愛德士 (IDXX) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Idexx Laboratories 4th quarter 2004 earnings analyst conference call. Just a reminder today's call is being recorded. For opening remarks and introductions we'll now turn the call over to Mr. Conan Deady, Vice President, General Counsel for Idexx Laboratories. Please go ahead, sir

Thank you Eric. Good morning, everyone. Thank you for joining us on the call this morning. The first thing I will do is introduce the people who are here on this end. With me is Jon Ayers, CEO. Merilee Raines, Vice President and Chief Financial Officer, Bill Wallen, Senior Vice President and Chief Scientific Officer, Quinton Tonelli, Corporate Vice President for rapid assay and production animal services and Ed Garber, Director of Financial Planning. I will start as always in reading our Safe Harbor language and then I will turn the meeting over to Merilee who will review the financial results and following that Jon Ayers will add some further commentary on the quarter and on the business and then we'll open it up to your questions Statements that we make on this call regarding management's future expectations and plans and the company's future prospects constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially from management's expectations. Factors that could cause or contribute to such differences include the company's ability to develop, manufacture, introduce and market new products and enhancements to existing products, the effectiveness of the company's sales and marketing strategies, the company's ability to develop, license, or obtain rights to new technologies, the company's ability to identify acquisition opportunities complete acquisitions and integrate acquired businesses, the impact of competition and technological change, the effect of government regulation on the company's business, the impact of distribute or purchasing decisions on sales of our products that are sold through distribution, changes or trends in veterinary medicine, the company's ability to obtain patent and other intellectual property protection for its products, successfully enforce intellectual property rights and defend itself against third-party claims, disruptions, shortages or pricing changes that affect the company's purchases of products and materials from third parties, including from sole source suppliers, the effect of government regulatory decisions, customer demand, pricing and other factors on the realizability of our inventories, the company's ability to manage complex biologic products, the effect of international operations, including currency fluctuations and the loss of key employees. Further description of these risks and uncertainties is contained in our quarterly report on form 10-Q for September 30, 2004 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. And now I will turn it over to Merilee.

Thanks, Conan. That gets better every time. [ LAUGHTER ] Good morning, and thanks again for joining us today. As you have seen seen from our press release earlier this morning our fully diluted earnings per share for the 4th quarter were $0.49 on revenues of $144.3 million. Year-to-year increases of 44 percent and 16 percent respectively. In viewing earnings performance versus prior year it is important to note that earnings per share in 2003 were impacted by certain discrete items. These were described in our press release and I will mention them again now. The reported 2003 earnings per share of $0.34 include a negative impact of $0.12 resulting from the write-down of certain manufacturing equipment associated with the discontinued development of a clinical chemistry system. And a positive impact of $0.03 per share resulting from the reduction of an estimated liability for a third-party claim, and revision of an estimate of the collectibility of a customer receivable. Excluding these discrete items earnings per share increased by 14 percent year-to-year. The 4th quarter guidance which we gave you at the time of our 3rd quarter call for revenues of $134 to $135 million and earnings per share of $0.46 to $0.47 did not include the impact from the two acquisitions, Vet Med Lab our new European reference laboratory and Bommeli, our new production animal business, which we closed on in November and December, respectively. They contributed revenues of approximately $5.3 million, and were essentially earnings neutral, inclusive of expenses associated with write-down of certain acquired assets, as required by purchase accounting, and transaction-related expenses.

So relative to guidance, revenues were up 4 to $5 million and earnings were up to $0.02 to $0.03. The earnings favorability is the net result of several factors, including stronger than anticipated revenues, partially offset by slightly lower than anticipated gross margin and a reduction in our tax rates All of which I will now discuss in greater detail. Looking further at top line results, total company revenue of $144.3 million marked a 16 percent increase over the same period last year. Or 13 percent on a constant foreign currency basis. Vet Med Lab and Bommeli contributed 4 percent to year-to-year growth so growth adjusted for currency and these acquisitions was 9 percent. Our companion animal revenues of $117.3 million, grew 17 percent, or 15 percent adjusted for foreign exchange. Point of care rapid assays were $21.4 million, an increase of 7 percent, or 6 percent currency adjusted. Led by strong performance from our canine products. Our Idexx vet lab instruments and related consumables, accessories and services totalled $51.9 million for the quarter, an increase of 9 percent over the 4th quarter of 2003. Consumable reagent sales were $34.9 million, up 13 percent, or 10 percent adjusted for currency. We believe this strong performance is in part reflecting the focused effort on instrument placements over the last several quarters. Which has increased our install base. However, in addition, the growth may be somewhat impacted by timing between quarters, as 3rd quarter consumable growth at 2 percent adjusted for currency was relatively lower than what we had been experiencing.

Instrument sales were $12 million, an 8 percent increase year-over-year, and a nearly 50 percent increase sequentially, as the 4th quarter is traditionally a strong quarter for capital equipment sales, due to our customer year-end tax planning considerations. $450 LaserCyte instruments were placed in the 4th quarter to bring the total for the year to just over 1,400. And the balance of our instrument offerings performed strongly as customers continue to take advantage of the benefits from an integrated suite of in-clinic diagnostic instrumentation. The U.S. distributor inventory levels for rapid assay test kits and instrument consumables remain between three and four weeks based on forward-looking demand and relative year-to-year changes in inventories did not significantly impact reported growth percentages of the product line. Laboratory services of $33 million increased by 41 percent from the 4th quarter of 2003. Acquisitions completed in the 1st and 4th quarter of 2004 contributed 27 percent to growth, and favorable currency contributed about 2 percent. So growth adjusting for these two factors was 12 percent. Our computer systems product line had a strong quarter with revenues of $6.7 million, or 21 percent growth year-to-year. As with in-clinic diagnostic instrumentation, the 4th quarter of the year also tends to be the strongest for computer system installations. In addition, we have been building the strength of our sales and marketing efforts dedicated to this product line. Pharmaceutical products contributed $2.5 million to the companion animal group revenues.

The water business recorded sales of $14 million, an increase of 7 percent year-to-year, adjusting for exchange, growth was 4 percent. The 4th quarter of 2003 was a particularly strong year with year-to-year growth in excess of 18 percent. The food diagnostic segment recorded revenue of $13 million, a year-to-year increase of 13 percent or 8 percent currency adjusted led by strong performance in our production animal services line, with revenues of $8.9 million, or 20 percent growth. The Bommeli acquisition contributed 5 percent to growth and currency contributed 6 percent. So organic growth of the production animal services line was approximately 8.5 percent. International revenues of $51.6 million were 36 percent of total company revenues. As mentioned, continued strengthening of international currencies year-over-year contributed about $3 million or 3 percent to top line growth for the quarter. Favorable currency also contributed about 3 percent to total year reported growth of 15 percent. We project 2005 revenues to be $630 to $640 million, a growth of about 16 percent, with Vet Med Lab and Bommeli acquisitions contributing approximately $30 to 35 million or 5 percent to growth, and currency contributing another 1 percent or so to growth. For the 1st quarter, we project revenues to be $152 to $154 million. Year-to-year growth of approximately 15 percent, or 9 percent excluding 4th quarter 2004 acquisitions. The 1st quarter growth rate will be impacted by the strong compare with the 1st quarter of 2004, if you will remember the growth rate was 22 percent year-over-year last year.

And we have particularly a strong rapid assay product line growth. And that quarter we benefited from the impact of certain marketing programs, and sales force emphasis and the temporary absence of a competitor from the market. Moving down the P&L. Total company gross margin was 48 percent, or 1 to 2 points below our guidance of 49 to 50 percent. Our 4th quarter acquisitions accounted for nearly a point of shortfall, with about half a point due to discrete transaction-related issues, and the remainder due to revenue mix. As lab services generally have a lower growth margin than our product businesses. For full year 2005, we project gross margins to be in the 49 to 50 percent range, with a gradual improvement over the course of the year. Factors contributing to the margin improvement include exchange favorability, product mix, as we have revenue contribution from some relatively higher gross margin products including BSE and gradual reduction of integration costs associated with acquisitions which occur primarily in the 1st half of the year. For operating expenses, R&D was $9.4 million, or 6.5 percent of revenues. SG&A at $36.3 million, or 25 percent of sales compares to $36.5 million or 29 percent of sales for the 4th quarter of 2003. Adjusting for discrete items, which I mentioned, SG&A for 2003 becomes $29.8 million, or 24 percent of sales. As a percent of revenue, we are at the high end of the guidance, in part due to the impact of acquisitions, including transaction-related spending, and the amortization of intangibles.

Over the course of 2005, we expect R&D expenses to be 6 to 6.5 percent of revenues. R&D spending as a percent of revenues has been declining gradually over the last few years from 7 percent in 2002, to 6.5 percent in 2004. We will continue to make the appropriate investments in R&D to support our new product pipeline, and the modest decline in spend as a percent of revenues is the result of the laboratory business with its negligible R&D spend becoming a larger part of the revenue mix. With regard to SG&A, we project expenses to be about 26 to 27 percent of revenues for the full year. This is higher than the 25 percent or so we have been experiencing, and is due in part to the full year impact of 2004 sales and customer support personnel additions to our companion animal group, North American commercial operations. As well as investments we will make in Europe to mirror the U.S. companion animal group's structure and enhance service levels for our other businesses including preparation for the launch of BSE. In addition, integration costs and intangible amortization expense associated with our Q4 acquisitions, add nearly 1 percent to SG&A as a percent of revenue. The operating margin of $23.3 million, or 16 percent of revenues compares to $15.3 million or 12 percent of revenues for Q4 2003. Adjusting for discrete items, the operating margin for 2003 becomes 17 percent of revenues. For 2005, we expect that operating margins will be 17 to 18 percent of revenues for the total year with the 1st quarter being approximately 15.5 percent and gradually increasing over the year to approximately 18.5 percent as the integration costs in SG&A associated with acquisitions diminish after the 1st half, and as we see gross margin improvements.

The tax rate for the quarter of 29.8 percent was lower than anticipated due to changes in certain estimates, including the relative mix of income across geographies with varying tax rates which had a positive impact on 4th quarter earnings. Looking ahead to 2005, we are still analyzing the impact on us of the tax legislation passed last October, but our early estimates indicate that it will not have a significant impact on the year's effective rate. We would use a rate of 33.75 percent for planning. Our thinking on revenues, operating margins and tax, tax rate, yield an EPS estimate of $0.47 to $0.48 for the 1st quarter of this year. The Bommeli and Vet Med Lab acquisitions should be about $0.02 dilutive to the 1st quarter earnings with intangible amortization and integration costs of approximately $0.04. We affirm our total year EPS projection of $2.20 to $2.25 as upside from projected higher revenues is neutralized by our 4th quarter acquisitions which should be $0.03 dilutive for the full year net of integration costs of $0.06 and amortization expense of $0.05. Also, the increase in the tax rate from previous guidance up 33.25 to 33.75 is negative to EPS by $0.02. As noted in our press release, the guidance for our expense and operating margins and EPS does not include the impact of expensing options in accordance with the guidance of FAS123R which becomes effective in the 2nd half of this year. Moving to the balance sheet and cash flow, cash and investments ended the quarter at $157 million, which was an increase of about $58 million -- I'm sorry, which was a decrease of about $58 million from September 30. Cash from operations was $27.3 million, and purchases of fixed and other assets were $6.5 million, to produce free cash flow of $20.8 million. We used $47 million of cash for acquisitions.

We repurchased 685,000 shares of stock in the 4th quarter at a weighted average price of a little over $51 per share for a total cost of approximately $35.2 million. Day sales outstanding was 39 days down one day sequentially and up one day year-to-year. Inventory up $76.4 million, decreased by $9.6 million from the end of the 3rd quarter, primarily due to lower chemistry consumables resulting from the timing of year-end shipments from our supplier. For 2005, we project DSO to remain at current levels and inventory balances to be between 80 to $85 million. Fixed asset purchases will be approximately $30 million. And now to Jon.

Thank you, Merilee. Since Merilee has given you a thorough review of the numbers, I would like to highlight just a few businesses and product lines where we have had significant developments in the last three months before we open it up to questions. Let me start in the companion animal group, with the Idexx vet lab line of instrumentation and consumables. As investors know, the Idexx vet lab is a suite of integrated blood analyzers designed for the unique needs of the veterinarian, allowing lab work to be completed in the clinic during the patient visit. We continue to bring innovations to this suite, including upgrades and menu expansions on the existing instruments in the offering, as well as new instrument additions. In December, we launched an important menu expansion on the VetTest chemistry analyzer, simultaneously in the U.S. and Europe. This test for something called protineria for excessive levels of protein in the urine gives a fully quantitative that can be used to measure kidney function and disease. It's called Urine Protein Preatnea Ratio, or UPC. This is first and only quantitative test for urine on any bench top analyzer in the market. An example of the innovation Idexx is bringing to our VetTest customers. The customer response has been fantastic in the eight weeks since launch and the early clinic level sales are above our expectation. While this test, which is actually two slides, will not generate large revenue volumes in relation to the overall Idexx vet lab line, its net effect is growth in VetTest live utilization.

The medical value of the test to the veterinarian increases loyalty and supports the acquisition of new Idexx vet lab customers. And the UPC product has a very attractive gross margin. A second new product launch for the Idexx vet lab line is a completely new instrument and associated set of consumables called VetStat. VetStat is a blood gas and electrolyte analyzer specifically designed for the veterinarian with species specific reference ranges and a test menu also specifically designed for companion animals. We introduced the VetStat this month, and we'll start shipping before the end of the 1st quarter. Customer response has also been great. The analyzer integrates with the Idexx vet lab, to give a complete set of blood parameters in one printout for those customers who also have a LaserCyte. We expect VetStat will generate first year sales of instruments and consumables of a couple million dollars. Since the average unit price of the instrument will be under $5,000 compared to around $17,000 for the LaserCyte, the VetStat's longer term revenue potential, instrument and consumable sales will be similarly less than that of our LaserCyte system. Speaking of LaserCyte as Merilee mentioned we had a strong 4th quarter with 450 placements worldwide, bringing our total for the year to roughly 1,400. The LaserCyte hematology analyzer continues to easily lead the industry in technological innovation, menu comprehensiveness, revenue and unit volumes. In the last month we sent out a regular software update to our LaserCyte customers that brings even more functionality to the analyzer. As a result, customer find -- can find the value of their LaserCyte investment growing with time.

For example, the recent software release allows LaserCyte's bed station, touch screen to graphically depict, analyte trends from multiple runs of any analyzer that's part of the Idexx VetLab suite, highlighting potentially subtle changes in blood values that could indicate disease or disease progression. In this way, the purchase of a LaserCyte adds value to VetTests and other Idexx vet lab analyzers in the clinic. New instrument systems, menu expansions and new functionality through software updates show the customer that when they own an Idexx vet lab they have made an investment in not only a suite of instruments but also with the most innovative partner in veterinary diagnostics. We intend to launch further menu expansions over the course of 2005. Perhaps this is one of the reasons why the 4th quarter continues strong for instrument placements worldwide, not only for LaserCyte but for all the analyzers in the Idexx vet lab. In fact, the total number of instrument placements in units and dollars exceeded last year's 4th quarter which itself was the best quarter we had in many years. For the year total instrument placements globally were up about a third over 2003, building our install base of customers and thus our stream of profitable reagent revenues, and as Merilee reports we had very good growth in Q4 in the instrument consumables business as a cumulative result or in part as a cumulative result in increased placements over the last five quarters. We continue to make excellent progress in the development of our next generation chemistry platform which will be the next major evolution of the Idexx vet lab suite. This new instrument will, first, utilize our dry slide reagent, the gold standard in accuracy and precision, both in the veterinary world and the human world.

Second, it will have all the benefits of VetTests including its flexibility, dependability, speed of result and world-class customer service and third and importantly, it will have unique capabilities valued by the larger or growing veterinary hospitals including the ability to run multiple sample patients in one run. It will incorporate vet tests expansive menu and have additional menu capability. In effect, duplicating the complete chemistry tests that might be run on an outside lab on the big machines. Note that we have not set a date for introduction at this time, as I feel that would not be appropriate given the timing uncertainties involved in any major development effort ever this type. It's certainly more than a year out, though. Turning to the laboratory services business, we completed the acquisition of a leading European player in November of 2004. The company, Vet Med Lab is based in Germany and receives samples from Germany and several other European countries. It has the leading market share in Germany and Switzerland. The former country being the most important laboratory services market in Europe. Vet Med Lab has an extraordinary reputation and franchise in these core countries. This lab operation will integrate very nicely with our market leading position in laboratory services in the UK, and our market leading position in in-clinic instrumentation, the Idexx vet lab and rapid assays in all of Europe.

We expect that 2005 revenues from this acquisition will be over $25 million and before amortization and integration costs the operation has good profitability. It also has a history of strong revenue growth in the developing European companion animal market. Vet Med Lab will also help us grow the in-clinic market. For example, we have come to understand that Lyme disease is prevalent in Germany, and thus our canine 3Dx test kit with its unique ability to diagnose canine Lyme disease has great potential in Germany. Of course we have a lot of work to do to integrate Vet Med Lab fully with Idexx. In our pharmaceutical business we had about 50 percent growth in revenues in 2004, supported both by the launch of two new equine products and the growth of our existing products. As to the pharma pipeline, we continue to be on track with preparing for FDA approval and launch of our telmicasin single dose antibiotic for cats. We have now submitted -- we have now completed and submitted to the FDA the work we needed to do with the manufacturing section of the application, and we'll complete this quarter a response to the FDA's remaining question on the efficacy section. As we have indicated previously giving the timing of an FDA review we do not expect to launch and generate revenues from telmicasin until at least early 2006. We received some good news regarding our intellectual property for this product, by way of background, our telmicasin formulation incorporates a very innovative and flexible delivery technology, using a chemistry called fatty acid salt, or FAS. Last month, we received a notice of allowance from the U.S. patent office on our primary patent application for this technology which means that we are virtually assured of receiving very broad protection on our FAS technology in all mammals in the next few months.

We believe the FAS platform has applicability with a number of other pharmaceutically active molecules where one desires a sustained release formulation, for the convenience and assured compliance that comes with this capability. Thus, the technology is part of our development pipeline, at Idexx pharmaceuticals. In addition, we have begun talking with other animal health pharmaceutical companies about any potential interest in licensing this technology in areas not in direct competition with our pharma pipeline. In another of our CAG lines, digital radiography, we ended up with strong revenue growth for the year. This is a small, but emerging business for us. Sales in 2004, while still less than 1 percent of Idexx's total revenues were almost threefold what they were the prior year. We are the clear market leader in the midprice point end of the market given our share of the install base in the segment. Our system best fits the clinic with two to five doctors who desire the benefits of a digital system. To give you some background, almost every veterinary clinic has a system to take an x-ray of a patient, which uses film to capture the image. Clinics have a film processor to develop the film and get a radiograph. We expect majority of the veterinary industry to convert from film capture to filmless or digital over the remainder of the decade and we are extremely well positioned with our digital radiography business with a technology, system and software solution for this customer segment. And, of course, we also have the benefit of an extensive and established sales and customer support organization.

Switching to the production animal service line, within the food diagnostics group, we closed the Bommeli diagnostics acquisition in December and are executing in accordance with our integration plan. For example we have already announced internally an intention to consolidate from two to one production facility in Europe for production animal diagnostics. As many investors know, we evaluate acquisition returns on a discounted cash flow or economic value-added basis and Bommeli diagnostics comes out looking very strong. The deal brings some strategic bovine and porcine products such as foot and mouth disease and hog cholera with good intellectual property. The European geographic presence is also helpful with Bommeli's location in Byrne, Switzerland. Regarding our Idexx hircheck BSE antigen test kit, as indicated in a press release earlier this month, we received a letter from the European commission stating that Idexx test will be approved for use in the EU pending final publication later in Q1. While expected , we are pleased to achieve this key milestone on schedule. We have fully staffed our European sales and marketing organization for BSE in Europe and we are currently participating in BSE tenders with customers in several countries. We have also been demonstrating our kit in several customer laboratories and the feedback is very positive. Given the timing of final European commission action, some specific country approvals and lab accreditation processes required, we do not expect any meaningful BSE revenues until early Q2. And our Q1 revenue guidance reflects this. However, our revenue outlook for the year for BSE remains very good and on track at roughly $5 million. In the U.S., Idexx has responded to a competitive bid request to supply kits to five new U.S.D.A. sponsored state labs to support the U.S.D.A. surveillance program.

We expect to hear about the status of this bid in the next month. To remind investors the entire U.S.D.A. surveillance system is at a volume that is only 2 percent of the European market. As to the future of U.S.D.A. BSE surveillance, we would point folks to the U.S. Department of Agricultural for guidance. Looking back on the quarter and the year for the business as a whole we had strong revenues coming from organic growth, currency and acquisitions. EPS growth was very strong for the year at 24 percent adjusted for the discrete events that Merilee has mentioned. In the 4th quarter earnings were helped by revenue growth, tax rate and a reduction in share count. Margins reflect a number of investments we have put into the business that will help propel growth in the next several years. Turning to cash flow, we were pleased with the cash generation from the business for the year as it approximated our plan. We are committed to using our cash in an owner-oriented way and in 2004, we did just that. We repurchased 2.4 million shares and we issued options at about 1.8 percent of shares outstanding. The net result, after the dilutive effective options, was a reduction of our fully diluted share count of 1.7 million shares using a snapshot of shares, as of December 31st, 2004, as compared to the end of 2003. We also invested $54 million in some very strategic and financially attractive acquisitions building the value of our business. We will continue to look for opportunities to use cash forward -- going forward in a way that will benefit the owners of Idexx.

As we look to 2005, we see the opportunity for continued investment, as we build a great company. These areas include product development, quality, operational excellence, using such tools as lean and Six Sigma and sales and marketing all of which will propel revenue growth in 2006 and beyond as well as improve margins in the out years. As I have indicated in the last few calls we have several factors we expect to be contributors to attractive and sustained growth of sales and earnings in the years beyond 2005. First, the general robustness of our markets including the growth in the companion animal market driven fundamentally by the bonds between the pet owner and his or her cherished companions. Second, new product launches that are in the pipeline for 2006 and 2007, including products in all of our major companion animal businesses, instrumentation, rapid assay and pharma and for our water business. Third, revenue growth, and improving cost position in our existing Idexx vet lab instrumental and consumables line coming from product mix, our long-term supplier agreements and improved costs over our manufactured instruments such as LaserCyte. For example, the improvement in costs for instrument consumables alone will add almost a point of gross margin to all of Idexx in 2006. Fourth, expected improvement in the operating margin of laboratory services through a focus on operational excellence. Fifth, improvement in the earnings of our acquisitions as they work to through acquisition integration costs in 2005 and accelerated amortization. Sixth, growth in our international market positions in Europe and Asia as we augment our sales and marketing staffing and introduce more of our existing high-margin product lines to these geographies and seventh, and finally , further deployment of cash generated by the business for tuck-in acquisitions and stock repurchases as appropriate. As a result we have a strategic plan for beyond 2005 that generates an average 10 percent plus revenue growth and mid-teens earnings growth. We remain focused on these longer-term financial goals and make our investments with that horizon in mind. Of course, our business, like any business, has risks and uncertainties, a long list of which was laid out by Conan at the beginning of the call and also is incorporated in our SEC filings. However, Idexx also has a very strong strategic position in great markets and we have a team that gets the job done. We think our recent results demonstrate that. We now open the call to the question and answer portion.

Thank you, sir. The question-and-answer session will be conducted electronically. Anyone who would like to ask a question, please press star, one on your touch-tone phone keypad. We'll take your questions in the order you signal and as many as time permits. Additionally, if you are using a speaker phone, please be sure your mute function is turned off so your signal can reach our equipment. Again it is star, one to be placed in the queue. We'll first hear from Timothy Lee of Merrill Lynch.

Good morning.

Good morning, Tim.

Jon, if you can kind of help me better understand the European BSE market. I mean my understand is $130 million market yet you are only targeting $5 million in sales in '05. Are much of those sales already locked up under contracts or they're not coming up to bid, therefore, your available market here for '05 is really significantly lower than that?

Well, Tim, a couple of comments. It's a -- we think it is about a $10 million test market and the average unit price is -- is probably in the high single digits. So the market estimate you have is probably high.

Okay.

And second, as a new entrant, there's always a -- you have to start working with customers and so we're -- that takes a process, and work, and bids do come up -- over the course of time. They don't all come up with when you introduce the product and so all of those factors are involved.

And one -- in the past, on the -- if I could switch gears to LaserCyte. I know I haven't really talked about the consumable component of that, but now that having been in the field for sometime, can you kind of give us a sense of what type of consumable revenue LaserCyte is now generating?

Tim, it's Merilee. I think if we looked at kind of average utilization, we talked about this being in maybe the 10 to 12 tests or so per week, maybe a little higher than that and that generates for us a per customer base of about $2,500.

Great. And one more if I may. Just got to ask on the pharmaceutical pipeline, anything beyond telmicasin?

We do have things beyond telmicasin, but they're not ones that we are ready to talk about.

I'll keep trying. Thank you.

You never know, Tim.

And moving on we'll next hear from Rick Weiss of Bear Stearns

Good morning, everybody.

Good morning, Rick.

Let me start off with, Jon, you talked about the Vet Med Lab and, quote -- I think you said a lot of work to integrate it into Idexx. Maybe could you help us understand what that work is, and what kind of assumptions have you made and what could potentially accelerate and get it going faster or get the cost down faster?

Yes. First of all, the work is not -- is not -- it's a great lab in terms of market and operationally and, in fact, it's going to be our largest lab in our entire global lab network in terms of number of samples that it processes. It's more having to do with it was a private German company and now it's part of a public U.S. company, and the way the public U.S. companies run businesses has a number of financial and other operational components that are more in the back office side, and the other type of work is just the -- the work of bringing our two sales forces together in continental Europe, pretty standard kind of thing. Everyone is pretty excited about it but it does take time to learn how to work together.

And basically six months involved or something like that, you think to get that resolved this year. Because margins improve later in the year?

Yes. Yeah, Rick, I might just add something because as we're talking about these integration costs we really were talking about both Bommeli and Vet Med Labor, and so some of the items that we talk about I think the primary portion of them relate to Bommeli. Jon mentioned that we are consolidating manufacturing operations for our production animal services in Europe. You know, for both Bommeli and Vet Med Labor, we are working to set up common IT and financial system infrastructures. With Bommeli there's transitioning of product sales from the their -- Bommeli's prior distributor to our own sales force and so there's some related kind of cleaning out of the channel that has to go on. So those are the types of activities that we are talking about and that are really generating these integration costs, which they -- the bulk of them are the 1st half of the year. They will be, you know --

They tail off the second half.

Mm-hmm. Second question, we've seen the 2nd half of this year, U.S. sales in total settle into the upper single digit range. Again, had you tough comps, I suppose with the LaserCyte launch. What are -- what's a realistic way to think about domestic growth? I mean is it going to stay in that kind of range for a while? What will kick it back into double digits and when?

That's a great question. In fact, I think if you really looked at everything, over the last couple of years, we were -- three years ago we were at mid -- I'm going to take out the LaserCyte launch because that was -- that certainly added a number of points of growth for a number of quarters. But if you just sort of take that piece of the equation out, if you will, we were at midsingle digit growth now and now we're high single digit growth. And, you know, across all of those areas. And then every once in a while have you a new product that -- that launches you into double digit or acquisition, or other kinds of efforts that come from our focus on the customer. So, we're -- we have that baseline of high single digit if we can improve that further, it would be nice. But the primary way will be some specific new product launch, or -- or tuck-in types of acquisitions.

So in '05, we shouldn't expect that to kick back into the low double digits until you -- this certainly sums my next question, until, what, the next generation chemistry launches potentially in '06? Is that the next time we get back into double digits again? Or -- I don't know if that's the right way to think about it.

Well, we are projecting revenue growth in '05 --

U.S. now I'm talking, of course.

I I have to think about it from a U.S. point of view. I think we're in the close to double digits in '05. And then, like you say we haven't really talked about '06 and beyond but we hope to maintain that level.

I understand that, Jon, you -- your reluctance to get into details on when the chemistry unit will launch, but can we just, in general assume it's on track and that '06, sometime is a reasonable notion?

I am -- I'm not ready to tell you when the chemistry product will launch, but I can tell you it is on track. We're very excited about it. Every day we're, achieving important developmental milestones, the capability of the machine is -- is -- is -- it's designing out very nicely but we have not yet given a launch date for it.

Okay. Thank you very much.

And I will -- just one other comment. This is a development effort that is focused primarily on the engineering activities. It is not a development effort that has the technological risks that LaserCyte did. LaserCyte was a high technology innovation and risk. The chemistry machine is very innovative but it doesn't have a technology risk associated with it that the LaserCyte had. It's more a timing risk income terms of an engineering development effort.

Very helpful. Thank you, Jon.

And moving on we'll next hear from Robert Goldman of Buckingham Research

Thanks. Good morning.

Good morning.

First question is on the '05 guidance. I profess to have gotten a bit lost on the discussion relative to integration costs. And I'm hoping maybe you could, again, just tell us what the acquisition-related costs are in 2005, and if you can split those between what you might view as an acquisition transaction-related cost, versus ongoing costs. And then afterwards I've got a question on '06.

Okay. Good morning, Bob. This is Merilee and I will try to help you with my rather complicated message there on the impact of the acquisitions. With regard to the -- the costs that we would consider more transaction-related, and would not expect to be a recurring part of normal business, post 2005, those are in total we would estimate about $0.06. And I -- as was enumerating to Rick, I think listing all the different components there, that would be a part of that. In addition, we have amortization expense associated with the intangibles from both of these acquisitions that is about $0.05 for the total year, and for a couple of the key components of intangibles, they are being amortized in an accelerated fashion, as opposed to straight line and that is in accordance to the cash flows on which the intangible valuations are based. So this -- for the next few years this doesn't go away after 2005. The amortization expense will continue to be about at that level for the next, four, five years or so. Because it's an accelerated amortization, it will drop off in the out years. A couple of these larger intangibles items have 15 year lives and I think after four or five years, we will be 50 percent through with that amortization. So, again that was another $0.05 in 2005. So if you look and I said all in, then the net impact of these acquisitions in 2005 would be $0.03 dilutive. So you can do the math backwards and that's saying that there's $0.08 to $0.09 from what we would just call normal operations excluding amortization, excluding transaction related costs that these acquisitions would be contributing. Is that I hope -- is that clearer?

It's clearer. But let me ask on the press release, where you speak about the $0.03 of anticipated acquisition integration costs in in the quarter. That $0.03, is that part transaction related and part ongoing or one versus the other?

Yes, the $0.03 for the quarter is -- consists of about a penny of amortization and about a penny of the -- or I'm sorry, about $0.03 of integration costs.

It is the integration or how you refer to it as transaction costs is the $0.03 of $0.06 we see in those types of costs we see for the year 2005.

So those -- so that $0.03 in your mind would be a one-time cost. You have another $0.03 sometime else in '05, but not to be repeated in '06? Is that --

We would refer to them as certain discrete costs associated with the integration of the transaction.

But you are going to embed them within your operating results and not strip them out as a -- as a one-time cost and give us proforma numbers, is that correct?

That is correct. They would be included as a part of normal operations. So what we will do -- I mean that's what accounting rules would require that we should do but we will certainly be able to point those out as we report earnings

And then let me ask if I can on '06. I know you didn't give off guidance per se, but did you kind of on a couple of lines. I thought that I heard that sales would be greater than 10 percent, and I thought I heard that gross margin would be up over 100 basis points since the reduced costs from the J&J contract would add 100 basis points in and of itself. Did I hear that correctly?

Bob, the -- what -- what we indicated was that our outlook beyond 2005, over the several year horizon and our goal, our strategic plan is for 10 percent plus top line growth. That's per our earlier conversation with Rick. So, every year will be a little bit different, but that's our -- that's our goal for growth rate beyond 2005. What I mentioned is that we are also looking for margin expansion beyond 2005. And one of the elements of margin expansion we feel very comfortable about is our consumable cost position for the Vet Lab suite of instruments, which in and of itself will contribute -- will add one point all other things being equal to our company gross margin.

And when does that one point kick in?

That's in '06, over '05 comparison.

So is it fair to say then based on what you said that gross margin in '06 should be up more than 100 basis points relative to '05?

I think there is a -- we're just saying that there's one element of gross margin that is pretty rock solid, but there's going to be puts and takes with regard to the gross margin overall.

Okay. Thank you.

And, again, it is star, one if you would like to be placed in the queue for a question. If you find your question has already been answered you can remove yourself from the queue by pressing the pound key. We'll next here from Chris Montano of Wells Fargo.

Good morning. Could you please talk a little bit about your strategy or if you formulated one, for the Asian markets?

Yes, Chris, Jon here. I will take that. Actually, in my prior life, I spent a couple of years over in Asia, and I think you say it right there's more than one market there. We really look at it as three or four different markets. In Japan, we have an in-clinic -- well, we sell all of our products in Japan, including the companion animal products, water, dairy, and production animal services. And that's a good market for us, even though the Japan economy is traditionally viewed as a slow growth economy. I think it is a good economy for our products and one of the things that we hope to do later this year, for example, is to introduce the LaserCyte hematology analyzer to that market. And we think it will be very well received there. There are 8,000 veterinary clinics in Japan and that's compared to 25,000 in the U.S. They care as much about their companion animals as we do. They are just a little bit smaller in physical size but they have all the same issues. The second market is Australia.

That's another market where we sell all of our products, including the companion animal products, both in Japan and Australia, I might say we have a laboratory services business, and we are also planning on introducing LaserCyte in Australia this year, and that's just -- it's -- it's a very small market, obviously in relation to others. Only 20 million people there, but, again, an attractive set of markets for us. And then on a third market, that we would highlight would be China. China is primarily a market for production animal services. We have a joint venture in China with a local player, and I think that -- we are clearly as a first mover position in China. In fact even the Bommeli acquisition brings us some nice products that would be appropriate for the Chinese market and it's going to be -- China is one of the most difficult markets to predict when it is going to take off because they do have 600 billion chickens and 400 million pigs as to when they start using diagnostics to help maintain the health of their herds will be less predictable but when it happens we are going to be there. And we are there with a small production facility. And then the fourth area is really a collection of smaller markets would be Taiwan, Korea, Southeast Asia, and we sell actually all of our products in those markets too, with either on-the-ground presence or distribution. We hope to see growth in Asia, as robust as the growth that we have in Europe and actually all of those we're going to compare nicely, but maybe not be any more than the growth we see in the North American market.

Well, what's the penetration rate there? It sounds like it's fairly low in some -- in certainly in China but I guess I'm sort of looking for avenues of growth, that's -- that's the point of my question. What can we expect there going forward? Is it too soon to tell?

In all Asia?

Yes

I would say that the growth in Asia will mirror the growth in the rest of the company. It's a little harder to predict Asia but our expectation is growth in Asia will be at least the same level as -- as growth in -- in the rest of the company, consistent with our focus on a double digit topline growth.

Thank you very much on that. May I ask a follow-up question on the drug delivery intellectual property issue?

Please.

Do you have any sense of when you will might or -- when you might realize some revenue from licenses of that, or is that a -- is that, again, too far out to determine?

I think that's too far out to determine. It always depends on what other people want to do and there's -- people will -- other companies will make decisions about their pipeline using a lot of factors that we won't ever see, but we know it is a good product, certainly, the basis of what we're having with our launch of tomicasin. So, we think it's pretty innovative technology but somebody else also has to value it as such to license it

Thank you very much, Jon.

And we'll go next to Antoine High of Jefferies & Companies.

Hi. Good morning. In your lab services business, the 12 percent figure, excluding Vet Med Lab, and foreign currency gains is helpful but I wanted to see if we could drill down further into the components of that. You know, how much of that is domestic market and how much is driven by price versus volume or mix changes?

We don't -- we don't go to that level of detail. I will tell you that if you pull out the -- the Vet Med Lab acquisition, the lab business is heavily weighted towards the U.S. although not exclusively, of course, but it's a majority component of our lab services revenue so you would expect that the U.S. would have therefore disproportionately a larger impact on the way to growth globally

So then the U.K portion isn't that large?

Well, we -- it's U.K. and Japan and Australia

Okay

And collectively those are smaller than the U.S. one.

Okay.

In the -- in the U.S., it's a very competitive market.

Mm-hmm.

And we have a -- a respected -- one respected competitor, I'm sure you know well, and I will just leave it at that.

Okay. On the competitive front, have you -- do you feel like you've seen any changes in market share, in the -- in the particular markets where you do -- where you do compete?

It -- it's -- the market -- I think the great word to use was market, lab services is very geographically focused set of markets and there are changes in market share that go both ways in individual markets.

Okay. And then do you see any trends in the margins in that business?

Well, globally we are -- have a plan in place to see margin expansion in that business as a result of a focus on taking advantage of the opportunities that we have for operational excellence and cost and scale, particularly with the new acquisitions and how they fit into the network.

So then most -- it sounds like most of the profitability opportunities are in underserved markets?

Well, of course we -- we also made an acquisition in the U.S., a small one, early in 2004, and we have some operational opportunities in that acquisition. That will take -- that will have -- take some runway to achieve.

Okay. The -- you outlined pretty sizable growth in your digital radiography. I wonder if you could give us a picture of where you see the size of that overall opportunity in digital imaging?

It's a niche market. You know Idexx -- our guidance for 2005 will be $630 million. You know, I think the story with digital is really not unlike a story of all of Idexx. We have a lot of different products, and they are -- our plan, and the way we look at it is we see the opportunities in these different products and services and the opportunity to integrate them, and focus on a customer. The -- how each -- there's risk in every different product line. In aggregate, we are pretty comfortable with our revenue guidance. But we don't always know which one of our product lines is going to be over contributing and which one of our product lines will be undercontributing. Certainly we feel like we have very good momentum in the digital radiography business give than it is a very small piece of the total -- as I said the revenues in 2004 less than 1 percent of Idexx in total.

Right

So it's a small niche market but it's one that we think is at the knee of the penetration curve for that switch from film to filmless. The economics, as well as the customer benefits of the digital radiographed image and its ability to send that electronically to different locations is -- is -- is very compelling.

So then that's -- that's also compelling from a financial standpoint, not just as a strategic kind of cross sell for you guys?

Oh, yes. Well that's a good point. We are not profitable in that business today. We have been investing in that business, both in the hardware and more importantly on the software side. But it will be one of those elements that will be a margin contributor -- contribute to margin growth as that -- as that business grows. We'll get some good margin leverage.

Okay. Great. Thanks a lot.

Thank you.

And we'll go next to Josh Fisher of Pequot Capital.

Thanks. Could you share your volume or pricing in your lab services business in the quarter?

We don't -- we don't go to that level of detail.

Okay. How about your unit sales in your other machines, other than LaserCyte, like your vet scans in the quarter?

Vet scan is not a product that we offer. That would be one of our competitive products -- competitor products.

Your chemistry machine.

The VetTest.

Yep.

Yes. The numbers that we are, given the size of that in relation to the total materiality to the Idexx companion animal group, as I mentioned, for the year 2004, total instrument unit placements across all of our platforms, of which there are five or so, is up about a third over 2003. And then we also broke out the specific LaserCyte numbers.

Okay. And then did I hear correctly on the LaserCyte you said about 2,500 per quarter on the consumable side for LaserCyte?

That would be an annual number

Oh, annual. Okay.

$2,500 is a consumable annuity per instrument is the way to think about that

Okay. Great. And then lastly, again on just the margin on the consumable side in '06. What again -- I'm just trying to understand what gives you or what can you see that gives you the confidence that you are going to see gross margins increase in '06 over '05?

Well, the majority of those -- the majority of those consumables we have under very long-term contract. Some of those consumables we also manufacture ourselves. There's some mix issues too that factor in, and it's a matter of looking at our contract and our expected mix and such that gives us the ability to make a -- a prediction which we feel very, very confident about.

So it sounds like you guys are giving up-front price concessions?

No, this is -- this is purely a cost benefit.

Okay.

Purely cost and mix. Has nothing to do with pricing. We do -- this is nothing to do with stuff we do with the customer.

Okay. Just cost. And then you guys have been at it for a long time, so I don't understand what all of a sudden is going to give you this bump on the cost side on the consumable. I mean, I think --

It's -- it's something we are confident about as a result of mix and contractual arrangements that we have.

Okay. Thanks.

And that's all the time that we have for questions. I will turn it back over to Mr. Ayers for any additional or closing comments.

All right , I just want to thank everybody for being on the call and I also want to thank all of our Idexx employees who helped to contribute to a very strong 2004. We are building a great company here. We have a long ways to go. We're in an attractive market. A lot of different opportunities and -- and I really do appreciate the team that's -- that helps bring this to this point. Thank you all. That closes the call.

And that concludes today's conference. We thank everyone for your participation.