愛德士 (IDXX) 2003 Q4 法說會逐字稿

Good day everyone, and welcome to today's IDEXX Laboratories fourth quarter 2003 earnings analyst conference call. Just as a reminder, today's call is being recorded. And now at this time for opening remarks and introductions, I would like to turn the conference over to Mr. Conan Deady, Vice President and General Counsel. Please go ahead, sir.

Good morning everyone. In a slight departure from past practice, and in order to keep things a little interesting on the call, I am going to start today's call with our Safe Harbor language and then I will turn it over to John and Merilee.

Statements that we may make on the call regarding management's future expectations and plans and the Company's future prospects constitute forward-looking statements for purposes the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations of future events which are subject to risks and uncertainties. These risks and uncertainties include the timing and success of new product introductions, demand for our products and market acceptance of new products, availability of products and materials supplied to us by third parties, intellectual property protection of products, and the impact on our business of government regulation and government approvals, competition, technological change and litigation.

A further description of these risks and uncertainties is contained in our quarterly report on 10-Q for the quarter ended September 30, 2003, 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 specifically disclaim any obligation to do so, even if our estimates change.

We are, as always -- also joining us here today are some other members of our management team. We have Bill Wallen, our Chief Scientific Officer, Quentin Tonelli, and Bob Husly, also Officers of the Company, Ed Garber, our Director of Financial Planning and Analysis, and Merilee Raines, our Chief Financial Officer. And I would like to turn it over to Merilee now just to go through the numbers.

Good morning everyone. As John mentioned, I am going to first give you an overview of our fourth quarter financial performance, then I will turn it back over to Jon for some color on the business, including guidance for 2004. We will then open it up to you for questions.

As you have seen today, we reported fourth quarter earnings of 34 cents per share, which compared to 36 cents for the fourth quarter of 2002. I want to mention a few items impacting earnings both positively and negatively which are important to understand as we talk about ongoing business performance.

The first and most significant is the non-cash pretax charge of $7.4 million, or approximately 12 cents per share post tax. This was for the write-down of certain manufacturing equipment. Everyone will recall that we announced this write-down last October when we disclosed the extension of our relationship with Ortho-Clinical Diagnostics, which supplies the dry slides used in our clinical chemistry instruments.

At that time we announced our commitment to develop a Next Generation clinical chemistry system based on Ortho's dry slide technology, which has made our Vet Test platform so successful over the years. Based on this commitment we discontinued development of an alternative clinical chemistry system. And the write-down relates to the equipment that we had purchased to produce the consumables to be used in the discontinued system.

Second, we had about a 3 cent favorable impact to EPS associated with a reduction in our effective tax rate for 2003. You'll notice that we adjusted our tax rate to 31.5 percent for the full year 2003 from 33.5 percent, which we had been estimating in previous quarters. About 1 point of the rate reduction is associated with the $7.4 million asset write-down and revisions to international taxes. The remaining 1 point reduction is primarily the result of ongoing tax planning initiatives, and therefore we expect our tax rate for 2004 to be at 32 percent, which is down 1 point from the 33 percent rate which we had projected previously for 2004.

Last, we had a couple of events which together favorably impacted earnings by about 3 cents. We revised estimates for the collectibility of a customer receivable and a royalty accrual associated with a technology licensing agreement which we signed in the fourth quarter. So taking these items into consideration, our performance net of these items was in line with Street expectations.

Revenue for the quarter of 124.8 million grew 18 percent over the fourth quarter of last year. Normalizing for a 5 percent benefit from foreign exchange rates, the revenue growth is a very healthy 13 percent overall, with the growth in the Companion Animal Group of 16 percent, Food and Environmental Group growth of 2 percent.

Growth in the Companion Animal Group was driven by the strong performance of our LaserCyte hematology platform, which produced $7.7 million of revenue on placements of 433 units, and by continued momentum in our infectious disease rapid assay and reference laboratory businesses which grew by 19 percent and 14.5 percent respectively over the fourth quarter of 2002, normalized for currency.

International revenues were $40 million, or 32 percent of sales. And inventory at our distributors at year-end was approximately four weeks based on forward-looking demand. The gross margin of 48 percent was in line with our guidance and down a point or so sequentially. As we had indicated at the time of our third-quarter earnings release, we expected the gross margin to decrease from the third quarter to the fourth quarter due to a couple of factors.

First, seasonality of our higher margin rapid assay products benefits the revenue mix in the third quarter. Second, there was a favorable impact in the third quarter from a revised estimate for health benefit costs due to experience that was more favorable than our original estimate. We expect gross margin as a percent of revenue to be in the 49 to 50 percent range over the over the course of 2004.

Research and development of $8.3 million remains at 7 percent of revenue both sequentially and year-over-year. And we expect research and development to be approximately 7 percent of revenues of revenues in 2004.

SG&A of $30 million, or 24 percent of revenues, compares to $24 million, or 23 percent of revenues, in the fourth quarter of 2002. As a percent of revenue, this spend is a half a point or so above our guidance. We have made investments in our Companion Animal Group sales and marketing efforts over the course of 2003, not only to support the LaserCyte launch and ramp, but also to drive revenue growth across our other Companion Animal products and services. We expect SG&A to be about 24 to 25 percent of revenues for the full year 2004, with relatively higher percentages earlier in the year.

The operating margin of $15.3 million, or 12 percent of revenues, compares with $18.5 million, or 17.5 percent, for the fourth quarter of 2002. The operating margin was negatively impacted by the $7.4 million due to the write-down, and positively impacted by $1.6 million as a result of the other factors I described earlier. Adjusting for these factors, the operating margin becomes 17 percent of revenues.

For 2004 we expect that margins will be 18 to 19 percent for the full year, with the first quarter in the 16 to 16.5 percent range. This is consistent with the ramp we expect in our return on investment in sales and marketing over the course of the year.

Cash and investments ended the year at $256 million, which is an increase of $14 million from September 30. Cash from operations was $25 million, and purchases of fixed and other assets were $4 million, to produce free cash flow of $21 million. We repurchased 270,000 shares of stock in the fourth quarter at a cost of $12.7 million. The total amount remaining under our current authorization is 2.5 million shares.

DSO was 38 days, down 1 day sequentially, and an improvement year to year of 2 days. Inventory of $75 million increased $6 million from September 30, due primarily to the timing of purchases of consumables for our clinical chemistry platform. Turns were 1.9. As we look forward to 2004, we expect DSO to remain at current levels, inventory to be at levels of 70 to $75 million, and fixed asset purchases of about $25 million.

I would like to now turn it over to Jon.

As you can see, we had a strong revenue quarter driven by a very strong sales in our Companion Animal Group. Our strategy has been to bring all the products and services of our Companion Animal business to our customers in a coherent and integrated way. We have continued to invest in our sales, marketing and distribution channels across the board to support and augment growth. Certainly, I would like to congratulate all of our sales and marketing teams across IDEXX for the fine overall topline results in the fourth quarter.

Turning now to some of the specific lines of business, particularly the Companion Animal Group segment, you all saw that in November we received FDA approval for Navigator, our novel treatment for EPM serving the equine market. Fortuitously we received that approval a few days before the major equine veterinary conference of the year, and fully launched the product at that conference. The first patients were being treated with Navigator just two weeks after the launch. And we're very pleased with the regulatory approval, the timeliness and execution of the launch, and most importantly, the early customer reception.

Due to its efficacy, we believe that Navigator will become the preferred course of treatment in EPM positive equine cases in the U.S., given the seriousness of this parasitic CNS disease, especially if it is not treated effectively early.

Please also note that we're not yet in the season for EMP. Horses contract the parasite primarily by feeding outdoors, so 85 percent of the cases are diagnosed between May and October. Because of this seasonality and the fact that we ship this product not to our distributors but direct to our customers, our actual sales in the fourth quarter were not significant. However, even though it is very early, we have been pleased with the sales to date given the time of year.

Also we signed an important agreement concerning our raw material inventory of the patented active ingredient in navigator, nitazoxanide. And a bit of background, I think, is important year. We currently own raw material, that is active agreement, that based on our current dating must be converted to finished goods by 2005. We can now exchange a portion of our current active inventory for a like amount with extended dating, allowing us to delay the cost to convert to finished goods until needed by the market, thus improving future cash flow. This agreement also includes a royalty buy down. The agreement, along with the FDA approval of Navigator, is another step forward in our continuing focus on asset management, and particularly inventory management.

As to the other two products in our pharmaceutical group in FDA approval, SURPASS and tilmicosin, there is nothing new to report, which is not a surprise to us as we were not expecting to hear anything of significance from the FDA at this time. We continue to expect an FDA approval and launch of our SURPASS topical inset for equine use around the middle of year, although timing here with any regulatory process is always hard to predict.

Turning to our ramp in assay business, revenue growth was 21 percent of which 3 percent was due to currency, as Merilee mentioned. We benefited from our continuing success converting customers from heartworm only testing to the use of 3Dx, our three-way parasitic disease screen, and from continued growth in our flagship feline product, Feline Combo.

We also benefited from the continuing temporary absence in the rapid assay market of one of our competitors. We estimate that about 3 percent of our Q4 rapid assay growth was a result of their absence. We also had strong rapid assay growth for the full year and reported 18 percent, due primarily to the same factors I mentioned, and in addition, benefiting from not having reduced inventory at our distributors in 2003 as dramatically as we did in 2002. And this was primarily a first-half effect. We estimate also that about 1.5 percent of the full year growth in rapid assay was the result of the absence of the competitor in the latter half of the year.

In January this Company announced it has reentered the market with in clinic heartworm tests. In addition we know of one other company that has entered the market, so competition in heartworm will be picking up.

This month at the industry's largest companion animal veterinary show in Orlando, we introduced a new in clinic SNAP assay test for pet side diagnosis of Giardia. This is an intestinal parasite that affects dogs and cats, if anyone cares to know. It also affects humans, but our test is one for pets only. The test replaces a traditional microscopy method of diagnosis performed in clinic, which has been shown to be highly inaccurate, missing as many as 50 percent of all positive pets. While we have only very modest sales forecast for this product, interest by customers has been very good. We will start shipping this new SNAP product next month.

While this was a great quarter for rapid assay, we do not expect this growth rate will be sustainable over the long term, and we continue to see underlying growth in rapid assay line of business at 7 to 9 percent, all things considered.

Turning to our line of world-class in clinic diagnostic instruments that make up the IDEXX Vet Lab, instruments in the area of hematology, chemistry, electrolytes and endocrinology. Our ramp up of our newest hematology platform, LaserCyte, continues to be on track. As mentioned in the press release, we delivered and installed 433 systems in the quarter, consistent with our expectations for a disciplined launch process. Customer reception continues to be very positive.

The sales of consumables for our complete line of instruments, including the chemistry platform Vet Test, which makes up the majority of this category, were a bit of a disappointment. And had 7 percent year-over-year growth for the quarter, of which 5 percent resulted from the benefit of currency. For the year, growth was 12 percent, again, of which 5 percent was the result of currency, and for the year another portion was due to the favorable compared to last year's first-half when we aggressively reduced distributor inventory.

In the quarter we were impacted by slowness in Europe where we had a tough Q4 2002 compare, and some slowness in our U.S. clinic level sales. Our outlook for the underlying growth of instrument consumables continues to be 4 to 6 percent, supported by a variety of strategies, including our single slide packaging launch of last November.

As we mentioned in our Q3 call, we will we now provide Vet Test single chemistry slides in a 12 pack in addition to a 25 pack. This is in response to requests by our customers to be able to buy these slides in smaller quantities, so as not to risk outdating. And in fact, we have had a number of customers who do not buy the singles because of that very concern.

We expect to see a gradual increase in utilization as a result of this launch, as it takes advantage of the unique flexibility of the Vet Test to run any menu of chemistries called for by the veterinarian. This launch has gone well in the U.S. in November, and will be rolled out internationally in the first-half of 2004.

We are also seeing good momentum with our computed radiography line of diagnostic imaging instruments. While the number of placements was not meaningful to the IDEXX's revenues in 2003, we believe we are in a position for some healthy growth in this line in 2004, given the progress that we've made in adapting the system to the veterinary market, and with the support we have received from key industry opinion leaders.

IDEXX Laboratory Services had good growth worldwide at 14.5 percent, net of the currency impact. And we expect the underlying growth rate in this business to in the 9 to 11 percent range. Computer systems had essentially flat sales, which was a bit of a disappointment, however, the backlog at IDEXX Computer Systems goings going into 2004 is three times the size of a year ago.

Our Food and Environmental Group's growth was reported at 10 percent, and at constant currency was 2 percent, and was driven entirely by our water quality line where growth was 13 percent for the quarter 8 percent for the year, net of currency impact of about 5 percent for each of these periods. This performance essentially matched our expectations.

Another line of business in the Food and Environmental Group segment is the Production Animal Services, which had a difficult quarter and year for growth coming off of an extremely strong 2002 at about a negative 5 or 6 percent for both the quarter and the year in constant currency terms. As we have discussed in the past, this is a very cyclical and also a very international business. This is the business line that is developing a test for BSE, or mad cow disease.

During the fourth quarter we received USDA approval for our chronic wasting disease, or CWD test, a post-mortem test for this prion-based disease in deer. Since Christmas Eve the U.S. public has learned more about the disease classes called TSEs, or Transmissible Spongiform Encephalopathies, including mad cow disease, or BSE, maybe even more than the public cared to know.

As you know, the market for rapid testing of BSE in the U.S. does not exist today. On January 9th, the USDA announced that they have begun accepting license applications for rapid tests for BSE. We have submitted an application for our BSE test using the same Seprion ligand technology that is the basis for our previously approved CWD test. We believe this technology has a unique advantage in the sample preparation phase of the test process that eliminates the need to predigest the sample.

We are also in the approval process for our BSE test in the European Union. Approval times in both cases are uncertain given the regulatory process. As to the market development for rapid testing in the U.S., we're following the guidance of the USDA, which is taking a practical and scientific approach to protecting the beef food supply in the U.S. We stand ready should they determine that rapid testing should become a component of their plan.

On the management side at IDEXX, Lou Pollock, our Senior Vice President of the Companion Animal Group and head of the Customer Facing Organization, announced this month his retirement after 18 dedicated years of service. Lou has made many contributions to IDEXX over the years, and while we will miss his passion for the business and his commitment to IDEXX's mission, values and principles, we do want to take a moment to congratulate him on his retirement. We have an executive search under way for a successor to this important leadership position at IDEXX.

To wrap up, let me comment that IDEXX is composed of many different lines of business. While it is difficult and inherently uncertain to forecast the future of any one product line, we remain confident in our strategy and the in robust market for our products and services. Our guidance for 2004, as you have seen in the press release, is for revenues of 525 million and diluted earnings per share of between $1.86 and $1.88. Our guidance reflects the assumption that not all of our stretch (ph) plans to come to fruition as we expect, as they rarely do, but that the overall plan is robust enough to absorb some individual disappointments.

Our per-share earnings guidance is higher by 3 percent from our previous guidance as of October of last year by 3 cents from our previous guidance. Simply as a result of the reduction in our expected tax rate in 2004 from 33 to 32 percent, as Merilee mentioned. This reflects the job that Merilee and her team have done in adding shareholder value through a disciplined tax management strategy.

We will now open it up to your questions. So the operator, please.

(OPERATOR INSTRUCTIONS) Dee Acutant (ph).

It is Irving Quivan (ph) and Dee Acutant. Congratulations on an excellent finish to the year, Jon. A couple of things. First, I just want to make sure -- LaserCyte seems to be doing well and certainly did a little better than we looked for. Are the manufacturing problems and the performance problems totally resolved? Are you seeing any product come back from the field? Where does that all stand?

I would say we're very pleased with the ramp up of the program, and we're very pleased with the customer response. I was at the tradeshow a week and a half ago and I think we had a very, very good reception in the field. And so I would say the ramp is going according to our expectations. I think with any instrument platform you always have a learning curve on the cost side, which we continue to -- as we accumulate experience, we will be moving down that learning curve from the cost side.

A couple of things. Can you remind us of the market size in your view -- or I am sorry, for Navigator, and should we assume the margins here are above the corporate average? And what sort of range of sales are you expecting for '04?

I will talk a little bit about the market size and then have Merilee answer the questions -- specific questions about '04. It is hard to know exactly, but we think that it is roughly 40,000 cases of EPM are treated each year by various means. And, as in any market, it takes a while for people to get familiar and comfortable with your products. And we're never going to get a majority of that market, but we expect to get a good piece of it over a three to four year period time. 2004 is the first real year that it has been available, so I will turn to Merilee on that piece.

Rick, I think, first of all for the sales for 2004, we're probably looking for somewhere between 2 and $3 million. And on the gross margin side, this product will initially have a little a bit higher gross margin than we would expect over the longer-term, as we did write-down some of the inventory early on, you know, a year or so ago with this product. And we will be able to sell that inventory. So it will have a little bit of a higher margin in the first couple of quarters post launch. But as we go out the margin -- the gross margin will probably be somewhat below our total Company gross margin percent.

And last for the moment, you talked about BSE test, and you said that -- you made it clear that given the regulatory environment it is not clear when that might get approved. But I assume that you don't think it is '07 or '08. I assume you're hoping and thinking it might be sooner. Couldn't it be this year? Do you think it is likely that it is this year versus the second half? Can you help narrow it down a little bit more for us?

We don't have a great deal in our plan for BSE this year. And if we get some, I can't rule that out as a possibility because I think it is a very, very uncertain situation, particularly in the U.S., where there is no BSE rapid testing today. It is just that there is not a market for it. And the USDA is still sorting out to figure out what the appropriate plan is. And as I said, they are working hard with the practical and scientific a approach. So the U.S., I don't know. It is anyone's guess.

And the European process is -- we are in that regulatory process. We are in, if you will, the second and final round, but that takes some time. So we think we have got a great test. And it is really uncertain with regard to -- in the case of the U.S. how the market will develop, and in Europe the regulatory time frame.

Okay. I am going to speak to one other question now. On the FX, can you remind us what the FX impact was for the full '03 year? And are you projecting any FX in what looks like 10 percent or so sales growth for '04?

Yes, Rick, the overall impact for the year, I believe, was about just a tad over 4 percent. And implicit in the guidance that you would have for this year, of course, when we -- there is some impact of currency. I think when we gave guidance back in the third quarter of topline growth of 520 million, we were certainly taking into account the strengthening of other currencies vis-a-vis the dollar that happened through three-quarters of the year. And then in raising the guidance now to 525 million, I think a good portion of that is looking at what has happened recently with exchange rates. So I would say there is definitely some built-in impact of exchange rates in those numbers.

(OPERATOR INSTRUCTIONS) Timothy Lee with Merrill Lynch.

During the fourth quarter you opened a new reference lab in Atlanta. How quickly does it take for one of those new facilities to kind of get up and running in terms of having some meaningful revenue contribution? And can we expect to see additional geographic expansion here in '04?

It takes a while. There are a lot of different things going on in the lab business, as there are in other businesses. And it is typically not a profitable endeavor until we get the thing going. I would say it takes at least a year, a year and a half, to get the thing -- to get a new lab to the level that we expect it to be.

In terms of expansion opportunities, are there major metropolitan areas that you currently aren't competing in?

There are a number of major metropolitan areas that we are currently not competing in. In fact, our lab business is -- where we are generally, we're very strong, and where we're not, we're not there at all. And so it is a geographically focused business.

And just kind of following up on some of Rick's questions on the mad cow opportunity. How large is that opportunity right now in Europe? And how large could it be in United States?

I would say it is anyone's guess if there is, A., going to be a market in the U.S. and, B., the size of it. I would say you probably have as good a guess as we do on that. And we're just following the guidance of the USDA. Quentin, the European market size currently?

The European market size is about 10 million tests a year, or about $110 million right now.

And there is also a market in Japan, although it is far fewer tests.

It is fewer. It is about, I believe, 1.4 million tests in Japan.

(OPERATOR INSTRUCTIONS) Chris Arnt (ph) with Select Equity Group.

Two quick questions, which is, can you talk about what your expectation for diclofenac will be if that improved this year? What type of revenue opportunity there is in that, first?

You mean over the long-term?

Yes.

I think we have said in the past we think it is a pretty attractive market. It is 20 to 25 million over a three to four year growth period. And we're very excited about that product. We think there's a good -- it will actually probably expand the market for treatment of lameness in horses and be in addition to a replacement in adjunctive therapy to other systemic therapies. So that is our outlook.

One other question is, you mentioned the digital radiography product and there seems to be a lot of enthusiasm around digital radiography. What are your expectations this year? And how much in the way of resources are you putting toward that in terms of sales staff and so forth?

It is just a technicality. Our product is a computed radiography, which is an indirect form of -- it creates a digital image. And it has, of course, the benefits of being a very, very cost-effective strategy, which is appropriate for the veterinarian market. We like our product a lot, but it is a new one. We're devoting what I would say would be the appropriate resources as we ramp that up. And it is part of our overall investment in the sales and marketing resources devoted to our Companion Animal Group line. It was very small revenue in 2003, so we're going off of a very small base. I guess it will still be not a large business in 2004 in relation to our traditional businesses in the Companion Animal Group.

Alright. Thanks a lot.

But you're right, Chris. We have gotten a lot of enthusiasm about that product. It is a neat product to talk about.

And it appears we have no further questions in the queue at this time.

Very good. Thank you all for joining in. And I also just want to take this opportunity to thank the team at IDEXX for the accomplishments in what I think what was an overall very strong year. It was nice to see very robust topline growth, and the execution of our strategies to achieve that. We had a number of good accomplishments. I think we are well-positioned for 2004. And I'm just grateful that we've got a great team here and we have a great customer set. And I also appreciate the confidence that our investors have had in IDEXX. So thank you again. And that will conclude our call.

That concludes today's teleconference. We thank you all for joining us.