愛德士 (IDXX) 2003 Q1 法說會逐字稿

Good day, everyone, and welcome to the Idexx Laboratories First Quarter 2003 Earnings Review Conference Call. Just a reminder, today's call is being recorded. For opening remarks and introductions, we will now turn the conference over to Mr. Jon Ayers, Chairman and CEO of Idexx Laboratories. Please go ahead, sir.

Thank you, Amy, and good morning. As is the usual custom, I'd like to start by asking Conan Deady, our VP and General Counsel to review our safe harbor statement.

Thanks, Jon. As always, I'll remind everyone that statements that we may make on the call regarding management's future expectations and plans and the company's future prospects, including statements relating to expectations about revenues or earnings for future periods, the status of products under development, or the timing of new product introductions, constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Factors that could cause actual results to differ materially from those reflected in these forward-looking statements include those that are discussed in our annual report on Form 10K for the year ended December 31, 2002, which is on file with the SEC. In addition, any forward-looking statements represent our estimates only as of today and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we disclaim any obligation to do so, even if our estimates may change.

Thank you, Conan, done with the usual flair. Now let me introduce the other members of management who are joining me today. Sitting with Conan and me and Merilee Raines, Corporate VP, Finance, and Lou Pollack and Bob Hulsy, both Corporate VPs of the Companion Animal Group. And connected by phone is Dr. Erwin Workman, Chief Scientific Office and President of Idexx Pharmaceuticals, which, as investors know, is part of our Companion Animal Group.

I'd like to review the first quarter performance and some comments about our product lines and businesses, and then, as per our usual custom, I'd ask Merilee Raines to review our financial performance for the quarter, and then I'll take it back and review our outlook for the year before we open it to your questions.

As you saw in the press release, with revenues in the first quarter of $109m, we achieved 13% year-over-year growth, consistent with our expectations for accelerating revenue as we enter 2003. By the way, this is a record level of sales for the company in any quarter, interesting because the first quarter is usually one of the lowest revenue quarters of the year.

Earnings per share came in very strong at 34 cents per share, fully diluted, an increase of 62% over prior first quarter earnings. Excluding a one-time charge in last quarter's first quarter of $1.9m, or five cents per share, EPS growth would have been 31%. I might comment that these were good, solid earnings, without any unusual level of net, non-recurring gains or losses.

Free cash flow was $26m for the quarter, which was very strong. To remind investors, our definition of free cash flow is pretty straightforward, and takes into account changes in operating working capital and capital expenditures, but excludes cash from options exercises, any acquisitions, divestitures, stock repurchase, or financing activities. We feel free cash flow is a useful measure because it indicates the cash, the operations of the business is generating, after appropriate reinvestment. A table reconciling operating free cash flow to-- operating cash flow to free cash flow is included in our press release, which, if you've not seen it yet, is posted on our website, www.Idexx.com. I'll come back to that website a little later.

Cash and investments on the balance sheet at the end of the quarter stood at $184m, and that remained deminimus at less than $1m. We're certainly very pleased with this financial performance for the quarter. We achieved our expected growth in revenues and volume, which, due to lagging growth in costs and some operating efficiencies, generated a higher level of earnings growth.

I'd like now to turn to our two business segments, starting first with the Companion Animal Group. As you all know, our revenues for this segment are 81% of the total company. In the first quarter, revenues were up 15% year-over-year, 3% of which was due to favorable currency translation. We continue to be pleased with the progress we are making in the scales of our next generation laser-sight hematology blood analyzer platform. We delivered, installed, and recognized revenue on 183 units in Q1, and our backlog at the end of the quarter stands at over 275 units. Also in Q1, we launched LaserCyte in Canada and Europe, with some initial installations. Average unit price continues to exceed our expectations, and came in a little over $16,000 for the first quarter units sold. I might not that we continue to estimate an average unit price of $15,500 as a forward model assumption. This AUP is lower than the list price of $18,900, primarily because we give the customer some credit for any existing hematology machine that we take in trade. These are our own [vet auto rate] or competitive equipment.

Investors will remember that we had forecasted that we would double the Q4 installation units of 114. I'd say that in retrospect, an actual growth of 60% in the installed units for the quarter, over the prior quarter, was a great accomplishment. Our philosophy starts with putting the customer satisfaction first. Our goal during the LaserCyte launch is not to maximize placements in the short term, but to conduct a careful and disciplined ramp-up that will establish a successful product platform in the long term. An important reason why we lowered-- had a lower level of revenues in Q1 was that we held up shipments, essentially, during the first 45 days of the quarter, to implement a new software release, which addresses issues that arose in the field with many of the Q4 installations. And that software release also, of course, went out to all existing customers and they're all on that new release.

It's an example of how we are cautiously going in the rollout of manufacturing, installation, and training and after-sale service, at a level that ensures the best possible user experience. Having said that, our target for the second quarter is a 35 to 50% sequential increase in quarter over quarter growth in revenue units. While a full year number continues to be harder to predict at this point, given our approach on customer satisfaction, I would give a rough estimate of 1,300 to 1,400 units.

With the program proceeding, we're learning about this new technology and its use in the clinic. We're devoting substantial resources to observing and understanding the performance of the instrument in the field, and the experience of our customers. Many of the earlier customers that we have are those that normally do a very high volume of in-house hematology. For example, one of our customer installations that I was talking with the other day, does 25 to 50 runs per day. And our instrument is really getting a workout at that location. So we get great information about the instrument and the customer experience from these clinics. Our installed customers appreciate LaserCyte's ability to permit the veterinary clinic to obtain comprehensive hematological information at the point of care. Actually, 24 different hematological values from a single blood sample. It's a powerful technology and we are learning about just what kind of customer training and support they require as they integrate LaserCyte into the clinic work flow.

For example, we are working with customers on how to use and interpret all the diagnostic information. We've also been refining some of the customer operating procedures to address an issue that would come up occasionally in some customer locations. Of course, customer training and support play to Idexx's strength. With the feedback we now have as a result of some months of experience, we know that the machine design has correctly targeted the veterinary’s need for in-clinic hematology testing. We have now successfully opened a new era in veterinary medicine, having introduced a diagnostic system designed from the ground up to meet the unique needs of companion animal care. Our continued strong backlog is a testament to the strong medical and business value proposition of LaserCyte, and we continue to feel very confident about the broad attractiveness of the instrument to veterinarians and the business model for Idexx Laboratories.

We also continued placement of our other hematology and our clinical chemistry instrument, the QVC Vet Auto Read and the Vet Test, respectively, and between these two categories, we installed 591 units. With LaserCyte, that would total 774 units, a little over last quarter's total instrument installation of 766 units. Our numbers here show the continued strength of these other instruments at the same time as the launch of LaserCyte.

Moving on to instrument consumables and rapid assays, here, you'll hear me reference our reported revenue growth in each line of business. However, please keep in mind that year-over-year revenue growth in our in-clinic diagnostic business can fluctuate from quarter to quarter due to a variety of factors, some of which are unrelated to demand at the clinic level. In the U.S., changes in distributed inventory levels for this year and last, and other miscellaneous factors, can affect reported results, sometimes substantially. Internationally, we also have currency as an added factor. So, because reported revenue growth in a particular quarter isn't always indicative of what we believe to be the underlying growth for a particular product line, I will also give our estimate of an underlying rate of growth of demand that we see for each of these product lines.

Now, for instrument consumables, overall worldwide reported revenues grew 17%, or 12% in constant currency. Really strong volume performance in Europe partially offset slower growth in the U.S. Given the trends that we see, we see underlying demand in instrument consumables growing at 4 to 6% range, before any LaserCyte impact. Consumable growth is supported by three strategies. First, a variety of marketing programs to support the practice of better medicine, and thus, consumable utilization. Second, continued instrument placements in both hematology and chemistry. And third, strong customer loyalty and retention.

LaserCyte consumables do not generate any meaningful incremental volume in 2003 due to the low installed base and their replacement in many locations for currently operating Idexx QVC Vet Auto Read Systems. The LaserCyte consumable stream will become more of a factor as the installed base grows in future years.

Turning to our Rapid Assay line in this segment, these are the single-use point of care kits that test for the presence of certain infectious or vector-borne diseases. Worldwide reported sales were up 16%, or 14% in constant currency. Our estimate is that the growth in underlying demand for Rapid Assays is in the 7 to 9% range. Reported sales growth benefited from an easy Q1, 2002, compare, as a result of U.S. distributor inventory reductions achieved that quarter.

OK, breaking Rapid Assays down further, our largest Rapid Assay product line, canine test kits, reported sales growth of up 17%. We continue to see success of our heart worm line, and in particular, the 3DX panel test, which screens dogs for three parasitic diseases in a single test -- heart worm, Lyme Disease, and [arlikiosis].

Feline test kits are the other important product line in our Rapid Assay business. Here, our principle product is Feline Combo, which tests for two infectious diseases in one test, Feline Leukemia Virus and Feline Immunodeficiency Virus, or FIV, which is the cat version of HIV. Feline Combo is the only FIV in-clinic test available in the U.S. market. Reported sales for feline test kits were up 15%.

We had a very strong performance internationally, with slower growth in the U.S. We continue to spread the medical message to test all sick cats, and cats at risk -- these would be your outdoor cats -- and all kittens, for these two diseases. Given that we have such low penetration in the usage of the FIV test, particularly in testing at-risk cats, we remain confident that there's a lot of a runway ahead of us for this product line.

Turning now to distributor inventories, as you know, we sell our test kits and instrument consumables in the U.S. through distribution. At the end of the quarter, we ended at $10.1m, or 3.2 weeks, of demand, for test kits and consumables in U.S. distributions, which is down $3.2m from the fourth quarter. While we continue to improve our processes with distribution, the ending level of 3.2 weeks is lower than the normal range, which I would characterize now, with new efficiencies, in the 3.5 to 4.5 week range.

Turning to our lab services line of business, the key service offering of Idexx's Companion Animal Group, laboratory services worldwide continue to show very nice growth on sales of just under 14% versus first quarter, 2002, with 3% coming from favorable currency translations. Lab services has been one of the business lines that's really done well, implementing productivity programs that have driven continued improvement in its operating margins. We think that this business can continue to grow in the 8% to 10% range.

Our computer systems business sales growth in the first quarter was 1% over prior year, which is lower than normal, although orders and backlog look to be promising for future quarters. We continue to project launch of the next release of Cornerstone for July of this year. Margins also continue to improve in this line of business.

At Idexx Pharmaceuticals, our pipeline includes two products currently in FDA review. The first, Nitazoxanide, is our proposed treatment of Equine Protozoal Myeloencephalitis, a debilitating neurological condition in horses. This is an attractive market of about 50,000 treatments annually, plus or minus. Nitaxonanide has an 81% success rate in open trials.

To review the status of this product, we were requested by the FDA in the summer of 2001 to provide more clinical data on safety, and we conducted a safety trial, based on the FDA's recommended protocol. This data was submitted to the FDA in April 2002 in an amended New Animal Drug Application, or NADA. In December, we received a letter from the FDA that indicated that our application was not yet complete in terms of labeling and other documentation in what is referred to as the Freedom of Information Act portion of the application. Based on this latest feedback, the FDA has indicated that they could consider our application to be complete in terms of product safety. In February of this quarter, as expected, we resubmitted the Nitaxonanide NADA after meeting with the FDA and incorporated their suggestions for labeling. Although we would hope for a quicker turnaround at the FDA, given the nature of the remaining issue, the best assumption is that they'll take their normal six to nine months to review the application and approve the drug for launch. And our 2003 outlook continues to reflect that assumption.

Our other product in FDA review is our topical, non-steroidal anti-inflammatory drug for [insed], the drug [Diclofanax]. This product is being developed for the treatment of lameness in horses. The active [Diclofanax] is formulated in a lipsomal delivery system, which provides targeted drug delivery that is applied topically at the point of lameness. That means it's easy to use and there's no issue with client compliance. Importantly, the topical application avoids the undesired side effects, such as gastro-intestinal problems, that can be seen with the systemic non-steroidals. We believe the treatment of lameness is a very attractive market. Currently, about $60m is spent annually on lameness and sore joints in horses. We have not yet heard anything from the FDA regarding our application. Again, to review, we submitted an amended NADA in June of 2002, answering the FDA's question regarding the manufacturing portion of the application. The efficacy and safety portions of the application were already deemed to be complete. While we cannot be sure of the timing of the FDA's response, we hope to receive some indication from the FDA in the very near future, and assuming a complete application, to be in the position to launch this product in the equine market in the September timeframe.

Further back in the IPI pipeline, the development of our [Telmicacine] antibiotic product for cats is progressing nicely. We are now in the process of submitting various technical sections, including pivotal efficacy, pivotal safety, the chemistry manufacturing and controls portion, so-called CMC section, and labeling, to the FDA under their phased review process. We anticipate that all pertinent information should be submitted within the next two weeks.

Now, for a very quick review of our other operating segment, the food and environmental group, which contributes 19% of our total revenues, we saw top line growth of 5% in the quarter, as a result of strength in foreign currencies. Our production animal services business had year-over-year growth of 8%, all of which came from currency translation, due to a significant European customer base. The comparison for this business was especially tough, because in the 2002, it was unusually strong for PAF. In the quarter, we signed an agreement with Proteum Sciences to support the development of a diagnostic for BSE, or Mad Cow Disease, and we are continuing the development effort in this area.

Our water quality testing business achieved 8% growth for the quarter, due to strong volumes, particularly in Europe, and 4% of this was from currency.

Our dairy business brought down the segment's growth, with a decline in sales of 8%, or 12% without the benefit of currency.

So, a pretty strong quarter altogether, with solid progress on LaserCyte, very strong international performance, even above the currency benefit, good performance in laboratory services, and further distributor inventory reductions, offset by some tough comparisons for PAS and some weakness in our dairy business.

At this point, I'd like turn it over to Merilee for a more in-depth review of the financials before I conclude it and then open it up to your questions.

Thanks, John. As already mentioned, total revenues for the quarter were $109.2m, which was an increase of 13% from the first quarter of 2002. International revenues of $33.2m increased by 26%. Strong currencies augmented overall top line growth by $3.6m, or a little bit better than 3.5%. Relative to guidance for the first quarter, exchange favorably impacted operating margin by about half a million dollars, due to the net impact of hedging, local currency expenses, and transaction gain.

For the second quarter, we expect revenues to grow by 12% to 14%, driven particularly by growth in Rapid Assays, instrument consumables, reference laboratories, and the continued ramp of LaserCyte. Revenue growth for the full year 2003 should be approximately 13%, to $465m, with 5% to 6% of that growth coming from LaserCyte and pharma launches. The gross margin, at 47%, was about 2.5 points better than the first quarter last year, and about a half a point better than last quarter, and expectations. The favorability from expectations was primarily due to selling price and to manufacturing variances. For the balance of 2003, we believe we are on track to achieve margins between 48% and 49%, to produce a total year gross margin of about 48%. Margin improvements will come from volume, leveraged from higher revenues, continuing manufacturing efficiencies, and clinical chemistry units, rental units, becoming fully amortized.

Turning to operating expenses, R&D came in at $7.3m in the quarter, or about 7% of revenues, compared to $7.2m, or 7% for the first quarter last year, and we expect R&D to remain at a 7% level for the balance of the year.

In discussing the remainder of the P&L, I will provide year-to-year comparisons first to our 2002 reported numbers, followed by comparisons to 2002 numbers, excluding the effect of the CEO succession charge, which was $2.9m, pre-tax, $1.9m post-tax, and five cents per share in the first quarter last year.

So, SG&A expenses, at $26.7m, or almost 24.5% of revenues, were in line with expectations, as we add resources to support revenue growth. For the first quarter of 2002, reported SG&A spending was $25.6m, or 26.5% of revenues. Excluding the CEO succession charge, 2002 first quarter SG&A was $22.7m, or 23.5% of revenues. For the balance of 2003, we would expect SG&A to range between 23 and 24% of revenues.

Operating profit, at $17.4m, was 16% of revenue. The margin was about a point above expectations, driven by higher-than-anticipated gross margin and slightly lower operating expenses. The reported operating profit for the first quarter of last year was $10.3m, or 11% of revenues, and excluding the charge, was $13.2m, or 14% of revenue. Based on our thinking about gross margin and operating expenses for the balance of 2003, we expect that operating margins will increase 1 to 2 points or so, to 17% to 18.5% over the remainder of the year, and total year operating margins should be about 17.5% of revenue.

Net income of $12.1m, or 11% of revenue, compared to net income of $7.2m, or 7% of revenues last year, as recorded, or $9.1m, 9% of revenue, excluding the charge, an increase of 33%. EPS of 34 cents for the quarter compares to 21 cents for the first quarter last year, as reported, or 26 cents, pre the charge, an increase of 31%. We expect EPS to be 42 to 43 cents for the second quarter, and around a $1.58 for the year.

With regard to the balance sheet, cash and investments increased by $21m in the quarter, to $184m. Cash from operations was $30m, and we purchased $4m of fixed and other assets. Inventory, at $69m, decreased $6m compared to the end of the fourth quarter. Receivables for the quarter were $52m, which was up $6m from the fourth quarter, and DSO at 41 days was up one day from the end of the year and down seven days from the first quarter last year. We repurchased 257,500 shares of stock for about $9m in the first quarter, which brings the total repurchase under our ten million share authorization to 8.9 million shares.

Looking at the balance of 2003, we would expect to DSO remain relatively constant and inventory levels should range between $70m to $75m. Fixed asset purchases are forecast at approximately $20m. Back to you, Jon.

OK, I just want to turn back to our website, that I mentioned earlier, and take a minute to invite investors to visit a new section. We've added the 2003 annual report and the proxy statement that was filed with the SEC last week; of course, we'll be mailing those out, for the annual meeting. Even more importantly, we've added a new section, summarizing and referencing details of our corporate governance practices. The board of Idexx Laboratories has been hard at work in the last 12 months, documenting and updating our corporate governance policies, and you will see the results laid out in full detail on the website. While there are many elements of our corporate governance I could present, suffice it to say that we are now rated by an independent firm, Institutional Shareholder Services, ISS, as being in the top 10% of companies of the S&P 600 Small Cap in terms of governance, and the top 5% of companies in the Biotech and Pharma Group. Our objective remains the sustained creation of shareholder value, and our corporate governance practices are designed to support that performance.

You've already heard from Merilee about the 2003 guidance. Based on the strong profit performance of the first quarter, and the current trends in our business, we're raising our guidance for 2003 earnings per share to $1.58, and we're also, as you heard from Merilee, have the second quarter guidance of 42% to 43% The revenue growth outlook for the year remains at 13% over prior year, at $465m, and the second quarter, 12% to 14%.

So, just to conclude my opening remarks, Idexx Laboratories is a great business model, with market leadership in our related businesses, and a very unique combined position in animal health. In the first quarter of 2003, we saw a little more acceleration in the growth of revenues, great earnings, and strong cash flow. My priorities continue to be focused on double-digit top line growth through the new product launches that come from our great technology portfolio, such as LaserCyte and pharmaceuticals, and to accelerate penetration of our underserved markets through great distribution of our broad product offering, and of course, to continue our track record of continuously improving operational excellence, supporting our gross margin and asset management performance.

So with that wrap-up, I'd like to know open it up for your questions.

Thank you. And the question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit one, on your touch tone telephone. If you are using a speakerphone, please make sure your mute function is turned off to allow your signals to reach our equipment. We will proceed in the order that you signal us, and take as many questions as time permits. Once again, please press star-one on your touch tone phone to ask a question. If you find that your question has been answered, you may remove yourself by pressing the pound key. We'll pause for just a moment to give everyone an opportunity to signal for questions.

We'll take our first question from Rick Wise with Bear Stearns.

Good morning.

Good morning, Rick.

I wanted to jump right into the LaserCyte performance and maybe you could give us some more thoughts -- I think we all understood exactly what you said, in terms of the fulsomeness with which you're rolling out the product, but is the strong backlog a sign of strength or weakness? I mean, is it that you were not able to ship, and so you had this built up? Can you help us understand a little bit better what the backlog represents, and maybe as well, talk a little bit more about your full-year projection, now which you all think the units shipped might be more like 1,300 to 1,400 units? I might have thought that with a little slower start in the first quarter that we might still be, you know, see an acceleration through the year. Is it product performance, is it the lack of support. Just help us understand your thought process in giving that guidance. Thanks.

OK, first, I think I understand the gist of all those questions, and they really relate around what the field reception is and the gain in performance. We are-- I might just turn it to Lou Pollack for a minute to talk about the, you know, the order rate and the backlog, but I will tell you, though, that we're being-- we're not particularly gated by the demand for the product. On the other hand, we don't want to take orders that have too long a lead time associated with them, because that would be a- that would be a customer dissatisfier, so we're actually building the backlog consistent with what we think is our strategy and capacity to deliver and install units. Lou, you want to make comments on the field response?

Good morning, Rick. Just echoing what John said there, I think we've been very much on target with the expected demand from customers for this product, and we're satisfied that the acceptance has been good to date.

What were the other elements of your question?

Again, I think what we're trying to understand is, I mean, here's a product, it seems to be launching reasonably well, but you've pulled-- I mean, obviously the performance for the first quarter, however excellent, is less than you had suggested, and the guidance for the year is less than you had suggested initially. I'm just trying to make sure that we fully understand maybe the following things. One, are the product performance issues totally resolved and you're shipping as you expected? And number two, has there been anything in the customer acceptance that makes you think that the sales cycle is going to turn out to be longer, because you need more sales support, or something like that?

OK, first of all, the product is performing, I think, quite well in the field. I mean, nothing is ever perfect. I mean, even vet [labs], after ten years, you know, the machine doesn't work perfectly in the field, and that's why we have a pretty outstanding customer support organization. But we have-- we have a number of really great examples. One of the things that's going on here, Rick, is a surprising number of our higher volume customers were some of the earlier purchasers, and you know, they're very important customers to us, and so this is a brand-new technology, no one is used to using laser float cytometry, which would be, you know, as we all know, is a big iron system in the clinic, and there's been some-- we really wanted to take care, in our sales and aftermarket, to support to make sure that the customer experience is great. So, we had some issues as we mentioned -- there was some issues that we fixed with a software release, and we'll continue to have software releases to continue to refine the system.

That happens even again in our existing systems. We had an issue with an air vent that would tend to get obstructed, and we've added a rather simple customer procedure, it's about a 20-second procedure that they do at the beginning of the day and at the end of the day, to ensure that the vent is clear. And you know, it's taken us a while to foresee that, with the customer field installations, and second of all, then get that information out to our customers, as well as things like just, you know, basic sample prep and stuff like that. So, it's all, I think, in the normal, ordinary course of launching machines, and our approach is to make sure that, you know, that the customers-- that we are able to give them the right kind of training and support. So, I'd say we feel great.

We're going to be the- the American College of Veterinary Internal Medicine, ACVIM, has accepted a paper that we're going to be presenting in June, which compares LaserCyte to another hematology analyzer, a laser float technology, that's used in many reference laboratories, and it's a paper that demonstrates that both dog and cat samples, over 300 samples, were measured over a wide range of results, and results that could be normal, above normal, or below normal. The precision, the repeatability, the linearity of the instrument was also tested, and you know, there's a lot of different parameters here. Several routine parameters were evaluated in this study, including red blood cell counts, RBCs, white blood cell counts, WBCs, hemoglobin platelet count, hematacrit, and red cell size, called mean corpuscular volume. And in this study, the two analyzers compared very well. So, these are-- we're very confident that this is a-- that the machine has outstanding performance and has so in the field.

Let me just ask one last follow-up on this, then I'll get back in line. When you reported the fourth quarter in late January, or early February now, you were still reasonably comfortable with an outlook of, I think, 1,500 units for the year. What's changed in the-- and presumably, at that time, you knew that you were sort of delaying because of the software fix. What's changed between our outlook then and your outlook now, just help a little to understand that. Thanks.

Well, you know, we actually, as I said, we essentially shipped all of the units that we shipped in the first quarter in the second half of the first quarter. And the software-- until we got the new software release, and that took, actually, a little bit longer than we had anticipated, so that's one thing that's changed. And the second thing is, I think we're appreciating now that because this is pretty different technology, it's pretty revolutionary technology, there is a fair amount of training and customer support in order to- in order for people to understand. It's a different methodology. Most veterinary clinics use the QBCR reader, which is a fundamentally different and more limited technology than laser float cytometry, and so there's-- we've appreciated that there are some kinks we have to work out in the system, and in customer support, and we wanted to make sure we did that as part of a careful and disciplined ramp-up.

Thank you very much. That's very helpful.

Moving on, we'll hear from Tim Lee with Merrill Lynch.

Good morning. Just following up on a couple more LaserCyte questions here -- just wanted to make sure I was clear on one point -- there's no manufacturing issues at this point that's going to limit the rollout, as it's a matter of just management holding back shipments. Would that be the right way to look at it?

Yeah, I don't think we are manufacturing constrained. Of course, you know, we haven’t demonstrated a run rate of many times what we're doing right now, but I would say that in the near term, we are not manufacturing constrained.

OK. And second, in terms of your focus on the customer satisfaction, I mean, what type of feedback mechanisms do you have in place? I mean, is there a return policy? Has any field units been returned because of customer dissatisfaction?

We have a pretty significant customer support group, and this group not only, of course, receives in-bound calls, but they make out-bound calls, and we monitor our clinics. We make a couple calls a month to see where they stand in terms of satisfaction and if their issues have been resolved and such, so we have a pretty detailed effort here. It's one of the strengths of Idexx. It's part of the organization that we've built over time. You know, you're always going to have a range of people from highly satisfied to people who have outstanding issues, and we have that. I mean, we had-- we've got, you know, I've talked to clinic after clinic that maybe they had an initial issue, either a learning issue or an instrument issue that we've resolved, and they're now really happy, so-- and we have others that we're-- that we're in the process of working with. But generally, you know, vets want this technology and they're very-- they're patient, they understand it's a new technology, particularly these early adopters, and you know, they want to learn and they want to know how to use the system, so we're-- you know, that's our strategy, too. We're not going to get into-- you know, I don't want to get into the details of what our revenues, our units are, in terms of the details there, but I can tell you that there is no material issue. We sell these things-- they are sold, as you know, as-- they're not sold with recourse. They're sold-- you know, there's no return policy, if you will.

And then just switching gears to the pharma side, you had talked about your initial submissions on [Telmicacine]. When can we expect the final data submissions, so we can kind of start the clock on the approval process?

I'll turn that one over to Erwin.

Hey, Tom. I think as Jon said, we're hoping to get everything submitted within the next couple of weeks. We've already submitted the pivotal efficacy data. So hopefully we can start the clock sometime in early May.

So, given the normal timelines, we can potentially see this like a mid-04 type of event, approval? Optimistically?

I think I've been notoriously bad at predicting. FDA seems to be running at the eight to ten-month turnaround time now, so we'll hope for the best there.

Great. Thank you.

I might also comment that this is a slightly different process that may-- that we're using a phase review process. That may be a little bit longer than if we filed a definitive NADA.

Thanks.

As a reminder, if you would like to ask a question, please press star one. We'll take our next question from John Smith with Deerfield Management.

Hi, I have two questions. One on LaserCyte, just a little one -- were there any significant number of units shipped but not yet recognized in revenues, and then secondly, on the NTZ refiling, I don't really understand the necessity for refiling the application after all that had gone before that. I was wondering if you could explain how that came about. Thanks.

OK, there are always going to be units where we haven't completed the installation process, and we don't recognize revenue until the unit has been shipped, installed in the customer with one of our representatives, and the customer has signed off on the installation, so it's a very rigorous process. So we've always had unit that have not completed that process.

I'd like to turn to Erwin to answer the other question.

We have a little noise on the call -- I don't know of it's coming from the operator?

Go ahead, Erwin.

Yes, with respect to Nitaxonanide, as you recall, the primary issue at the end of last year was safety. We did the additional trial, which the FDA has accepted and considers safety complete. One of the last things that the FDA reviews is labeling, and that includes the actual labels that go in the product, the package inserts, the Freedom of Information Summary, and I think they had really only, after the safety was deemed complete, really looked carefully at that, and there were a number of changes, more than they could have said, ``OK, we'll just go ahead and process it.'' So we had to meet with them, discuss how they wanted the labeling to be done. We made the changes, and resubmitted, and that's pretty much their policy with NADAs.

So you're saying it was just the scope of the changes, or the unusual number of changes, from what they had reviewed?

I think part of it is, they may not have reviewed all the labeling very carefully, and they did have some substantial changes.

OK. And Jon, I just wanted to follow-up - I was wondering if there was a significant number that you could give us of LaserCytes which may have been--

Well, it wasn't a significant number.

Not significant? OK, thanks.

Moving on, we'll take a question from Chris Ott with Select Equity Group.

Hi, Jon. I just want to ask a question on the Companion Animal Group. You all-- when you went through some of the product lines, for instance, the instrument consumables, was up 12%, I think, you said in constant currency, and you projected growth of lower than that, of 4% to 6%. Rapid Assay kits as well, I think was 14% in constant currency, and you projected the underlying demand at 7% to 9%. And then you also said that the inventory levels at the distributors were down. So, I was wondering, you know, is there-- on your projections, are you being, you know, conservative relative to what we had, or is there a specific reason that you would expect growth to be less than what it was in this quarter? Just wondering if you could just comment on that a little bit more?

Chris, it is a little bit confusing, so the reason is that you were right, the distributor inventories are down from the fourth quarter. Last year, though, they were down more. So the compare is favorable.

OK.

That, combined with some currency benefit on the international, were the two primary drivers and I would say that our underlying growth rate is, you know, I don't know it's called conservative, but it's something that we think is-- you know, we'd love to be able to do better, but it's what I think we're comfortable banking on.

OK, OK, sounds good. And could just remind us, then, what the inventories were at the distributor level a year ago?

They were, I want to say, $13.3m, and Merilee is going to confirm that number for me.

Yes, at the end of the first quarter, last year, Chris, they were at $18.3m.

I'm sorry, $18.3m?

At the end of the first quarter of '02--

OK, I'm sorry, the change was down. So they were $18.3-- they were 10.1 this quarter and they were 18.3 this quarter last year.

OK, so, you know, even the growth that you showed in some respects in the last quarter--

What's different is the-- the reduction in distributor inventories in the quarter last year was $4.2m. That was from the fourth quarter to the first quarter.

OK. And am I correct in this year, it was almost $8m, year-over-year?

No, year-over-year, but quarter-over-quarter, it was $3.2m.

You mean sequentially, $3.2m?

Yeah.

Yeah, OK, fair enough. Great. Thanks a lot.

We'll take a follow-up question from Rick Wise with Bear Stearns.

Hi. A couple of ones. Just a couple of small things. First, tax rate -- it was 34% in the quarter, I think, Merilee, we've been using 33.5. Is this-- are you bumping that up a touch for this year?

It should be 33.5, Rick.

For the year, still, averaging 33.5?

Yes. It should have been that for the quarter as well.

OK, maybe I didn't calculate it right. The R&D also was a touch less than we looked for. Can you help us understand a little bit, you know, where the R&D spending is going, and you know, again, why is it less this quarter as opposed to, you know, the average for the year? That kind of thing?

We are-- we have three major thrusts in our R&D and then a lot of little things. First is instrument platforms. Not just LaserCyte; other instrument platforms, including a chemistry instrument platform. The second major thrust is pharmaceuticals. And the third major thrust is what I lump into a general category called infectious disease, which includes both Rapid Assays and the Production Animal Services business, and that category would be, for example, our work on BSE, and then there's just a lot of smaller things. But those three make up the large majority of the R&D.

And I think the R&D part is up year-over-year. It's probably-- Merilee, do you want to comment on that?

Rick, the differential maybe from expectation is really driven by a couple of things. One of them is just the timing for some outside contract services, so it's really just a slight delay there. And the other aspect was that we had planned on adding resources in R&D this year and we're just a little bit behind in that staffing plan from what we had anticipated.

Pretty aggressive build.

That's very helpful. And last, maybe you could flesh out your comments on dairy-- actually two things -- on the weakness in dairy and how that outlook will be the same or different for the rest of the year, and consumables, maybe, you know, more detail on that as well. The strong Europe, weak U.S. -- what's going on in each market that-- and maybe what turns U.S. around, if anything?

OK, on dairy, we expect that that business will- we lost some U.S. business a little more than a year ago, and that affected our year-over-year quarters. We think that's going to essentially stabilize after the first quarter. Maybe down slightly in the second quarter, but stabilize, and so we're-- we actually feel rather sanguine about the dairy outlook.

The second comment was on instrument consummables. We had a very-- we had really good growth outside the U.S. I think we're doing a great job in terms of continuing to place instruments there, of all kinds. As you know, we launched LaserCyte in Europe; that wasn't a big deal in terms of volume, but it was a nice step forward in that program. But we also placed-- continue to place Vet Test and QBC Auto Reads in those locales, and our outside U.S. growth in instruments was actually double-digit, even adjusting for exchange.

The U.S. was weak, particularly in January and February. It was low single digits. We had a pretty good-- actually, really outstanding March. It does fluctuate from month to month and quarter to quarter, and I think it's probably-- you know, we tamped down our outlook in that business just ever so slightly. I think we used to 6 to 7, and now we're saying 4 to 6% growth, not in the U.S., but that's kind of an overall number, and it's just conservatism there and taking into account, you know, the first quarter and longer-term trends that we see.

And have the March trends continued into April, or-

I think we had two weeks in April. There's not much you can say. The-- generally, yes, but it's very hard to make any conclusions on one or two weeks' data.

OK, thank you.

As a final reminder, if you would like to ask a question, please press star one. We'll pause for just a moment. Once again, if you would like to ask a question, please press star one.

Sounds like we're all set.

Thank you. That does conclude today's question and answer session. Thank you for your participation, and have a wonderful day.

Thank you, everybody.