愛德士 (IDXX) 2004 Q1 法說會逐字稿

Good day everyone and welcome to the IDEXX Laboratories first-quarter 2004 earnings and analyst conference call. Just as a reminder, this call is being recorded. For opening remarks and introductions we will now turn the conference over to Mr. Conan Deady, Vice President and General Counsel of IDEXX Laboratories. Please go-ahead, sir.

Good morning everyone. First I would like to introduce the members of management who are here today; as always we have Jon Ayers, President and CEO; and Merilee Raines, our CFO. Also here today are Bob Husly, Quintin Tonelli and Laurel LaBauve, all of whom are Corporate Vice Presidents as well as Ed Garber, Director of Financial Planning and Analysis.

I will now go through the Safe Harbor language. Merilee will then do the numbers and Jon will then provide some additional analysis prior to taking your questions.

Statements that we may make on this call regarding management's future expectations and plans in the Company's future prospects constitute forward-looking statements for purposes of 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, demands for our product and market acceptance of new products, availability of products and material supplied to us by third parties, intellectual property protection of products and the impact on our business of government regulation and government approvals, competition and technological change.

A further discussion of these risks and uncertainties is contained in our annual report on Form 10-K for the year ended December 31, 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 may change.

Thanks, Conan. Good morning everyone. First In would like to give an overview of our first-quarter results, including some details behind revenue growth, the P&L and other financial matters and then I will turn it over to Jon Ayers for some comments on the business and our outlook for the balance of 2004. We will then open it up to you for questions.

As you have seen, today we reported revenues of $133.4 million and earnings per share of 49 cents, year-to-year increases of 22 percent and 44 percent, respectively. We are pleased by these strong results, and they are slightly favorable to the updated increased guidance we provided in early March. As mentioned, the total Company revenue of 133.4 million marked a 22 percent increase over the first quarter of 2003 or 17 percent on a constant currency basis. This increase was driven by our Companion Animal Group performance where revenues of $109.8 million grew 24.5 percent or 20 percent adjusted for currency.

Within the Companion Animal Group sales, within the companion animal group sales of rapid assays grew $24.6 million, 30 percent or 28 percent currency adjusted with strong performance from both feline and canine products. Lab Services of $26.4 million grew 22.5 percent year-to-year or 17 percent on a constant currency basis. Instrument consumable sales of $33.4 million grew 17 percent or 12 percent on a constant currency basis.

As we have noted in previous quarters, in addition to currency fluctuations, year-to-year growth rates of rapid essays and instrument consumables are impacted by changes in U.S. distributor inventory levels. This quarter we had a favorable compare from this distributor inventory effect as distributor inventories decreased over the course of the first quarter of last year as part of our continuing efforts to improve the efficiency of the channels and increased in absolute dollars in the first-quarter this year.

Measured in terms of weeks of forward sales, our first-quarter ending U.S. distributor inventories remained in the same three to four-week range that they were at the end of the fourth quarter, so the growth and inventories reflects increased demand at the clinic level. Looking forward, as mentioned previously with regard to our rapid essay business, we benefited in 2003 from the temporary absence of some competitors who have either re-entered the market during the first-quarter or have indicated that they will re-enter the market in 2004. Because we continue to expect that competition for certain of our rapid essay products will increase in 2004, we expect the underlying organic growth rate for this business to be in the 7 to 9 percent range.

As for instrument consumables and lab services, we continue to be longer-term organic growth at 4to 6 percent and 9 to 11 percent, respectively.

Instrument revenues increased approximately 45 percent to $8.9 million. In the quarter we continued our roll out of LaserCyte, placing 326 units or $5.7 million at an average selling price of over $17,000. Our computer systems product line posted strong growth of about 24.5 percent, and our pharmaceutical productline reported $2.3 million of revenue with a modest contribution from pre-season navigator sales.

Food Diagnostics Segment revenues of $11.7 million grew by seven percent as reported, but declined by two percent on a constant currency basis with production animal sales essentially flat and milk residue testing sales down six percent. The water business with sales of just under $12 million grew by 18 percent or 11 percent adjusted for exchange.

International revenues of $41.7 million were 31 percent of our total revenues, stronger international currencies year-over-year contributed about $5.6 million or as mentioned five percent to top line growth and between 2 to 3 cents for EPS. For the second quarter, we expect revenues to grow about 13 percent to $138 million with continued strong performance across the Companion Animal Group, measured against a strong compare for 2003.

Turning to other elements of the P&L, the gross margin for the quarter of just over 50 percent was in line with our guidance. The three point improvement over last year is attributable to favorable manufacturing and service costs driven by volume leverage, favorable impact of exchange and the relatively high proportion of high margin rapid essays sales in our revenue mix which helped offset the continued higher than desired costs to manufacture and support LaserCyte. LaserCyte produced a 2 point drag on the gross margin of the quarter.

Going forward, we expect to see gross margins at 49 to 50 percent of revenue. Research and development of $8.5 million was about on target in absolute dollar terms. But as a percent of revenues was a little low at 6.4 percent. Over the remaining quarters of 2004, we expect research and development expenses to be around seven percent of revenues.

SG&A of $33.2 million or 25 percent of revenues compares to $26.7 million or 24 percent of revenues for the first quarter of 2003 and $30 million or 24 percent of revenues in the fourth quarter. Though these expenses have been growing in absolute dollar terms and as a percent of revenues, the first-quarter spend was below our expectation as a percent of revenues. We indicated in our fourth quarter call that we made investments in our companion animal sales and marketing efforts primarily during the second half of 2003 to support LaserCyte and drive revenue growth in other product lines.

As the early returns on these investments appear attractive contributing to our strong top line growth, we will continue to invest here. Therefore we expect SG&A to be about 24.5 percent of revenue for the second quarter and 24 to 25 percent for the full year.

Operating margin of $25.3 million or 19 percent of revenue compares to $17.4 million or 16 percent of revenues for the first quarter of 2003. As a percent of revenue, the margin was about 2.5 to 3 points above the guidance we gave it our fourth quarter earnings release. This is the result of operating expense growing at a lower anticipated -- than anticipated rate relative to our revenue growth. For ensuing quarters we expect operating margins to be about 19 to 19.5 percent of revenues.

Cash and investments ended the quarter at $243 million which was a decrease of about $12.6 million from December 31. Cash from operations was $10.7 million, and purchases of fixed and other assets was $6.5 million to produce free cash flow of $4.2 million. We repurchased 434,500 shares of stock in the first quarter at a cost $22 million, and we use about $5 million of cash for acquisition activity.

Days sales outstanding was 39 days, up one day sequentially and down two days year-to-year. Inventory of $76 million increased $1 million from year-end and turns were 1.9.

For the full year 2004, we expect DSO to remain at constant current levels and inventories of 75 to $80 million, fixed asset purchases of about $25 million. I would now like to turn it over to Jon.

Thanks, Merilee for going through the result including the element of the top line growth, P&L and a balance sheet. What I want to do is give some color commentary on the numbers. Our strong top line growth performance in the Companion Animal Group was driven by solid performances across all of the individual business lines that make up the group. I thin we are seeing the strength of our core strategy, which is first and foremost focused on servicing our customers, the Companion Animal veterinarian with a value and approach and an integrated product and service offering. This strategy in tandem with great execution by our sales and marketing team resulted in a higher level of growth than prior periods from many of our existing products. While new products were a factor in the growth, they were not the major factor.

In addition to currency and favorable distributor inventory compares as mentioned by Merilee, we are seeing good returns from the increased investments we have made in sales, marketing and customer support. We view the Companion Animal veterinarian as a customer worth investing in, and we will continue augmenting this level of investment as the year proceeds.

Let me provide some comments on some of the individual CAG lines. The Rapid Assay business saw excellent growth in Q1. Canine was helped in part for the launch of a seasonal promotion that we have done every year for the last few except that this year we started it two weeks earlier in the season. We also continued to benefit from the conversion of customers to 3Dx, our three-way parasitic disease screen from the straight heartworm only test. This year, 58 percent of our canine heartworm tests sold to U.S. clinics for 3Dx, while last year in Q1 this number was 51 percent.

As Merilee said, we are beginning to see more competitors in the heartworm only segment and looking forward we expect that this will impact our growth year even though we have the most accurate and highest quality heartworm only offering.

Feline growth benefit from some special sales force focused combined with new training tools and special programs intended to increase the customer’s utilization of feline combo. Also in Q1, we had a very successful launch of an in-clinic test for Giardia using our SNAP platform. Giardia is an intestinal parasite that affects dogs, cats and humans. Note that our test designed and approved only for dogs and cats. While this product's potential is modest compared to our major rapid assay products, and sales in the quarter were very small, it does build on the SNAP customer franchise. Interest in the product has been very strong at U.S. veterinary clinics, and we are currently on backorder with our distributors as we continue to ramp up production.

Our instruments and consumables business had a very satisfactory result. We placed and recognized revenue on 326 LaserCyte hematology analyzers this quarter, which was our expectation. This revolutionary new platform continues to be extremely well received by customers in North America and Europe. Our current plan is to sell about 1500 units this year with more being sold in the second half, matching the veterinarian's buying calendar and our sales manufacturing and service plans. While the market response is strong for this unique platform, we still have significant opportunities to improve the platform's cost, both in manufacturing and after sales support. We have a dedicated effort underway in our R&D and manufacturing operation to this goal, which is actually part of a broader effort to drive world-class operational excellence and quality in all areas of the business.

The instrument consumables revenue growth this quarter adjusted for currency and changes in distributor inventory was in line with our expectation of 4 to 6 percent year-over-year growth. And the trends here are turning favorable in comparison to the trends in 2003. We continue to invest in our VetTest chemistry platform, enhancing the product offering for our customers. For example, our new single slide packaging launch has been very well received by U.S. customers and is now being launched in all geographic -- in all global geographies in Q2 in Q3.

The lab business saw a very strong quarter, and it is important to understand the element. As Merilee mentioned, of the 22 percent growth, five percent was from currency translation, a benefit that will diminish over the course of the year for all of our businesses including lab services assuming no significant changes in currency rates. Of the 17 percent currency adjusted growth, 3 percent was from acquisitions, including a lab in Ohio we purchased in Q1 and a small equine specialty lab EBI purchased in 2003.

Another 3 percent was due to the combination of two other factors. First the inclusion of an extra day in 2004 over 2003 due to leap year; and second, some episodic production animal testing work that we did in our international labs. This production animal testing business, while good, is not regular or predictable. Netting all the above factors we had an adjusted 11 percent organic growth in the lab business and we continue to think that on the same basis the lab business will have a longer-term organic growth in the 9 to 11 percent range.

Pharma growth came primarily from one of our existing products, PZI VET, an insulin for diabetic cats. The Navigator launch continues to progress well but sales were still small as we are not yet in season for the disease, and its diagnosis. We continue to plan for the prospective launch of SURPASS, a topical NSAID for the treatment of lameness in horses. You may recall that SURPASS contains the active diclofenac, a well-characterized nonsteroidal anti-inflammatory drug, using a liposomal formulation. We have received confirmation that all technical sections are approvable from the FDA, including now the CMC (ph) or manufacturing section. And we are currently waiting completion of the administrative review process. We expect final FDA product approval sometime late in Q2 or early Q3.

So to summarize on SURPASS, we are quite optimistic that the approval will happen this riding season and the only question is at what point during the season. I might mention that with our strong equine diagnostic product offering the acquisition of the EBI lab and what will be two o significant new therapeutic offerings for the equine veterinarian, we will have a very strong overall equine presence. We continue to invest in sales, marketing and distribution to the equine community to take advantage of this integrated and full-line offering.

We've also receive feedback from the FDA regarding our NADA, or new animal drug application for Tilmicosin, our single-dose antibiotic treatment for cats. We have submitted our NADA under the FDA's phase review process, which means that each technical section is submitted and reviewed independently until each is approved at which time we file for the final administrative review and product approval. We are very happy to report that the FDA in Q1 deemed our safety section approvable for the Tilmicosin submission.

We have received additional questions regarding the efficacy in manufacturing sections that will hire some additional work on our part and subsequent review by the FDA. None of the questions of the FDA gave us -- gives us concern about the product's approvability, and the type of feedback we received is fairly typical for completely novel technology like this.

Given the work we need to do and the timing of the FDA review cycle, we do not now expect the launch and revenue generation from Tilmicosin until 2006. While the timing is further out than we would like, the FDA's responses bode well for the current Tilmicosin NADA and the IDEXX developed drug delivery platform that underlies this product. We have other product candidates in the pharma pipeline that utilize this sustained release technology.

Finally, let me comment on the recent USDA approval for our rapid test for BSE or mad cow disease. Please indulge me for a moment in the technology as we are quite proud of it. This second generation BSE test uses a novel prion capture technology that eliminates the need for certain complex and error prone sample preparation steps required by all other tests. It works the following way. A chemical polymer not an antibody binds to the rogue or diseased prion in the presence of the naturally occurring or normal prion. That's what's important. All other tests must first use a proteinase digestion set in the sample preparation process to eliminate the naturally occurring prion protein from the sample before the binding step. Or else a false positive would result.

As investors know from the announcement made by the USDA, the agency is surveillance program in the USDA Ames, Iowa facility and through seven approved state laboratories. This program will create a market for about 200 to 250 thousand rapid tests over the next 12 to 18 months. We expect each of these state lab customers to select a test in the next month or so, and we feel we are well positioned to win a portion of this business. Our confidence is based on the fact that we believe our test is first, the best technology; second, easier to use; third, requires the least amount of capital equipment; and forth, requires the least amount of lab space. And of course, we've been serving the production animal diagnostic customers since our inception 20 years ago.

However, several other companies also have USDA approved tests and will be in competition for this business. Our product is also in the EU approval process and is tracking well. Given the timeframe of the EU process, we don't expect approval and revenues before 2005.

Turning now to financial guidance for the remainder of the year, we expect revenues for the year to be in the range of 540 to $545 million and earnings to the approximately $2.00 dollars to $2.02 per share, fully diluted. This 2004 guidance is increased over what we gave in January by 14 cents. This range incorporates the first-quarter results of 49 cents, 10 cents above the high end of our initial Q1 guidance given in January and is an additional 2 to 4 cents higher for the remainder of the year.

As mentioned in our press release, we expect some of the incremental revenue in the balance of the year to flow through to the bottom line and thus the 2 to 4 cents. In addition we see the opportunity to make some incremental investments in the business, primarily in the Companion Animal Group but not to exclude the Production Animal business. These investments will be in the area of sales, marketing, R&D and operational excellence.

Speaking of operational excellence, before we above the call to your questions I would like to take this opportunity to introduce and welcome Laurel LaBauve to our investors. Laurel joined IDEXX in February in the newly created position, Corporate Vice President, Worldwide Operations. Laurel adds great experience and leadership to our team with a background and diagnostics at J&J and quality Six Sigma and manufacturing engineering experience at Allied Signals, since renamed Honeywell. So with that, Mike, please open the call for investor’s questions and answers.

(OPERATOR INSTRUCTIONS) Dee Akyatan:

Jon, I have a more conceptual broad question. I was wondering considering the business is turning out such great numbers, are you seeing something different fundamentally at the vet office level with the basic business Companion Animal Group Business? It seems to be breaking out of this mid to slightly upper single digit growth rate. If you do, if you could share that with us, that would be great, and then Rick has a follow-up.

Thanks for that question. We think this is generally a robust and secular mega trend that we are following in terms of pet owners and the care and medical care that they want to give their pet. And that is obviously driving increased demand for veterinary services and thus demand for our products and services. I would say that I don't see anything extraordinary changing in the last year or so, other than certainly our product lines are growing in the vet clinic and I think we and the veterinarian are learning more and more how to use our products and diagnostics and therapeutics in general to serve the pet owner. And that is that probably one trend that I think will drive the business over the next many years will be increasing utilization or compliance by the veterinary clinic in terms of medical protocol.

We find that most customers when it comes to their pet and the healthcare and well-being of their pet are not particularly price sensitive. They're interested in the best veterinary care, and the veterinarian is learning more and more how to serve the veterinarian and have higher compliance to what they know themselves are best medical practices.

Rick with a couple of extra questions here. With your new head of manufacturing in operations there, perhaps you can talk to us about what needs to be done with LaserCyte manufacturing? Why is it taking so long, Jon, and is it -- new people, new equipment, new systems -- what needs to be done to really get this turned around?

Well, first of all we are very pleased with the product so with regard to the market acceptance and the performance of the product in the field. So I don't think there is anything there to turn around. It's a revolutionary technology. But with regard to the manufacturing issues, I think we are coming down the normal learning curve with a revolutionary technology. We've got some application of some new components and component yield through manufacturing is an area and working with our suppliers on that is an area that is an opportunity for improvement and also us learning about the best way to support the veterinarian in the field. Best way meaning in a cost-effective way, which also generates high levels of customer satisfaction.

So when does drag on gross margin turn around?

I would say -- it's a good question because it also depends on the rest of the gross margin of the company. There are going to be a couple of factors. We do expect to become more efficient with regard to the cost of LaserCyte over the course of this year and into the next. Of course the other factor with regard to the platform that as we increase the install base, we will be increasing the volume of consumables, which are at a higher margin than the instrument itself. Once we've sold and placed the instrument, then we have an install there that starts utilizing consumables. And so that will be another factor in improving in the margin. That is a trend that will play out over several years.

And the last for the moment. SURPASS, and to the run rate. How -- can you give us some sense of run rate for this year and next and how big is the combined opportunity? Thank you.

For this year, again with SURPASS it's a little question of when the product is actually approved and launched, but assuming that that does happen sometime in the third quarter, we peg those sales at probably around $2 million, maybe a little but higher for this year but around that range. And for NTZ, I think we've said that we would expect that to be around $3 million or so for this year. And then I think we talked about the longer-term growth revenue potential of those products -- say three to four years out of Navigator being somewhere in the maybe 10 to $15 million range and SURPASS to be in the 20 to $25 million range.

Timothy Lee with Merrill Lynch.

Just a couple of questions here. Jon, in terms of Tilmicosin, are you doing any additional clinicals in terms of any more pets that need to be tested on this thing, or what is actually involved in the questions that the FDA has raised?

Yes, Tim, there is a -- some more work that we need to do in the field, although it wouldn't be what you would term your traditional clinical trial. It is to address a very specific and limited question. And there is also work we need to do on the manufacturing side that doesn't have any fieldwork associated with it -- its more working with our manufacturing supplier and such.

It's been awhile since you shared with us what is in the pharmaceutical pipeline. Can you -- would you care to comment on what is further in the pipeline beyond Tilmicosin, in terms of longer-term revenue growth drivers?

Tim, we do have some other products that we do have in the pipeline. We like the underlying platform technology behind Tilmicosin and the ability to give a single-dose administration of a product. And we think that is applicable in other applications. And so we've got some product development in that area, and we've got one or two other things. Nothing that we are at the point that we are ready to talk about. None of them are yet at the point where we have gone for FDA approval.

So we shouldn't expect any new compounds until beyond Tilmicosin, so there is nothing new other what's in the pipeline right now for '04, '05 and part of '06 then?

Yes. That would be correct.

And then just one last one in terms of LaserCyte, do we have enough of an installed base now that we are getting a meaningful revenue contribution from consumables on LaserCyte?

Merilee?

Tim, it is still pretty early in the game on this. I mean, we are getting consumables revenue from it, but in terms of being able to really get a good handle on what the longer term use is, I still think it is early in the game.

Thank you.

(OPERATOR INSTRUCTIONS) Stanford Rothschild .

I have just a question that may be an erroneous interpretation, but there was some publication about Abaxis having what sounded like a competition instrument for LaserCyte and in that description, they made it sound as if there were some displacements taking place because the other unit is either less-expensive or supposedly more efficient. And I admit to just Paul-parroting something I have read elsewhere, I don't know any of the facts firsthand. But I'm sure that you have some comments on Abaxis equipment?

Well, what I can say is we are pretty confident that we have the only technology that provides the comprehensive diagnostic information, including a five-part, a true five-part white blood cell differential where we actually count all five different types of cells and an absolute reticulocyte count and all the other parameters and ease-of-use and to our knowledge there is absolutely nothing in the market or even that we are aware of anyone's development pipeline that would match the comprehensiveness of this product. And I would say that we have done -- I think we are very, very pleased with the number of placements. To our knowledge it is quickly -- LaserCyte has quickly commanded a market leadership position in the veterinarian market.

I don't in any way dispute or have no position to dispute that, but I wondered whether there might be a price matter of something that is not as comprehensive but on the other hand is significantly less costly, so that they may be having some inroads? They claim that that there were displacements of the LaserCyte installed base even though you are selling new ones, so there is some displacement and maybe there is some price advantage or effort to sell on that basis?

There are actually -- there are other hematology technologies out there including one that we continue to sell, the QBC AutoRead (ph) , which is a lower-priced offering. The LaserCyte's average unit price including the value that we get for trading equipment has averaged around $17,000 and the alternative technology that we offer is substantially less than that, and some of the so-called impedance technologies that are about out there which I believe Abaxis would be one of them are lower cost and less comprehensive information.

So you are not seeing any actual net displacement?

It would be negligible if at all, yes. This is a new technology, and the demand for it is very, very robust.

I think this may have appeared in Investor's Business Daily, in which they had a little discussion Abaxis, and made a claim of 150 units per quarter as an encouragement factor.

I think you are maybe thinking about -- I'm not sure Investor's Business Daily is -- I think you may be thinking about the chemistry side of the business as opposed to the -- which is also a good business for us.

We only read it and didn't have any way of evaluating it. Thank you.

All right. Thank you.

Dee Akyatan

I wanted to follow-up on the BSE product. What could the timeline be -- I'm sorry if I am making you repeat this and if you do win such a contract, what could the financial impact be in terms of revenues? And are you hearing -- we are under the impression that some of the really large competitors in diagnostics area are also taking a look at this space. And are you concerned with respect to the size of their sales organization in terms of winning these contracts? Thank you.

The market opportunity in the U.S. has been defined by the USDA and their surveillance program, Dee. And they talked about 200 to 250 thousand tests over the next 12 to 18 months. The tests typically run somewhere between 10 and $15 so you can sort of figure out the total market size. We've got a small amount of revenue this year in our forecast because it's a small at this point in time -- it's not that big an overall market size. And as I mentioned, there are other tests that are approved and we're in competition with those tests for the business.

Thank you.

Joseph Beyondo with Barney.

They've actually asked the questions and they have been answered already but I would like to add my congratulations for a great quarter.

Thank you, Joe. Appreciate it.

(OPERATOR INSTRUCTIONS) We have no further questions at this time. I will turn things back over to you.

Thank you. That concludes our call, and we are very happy to have had this quarterly event with investors. And we look forward to the next one in July. Thank you very much.

That concludes today's conference call. We thank you for your participation. You may now disconnect.