愛德士 (IDXX) 2005 Q4 法說會逐字稿

Good day, everyone and welcome to the Idexx Laboratories fourth-quarter 2005 earnings conference call. Just a reminder, today's call is being recorded. Participating in this morning's call are John Ayers, Chief Executive Officer; Merilee Raines, Chief Financial Officer and Ed Garber, Director Investor Relations.

Idexx would like to presage the discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements that numbers of Idexx management may make on this call regarding management's future expectations and plans and Idexx's future prospects constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995.

Such statements include but are not limited to statements regarding management's expectations for financial results for future periods and the timing of new product introductions. Listeners are reminded that actual results could differ materially from management's expectations. Factors that could cause or contribute to such differences are described in Idexx's quarterly report on Form 10-Q for the quarter ended September 30, 2005 and its annual report on Form 10-K for the year ended December 31, 2004, which are on file with the SEC and also available on Idexx's website, Idexx.com.

In addition, any forward-looking statements represent Idexx's estimates only as of today and should not be relied upon as representing the company's estimates as of any subsequent date. The company disclaims any obligation to update or revise any forward-looking statements in the future even if estimates or expectations change. At this time, I'd like to turn the conference over to Merilee Raines.

Thank you. And good morning, everyone. Thank you for joining us today as we discuss our fourth-quarter financial results, 2006 financial outlook and other updates on our business. I will first provide some highlights on the fourth-quarter financials and 2006 projections and then John Ayres will share with you the business update.

As you have seen from our press release this morning, we had a strong finish to 2005 with fourth-quarter revenues of $167 million and earnings per share of $0.60. These were year-over-year increases of 16% and 22% respectively. We exceeded our quarterly revenue guidance of 160 to $163 million and earnings per share were right at the high end of our guidance of $0.58 to $0.60.

As mentioned in or press release earnings per share included $0.03 of taxes associated with a $30 million dividend repatriation to the U.S. from our international operations under the American Jobs Creation Act. The dividends and related taxes were not included in our guidance. So exclusive of these additional taxes, we exceeded our earnings guidance by $0.03. The earnings favorability was the result of our top-line performance.

Acquisition integration costs came in at our projected $0.02. We also had $0.02 of integration costs in the fourth quarter of 2004. So year to year, earnings per share adjusted for these discrete items of acquisition integration in both 2004 and 2005 and taxes on dividend repatriation in 2005 were 28%. Revenue overdelivery came from strong performance across our Companion Animal Group businesses with all product lines performing at or above our expectations.

To remind you, our earnings press release now provides revenues by product and service line and year-to-year revenue growth both as reported and adjusted for currency.

As I will refer at various points to organic product line revenue growth adjusted for currency, acquisitions and in some cases distributor inventory changes, you should refer to the press release for reported growth rates.

Acquisitions contributed 5% to total company revenue growth in the fourth quarter, a little more than our thinking of 4%. So organic growth adjusted for acquisitions and the 3% negative impact of currency was 14%. International revenues comprised 35% of total revenues. They increased year to year by 15% on a reported basis with currency producing a negative 8% impact and acquisitions adding 10% to growth.

Our Companion Animal segment, which accounted for 81% of total revenues for the quarter, had a growth of 13% after adjusting for the 2% negative impact of currency and 5% contributed by acquisitions. These acquisitions were primarily in laboratory and professional services.

To provide you with a little more color on revenue performance by product line within our Companion Animal segment, instruments, consumables and related accessories and service revenues were $59.2 million in the fourth quarter of 2005 and had currency adjusted year-to-year growth of 15%. As is normally the case, the fourth quarter was our strongest instrument placement quarter of the year as there is seasonality driven in part by our customers' year-end tax planning activity.

However, beyond normal seasonality, growth of instrument placements to new customers in the fourth quarter continued a pace with our strong third-quarter performance to produce total year growth of 30% over a strong 2004, which also posted 30% annual growth. As we have noted, new instrument placements are the primary driver of consumable growth. Instrument consumable revenues were $39.8 million for the quarter.

Now there are a couple of factors impacting year-to-year consumable growth rates that are worth mentioning. In the fourth quarter of last year, we had a temporary disruption in the supply of one of our lower volume reagents, which reduced 2004 fourth-quarter sales of this reagent and therefore increased our 2005 reported growth rate. As an offsetting factor, year-over-year changes in distributor inventories negatively impacted the growth rate. Adjusting for the net impact of these two factors, the year-to-year growth for instrument reagent sales was 11%. This very strong performance is primarily the result of instrument placements as I have said. So we also see some benefit from modest price increases on certain reagents.

The solid growth in the fourth quarter produced year-to-year growth rates for the second half and full year 2005, up 9% and 7% respectively. These growth rates are normalized for currency, changes in distributor inventory and the fourth quarter 2004 supply disruption issue that I just mentioned. Accordingly, we are increasing our longer-term revenue growth projection for instrument consumables from 5 to 7% to 7 to 9%.

Rapid assay products with revenues of $22.8 billion had year-to-year reported growth of 11%, the same as organic growth, which is adjusted for exchange and distributor inventory changes. This organic growth is higher than previous quarters of 2005 as we saw a relatively greater contribution from price favorability in the fourth quarter. Full year growth in 2005 for rapid assay products was 8% adjusted for currency and distributor inventory changes. We are revising our longer-term growth rate to 6 to 8% based on a lower growth rate for our feline products, which is consistent with recent trends.

The fourth-quarter 2005 laboratory and professional services revenues were $39.5 million. Organic growth, which excludes the impact of currency and acquisitions, was 9%. During the fourth quarter, we completed the acquisition of a small reference laboratory business in France. Though not financially significant, this acquisition, together with our other European acquisitions earlier in the year, augment our service offering in continental Europe and the United Kingdom.

We reaffirm our longer-term guidance for growth in labs and professional services of 8 to 10%. Our computer systems and digital radiography product lines posted revenues of $10.8 million or growth of nearly 40%. As is the case with sales of our in clinic blood analyzers, the fourth quarter of the year also tends to be the strongest for this suite of products.

In addition, both benefited from our third-quarter acquisition of a direct digital imaging product line that contributed 23% to fourth-quarter year-to-year growth. We are seeing an increasing market interest in this technology and we will be expanding our product offering in 2006. We expect revenue growth from these product lines of 20 to 30% in 2006 as we benefit from the full year impact of the acquisition and product line extensions and enhancements.

The Food Diagnostic segment sales were $16.4 million with 24% year-to-year growth adjusted for currency and acquisition. Consistent with prior quarters, our production animal line of products led the way in this segment with year-to-year organic growth of 35% for the quarter. The $0.02 of integration costs in the fourth quarter of 2005 were largely attributable to the final stages of our consolidation of European manufacturing and a newly renovated facility in Switzerland. We are pleased at how well the integration of the fourth-quarter 2004 acquisition of Bommeli has gone and this business has added to the already strong foundation of our production animal services business in Europe.

With regard to BSE, the improvements to our product protocol and expanded specie testing capability have helped us secure testing contracts across Europe and we are tracking well to our projected 2006 revenues of 5 to $6 million.

Now moving down the P&L, gross margin at 51% of revenues was right in line with our projection and down slightly from the third-quarter margin percent due to the relatively greater portion of lower gross margin capital equipment sales in our fourth-quarter revenue mix. Our operating expenses, which include R&D and SG&A, were nearly 33% of revenue. All of these P&L components produced an operating margin for the fourth quarter of 18% and just over 18.5% for the second half, right in line with our thinking.

A couple of closing notes on the quarter's financial performance. We ended the quarter with cash and investments of $133 million. Cash from operations was $40 million and we purchased $9 million of fixed and other assets to generate free cash flow of $32 million in the fourth quarter. This brings year-to-date free cash flow to $90 million or about 115% of net income.

Inventory at $69 million was lower than it has been in recent history due primarily to the timing of a receipt of an inventory shipment of chemistry slide consumables in early January 2006 rather than in December.

Now, looking forward to 2006. As we mentioned in our third quarter earnings call, we will be giving only annual guidance for 2006. We are increasing our top-line projection to 700 to $710 million from our previous guidance of 695 to $705 million or about 10% over 2005 with currency negatively impacting growth by about 1% and 2005 acquisitions contributing about 1 to 2%. We expect year-to-year revenue growth to be relatively constant over the quarters.

The following comments on the remainder of the P&L include the impact of expensing equity-based compensation in accordance with FAS 123R. We expect the gross margin as a percent of revenue to increase about 50 to 100 basis points over the course of the year and be approximately 51 to 51.5% of revenue for the full year.

Drivers for the improving gross margin are as we have discussed previously, improving margins on instrument consumables in accordance with supply contracts, efficiencies in our manufacturing processes for both instruments and test kits, lower cost to provide after sale service and support of our Idexx VetLab instrument suite and improving margins in our lab businesses due to volume leverage and efficiencies. R&D will average out between 7 and 7.5% of revenue and will be fairly ratable in dollar terms over the course of the year.

SG&A is projected to be between 27 and 28% of revenues for the year with expenses highest in the first quarter and dropping down to a relatively constant level as a percentage of revenues for the balance of the year. The profile of SG&A spending is impacted by the timing of marketing and sales promotional activity.

Our thinking about gross margin and operating expenses leads to an operating margin rate between 14.5 to 17.5% of revenues over the course of the year. It will be lowest in the first quarter and approximate 16 to 17% for the year. We project interest income to be approximately $4 million for the year and the tax rate to be approximately 31 to 32%.

Another word or two regarding the equity compensation expense. This expense is expected to be fairly ratable over the four quarters and will be spread over the P&L consistent with other cash compensation. The majority of the expense, approximately two-thirds, will be in SG&A. Since we last communicated with you at the time of our third-quarter earnings call, we had made some modifications to our equity compensation program so that it now contains a blend of restricted stock and stock options as compared to our previous program, which used stock options exclusively. Our updated projections indicate that equity-based compensation charges will be about 1.5 to 2% of revenues for the year, which implies an operating margin of 18 to 19% for the year, excluding the impact of this expense.

This adjusted operating margin is relatively on par with the operating margin for 2005, exclusive of acquisition integration costs and is reflective of our thinking that year-to-year improvements in our gross margin will be reinvested in the business to support attractive growth opportunities. Our longer-term expectations remain at 10 plus percent revenue growth and midteens earnings per share growth.

As stated in our press release, we project earnings per share to be $2.40 to $2.50, which equates to a growth of 13 to 17% if 2005 is adjusted for discrete items associated with acquisition integration and taxes on cash repatriation and the pro forma expense for equity compensation.

We project capital expenditures to be 55 to $60 million. This is higher than in recent history and reflects the perspective purchase of our Maine facility and surrounding land for $18 million as reported in our press release and 8-K filing last week. As a quick aside on that point, we currently lease only a portion, approximately three-quarters, of the facility here in Maine and the opportunity to purchase the entire building provides us with some much-needed expansion space. We will be able to support our growth and retain the benefits of keeping closely interacting functions such as R&D, manufacturing and marketing under the same roof.

At the same time, the terms of the purchase and the economic benefits of ownership yield an investment return that is very favorable to our cost of capital. The purchase is contingent upon completing our due diligence and receiving some local and state financing incentives that we are in the process of applying for. We have been exploring expansion possibilities for some time and we're very pleased to announce this plan.

Days sales outstanding are projected at approximately 40 days and inventories between 80 to $85 million. Free cash flow is estimated at 65 to 70% of net income, lower than recent history due to our projected higher capital expenditures, most significantly the purchase of our Maine facility. As has been the case over the last couple of years, we expect free cash flow to be lowest in the first quarter of the year due to regularly scheduled uses of working capital such as tax and annual compensation payments and the timing of inventory purchases between the fourth quarter of 2005 and the first quarter of 2006 as mentioned. And now to John.

Thank you, Merilee. Obviously we're pleased with the quarter's performance. The momentum established in the second half of the year as we expected, particularly Q4, bodes well for 2006 and beyond. So let me provide some brief updates before we open it to Q&A.

First in our pharmaceutical business, we're disappointed to learn that the FDA has informed us that our [Tilmax] new animal drug application submission is not yet complete. The FDA comments indicated that we have some additional work, including some additional clinical studies, to satisfy the FDA's questions with regard to safety and efficacy. At this time, we do not know the timing or outcome but expect it will take some time to respond. Of course as a result, we do not have any Tilmax revenues or costs in our 2006 outlook.

While the Tilmax news is disappointing, we continue to be enthusiastic about the opportunities presented by the innovative, patented delivery technologies that we have developed in this business.

In the meantime, the revenue growth of our pharmaceutical business driven by the products we have already brought to the market is doing well at almost 50% in Q4.

In our Idexx VetLab line of instrumentation and consumables, we continue to introduce a steady stream of new product innovation as propelling instrument placement and consumable growth. As investors recall from last quarter, we launched three new products, including a new assay and two new panels. New products contributed about 1% to the instrument consumables growth in Q4 while also building the value of the Idexx VetLab with our installed base of customers as a result of further expanded menu and flexibility. This 1% does not include VetStat, the new electrolyte and blood gas analyzer we launched in June. VetStat also had a strong instrument sales quarter.

This month, January, we introduced an upgrade to our LaserCyte hematology analyzer. LaserCyte will automatically come with an Idexx VetLab station, which serves as both the controller for LaserCyte and a laboratory information management system for the entire suite of all members of the system of Idexx VetLab analyzers. Noting by the way, all instruments in development plan for the future.

The Idexx VetLab station combines a powerful Dell PC, a 10.4 inch touch screen and a new laboratory information management software that allows the hospitals to link and manage multiple instruments and in fact multiple entire Idexx VetLab systems with a single workstation driven off a single common patient database. The station provides capability in the area of powerful, historical trending analysis, customized reporting capability and quick medical reference supporting the veterinarians' process of diagnosis and the discussion of that diagnosis with the pet owner.

We have already begun taking orders for the upgraded LaserCyte with station for delivery in the next several weeks.

In general, I would comment that we couldn't be more pleased with the success of the LaserCyte program. Demand is strong. The instrument's reputation worldwide is superb and expanding and our LaserCyte instrument margins in Q4 reached a new high as a result of continued progress in manufacturing, world-class quality and service efficiencies. Of course, every LaserCyte we place with an Idexx VetLab customer further solidifies the loyalty of our installed base.

Speaking of future instruments, let me make a few comments about our next-generation chemistry analyzer. I continue to be extremely pleased with the development progress and the achievement of some very aggressive (indiscernible) goals. This will take in-house chemistry testing to a whole new level in terms of menu breadth, convenience, throughput, speed to result, ease-of-use and information management. As a policy, I'm not going to be going to discuss projected launch states other than to say that we are taking the time to introduce a platform that, when available, will be an instant hit with customers worldwide. In fact, we have several instruments as well as other diagnostic products in the development pipeline that will support our growth plans over the next several years.

In the meantime, our instrument and consumables businesses has seen accelerating growth in 2005 as Merilee has reported. This is true in part because our current VetTest chemistry analyzer is the worldwide leader in new customer placements and by a wide margin.

In addition to the Idexx VetLab station, we also announced three other new products at the beginning of the year in our Companion Animal business. First, the next release of Cornerstone, our market leading practice information and management system with some significant expanded capabilities popular with our customers. Cornerstone by the way has 50% growth in customer placements year-over-year in 2005.

Second, we launched Idexx VetVault, an automated off-site backup service for Cornerstone customers. After Katrina and other natural disasters, practices have a new appreciation for backup and offsite storage of their invaluable hospital data through an automated Internet service such as Idexx VetVault.

Finally, we announced to our customers that we will launch by midyear the next model in our line of digital radiography systems, a direct digital system with a 14 by 17 inch plate designed to produce a digital x-ray of a dog or cat within seconds. To remind investors, our digital radiography product line consists of a computed digital radiography line for both the dog/cat and the equine practitioner. In computed digital radiography, we are the clear market leader. Our line also includes an equine specific direct digital product that we acquired with the ITS acquisition that sold very well in Q4 under our ownership. This new 14 by 17 direct digital model will address the dog/cat market and complete our digital radiography product lineup. We will then be well-positioned for strong growth as the veterinarian profession moves from film to digital x-ray image capture and storage.

Now I'd like to expand on Merilee's comments about stock options and restricted stock in 2006. For employee equity awards in 2006 and beyond, we're making several equity compensation changes that will permit us to continue to attract and motivate a growing talent base while also addressing some of the dilution and expense impact of equity compensation under FAS 123R. The changes entail switching a majority of what in years past were stock option awards to restricted stock using a 4 to 1 conversion ratio. This ratio is consistent with emerging compensation trends.

For the portion of awards that will remain stock options, we have reduced the term on newly issued option awards from 10 to 7 years. The impact of these and other equity program changes will reduce our cost of equity compensation while providing consistent value to our talent base. As investors know, when we issue an equity award with five-year vesting, as is our standard practice, we amortize the cost of that award over five years. The equity award program that we will switch to in 2006 will reduce by several million dollars the expense that is amortizable over the next five-year period compared to what would have been the amortizable expense using our previous equity program.

I also note that the partial shift to restricted stock will reduce the number of shares awarded annually by about two-thirds thus reducing future dilution that results from equity compensation. The benefits of restricted stock for employees is that most employees generally prefer this lower risk equity vehicle to stock option. Options are pretty risky for your typical middle manager, scientist or engineer in that they have no in-the-money value at the date of the award. Restricted stock, on the other hand, has an understandable value on day one and just needs the time best. Restricted stock for this reason is also a better recruiting tool for new talent.

With this new equity compensation approach, we have optimized both employee and shareholder interest in the new era of stock option expensing.

To sum up before Q&A, we're very pleased with the overall strength of our market franchise and the results of our new product innovation. As in past years, we have a number of new products in the pipeline that will be introduced in the next few years. The sum of their expected contribution along with the projected growth at the core business together add up to more than our long-term guidance of 10% plus top-line growth. The difference is a margin that accounts for the fact that not every new technology development goes according to plan or schedule. Thus we feel that our outlook is robust for the inherent uncertainties that come with a strategy of technological innovation.

Our long-term EPS growth target is affirmed to be midteens as is evidenced by 2005 and projected 2006 EPS growth on an adjusted basis outlined by Merilee. And because of the strength of our businesses and the continual introduction of new innovations, we've raised our revenue and earnings guidance for full year 2006. This more bullish outlook is supported by the business performance in recent quarters, particularly the Idexx VetLab line of instrumentation and consumables. Thank you. So I'll ask Tracy if you'll open up the call for the Q&A portion.

(OPERATOR INSTRUCTIONS). Lee Brown, Merrill Lynch.

I just wanted to talk to you quickly about the five-year collaborative agreement with Banfield, how that is shaping up since the announcement this past May in terms of incremental instruments and rapid assay sales?

We are very, very pleased with our agreement and our relationship with Banfield. We are still in the process of placing those instruments. In fact, the majority of the instruments have yet to be placed.

So you haven't booked -- at this present, you have yet to book any incremental sales from that?

We do have modest incremental sales because we added some new assays to the agreement but it is not a big deal. It will grow in time -- grow in value over time.

So not meaningful perhaps in the near-term outlook but definitely a good strategic collaborative agreement over time is the take away there for '06?

Yes, I think we feel very, very good about it on the five-year period of time and it will grow in value '05, '06 and then more value '07, '08, '09.

And then turning to the HerdChek BSE opportunity there. Is it fair to assume that sort of European market is in the $100 million range? And if so, what are the potential for upside in terms of the 5 to 6 million target in '06 with your current contracts?

Lee, that's a very good question. With regard to the European market, I would say that the unit volume assumptions that we have used is consistent but the pricing has come down significantly as that market has evolved. So I think the market size in revenue is substantially smaller. But having said that, we are very pleased with our product. It is fully launched. It is a fully differentiated product in a number of ways and we think the 5 to $6 million revenue outlook for '06 is pretty solid.

And then similarly, what about the HerdChek PRV opportunity? It doesn't get much air time. I was wondering how that's going and if you could flesh out the market details on that as well?

I think I know what product you're talking about. We are in pretty good shape on that but I don't think we have talked much about the details of the other products within the production animal services business. I have to admit that we have actually a product portfolio in production animal services of over 60 products. It is a very diversified portfolio.

And then lastly and then I will get off, just the outlook for the water business. It has been a bit anemic of late and I was wondering -- that used to be a pretty good performer. I was wondering what you though the outlook would be in that segment?

We are very pleased with the performance of the water business. It is very solid. It is affected like some of our other businesses by currency translation that goes up and down. I think we had 3% negative currency in the fourth quarter, 7% adjusted for currency growth, which is right in line with our expectation of mid to a little bit higher single digit growth for the water business.

Rick Wise, Bear Stearns.

This is Mike Bailey in for Rick. A couple of questions for you about the 2006 sales and earnings guidance. Just wanted to get an idea looking at the fourth quarter of '05 just sort of organic sales growth rate before we start thinking about '06 and I know you guys said that if we strip out currency and the acquisitions, it was something like 14% year-over-year sales growth. Is that correct?

That's right.

And it sounds like there were some other one-time items or maybe easy comparisons in the fourth quarter. If we try to strip those out as far as the distributor issues I think the year ago, what type of organic growth should we be thinking about there for the fourth quarter?

Mike, I think I tried to get those pieces out. The items that I talked about would be significant maybe on a product line basis but overall, our organic growth in the fourth quarter, you can probably think of it -- it was reported as about 14%. It might be a hair lower than that but that is a pretty good number.

Great. So let's say for example an organic growth rate is maybe 12 to 14%. For '06, it looks like the guidance range there is more in the 10 to 11% sales range. Now is there a currency hit built into that or are there some other moving parts that we should be thinking about for '06 sales?

As I mentioned, we expect currency just based on where rates are today to have a negative impact of about one point or so and within our numbers again probably the impact of the acquisitions that we have done in 2005 will add a point or two. Those two things just about neutralize out. So about the 10% growth is what we're thinking for organic growth.

So just maybe as a comment, it seems that if current organic growth is in the 12 to 14% range, it seems like maybe there's some potential for upside in '06 as far as only 10 to 11% growth. But we'll leave that up to you and we'll see how the year progresses.

Well I just might say we have a saying in this business, one quarter does not a trend make. We had a very good fourth quarter.

And I would think that would be reflected particularly where the consumables growth, as we talked about organic growth there of 11% and really thinking that our guidance over the longer term here is in that 7 to 9% range. So there again it was a strong quarter. Rapid assay was also a strong quarter organic growth wise and we again projected that to be a little bit lower as we look out over the longer term.

And then one other question on the 2006 EPS guidance. Just thinking about that within the P&L, it sounds like the gross margin guidance is for roughly 50% to 50 to 100 basis point increase. I think in prior calls we have talked about one of the consumable contracts adding potentially 100 basis points just in itself. Are there other offsetting issues there that are sort of reducing the benefit from that particular contract?

I think basically I gave a range there of 50 to 100 basis points. So I think there is opportunity. There are particularly -- Mike, I don't think any major changes from our outlook on gross margin and the major drivers for gross margin.

And I would also comment that it is a pretty solid 1% contributor from -- actually two -- the sum of two consumable contracts. The second one being the new agreement that we inked in October for our Idexx VetAutoread hematology analyzer. That is a much smaller impact but the two together give us about a 1% year-over-year improvement in the gross margin all other things being equal.

(OPERATOR INSTRUCTIONS). Ryan Daniels, William Blair.

A quick question on the acquisition integration costs. I know it was $0.02 during the fourth quarter. Merilee, do you anticipate anything if we look out to '06 or was that pretty much behind Idexx going forward?

Essentially behind.

And then on the tilmicosin, is there still an opportunity to license your patented technology going forward or do you have to wait for the actual approval of that product before you can enter into any licensing agreements for the technology?

No, the two would be completely independent events.

Okay. Perfect. And then I also noticed two quarters ago I think you moved your consumable sales range from 4 to 6 to 5 to 7. Now it is going up to 7 to 9. Obviously that is a very strong improvement. Is there anything particular? Is it placements? Is it more demand in the vet community to do diagnostics? What is really driving that very robust sales growth for you guys?

Well I would say placements. You noted the -- Merilee mentioned the growth in instrument unit placements of 30% year-over-year. We feel very good about that. That is all of our different Idexx VetLab instruments added together. We are introducing some new assays, a better use on instrument. That is a very small contributor and certainly we feel good about the loyalty of the installed based. Then there is always a small component of just increasing if you will same-store sales or utilization growth on a consistent same product basis, not including the impact of new assays.

Great. Last question and I'll jump off. If we look at kind of a follow-up to the last comment you just made, John, on the gross margins. I know you guys have a new chemistry consumable contract in place and you changed the QVC as well via the acquisition of one of your suppliers. How much of a benefit did we see or did you guys see in the fourth quarter from that? Is that kind of the full run rate impact on gross margin or will that continue to improve in '06 and perhaps beyond driven by the terms and the volume if it continues to increase at this rate?

Ryan, I will let Merilee answer the numerical part. I think you missed this but we didn't actually acquire our supplier. Our supplier was acquired and we supported that acquisition with financing and a very long term contract. I think that's what you meant. (indiscernible) others who may not have been.

And with regard to the financial impact, we did see some modest benefit when we looked at gross margin year-over-year from the contract but it will be one of the drivers of the gross margin percentage increasing gradually over the year. It will become a bigger part of the improvement as the year goes on and we will see some improvement going on beyond 2006.

Is that based on volume assumptions or just contractual terms that are locked in for '07, '08, etc.?

It is more the latter but a smaller contributor from the former.

There are no further questions at this time. Mr. Ayers, I'll turn it back to you for any closing comments.

I just want to congratulate everybody at Idexx for a very strong quarter. A lot of people worked hard to make that happen and we are very pleased by that. And thank everybody for attending the call today. That ends the call.

Thank you. That concludes today's conference. Thank you all for joining.