愛德士 (IDXX) 2005 Q1 法說會逐字稿

Good day, everyone, and welcome to the IDEXX Laboratories first quarter 2005 earnings analyst call. As a reminder, today's conference is being recorded. For opening remarks and introductions, we would like to turn the conference over to Mr. Conan Deady, vice president and general counsel for IDEXX Laboratories. Please go ahead, sir.

Thank you, Wanda. Good morning, everyone, and thanks for joining us. I'll start by introducing everyone who is here today. Jon Ayers, chief executive officer; Merilee Raines, vice president and chief financial officer; Bill Wallen, executive vice president and chief scientific officer; Bob Hulsy, vice president, laboratory services; and Ed Garber, director of financial planning and analysis.

I will, as always, first go through the Safe Harbor language, and then I'll turn it over to Merilee, who will review the financial results. Jon will then provide some commentary and then open the call up to questions.

Statements that we make on the call regarding management's future expectations and plans and our future prospects constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Our actual results could differ materially our expectations. Factors that could cause or contribute to such differences include our ability to develop, manufacture, introduce and market new products and enhancements to existing products, the effectiveness of our sales and marketing activities, our ability to develop, license, or obtain rights to new technologies, our ability to identify acquisition opportunities, complete acquisitions, and integrate acquired businesses, the impact of competition and technological change on our business, the effect of government regulation on our business, the impact of distributor purchasing decisions on sales of our products that are sold through distribution, changes or trends in veterinary medicine, our ability to obtain patents and other intellectual property protection for our products, successfully enforce our intellectual property rights and defend ourselves against third-party claims, disruptions, shortages or pricing changes that affect our 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, our ability to manufacture complex biologic products, and the effects of international operations including currency fluctuations. A further description of these risks and uncertainties is contained in our annual report on form 10-K for year-ended December 31, 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 future date. I will turn it over to Merilee.

Thanks, Conan. It's amazing to me you can do that without a script. Good morning and thank you for joining us today. As is our customary practice, I will take a few minutes to highlight our financial performance for the first quarter and provide an outlook for the second quarter and the year, and Jon Ayers will share with you an update on the business. We will then welcome your questions.

As you may have seen in our press release this morning, revenue for the quarter was $152.4 million and fully diluted earnings per share were $0.51. Year-over-year increases of 14% and 4%, respectively. Revenue was within the range of our guidance given in January of $152 million to $154 million, and earnings per share were $0.03 to $0.04 above guidance. I will give more details on the components of the P&L in a moment, but the key driver for the earnings over delivery were stronger-than-expected gross margin and lower-than-expected selling, general, and administrative expenses in part due to lower integration costs associated with our fourth quarter 2004 European acquisitions. Those costs came in at $0.02, about a penny less than our projections.

For further P&L highlights, the 14% revenue growth consisted of 7% contributed by 2004 acquisitions, 1% from favorable foreign exchange rates, and 6% organic growth. International revenues of $53.5 million comprised 35% of total revenues. They increase year-to-year by 28% in large part due to the strong contributions from our fourth quarter contributions, Vet Med Lab and Bommeli, which added 19% to international growth. International year-to-year growth adjusted for currency and to eliminate revenues from acquired businesses was 5%.

Our companion animal group revenues of $124.9 million grew 14%, or 13% on a constant currency basis. Point-of-care rapid assays were $24.8 million, an increase of 2% on a reported and currency adjusted basis. As we noted throughout last year, the first quarter of 2004 had unusually strong growth of 30% for this product line due to various factors including some targeted marketing and sales efforts and favorable impact from distributor inventory changes. We anticipated that this strong compare would produce a correspondingly low single-digit growth in the first quarter of 2005. As we look forward, we project rapid assay growth rates to rebound and, for the balance of the year, be in the 7% to 9% range we have been citing for a while.

Sales of our IDEXX vet lab and related consumables, accessories, and services totaled $52.9 million for the quarter, an increase of 8% over the first quarter of 2004. Instrument sales were $8.6 million, down slightly year-to-year, reflecting a slight decline in LaserCyte placements from 326 units in 2004 to 308 units in 2005. However, total instrument placements were up 10% over the first quarter of last year. LaserCyte placements were slightly lower than anticipated due primarily to a shortfall in Europe where we had some transition in our sales force. We project full-year placements at 1,400 to 1,450 with an average selling price of $17,500. The mix of instruments place combined with the mix of sale versus rental instruments is the reason for the relatively flat revenue on higher placements.

Consumable reagent sales were $39.7 million, up 11%, or 10% adjusted for currency. I should note that we have done some regrouping of our product line revenues to conform with groupings in our 2004 10-K. One result of this is that instrument consumables now include all consumables associated with the IDEXX vet lab instrument suite and previously we had included only chemistry and hematology reagents. We have also regrouped 2003 revenues for comparability. The timing of shipments between the fourth quarter of 2004 and the first quarter of 2005 for one of our relatively lower-volume reagents had an estimated favorable impact on the first quarter consumable growth rate of about 3%. Even adjusting for this impact, consumable revenues have continued to grow nicely, and we believe are reflective of the strong instrument placement we have been seeing over the last several quarters.

As throughout 2004, the U.S. distributor inventory levels for rapid assay test kits and instrument consumables remained between three and four weeks at the end of the first quarter based on forward-looking demand. Changes in inventory levels had an insignificant impact on reported growth percentages of the product line.

Laboratory and professional service revenues of $35.6 million increased 35% year-to-year. Acquisitions completed in the first and fourth quarter of 2004 contributed about 30% to growth and favorable currency contributed about half a percent. So organic growth was about 5%. This adjusted growth rate is lower than what we have experienced in recent quarters, largely due to lower growth in Australia.

If you will remember, in 2004 our labs in Australia benefited from a high volume of testing of livestock for export purposes. As we noted at the time, this testing tends to be episodic in nature, and we have not seen these testing contracts to the same level in 2005. For the rest of the year, we project worldwide growth, excluding currency and 2004 acquisitions, for labs and professional services, up 8% to 10%. This range is down slightly from the 9% to 11% we have cited previously, and is due to the slower-than-anticipated growth in Australia.

Our computer systems and digital radiography product lines posted revenues of $7.5 million, an increase of 2% over the first quarter of 2004. The modest growth is primarily the result of timing of system installations in our computer systems product line. We ended 2003 with a relatively large backlog of systems, which were installed in the first quarter of 2004. Conversely, system installations were very strong in the fourth quarter. If you will remember, this product line grew 21% year-to-year in the fourth quarter of 2004. And so we entered 2005 with a relatively smaller backlog. We expect revenues from these product lines to rebound to double-digit growth in the second quarter.

Pharmaceutical products contributed $3.3 million to companion animal group revenues in the first quarter.

As for our other business segments, the water business recorded sales of $12.8 million, an increase of 8% year-to-year. Adjusting for exchange, growth was 6%.

The food diagnostic segment reported revenues of $14.7 million, a year-to-year-increase of 26%, or 22% adjusted for currency led by continued very strong performance in our production animal services line with revenues of $10.9 million, or 34% growth on a constant currency basis.

The 2004 acquisitions contributed about half the growth, or 17%, and organic growth also came in at 17% due to strong demand in Europe from livestock testing programs.

Now, looking ahead, we project revenues for the second quarter at $160 million to $162 million, year-to-year growth of between 17% to 18%, with acquisitions contributing about 6% and currency contributing 1% to 2%. For the full year we continue to project revenues at $630 million to $640 million, a growth of about 16%.

As I mentioned earlier, growth margin was strong for the quarter at 50%, about a point above our expectations. The better-than-expected performance was primarily due to continued efficiency gains in our after-sales support and service of our in-clinic instrumentation, particularly LaserCyte, and to strong sales performance in our relatively high-margin production animal products.

Looking forward to the balance of the year, we expect to see gross margins remain at about 50% for the second quarter, and then gradually increase over the back half of the year to be 25 to 50 basis points higher for the full year than for the first half. Factors contributing to the margin improvement include product mix, exchange favorability, and gradual reduction of integration costs associated with acquisitions.

R&D expenses at $9.8 million, or nearly 6.5% of revenues, were right in line with our guidance, and we expect them to remain at 6% to 6.5% of revenues over the balance of the year.

SG&A at $40.2 million, or 26% of revenues, compares to $33.2 million, or 25% of revenues for the first quarter of 2004. This percentage increase was expected and reflects our 2004 Companion Animal Group sales force expansion and acquisition integration costs. However, selling, general, and administrative expense was at the low end of our guidance as a percentage of revenues. Lower-than-anticipated integration costs associated with our fourth quarter acquisitions, some lower program spend, and slower ramp and headcount and related expenses primarily in Europe are the key contributors to the spending favorability versus guidance. We expect SG&A as a percentage of revenue for the balance of the year will range between 26% to 26.5% of revenues.

Operating margin of $26.1 million, or 17% of revenues, compares to $25.3 million, of 19% of revenues, for the first quarter of 2004. The 17% margin is approximately 1.5 points favorable to our expectations for the quarter, and is due, as noted, to the favorable gross margin and lower-than-anticipated selling, general, and administrative expense spending. Operating margin, as a percentage of revenue, should continue to gradually improve over the remainder of 2005 and be approximately 18% of revenues for the full year.

As noted in our press release, we estimate earnings per share in the second quarter to be $0.56 to $0.58 and $2.25 to $2.28 for the full year. Included in the quarter and year estimates, our integration costs of $0.01 and $0.05, respectively. Implicit in our guidance is an acceleration of EPS growth over the second half of the year as both a function of the strong compares in the first half of 2004 versus the second half of 2004 and improving operating margins over the course of 2005. Adjusting for discrete items in 2004, which favorably impacted earnings by $0.09 and for integration costs in 2005 of approximately $0.05, we expect the earnings growth rate for the first half of 2005 will be just under 4%, and the growth rate for the second half of the year will accelerate to the mid- to upper teens.

As for the balance sheet and cash flow, cash and investments ended the quarter at $122 million, which was a decrease of about $35 million from year-end. Cash from operations was $300,000, and purchases of fixed and others assets were $5.2 million. As was the case in the first quarter last year, we expected the first quarter of 2005 to be the weakest quarter from a cash flow perspective. Receivables typically increase due to the beginning of the revenue ramp for heartworm season and payables and accrued expenses declined from year-end levels due to tax payments and annual compensation-related payments. We expect cash flow to improve over the balance of the year, and we forecast free cash flow to be 80% to 90% of net income for the year.

Day sales outstanding was 42 days, up three days sequentially and year-to-year. The increase is due to timing of sales in the quarter. March was particularly strong, given a somewhat later start this year than last to our seasonal heartworm marketing campaign and also due to the timing of a couple of U.S. distributor payments, which lapped into the first week of April.

Inventory of $78 million increased $2 million from the end of the year. For the balance of the year, we project DSO to be approximately 40 days, and inventory to be between $80 million to $85 million. Fixed-asset purchases will be $30 million to $35 million for the full year. We repurchased 531,000 shares of stock in the first quarter for a total cost of approximately $29.5 million.

Thank you and now to Jon.

Okay, thanks, Merilee. I'd like to touch on some overall themes for the quarter and provide an update on a couple of aspects of our business, and our outlook, and then open it up to your questions.

Revenues came in very much as we expected against a strong compare for the first quarter of 2004 with about 13% before currency benefit of 1%. As investors will recall from last year's first quarter, we had a very, very strong quarter across the board for growth, and while our revenues met our expectation, we did better on margins, specifically gross margins. This came as the result of an early benefit in some of the work that we've been doing to improve product costs including LaserCyte instrumentation costs.

Operational efficiency, coming from a focus on such initiatives and Lean and Six Sigma across the company, continues to form a pillar of our strategy.

Our two European acquisitions, closed in the fourth quarter, are also doing very well; in fact, exceeding our expectations in some ways. Integration at both Vet Med Lab and Bommeli are on track, and the integration costs will be slightly lower for the year than we first expected, as Merilee mentioned. These two acquisitions are also reporting operating performance above our expectations. Vet Med Lab will enable us to achieve synergies with our in-house diagnostic offering in Continental Europe, particularly Germany, where they are the strongest, similar to our strategy in the U.S.

We are also very pleased with other fundamentals of our business across a variety of areas. For example, instrument placements are 10% over a very strong Q1 2004, and we are also pleased with our initiatives to drive productivity and sales and world-class customer service. On the new product front, let me start with the IDEXX Vet Lab line of instrumentation and the associated consumables that together form our largest line of business.

As investors know, the IDEXX Vet Lab is a comprehensive suite of integrated blood analyzers designed for the unique needs of the veterinarian, allowing lab work to be completed in the hospital during the patient visit. We continue to bring innovation to this suite including menu expansions on the existing instruments of the offering, software upgrade, and the introduction of additional instruments that expand the suite's diagnostic capabilities.

Our newest instrument addition is the VetStat, which we will begin shipping this quarter. VetStat is the blood gas and electrolyte analyzer specifically designed for the companion animal market and the equine veterinarian with a test menu and reference ranges specifically designed for this customer base. We expect that VetStat's instrument and consumable revenues for the first full year after launch to be $2 million. Average unit price for the instrument will be in the $4,000 to $5,000 neighborhood. The new news with VetStat is that we're actually launching with a broader menu than we anticipated in January. Along with electrolytes, blood gases, and ionized calcium, VetStat will include the capabilities to measure glucose, important in tracking glucose curves and helpful in certain fluid therapy situations.

The VetStat analyzer connects to the IDEXX Vet Lab through the PC that comes with the LaserCyte called "The Vet Station." This integration, which provides for a complete set of results on the patient in one report builds customer value for the whole IDEXX Vet Lab suite of analyzers.

Moving on to other new product news, the next menu expansion slated for the IDEXX Vet Lab is serum bile acids. The bile acid assay provides for an important liver function test and complements the IDEXX Vet Lab's current liver testing capability including that of ammonia, a unique menu item on the IDEXX VetTest chemistry analyzer. We expect to launch the bile acid assay this summer, thus, the IDEXX Vet Lab will provide the most complete and convenient capabilities for testing and monitoring liver function, augmenting its already best-in-class clinical menu.

Last winter we similarly enhanced the IDEXX Vet Lab menu with the launch of urine protein creatinine assay, or UPC, on the VetTest, important to screen and monitor kidney function.

To summarize, over the last 18 months we have upgraded the IDEXX Vet Lab with 12-pack singles, a new equine health profile; the introduction of urine testing with UPC; and software upgrades with new analytical capabilities. Add to that the introduction of VetStat and bile assets and other yet-to-be announced projects in the R&D pipeline that will further expand the IDEXX Vet Labs menu, capability, flexibility, and ease of use over the next year, and you can see why we feel confident with the momentum in the in-clinic instrumentation business.

From the customer perspective, new instruments, new menu, new functionality through software all bring value to their IDEXX Vet Lab investment. Customers with the IDEXX Vet Lab who have made an investment not only with the most comprehensive and integrated suite of instruments but also with a partner in veterinary diagnostics see that their partner continues to bring a steady stream of new innovations to the market.

Of course, for IDEXX this builds loyalty and increased retention of the installed base, the means for new account acquisition, and a growing profitable consumable revenue stream from this growing installed base.

Separately, we continue to make good progress on the development of our next-generation chemistry platform. We are continuing to find the final configuration of this new analyzer, and we've added some new features that will further distance it from anything currently on the market. As a result, we now see that its development will not be complete before 2007.

In our rapid assay business, we also have a pipeline of new products in the works, and expect to introduce one to the market later this year. I hope to be able to speak more about this during our second quarter conference call when we were scheduled to have completed more of the development milestones.

As for the pharma pipeline, we continue to prepare for FDA approval and launch of our tilmicosin single-dose antibiotic for cats. We have submitted to the FDA the manufacturing section of the application and will complete shortly a response to the FDA's remaining question on the efficacy section. A successful FDA review of our new animal drug application based on FDA's current review schedule would imply FDA approval of Tilmax [ph], our tilmicosin product, in the first half of 2006.

As we previously stated, we received a notice of allowance from the U.S. Patent Office on our primary patent application covering the tilmicosin delivery technology, and we've just been informed that the patent will issue next Tuesday. This broad patent covers the very innovative and flexible delivery technology used in the tilmicosin for cats called "fatty acid salt," or FAS. We believe the FAS platform has applicability with a number of other pharmaceutically active molecules or formulations. Thus, the FAS technology is used in other products in the development of pipeline of IDEXX pharmaceuticals.

A final customer note in our companion animal business -- this month we are very pleased to have signed a new five-year contract with Banfield, the vet hospital. Banfield is the largest veterinary service provider in the world with over 450 hospital locations. This agreement includes key components of the IDEXX Vet Lab including an extension of their use of the VetTest, and newly outfitting their hospitals with the VetStat and the VetTest Snap Reader. The agreement also includes UPC chemistry assay and the new addition to their protocols of two of our rapid assay test kits -- the canine Snap 3DX parasitic disease screen and Giardia in-house hospital kit. In addition to all these innovative IDEXX technologies will bring real value to Banfield, their clients, their patients, and staff veterinarians and, of course, to IDEXX.

Switching to the production animal line within the Food Diagnostics Group and the introduction of our IDEXX HerdChek BSE Antigen test kit, we continue to work this product's introduction with European customers. We have received EU approval for BSE and have been working on country approvals and lab accreditation processes with good success. We did not expect any BSE revenue in Q1, however, our 2005 revenue forecast for BSE remains the same at roughly $5 million.

If we were to get to 15% share in time of the market with the AUPs, or average unit prices, that we expect in future years in this market, we would gauge our BSE revenue potential at about $10 million annually.

As we look at IDEXX, in total, for the rest of 2005, our plan calls for continued investment in the first half of the year. These areas include product development, quality, operational excellence, and augment sales and marketing, all of which will keep us very competitive, propel revenue growth in 2006 and beyond, and improve margins. As Merilee has mentioned, our year-over-year EPS growth forecast for the second half of 2005 accelerates as these investments turn into leverage returns and margin growth.

We have a strategic plan beyond 2005 that generates an average of 10% plus revenue growth and mid-teens earnings growth. We remain focused on these longer-term financial goals and make our investments with that investment horizon in mind. Our confidence comes from several factors -- first, the underlying growth of the companion animal market and our number-one global position in diagnostic products and services; 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 food, animal, and water businesses.

Revenue growth and improving cost position in our IDEXX Vet Lab instrumentation and consumable line coming from product mix improved pricing under our long-term supplier agreements with our suppliers and improved cost of our manufactured instruments, such as LaserCyte. For example, the improvement in cost of our IDEXX Vet Lab consumables alone lie at almost a point of gross margin to all of IDEXX in 2006, all things being equal, and further improve gross margins in 2007 -- again, all other things being equal.

Improvement in the operating margin of our laboratory services through a focus on operational excellence and the integration of our European acquisitions is another area of confidence. The last two include improvement in earnings from our Bommeli acquisition as it works through acquisition integration costs and accelerated amortization in 2005, and, finally, further deployment of cash generated by the business for tuck-in acquisitions and stock repurchases as appropriate.

So, of course, our business, like any business, has risks and uncertainties, which were laid out by Conan at the beginning of the call and in more detail in our SEC filings. However, IDEXX also has very strong strategic positions in great markets. We have a great team here that is focused on our customer and our strategy. We think our results and delivery to plan over the last two years demonstrates that, and we have great confidence in the future.

So, with that, we open it up to your questions.

[OPERATOR INSTRUCTIONS] Timothy Lee with Merrill Lynch.

In terms of your comments there of improving gross margins in '06, in your words of "all things being equal," you're going to get 100% basis point improvement just from the slide alone, but given all the operational efficiencies that you're achieving today, and I suspect those are going to continue, going forward, should we think about gross margin uptick in '06 north of 100 basis points?

Well, a couple of corrections there, Tim. The gross margin that we're talking about really comes from that 100 basis points, all things being equal, is the outlook for cost position in all of our consumables for the Vet Lab, not just the slides, although slides is the biggest component of what we sell. So it's a little broader than just that, but that's a component.

We haven't given guidance for 2006, obviously, we've got a number of things going on in the business. There are product mix issues. We do expect improved cost position in a number of our businesses and how that all translates out, that's why I say "all things being equal," but they won't be equal. We'll also be growing new businesses that will perhaps have lower gross margins. So what we're saying is a very significant piece of the equation is something that we feel very confident about because it is pretty solid cost reduction that's in the plan.

Okay, and then just one follow-up, if I may -- over the last several quarters you've had some pretty consistent earnings upside -- some of that was a function of lower SG&A and the like -- are you having difficulty adding headcount or are you not finding the people, and could that impact some of your growth initiatives, going forward?

I think it's probably a little bit more of a competitive environment for talent than it has been. I think that's probably true for everybody in industry. One of the things that we do, though, is we work very hard to find the right people, and so typically when we're bringing people in, we talk to a lot of people, many of which we don't really think are going to be the right fit for the company and add to the culture that we're trying to drive. So it's like everything else -- if you hire someone, you want to hire the right person. You can make mistakes hiring the wrong person. And so we're picky about that.

Ryan Daniels from William Blair.

Yes, Merilee, a couple of quick housekeeping questions up front -- first, I know I read in the K that you guys took a charge of just under $1 million to extend the shelf life of your raw material for Navigator. Did we see that in this quarter anywhere? Was that in the cost of goods sold, perhaps? Where would that be?

Ryan, that is part of inventory cost, so it's on the balance sheet.

Okay, so it's in the balance sheet. Okay, and then in regards to the pharma, obviously, a nice quarter there, kind of at a run rate of $13 million or so. Is there any slowdown that you anticipate or do you think your $12 million target now looks conservative based on the start this year on the pharma side?

I would say it's neither aggressive or conservative. We feel pretty good about it. A couple of our products Surpass, in particular, and Navigator, secondarily, are seasonal products that second and third quarter are the most important quarters. With Surpass, we actually launched it in the middle of second quarter last year, and so we've got the season ahead of us there as part of a launch and ramp-up. But, on the other hand, we feel very good about it. All indications are good. Part of our SG&A has been in the first quarter included preparing the market for Surpass in its first full season. We feel very good about the fundamentals of the other pieces of other products within the pharma product offering right now.

Okay, great. And then, with your Banfield contract, are you going to be the exclusive provider for the U.S. and Latin America, or is that just for their U.S. stores?

I believe that covers -- I'm pretty sure it covers the whole Banfield customer relationship.

Okay, and then two more quick ones --

I'm going to have to confirm that with you. I'm pretty sure it does.

Okay, I can follow-up with you offline. Any impact on you guys from the Burns-Butler deal? I know you work with both of them from a distribution standpoint, but is there any kind of overlap in warehouses where they might let some inventory flow through that could disrupt you over the next quarter, or are you pretty comfortable with that as well?

First of all, they are two very important distributors to us, and we're pleased they're getting together, and if they become more efficient as a result of that, efficiency in our channel is a good thing for us. We're important to them, they're important to us, and we continue to work that relationship.

With regard to inventory in the channel, we are always trying to keep that channel as efficient as possible. We figure we've got it at -- if we could take even more inventory out and continue to have very high customer service levels, we would like to do that, but I don't think there's any worry about inventory overhang or anything like that. It's not a near-term concern for us. We'd like to gradually, over time, continue to lower distributor inventory, but we've done most of that over the last couple of years.

Sure. Okay, and then last question, I'll jump off -- the BSE rollout -- is that something you still think or anticipate you might start generating revenue early in the second quarter? Have you seen any revenue yet and, if not, do you anticipate it perhaps over the next month or so starting to roll in?

Ryan, we have not seen any revenue yet, but we do project that there could be a modest amount of revenue in the second quarter.

Rick Wise, Bear Stearns.

This is Mike Bailey in for Rick. I just had a couple of questions for you -- I wanted to dig in a little bit more into the better-than-expected gross margins. Can you help us understand a little bit sort of -- you gave us some information a little bit earlier as far as where it came from but perhaps on the acquisitions side, can you help us understand what were some of the reasons why the expenses were a little bit less than expected in the first quarter?

Hi, Mike, it's Merilee. With the acquisitions I think some of this is just -- particularly with relation to Bommeli, part of our integration efforts will be to consolidate our manufacturing operations in Switzerland, where we currently have operations now in Switzerland and Sweden, and that process, we're doing that with care, and it's just going to take a little bit longer than we thought. But also, as we're looking at combining of businesses, I think we're finding that operationally, they're doing better, and we're achieving our objectives more efficiently than we had originally projected. And part of that is a function -- does show up in the gross margin line. Some of these integration efforts track there. So they were actually about on track at that point in gross margin for the first quarter, but they will track down over the balance of the year in gross margin.

Okay, great, and switching over to the BSE test -- we know that there were a couple of other competitors that were attempting to launch products in Europe. Are there any products approved on the market and generating revenues at this point, or is IDEXX essentially in the same boat as everyone else?

Well, there are some -- first of all, of course, there is a market there today being served by the products that have been longer-standing -- first-generation products. With regard to the new product approval, I think there's only one other that we think is really going to be viable, and I think we're in no different boat than them.

[OPERATOR INSTRUCTIONS] Robert Goldman, Keybanc.

One question on the financials for clarification and then two product questions -- on the guidance, I just want to make sure that I understand this correctly -- it sounds like, excluding the $0.05 of acquisition charges, your guidance on earnings for this year is $2.30 to $2.33, and that compares to your prior guidance, excluding charges of $2.26 to $2.31. Do I have that correct?

That's correct.

The current guidance is correct, the prior guidance included --

If you included $0.06 integration costs -- so $2.26 to $2.31.

Okay, so you're increasing your guidance by a couple of pennies, and is it fair to say that relates to the higher-than-anticipated gross margin?

What we really saw was that we got an improved gross margin earlier than we expected, and so, if you will, it's a down payment on the year's growth and gross margin in the first quarter.

Right. On the product side, on clinical chemistry, I think your wording was that the development would not conclude until 2007. So it sounds like we should not anticipate this product on the market until 2008 at the earliest? Is that correct?

Well, we haven't given a launch date, but, no, we would say that the conclusion of -- when we do conclude development, that the launch would be the next step after that. So, really, to take the strategy here, Bob, we feel -- first we feel like we've got great momentum in the existing set of platforms, and, of course, we're adding to those platforms, and we're adding menu, so this existing chemistry analyzer, if you will, has shown it's got real good legs and expanding capability. So we're pursuing that.

And, second, this other instrument -- the next-generation instrument -- it's going to be -- we're taking the care to make it as good as it can be and, of course, that usually requires a little bit more development. So we feel very, very excited about how it will leapfrog all existing technologies on the market and the development timeframe, as it currently stands, as I mentioned on the opening comments.

Two other things on the product side -- first, in the heartworm diagnostic test, you suggested previously that you didn't have this additional competitor re-coming into the market, if you will, and that, I assume, is Symbiotics. But, of late, they've been having some financial issues, ongoing concern issues. What are you seeing relative to the competitive environment on the heartworm test?

Well, just to remind other investors -- and I know you know this, Bob -- when we look at canine, there are two segments. One is the parasitic disease screen, that includes Lyme disease and Ehrlichiosis, E. canis, and, of course, we have 100% of that market, because we have the only product on the market for that -- the SNAP 3DX. So the portion of the market that we're talking about here is the one that's heartworm-only. We see some competition at the very most price-sensitive segment of that market, but I wouldn't say it's a major -- we haven't seen a major activity there.

Okay, and then, finally, given your expectations on your DSE sales, given the assumed market share that you based those sales assumption on, it seems to me you're thinking the market price of the test is going to drop by about one-third. Are you seeing anything now that gives the indication that that will happen?

Well, yes, I think prices are coming down, and I think that generally happens when you have more offerings in the market. And so I think it's a natural phenomenon. We obviously are anticipating more price declines in our guidance than we've seen, to date. It's an evolutionary thing. Of course, from our point of view, it's not going to -- our costs here are very attractive but certainly the revenues will be reflective of an average unit price assumption.

At this time there appears to be no further questions. I'll turn the conference back over to you, Mr. Ayers, for any closing remarks.

Well, thank you all very much, and we appreciate being on the call, and we look forward to updating you in future quarters. That ends the call.

That does conclude our teleconference for today. We'd like to thank you all for your participate. You may now all disconnect.