Q3 2022 Heska Corp Earnings Call
[laughter] standby excuse me.
And welcome to the Heska Corporation third quarter 2022 conference call.
Today's conference is being recorded.
I would like to turn the conference over.
Mr. John <unk> Director Investor Relations. Please go ahead Sir.
Thank you and good morning, everyone welcome to Heska Corporation's earnings call for the third quarter of 2022.
As a reminder, today's conference is being recorded I am Johnny Gardy head of Investor Relations at Scott and with US. This morning, we have Kevin Wilson, <unk>, 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 the call to questions prior to.
Discussing heska is resolved 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 in this morning's earnings release, Heska 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 Heska does not intend.
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 third quarter 2022 results. Please note all references to growth refer to growth compared to the equivalent period in 2021.
Otherwise noted.
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.
Before I begin I'd like to encourage participants to review this morning's release.
You'll find a detailed and helpful and I'll try to refrain from unnecessarily reading it to you now.
As usual Catherine will cover the financial results from the quarter and I'll take some time now to share a few of my own thoughts.
To begin Theres, a lot of great performance and last quarter's results, especially in profitability year over year.
North America POC lab consumables were up 11, 4% gross margins on a consolidated basis up 180 basis points.
GAAP EPS up 78, 9% and adjusted EBITDA up 12, 3% are all fantastic results, especially in light of some softness in reported revenue.
Well, it's always great to beat and be in today's macro environment and in Heska specific progress overall, I'm pleased and I congratulate our team on controlling so strongly the things within their control.
Mitigating those things that are less controllable.
We are a much much stronger and better positioned company today than we were in January .
As we dive in further I think it is helpful to frame the periods impacts into two categories. The first being the macro drivers or what we have less control over and the second being heska specific or what we have more control over.
The macro drivers are widely known.
Foreign exchange is a big one inflation.
Inflation interest rates pandemic revenge travel labor constraints supply chain energy inflation and that visit trends round out the list.
Heska is impacted by each and in my opinion done an admirable job mitigating each.
Third quarter for Heska fit squarely into what we are seeing and hearing within the industry.
And this is reflected in our guide for the whole year result.
I wont drone on about any of these broadly felt trends here, but we'll be happy to answer questions or provide more commentary around those of interest to participants in the Q&A.
Specific to Heska in the things, we can and should control we have done well in many but can do better.
So far in 2022, we were slower than intended and launching and accelerating traction for things like Rapids internationally.
Heartworm domestically.
And element aimed to Europe and into North America corporate contracts as quickly as intended and in time to make a financial impact on 2022 that could overcome the accumulated macro headwinds.
That's the day merit for today and it's reflected in our guide for the whole year result.
The good news is that the calendar is now our friend entering 2023 as we lap these the merits and they turn into positive contributors.
Rapids around our warehouse and ready to go with a full menu internationally and heartworm approved by regulators for sale domestically.
Element aim is in our international warehouses sales and marketing materials and teams in each core country already and orders are being placed and Phil.
In North America has of November after a longer process than anticipated element aim is now authorized for hospital selection and installation in nearly all of our corporate contracts to serve good demand rising up from the hospital level from some of our largest customers.
<unk> medical officers or convince performance has been very well received our CE seminars are extraordinarily well attended.
Our pipeline is great and placements and utilization are growing regularly and consistently pointing to element aim being a solid differentiating and growing success that we see strongly contributing to our financial and portfolio performance for many many years.
To the extent, we are doing a forward looking probability exercise. These 2022 delays are now all set to reliably flip into strong reported and comparable contributors in 2023.
Add to these the growth that we expect from 'twenty to 'twenty three launches of our new cloud based <unk> and our exclusive new cube that cancer screening.
All supported by what we anticipate to be more favorable trends in prior year comparable.
And our line of sight for 2023 growth becomes clear and confident.
Timing is good.
For nearly five years, we have planned and publicly communicated that heska was targeting 2023 to transition from our five year build phase to our five year when at scale and when it innovation phase.
We've assembled an amazing and very unique asset the time is ripe and we are ready to go.
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.
I will take you through the quarter performance as well as how we see 2022 wrapping up seven weeks ago.
We reported total revenue of $61 5 million growth of two 1% and seven 1% in constant currency.
North America segment revenue was $40 3 million for the third quarter, which reflects growth of six 7%, primarily driven by POC lab consumables growth of 11, 4%. Our consumable growth included increased utilization of newer product launches from investments in innovation such as aim until cytology.
As well as pricing gains from our annual subscriptions price adjustment for the greater than 4% or CPI, which occur throughout the year based on contractual agreement dates P.
TLC imaging drove about three 4% growth on a very high comparable period. We also saw growth of 24, 3% percent within our pvt.
Which reflects timing of Tri heart shipments as compared to the prior year period.
Our International segment report.
Reported quarterly revenue of $21 2 million a decline of five 7%. This represented growth of seven 3% on a constant currency basis as foreign exchange was a significant headwind in the quarter.
Contributing to the growth as our new President and the practice information management software market. In addition to continued transition of our customers to subscription program within PSD law.
The macro environment in the European region impacted in vet visits and consumer spending coupled with our purposeful transitioning existing customers to subscription program in which we share price discount in exchange for longer term contracts and other benefits resulted in a decline in sales of consumables.
Approximately two 7% on a constant currency basis.
Consolidated gross margin expanded 180 basis points to 43, 7%.
North America segment delivered gross margin of 46, 5%, an approximate 50 basis point decline due to product mix.
International segment gross margin was 38, 4% an improvement of 512 basis points.
Rationalization from the aforementioned strategy of transitioning existing customers to long term POC lab subscriptions drove margin expansion on consumables that these software sales and services also favorably impacted gross margin.
Total operating expenses were 27 5 million roughly in line with the prior year.
Adjusted EBITDA was $6 3 million or an adjusted EBITDA margin of 10, 3%, a 90 basis point reported improvement or 50 basis points in constant currency.
It is driven by improved gross margin gain partially offset by increased investment and recent acquisition for the development of new technologies and products.
We had a loss of <unk> <unk> per.
Per share in the third quarter adjusted earnings per share was 41, an increase of 21 over the prior year period.
Our balance sheet is secure the cash of $161 1 million consistent with our stated strategy. We continue to actively evaluate capital deployment opportunities and have committed 20 million $25 million in cash as part of the acquisition consideration is in bio, which we announced in September .
As we wrap up 2022, we expect continued headwinds from foreign exchange International economic uncertainties impacting short and long term capital decision as well as price sensitivity and consumer spend.
<unk> commercial success from our true rapid launch, which missed the 2022 selling window and will not be recaptured this year will contribute in 2023 pressure on labor inflation and financing for new capital equipment placements and training is expected to affect growth in imaging devices, including digital radiography ultrasound.
And it has given me tell cytology and the final quarter of this year. We have also experienced supply chain and forecast changes within our contract manufactured products impacting 2022.
With these factors in mind, we believe it is prudent to expect consolidated revenue to be roughly in line with the prior year reported revenue, which as we've noted reflected historic pandemic related growth for the company.
This revenue outlook represents around 5% market growth.
America consumable growth of 8% to 10% as expected which include net net.
Net subscriber gains in 2022 international consumable sales as reported will decline approximately 12% due to foreign exchange, but remained in line with prior year, excluding currency impacts.
Profitability expectations remain largely unchanged and that we expect to gain 100 to 200 basis points on gross margin and an adjusted EBITDA margin of approximately 11% as we continue investment and planned product launches to drive 2023 and beyond when we had been targeting for some time to transition from a five year build plan.
Our five year when at scale and when it innovation plan with that we would like to open the call for your questions operator.
Thank you if he would like to ask a question. Please.
Star one on your telephone keypad.
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I guess Thats star one to ask a question, we'll pause for just a brief moment to allow everyone an opportunity to signal for a question.
And we'll take our first question from Chris Schott with J P. Morgan.
Great. Thanks, so much for the questions I guess the first one is just I was looking for a little bit more color in terms of what changed from the two Q call until today, because it seems like some of the the challenges we've been facing in the business I think you've articulated throughout the year, but they did seem like they get a more acute I guess over the last few months, so maybe specifically.
U S. I think you were talking about visit starting to recover but the guidance is coming down a bit helped me, they're a bit and then Europe . It seems like a little bit more dramatic pivots and growth rates. So also just elaborate on the other trends youre seeing there and then just have one follow up after that.
Yeah, Chris I'll start it's Kevin.
On the Q2 call.
We weren't seeing the things in our numbers quite as much.
And I think Europe has come in a little bit worse I think if you look back at the new cycle over the last three months certainly with Ukraine.
We hear kind of energy inflation. So we have examples.
Where.
Winter heating costs double triple and.
And I think if you pull 1000 or more euros out of a monthly budget for for a German family I think that causes some potential caution certainly cautious caution.
Also on the in the veterinarians. So I don't think it is a new trend is just that it showed up in our numbers more.
And we think it would be prudent to just kind of extrapolate that going through the fourth quarter as well.
I think I would answer the question in terms of in terms of U S. Veterinary visits I think we're seeing the same thing that everybody else is seeing.
It's kind of gone from from down 4% and visits year over year to.
Two to three.
To you now.
Two two and a half and I'm just using broad numbers everybody is with them.
Within 10 basis points 20 basis points of each other from what we're hearing.
And I and it's a trend, but it doesn't show up in your numbers instantly.
So we.
We could be positively.
Surprised that maybe that trend continues and you and you get closer to a year over year, maybe you get down into the ones.
That trend continues but maybe you don't and it was six seven weeks left in the quarter. We just think it's prudent to just say the environment is what it is we're seeing it in our numbers. So let's go and extrapolate that through the end of the year and and and.
And make sure that we're ready for year over year 23 to get back to growth.
Okay, and then just one follow up and then what additional I guess the follow up was just given the macro environment in Europe does it makes sense they point to either pull back or slow a bit the things like element aim is it just the rate environment I guess to be launching a new product and would just love your thoughts there and then the second one is I know you.
We're not updating 2023 guidance right now, but just maybe qualitatively can you talk about how you're thinking about those targets in light of the environment. We're seeing I guess do you expect this to rebound next year. Those are those targets still make sense or do we need to maybe rethink those a bit just given what's happening, particularly in Europe .
Yeah, I think I think it's prudent to rethink.
<unk>.
To rethink twenty-three numbers as well, but we do think that most of these trends.
Moderate, but again I'm not a currency speculator. So forex, obviously is a huge one but I I don't see the currency moving another 15%, 20% off of where we are today I don't see interest rates.
Having the same.
Velocity and amplitude of moves and all those kinds of things so.
I think it's prudent to look at it offsetting to that.
Are some new products that we think will contribute for next year that that really weren't in our original 23 multiyear guide so theyre going to be puts and takes there.
But we do think 'twenty three is a more positive environment in terms of launching element name into Europe .
No. There is still plenty of places plenty of pockets and plenty of.
Continent, well performing businesses in Europe , it's not it's not like everything is shutting down.
So I think we're having good response on element name.
Candidly, our execution was a little bit slower and exacerbated by some of these concerns that we pointed out.
We had slower execution getting.
Element name International ice in terms of languages.
In terms of marketing materials in different languages installation training materials training videos those types of things. So we have to own some of that some of that was execution.
And some of that as economies, so I'm not trying to blame the whole the whole change in 'twenty two on the economy. Some of that is execution, but I think we've got it right now just took an extra month or two to get it right and Unfortunately, you can't get those months are to back in terms of making a contribution in 'twenty two.
But they will contribute in 'twenty three now that we've got it right.
Alright, thank you so much.
Youre welcome.
Thank you next we'll move on to David David Western Berg with Piper Sandler.
Hi, guys. Thanks for taking the question sorry, if theres any cut out and I am calling internationally right now and so.
So I just wanted to.
Touch on that that European point.
I definitely appreciate the structural.
Issues in Europe , just from a you know a.
Fundamental macro standpoint, we're all hearing yet.
The different companies, but.
How do we feel how can we feel comfortable that you have it.
You continue to have a structural sound strategy, there that theres nothing maybe heska specific and if theres anything qualitatively you can point to or even quantitatively I mean, I did see instruments did do.
Better than expected on an organic basis versus recorded basis I mean is it.
That person that evidence that you really are executing there and it really is just a matter of law.
The macro just improving.
Yes, so I look at broad based if you see broad based slowdown.
Not execution.
I think you'd have to believe that right to the teams didn't get up 30 days later, just forget how to do their job.
Five or 10% less well.
Right and so I think that's real there's a lot of noise, obviously with Forex and everybody can do math on that.
On a point to that too much but it's real.
Interest rates are.
Interest rates are real.
Those affect the ability for people to buy things like ultrasounds.
Digital X ray machines kind of capital investments.
So again I don't think there I don't think there has gone skill specific I would point out to the east.
<unk> numbers, but let's just say our international business, 35%.
We're concentrated in Germany.
So a bigger portion of our international is concentrated in Germany, and I and I do think the the.
Ukraine affect certainly the gas inflation and in securities around that are affecting German society more than say, Spain, France, and some of the other countries I do think they've secured enough gas. We're hearing some positives from our German board member.
And some other touch points, but I really think were about in line with what you're seeing economically probably a little bit more specific to heska, because we're more concentrated in Germany, which has had a more difficult economic news cycle.
Got it Okay, and then let's turn our attention back to the U S.
Yes.
Two parter, then I'll kind of move on there.
So.
How do we feel comfortable about market share I know.
I mean should we continue to look at that consumables growth number and see that 11%.
<unk> be excited about that and that continues to be a market share gainer and then as you're layering on element aim you had there was a lot of commentary about the slowness.
And that affected your guidance.
Is element aim in the U S operating as expected.
I think I'm kind of hogging questions by doing this to partner so I'll stop there.
[laughter].
So with element aim we're not disappointed.
We're not disappointed with the trends, we're not disappointed with with demand where a little bit disappointed with our with our speed of execution. So so I would I would point to a couple of touch points on an element name.
Clinically is performing wonderfully.
Internally I think our teams would say, it's probably the best product launch in terms of performance.
That we've done and so so when you have a product that's performing well.
Remember, we reinvented it designed it manufactured it.
<unk> deployed at consumables supply chain all of these things and I think it's gone extraordinarily well and then customers are thrilled with it where could we have done better in 'twenty two.
You know, we're we have a strength in corporate accounts.
And and we had demand from hospitals and corporate accounts, but we didn't get out ahead of contracting and corporate accounts and what I mean by that is when a hospital. That's owned by a large corporation says I really want one of these new element aims and it's not on their contract and it's not in their system.
We have to take a step back and we have to go through their process. We have to convince now the chief Medical officer to sign off on it now finance has to add Skus legal has to review. The addition, and then it has to get pushed down to the regional managers for approval and then the hospitals can be can be serviced and we didn't really accomplished.
That were roughly 90% of our corporates are now.
Under contract with element name added.
So that their hospital demand can be served and installed but again, we probably lost.
A couple two three months that process has taken a little bit longer with some corporate some more than others, but in general and and that's.
Probably 50%.
The initial target element name customers because those tend to be some of the larger.
Bigger users bigger hospitals, so those things are in the number as well, but I'm thrilled with element name because it performs well.
<unk> is a problem the veterinarians and technicians love to have solved and.
And it performs really well like people who have it are thrilled.
And we've got different utilization levels. We've got we've got a handful of customers that are 2000 25000 in consumables utilization. This year and then a handful of customers who are just now getting their feet under them. So long term I think it's going to be a great contributor and I think its a successful product launch just a little bit slower than we'd hoped.
Great. Thank you.
Youre welcome.
Thank you and next we'll move on to Elliot Wilbur with Raymond James.
Thanks, Good morning.
Kevin I wanted to go back and ask a question.
Around the vet clinic visit trends I think last conference call you and Katherine had highlighted the fact that you believe that the company is delta or exposure to the percentage and visit declines was something on the order of <unk> five.
5.75, or or helping them in that range and I'm. Just wondering if that is similar to the experience that occurred in the third quarter and then maybe just bigger picture thoughts in terms of the overall trend in that number I mean, there had been expectations for recovery Bye bye.
Year end that seems.
Somewhat unlikely at.
At this point, but as we shift.
Our thinking towards 2023, I mean, what are.
You're thinking about in terms of potential inflection point.
That number yes, so much of the industry narrative I guess has revolved around the idea that it's largely capacity driven but it seems like theres. Other factors that are increasingly beginning to sort of weigh on the return to the organization in terms of clinic visit trends. So just maybe get a somebody get some high level perspective on that.
That thought.
Then I have a follow up as well, but I'll stop there for the moment.
Yes, Elliot I'll trying riff a little bit I'll keep it reasonably short.
Yes, if that visits her off for.
And in terms of.
Visitors we're seeing.
Unit volume.
In the negative three negative two and a half.
And I think those trends are largely in place. So when when vet visits are off three two and a half we're not capturing necessarily 100% of them and it's not a direct link right. So it's not it's not going to be a ratio where you can say, okay that visits are off two and a half of <unk> seven five multiple to it.
And we will get exactly what unit volumes are going to be.
Cause I think diagnostics seem to be holding up a little bit better I think spending per visit.
As a reasonably good indicator that diagnostics are holding up.
A little bit better than vet visits.
We think the trend is good but again 30, 60 90 days and these snapshots.
They're they're they're helpful, but they're not precise.
In terms of normalizing I think that's a super important word theres still a ton.
Of noise in the year over year comparisons.
Even on labor constraints and some of those things and so we're watching it but people tend to get comfortable and they tend to do better with constraints once they normalize right once they get more comfortable with it. So vet clinics are adjusting pet owners are adjusting everybody is adjusting and theres still an awful lot of noise on year over.
Year.
In terms of vet visits and things like that so I think it's a little bit early to say we are.
It's it's all clear, but I think the trend is definitely not negative for I think we're under negative three at this point, probably somewhere in the twos and maybe by the beginning of next year.
We start getting back to growth.
And I don't know, maybe second second and third quarter of next year.
It's a trend.
Okay.
And.
Just following up on some of your comments earlier with respect to how the dynamics youre seeing in the EU market on the on the capital equipment or larger dollar ticket item purchasing patterns. Just wanted to ask basically answered my question in terms of what you may be seeing in the U S or with higher inflation.
And higher cost of financing greater macro economic uncertainty.
How much is that negatively impacting capital equipment decisions.
On the part of our independent bets in terms of the larger corporates.
Okay.
Catherine I think were.
We had a great.
<unk> fourth quarter and third quarter last year.
And imaging and so I don't think we're looking certainly for growth over that.
With the headwinds that we pointed out I don't think any of our numbers that we're calling out are or kind of cliff events.
We see a million here a half million there are a million here half million there.
So what I mean by that is ultrasound and in Canada.
Struggle, where digital radiography might be doing okay going into the.
The November December selling season for capital equipment in the U S tends to be tax driven.
In terms of section 179 accelerated depreciation and some of those things.
But again I don't see it as a cliff event, but I definitely see it as a as cautious I think it's logical for people to see that.
Did it it's more expensive to finance it.
And capital equipment has a higher ticket item upfront I think just requires a little bit more confidence. So we hear that from the sales team and I think that's real cap Cathryn do you have any.
Additional color on that.
No I agree I think the last half of last year for.
Especially the U S. As it is.
Even Europe into Q4 from an imaging standpoint.
Pretty high.
Yeah.
While our record revenue for <unk>.
For hospital in that regard.
The full year guidance didn't necessarily.
Yes.
And I think youre right, but based on what we're seeing or a certain headwind that we're just being more cautious about giving them trending through the third quarter.
And was there any anything further Mr. Wilbur.
We'll move on to Ben Hayner with Alliance Global partners.
Hey, guys. Thanks for taking the question.
Congrats on the.
The clearance of the true rapid.
Heartworm test can you remind us how you plan to bundle that are in the U S or what kind of the commercialization plan is here.
Yeah, you know you followed the company for a long time. So so that's been one of my my White whales.
To get heartworm approved and so that [laughter].
October 'twenty and that was a big day.
So so in terms of getting into that market. We can we exited heartworm several years ago and getting back into it with a wonderfully performing tests and good margin.
Also comes at a good time for us because we we manufacture very nice heartworm preventative.
And so the Merck Celsis heartworm preventative Tri heart as a heska product.
And we also have the ability to market it under our own brand and we think that a test and treat.
Is good we think that is.
Super High performing tests, we think we have the highest performing tests on the market.
Had a had a very aggressive price can get some market share.
And so we loved the Rapids business. It's just it's got a moat around it and part of that moat is regulatory and the hardest thing to do is to get heartworm tissue samples the natural way.
And it's just taken many years to get there. So so yes test and treat and then also there are thousands of shelters in the United States that every time, they take up a pet in.
Heartworm test as required.
Heartworm test required on the way out and then of course heartworm preventative to make sure that they don't they don't affect the whole the whole population within the shelter.
We see a just a number of really good markets there.
Well I guess the question is will those be kind of sold as more of a one off type product rather than say a.
Include the true Rapids, and your bylaw to extend with Heska for another.
Six years.
Oh, absolutely will we will approach our subscriber customers and make it part of our bundle.
Everybody understands the power of a bundle and the power of having.
Every every leg of the stool.
And having a rapid business I think is an important piece of that so yeah, we'll we'll definitely be going to market with our own customers corporate accounts same thing shelters.
They don't necessarily tend to be one off they tend to be they tend to be in bulk. The other thing is is being ready for the main heartworm selling season, which tends to be spring is important as well and obviously, we miss that in 2022, and obviously, we won't Miss that in 2023, so kind of a year over year comparison, that's a nice positive for us as well.
<unk>.
Okay. That's helpful. And then can you discuss the AI powered aspects.
The <unk> system there.
Yeah. So so so there are two things that are really happening in perms, well, maybe maybe three but theres just a general upgrade cycle.
<unk> of mobile and cloud deployment.
The ability to run on touch screens mobile phones.
And cloud to upgrade update all those types of things. So I'll just call that cloud mobile architecture, and I think that's going to cause almost all legacy systems in the veterinary space to go through an upgrade cycle. The second thing is the AI piece of predictive medicine piece.
And that does a number of things.
Super helpful.
For instance, based on age species way breed all of those types of things and presenting conditions. There are clearly certain disease processes that are going to be more prevalent in some of those combinations than others and the ability for the AI than to predict and recommended the next steps in terms of the next diagnostic and then event.
We recommend the next steps in terms of the pharmaceutical and even the diet.
Is super important in addition to that.
The AI has the ability to speed up workflow a tremendous amount.
You're starting to see deployments and things like X Ray for instance, where the AI is is able to pick up with an.
<unk> really good.
Recognition rate a lot of pathology off of X rays point, those out and speed up workflow and improve and improve the diagnostics.
And then recommend the next steps and so those next steps might be and ultrasound ultrasound next steps might be.
Fine needle aspirate, the fine needle aspirate goes on a slide and goes through our Heska Beutel cytology business.
So all of those things.
I will be very helpful for us and one of the things that we find and we shared this with our with our industry peers.
The breakdown of next steps requires that every veterinarian have the latest information from the latest papers on.
On what the diagnostics reflects too and a lot of times, there's a breakdown somewhere in that process and all of the testing they clinically should be done it doesn't necessarily always get done and I think AI will will support that decision, making process and make sure that all the testing that should be done is getting done so it's super Big Revolution.
It's going to also help.
Tremendously with that labor constraints, it'll speed up workflow quite a bit.
And on that should be done.
That.
Gets to be done or is it becomes done because they are suggesting because that also do you think help with.
Some of these veterinarians, who may not be the most comfortable on selling.
Whatever the next.
Diagnostic in the chain might be does it make it easier for them to because that we should run this that and the other thing.
Pet owner in your view.
Absolutely look we're all creatures of habit and if our habit has a hole in it we don't know, it's probably a blind spot.
Look veterinarians want to do the best Medicine. They can and then they want to present level, a medicine level be medicine level C medicine within the constraints of the finances of the pet family.
The AI is going to give them a tremendous amount of information to do that without falling into those holes those blind spots and remember there's a great amount of variability in the.
The age and the training of veterinarians globally, and so certain markets, we'll do more testing of certain things in certain markets will do far less testing and it's not because the patient <unk>.
<unk> breed weight age all of those types of things are different.
Spanish dogs and cats, because they speak Spanish probably don't have different testing needs in German dogs, who speak German and so some of those holes that youll find are just that universal global best practices aren't necessarily making its way into each of those geographic markets.
I do think that the AI and then the easy to deploy.
And upgrade and update the AI capabilities via our cloud architecture will be supercomputing and Theyre just literally.
And thousands of legacy systems out there that are totally incapable of this and I think it's a big opportunity.
Okay.
That's very helpful. Thanks for taking the questions guys. That's it for me.
Thank you.
Thank you and once again, ladies and gentlemen, if he would like to ask a question today you may do so.
Star right.
And next we'll move on to Erin Wright with Morgan Stanley .
Great. Thanks, where are you now in terms of the installed base for element aim and <unk> and how should we be thinking about that in terms of your goal for the year as well as heading into 2020 three in terms of the element named strategy and installed base there. Thanks.
Yeah. So element aim will come in below our 500 target.
For the year I think we've called out the discrete reasons, mostly mostly delays in execution.
And getting to market in Europe .
30 to 60 day delays in some of those markets from what our plan was and then also and getting added to the corporate accounts, which again, we've we've accomplished that as of November , but we can't get the full calendar back going into next year I think both of those things are are in place.
Supply chains in place so just as in place localization languages in place I think we're in a pretty good a.
A pretty good place, we're not remediated in quality or performance issues. The product is performing wonderfully.
We've just spent a little bit slower on the draw and getting the product out to our own people and getting it executed on our own corporate accounts, but I think those are largely.
Behind us so I think we're in a pretty good place.
Our element a number is in our guide.
For the balance of the year and so I think we've communicated.
Munich hated what that looks like for 'twenty, two and I think 23 looks better.
And what are some levers that you can pull if fundamental trends don't get better from here either from a macro perspective or just in Europe for instance, and in <unk>.
How are you thinking about your visibility on growth now into 2023 in light of its dynamic right.
Yes, that's a great question again, you control what you can control.
And so so product launches are critical and it's a reasonably weak answer Aaron but.
But it's real.
If you're late in 'twenty. Two you are late not not you failed.
And you're ready for 'twenty three the things that you didn't capture.
Financial economics in 'twenty to become positives in 'twenty three day by definition become that incremental contributor and I think we've got a handful of those so.
We were maybe a little optimistic on the calendar, but not the end result, and.
We lost 30 days here in 60 days there in various different things, but going into 'twenty three of those things are secured I called out Rapids Heartworm in North America, we would hope to have the heartworm.
Approval in time at least for the late selling season through the summer and we Didnt get it from USDA, we did secure it.
On October 20th and we'll have it going into the next selling season.
In the spring so things like that.
Our growth drivers that we just didn't capture in 'twenty two that were confident will capture in 'twenty three because we hurdled the barriers.
That answers the question I've called out a couple of those on the call not all of them.
Great. Thanks, so much.
Youre welcome.
Thank you and we'll take Mr. Jim Sidoti with Sidoti and company.
Hi, Good morning, Thanks for taking the question Kevin can you talk a little bit about the.
<unk> acquisition, while you made it now and what do you think the impact would be gross margin and operating margin.
So I'll take the strategy piece first light deck.
This is an extraordinary technology, we began work with them. That's that's our element high plus platform.
And it's.
It's just extremely scalable and when I say scalable the menu was scalable to performance the ability to put multiplex tests on it so it does immunoassay tests.
It's been very well received.
But we wanted to scale it.
Thousands of them in the field not hundreds.
And we wanted to accelerate product development, we made an investment in a cancer screen, our new acute cancer screen.
And so that runs on our <unk>.
Light deck developed and manufactured element I plus platform and so that investment taking that in house allows us to go faster and allows us to go with a much bigger scale, we think the cancer screen is going to be.
A very very large business, we think the performance.
The market that it serves.
Cancer tests that serves a $50 or below.
Tests that can give you a cancer screening in minutes at the point of care, we think that's a winner.
And the veterinarians seem to agree so like for instance on our last webinar, we attracted 1900.
Registrants.
61% of those said they were very likely are likely to do cancer screening in their practice.
And another 28% said they werent sure.
We had a laugh I'm not quite sure what the other 11% are thinking.
But that's just one webinar.
Webinar that was conducted about a month ago, and so theres clearly a huge demand for taking it in house and being the technology owner.
Of those those things intellectual property and then the ability to make thousands of analyzers and millions of tests at scale and the timing was really good.
Hmm.
BARDA U S. Government funded had had also recently invested about $35 million.
Into a very high capacity.
Super modern Super automated facility.
That's able to reach FDA and USDA level manufacturing and it happens to be in Longmont.
Colorado, which is about 30 minutes from our corporate headquarters. So I was just just the fits across the board, we think that that product platform can be a huge franchise builder. We think it's super unique and we think it's going to be a halo product for us So a great investment.
Yeah, I can take the two.
2023 question Jim.
Obviously, we haven't provided much detail around the impact to 2023 just in general.
We'll update our.
Guide for 2023, and during our fourth quarter call, but given that we are acquiring a not yet online rather significant manufacturing facility.
With great capabilities.
And sometime in 2023, which is the data is not yet definitive we do believe it will be dilutive to operating margin and adjusted EBITDA margin in the near term.
As we start to scale that facility and as Kevin mentioned, coupled with the timing.
Timing of the cancer screening and monitoring test as well will impact.
Amount of dilution.
And the extent to how long we would expect that so we'll have more detail in February .
Okay. My question was actually more of a longer term impact on gross margin.
When everything is running their capacity what do you think a good target is for the for Heska as gross margin.
I think it's it would be I think it's too soon for us to communicate that on a long term.
At this point.
Okay, but I assume you do think it'll be fairly accretive to where you are now.
Acquisition over a long period of time for sure.
Gary Thank you.
Yes.
And one point on that Jim.
Thanks for that.
<unk>.
When we say that we're in a build phase and we're now transitioning into into scale.
The ability to scale something like an element I plus does two things just in the last couple of years, we've launched element aim which is a fully proprietary heska owned invention.
And we make it.
And has great margin profiles, especially as scale increases and we've done the same thing now with element I plus.
Traditionally point of care is chemistry hematology.
Some of these newer products as the products of the future. They are Differentiators I think heska can claim to have the most interesting innovative and possibly.
Influential point of care portfolio. So we do a great job in just a traditional chemistry hematology piece, but I think the future is going to be won on new testing things like cancer screening.
And things like element aim so so owning those as heska owned inventions, and then having control of our destiny and the scalability and just the inherent value of assembling those assets I think is extraordinary so.
Yes, it will be accretive to margins, but it's also much more than that.
Thank you.
Youre welcome.
There are no further questions I'd like to turn the conference back over to you Mr. Wilson for any additional or closing remarks.
Hey, Thank you. Thanks, operator, thank you to everybody who joined the call.
Go vote, I guess, its voting day, including you David.
Your international but I hope you were able to vote.
So we'll we'll we'll look forward to updating you.
On our full year and our 23 guide here on our next call. So until then be well stay safe and yeah go vote. Thanks Bye bye.
Thank you and that does conclude our teleconference. Today, we do appreciate your participation you may now disconnect.
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