veterinary doctors or whether there.

<unk> and technicians are front office staff I think their mission and I don't think you can find out a much better mission.

Then pet health care.

So I think the industry has a huge leg up in that regard so.

So tight labor market eventually I think people start to find as long as your competitive wage wise I think pet health care is a great place to be.

I think we will follow the path that you see in some shortages in human medicine.

Nursing and technicians will well.

A faster way to fill capacity constraints, so you'll have nurse practitioners.

In human medicine, helping to fill some of those capacity constraints, so lots of levers to pull here.

The big the Big thing is as pet health care the demand for pet healthcare is intact.

The bigger thing is again rationing by pricing in some of those things just create just some underlying societal issues right that health care it shouldnt be for wealthy dogs.

We shouldn't have those those kind of dynamics, but it is a market and so I think the market will respond it won't affect 'twenty, two and 'twenty three it's a 10 year.

Trend I think corporate groups also as a as a trend and it will bring a sophistication and ability to invest in software and efficiencies internal residency programs in term of our training programs with.

With some of the corporates will relieve some of those capacity constraints and you probably just need a couple more veterinary hospital or veterinary training programs I think we're stuck at 27% 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 long.

There's a lot of things at play here.

Okay.

Thanks for the thoughts on those.

That's it 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 large and incremental.

Is that a description.

<unk>.

Large being the.

Market potential market sizes of the test menu additions that you're planning.

Yeah. So so large an example or tests that would go in that bucket would be the 10th the cancer screen.

We think that's a that's a huge.

Fully new additive step up type of test for us.

<unk> would be would be things that go on existing analyzers.

Like an expansion of your of your hormone testing on the <unk> plus for instance, so so we have both happening building out menu on our rapids building out menu.

Incremental so that's that's what I'm, referring to it is not large and incremental its 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 over next question from Erin Wright of Morgan Stanley . Your line is open.

Great. Thanks, an element aim where you can comment I guess where would.

Installed base now relative to your internal that shouldn't 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 process progress when you mentioned it in the previous remarks here, but.

Is it really just eliminate that we should be focused on our well the progress on rapids, and and the other new product offerings and analyzers that you were mentioning the material for this year.

Yeah, you're welcome.

So.

Things like Rapids have definitely have a contribution for this year and being late in the first half certainly as part of our first half performance. So I think we've largely resolve that and we will have contribution from rapids in the back half.

As we had expected so that's in our that's in our updated guide.

In terms of element name, we've called out 500 units for the year.

I think in our Investor day, we reaffirmed that we expect.

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.

The bigger thing for me is just the just the positive reception and the performance of the product.

To find that you launch and manufactured product and supply chain and everything is just really performing just extremely well.

And then your performance in terms of just exam times and identification of event.

Of items in the samples and things like that is exceeding our expectations. So you have a really strongly performing product with a 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 Heska view tell us cytology.

I think it's also a good contributor for for the full year and also for the back half. So all of those things are in our in our in our updated guide kind of a.

Puts and takes and there still are not there to that premium placements.

When 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 their sales drivers and their 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 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 the for instance sales force disruption at the what if any other kind of changes price increases et cetera.

Just curious your thoughts on the competitive landscape here.

You're welcome I think that's right.

IDEXX, obviously is soup.

Super competitive.

Well, they're very aggressive bundling.

And they've been that way for 2030 years. So they keep doing their thing and we keep trying to chip away at them I think will be a net gainer of subscribers. This year. So I think that's really a positive and in a nod to our team doing a great job.

But yeah I think there are 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.

There was the wettest buildout of our sales force, we haven't seen a lot of trading I mean, I think theyre doing their own work, 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 and it happens in spots, but it's not a wholesale.

The wholesale issue in the industry. So so yes, there there.

They're big they're good they don't intend to lose.

We try to have knowledge all of 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 so we're we're cognizant that they're good at what they do and.

And it makes us.

Be better what we do so a lot of platitudes in there, but yes, its very competitive I guess that would be the short answer.

Okay Alright. Thank you appreciate it.

Mhm.

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

Good morning, and thanks again for taking the questions. Katherine Your 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 one first quarter levels.

The back half of the year.

Thanks, Jim.

So for the remainder of the year.

The 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 product.

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

It was about three and a half a million included in the one time.

And G&A.

Alright.

With regard to the volition pests can you just give us a little more color on how that's going to be the conversion to a point of care test.

What's the likelihood of approval process, so that is that.

Our USDA approval similar to what you're going to need 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.

Driver of that would be a cloud software development that in 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 in <unk>.

Get them out consistently we would aim to go to market.

Okay, and you think that it'll be late this year or early 2023.

Correct.

And I think that's right Jim.

It's really hard to pinpoint, but 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 alright, thank you.

Yeah.

Youre welcome.

It appears there are no further questions at this time I'd like to turn the call back to Kevin.

No closing comments.

Hey, Thank you operator, we appreciate it and thank you everybody who joined the call and I look forward to updating you next quarter.

We work hard to make that a good call I think it's going to be a critical.

Critical call.

And I think it's gonna be it.

<unk> back half so until then.

I take your pet to the veterinarian if you can get an appointment so with that I will sign off and everybody have a good day. Thanks.

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

Okay.

Yeah.

[music].