愛德士 (IDXX) 2007 Q2 法說會逐字稿

Good day, everyone, and welcome to the IDEXX Laboratories second quarter 2007 earnings conference call. Just a reminder, today's conference is being recorded. Participating in the call this morning are Jon Ayers, Chief Executive Officer, Merilee Raines, Chief Financial Officer, and [Jim Rawldy], Director Investor Relations. IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements that members 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 expectation. Factors that could cause or contribute to such differences are described in IDEXX's quarterly report on form 10-Q for the quarter ended March 31, 2007 and annual report on form 10-K for the year ended December 31, 2006 in the section captioned risk factors 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 its estimates or expectations change. At this time I could like to turn the conference over to Merilee Raines. Please go ahead.

Thank you, Matt. Good morning and thank you for joining us today. As we reported in our earnings press release this morning, revenues for the quarter were $237 million, a year to year increase of 24%. And diluted earnings per share were $0.67, a year to year decrease of 14%. In the quarter we had discrete items associated with acquisition integration of $0.02 per share and a noncash charge associated with one of our pharmaceutical products of $0.20 per share, that I will discuss more fully in a moment. Adjusting for these items in 2007 and a $0.04 per share benefit related to discrete tax items in the second quarter of 2006, our earnings per share growth for the quarter is 20%. I refer you to tables in our press release that reconcile reported earnings per share with earnings per share adjusted for discrete items in both 2006 and 2007 for the quarter and for the first half. Our adjusted earnings were on track with our expectations, though they were achieved with somewhat higher revenues and a somewhat lower gross margin than anticipated.

The $0.20 noncash charge that we have taken in the second quarter relates to the write-down of raw materials and other assets associated with our equine pharmaceutical product Navigator, used for the treatment of a neurological disease in horses. As those of you who have been following us for a few years may know, at one time we believed Navigator would be a big product for us. For several reasons, the market for this product has turned out to be far smaller than once anticipated and Navigator is now a small product with declining sales. Sales of this product for the first half of this year were about $200,000. As we have discussed in our SEC filings, we have been monitoring our inventory of the active ingredient in Navigator, nitazoxanide, for some time and in 2005 we entered into an agreement with the supplier of nitazoxanide that required the supplier to replace expiring inventory with longer dated inventory. However, we recently were informed by our finished product manufacturer that they will be discontinuing their contract pace business, which includes Navigator.

Due to the low and declining sales of the product, we concluded we would be unlikely to find an alternative manufacturer on economically feasible terms and therefore would not be able to obtain the product after the termination of the existing manufacturing arrangement. Based on our changed estimates of product availability, estimated future demand and market conditions, we evaluated our Navigator related assets for impairment and determined to write down $10.1 million of assets, which is reflected in the second quarter gross margin. I will now provide some further highlights on the P&L. The second quarter revenue growth of 24% included 9% growth from acquisitions and 2% from currency, so organic growth was 12%. As was the case in the first quarter, we had strong performance in both our in-clinic diagnostic instrument Suite and our laboratory and consulting services. Each had organic growth in the mid-teens. Based on revenue trends during the quarter, we believe we continued to experience some incremental volume in the quarter resulting from the pet food recall that began in mid-March.

We estimate testing for health concerns related to this event increased our revenue by $2 million to $2.5 million in the second quarter. Since early Q2 we have not seen a continuing impact from the recall. Our point-of-care rapid assays also had solid organic growth of 9%, driven by performance in our canine products. In canine we continue to see success in converting customers from heartworm only screening to our multiple analyte parasitic test panels, 3Dx and 4Dx. In the second quarter these tests comprised nearly 75% of our total SNAP canine test volumes. And 4Dx, on the market for only 10 months, represented a little over 30% of total canine volume. These tests are proprietary to IDEXX and provide enhanced medical and value to veterinarians at low incremental cost to produce over heartworm only tests. We had a very strong quarter for placements of instruments in our IDEXX VetLab Suite. Instrument revenues were $13.9 million and instrument placements grew by over 35% year to year. As you know, instrument placements are the number one driver of instrument consumable growth.

The growth rate I cited does not include placements of IDEXX VetLab stations, the laboratory information management system that works in conjunction with all the components of our instrument Suite. Placement of these stations now stand at just over 3500 worldwide. IDEXX VetLab station not only increases the overall value of the Suite to the veterinary practitioner, by enhancing medical information and staff productivity, it is also an integral component of the next generation clinical chemistry analyzer, Catalyst Dx. Instrument consumable sales of $51 million, grew 13% when adjusted for currency and the estimated impact of the pet food recall. U.S. distributor inventory levels for our rapid assays and instrument consumables are at the lower end of the three to four week range we view as normal. While changes in inventory levels had a relatively minor impact on the instrument consumable growth rate, relative year to year changes in rapid assay inventories depressed reported rapid assay growth by about 9%. Our reference laboratories and consulting services had reported growth of 43%.

Lab acquisitions, that provided 25% of that growth, performed very well. Revenue performance exceeded our expectations and we believe this was due in part to a significant seasonal impact of testing in our labs in Canada. Also, we suspect the pet food recall may have had some impact, albeit minor, on testing levels in Canada. Organic growth, adjusting additionally for currency effect of 3%, was 16% for the second quarter. And we estimate the pet food recall contributed 2% to 3% to this growth. As for the longer term growth rates for our larger companion animal product and service lines, we reaffirmed the 8% to 10% growth rate for both rapid assays and instruments consumables and the 13% to 15% growth rate for reference laboratory services. Our practice information management and digital radiography systems product line, with second quarter revenues of $11.7 million, grew organically only 8%, primarily due to some disappointing performance in our direct digital product line that we purchased back in the third quarter of 2005.

We are providing the right focus and attention to improve the product and service offerings so that our customers achieve the same high quality user experience with these systems that they do with our other products and services. Our production animal services line of business grew 21% for the quarter, primarily due to the contribution of Institut Pourquier acquired in the first quarter. Integration activities are proceeding smoothly and we see Institut Pourquier's product line and market presence complementing our existing business well. Organic growth for the quarter was 2%, a significant decline from the several proceeding quarters of double digit growth. There were some timing issues of shipments that depressed this quarter's growth, however the primary reason for the low organic growth is attributable to a difficult comparison for our BSE tests. We launched this test kit in Europe in 2005 and saw sales ramp sharply from $1 million in that year, 2005, to nearly $11 million last year.

Though we are still gaining new business, there is significant competition for this business, as customers primarily select suppliers through rigorous bidding processes. We have seen prices decline on new and existing business over time, nonetheless it remains an attractive market and we project BSE revenues of approximately $15 million for 2007. Moving down the P&L. The noncash pharmaceutical product related charge was recorded in the gross margin line. So second quarter gross margin, adjusted for this discrete item, was 52.5% of revenues. As I mentioned, this percentage is slightly lower than our expectation and was due to a few items, none individually significant or of longer term concern to us. Discrete costs associated with acquisition integration, as expected, also reduced our gross margin percentage by about 20 basis points. Operating expenses, including R&D and SG&A, were 34.5% of revenues and this is consistent with our thinking.

Typically, operating expenses as percent of revenues will be relatively lower in the second quarter compared to other quarters, given the seasonal increase in our revenues in the quarter and the fairly large component of fixed costs in operating expenses. Our tax rate was 31.5% for the second quarter. The pharmaceutical product related charge will be tax deductible and that deduction will be in the U.S., one of our higher tax rate jurisdictions. Adjusting for this, our effective tax rate was within the 32% to 33% range that we projected during our first quarter call. As for the balance sheet and cash flow, we ended the quarter with cash of $50 million and debt from our revolving credit facility of $84 million. Free cash flow, as defined in our press release, was $50 million, or 177% of net income, excluding the pharmaceutical product related charge. We repurchased 655,000 shares of stock during the quarter at a weighted average price of just over $88 per share. With regard to the latest outlook for full year 2007, we project revenues of $900 million to $905 million, an increase from our previous guidance of $890 million to $897 million.

This would represent a reported growth of approximately 22%, with acquisitions estimated to contribute 7% to 8% and currency to contribute 2%, so organic growth of 12% to 13%. We project that the total growth rate for the second half to be about 20% and that should be relatively consistent across the quarters. As we had indicated in the first quarter call, we project the growth rate for the second half to be down slightly from the first half. One contributor to this is the temporary favorable impact of the pet food recall on first half results. In addition, while the first quarter of this year benefited from a relatively easy compare with the first quarter of 2006 due to instrument sales, in the third quarter last year, we experienced an increase in distributor inventory levels of our rapid assay products that sustained through the fourth quarter. Given the relatively high margins on our rapid assays, this bills last year makes for a tough comparison in both year to year, revenue and earnings growth statistics, particularly for the third quarter.

We project gross margin as a percentage of revenue to be about 51% on a reported basis and 52% excluding the discrete pharma product related charge. This is consistent with our projection at the time of our first quarter call. For the year discrete items associated with acquisition integration are projected to negatively impact the gross margin by 20 basis points to 30 basis points, making the margin adjusted for discrete items a full percentage point higher than the 2006 gross margin. Operating expenses are projected to be 36% of revenues for the second half and, as a percentage of revenues, somewhat higher in the third quarter than the fourth quarter. Amortization of intangibles from our recent acquisitions is expected to have a 40 basis point impact on operating expenses. Our thinking about gross margin and operating expense leads to a projected operating margin for the year of about 15% of revenues on a reported basis or 16.5% of revenues excluding all discrete items. We expect the full year effective tax rate to be 30% to 31% of pre-tax income.

This is lower than the 32% to 33% projection we made at the time of our first quarter call, and the primary drivers relate to some state and foreign statutory rate reductions and the receipt of state tax incentives. We expect net interest expense to be approximately $2.2 million. All of the aforementioned factors lead us to an updated earnings per share projection for 2007 of $2.86 to $2.91, or adjusting for the $0.20 pharmaceutical product related charge, $3.06 to $3.11. This is up from our previous guidance given at the time of our first quarter call of $3.00 to $3.07 on a comparable basis. The dilutive impact of discrete items associated with acquisitions is projected to be $0.05, so earnings per share growth adjusted for all discrete items in 2006 and 2007 is projected to be 16 to 18%. It bears reiterating that we have made and continue to make some significant focused investments in our business.

We believe we will see an attractive return on those investments via margin expansion in our core franchise over the longer term. Some of the key drivers for this margin expansion will be -- growth of an increasingly profitable instrument consumable sales, resulting from an expanded install base of instruments; improved margins on next-generation instruments such as Catalyst Dx; volume leverage and operating efficiencies in our worldwide reference laboratory network; improving profitability of our acquisitions and international operations; and continued efficiencies in our manufacturing operations as the result of our lean and six sigma programs. As for the balance sheet, we project day sales outstanding at approximately 40 days, inventories at $90 million to $95 million, and capital expenditures of $70 million to $75 million. We project free cash flow to be about 80% of net income adjusted to exclude discrete items. Now I would like to pass it over to Jon for some additional comments on the business.

Thanks, Merilee, for that thorough review of our performance and for the financial performance. We are very pleased with our results for the second quarter. Revenue growth was driven by our three largest revenue contributors in the Companion Animal Group, that is instruments and consumables, reference labs, and rapid assay, all of which had exceptional results for the quarter. Our adjusted EPS growth of 20% in Q2 over last year was against a strong Q2 of 2006, when we reported adjusted EPS growth at that time of 37%. I would like to highlight just a few business items before we open it up to Q&A. The IDEXX VetLab instrument and consumables business continue to be very strong with Q2 being a record quarter for unit instrument placements. I attribute this success to a couple of principal factors that had an impressive effect on the competitiveness of the IDEXX VetLab Suite.

First, I think we are seeing the accumulated effect of augmenting the product line through a series of instrument introductions and upgrades, menu expansions, and other improvements that we have discussed over the past couple of years on investor calls. Second, we also had strong execution by our commercial organization in the first half of 2007. We are leveraging the investments made in our marketing and field sales organizations, and as a result, are accelerating placements of instruments of the IDEXX VetLab Suite. For example, as mentioned on the last call, we are on track for 5500 IDEXX VetLab Station customers by the end of the year, position us well for the new instrument launches planned in 2008. As investors know, instrument placements are what drive consumable growth and thus profits in this razor and blade business model. Just a couple of statistics I thought I would share about our IDEXX VetLab performance.

In acquisition of new VetTest customers, and recall that VetTest so that primary consumable generator of the IDEXX VetLab Suite, the second quarter and the first half of this year had the highest instrument placements in this decade. A great accomplishment. Also of note is a strong -- as strong as the accelerated momentum has been in Q1 and Q2, I don't feel we are fully firing on all cylinders around the world. Moving forward we aim to extend our sales and marketing best practices, that have worked well for us in certain regions and geographies, to the rest of our global commercial network. Of course our placement performance is also impressive in advance of our launch of major new instruments for the Suite in 2008, such as Catalyst Dx and SNAP Shot Dx. Speaking of our instruments in development, we are on track for all three of our new offerings, the IDEXX Coag Dx in the fourth quarter 2007, Catalyst and SNAP Shot Dx in January of 2008.

Design goals of all three of these analyzers are coming to realization just as we planned, with no compromises in capability or reliability. We have completed our formal development phase for Catalyst Dx, the most important of the three new instruments, and have entered the scale up and qualification phase. Upon completion of this phase, in January we will be ready to launch the instrument commercially. Of course, we have a lot of work to do between now and then and our development team is very focused on the schedule. Market interest in the new analyzer continues to grow. Perhaps that's why a record number of customers have elected to go with IDEXX for their in-house lab. They know their investment today in an in-house equipment will be rewarded as we provide an attractive and risk free migration path to an ever more powerful Suite of instruments that together make for a complete integrated and easy to use in-house laboratory.

I mentioned the IDEXX Coag Dx.. We are already in the market on schedule in Q2 with consumables that supply an existing install base of standalone coagulation analyzers. The IDEXX Coag Dx will be a new IDEXX branded analyzer that integrates with the IDEXX VetLab Suite by connecting to the VetLab Station. With the introduction of coagulation, we will provide a complete Suite of capability encompassing chemistry, electrolytes, hematology, endocrinology, blood gases, urinalysis, coagulation and infectious disease. All with results recorded in one database and reported neatly on a single patient report, a convenience exclusive to IDEXX. Moving on to our rapid assay business. Earlier this month we launched into the market a new SNAP test called SNAP cPL. This easy point-of-care test helps veterinarians diagnose pancreatitis in dogs presenting with vague and nonspecific GI tract symptoms, such a vomiting and anorexia.

Pancreatitis is a serious condition with a treatment plan that is much more aggressive than that used for more routine causes of these symptoms. And because this new SNAP test is already on the market, we can report that it is being well received by practitioners. In fact, the SNAP test responds to an unmet need that our customers have had for some time. Perhaps that is why an estimated 1,000 practices have purchased the product in the first week of its introduction. While we consider the revenue potential for this product to be small in relation to say our SNAP 4Dx franchise, it contributes to our confidence in a continued 8% to 10% growth in rapid assay revenues in the future.

I would like to just conclude my opening remarks by saying that during the first half of this year we had strong growth of sales and earnings, while still providing room for additional investments, R&D, sales, marketing, and crucial infrastructure. Our new product development pipeline is full with new products in Q2, such as SNAP cPL, and with planned product launches such as IDEXX Coag Dx, Catalyst Dx and SNAP [Jax] Dx around the corner. The results of this strategy, combined with great market fundamentals, should allow us to drive over the longer term sustained double digit organic growth and mid teens earnings per share growth through innovation, solid execution and continued focus on the customer and margin expansion. So Matt, at this time we are prepared to open it up to investor questions.

(OPERATOR INSTRUCTIONS) Our first question today will come from Ryan Daniels with William Blair.

Good morning, guys, and congrats on another great quarter. Couple of quick questions. First off, Merilee, on the guidance, I just want to make sure I understand this. When you build the guidance for the year that you updated on an adjusted basis, are you assuming for Q2 $0.87 or $0.89?

Okay. Let me just kind of go through it. The guidance that we gave on reported basis, so just our actual reported numbers, is the $2.86 to $2.91.

Right.

Okay? And then with the acquisitions -- I'm sorry, with the Navigator charge out of $0.20, that would get us to $3.06 to $3.11.

Okay.

Okay, so it's the Navigator. And then additionally I said the impact, the discrete impact of acquisitions that kind of helped with growth rate, is another $0.05 that we estimate in the quarter. So that would take us to -- .

For the year.

For the year, I'm sorry, to $3.11 to $3.16.

Okay that is helpful. That clarifies it. Just on the inventory levels, it sounds like another first, well the last couple of quarters you have had towards the higher end of that range. Now it looks like it's come down. Is that simply just more utilization of the rapid assays at the point-of-care during the quarter? I know it was kind of a big infestation season. It was wetter. It was warmer. They are using a lot of those tests at the end market. Do you anticipate that inventory building back up or was there anything unique in the market that drove that in your opinion?

Ryan, I think that's -- I think we are at the lower end of a normal range. I think it is more of a year-over-year compare issue.

Okay. Fair enough. And then -- .

There wasn't anything particularly abnormal going on this year in the second quarter other than it was just a great, solid quarter in terms of what we call practice level sales of the product.

Sure, sure. Okay. Great. And then Jon, you made a comment before, I want to make sure I understood this to about the first half of this year's represented the best placements for the decade of, was that the entire Suite? Or is that for VetTests, the chemistry specifically?

That particular -- first of all, it was a great quarter and probably -- and half year for all the unit placements. But I was calling out in that comment just looking at VetTests themselves. It was the best half year of any half year of the decade in VetTest placements to new customers, which are, of course, the vast majority of VetTest placement.

And is that -- is that something strategically -- it seems like that is a pretty important point of your comment. Is that strategically to get those out there in the market to then more easily upgrade people into Catalyst or is that just more of a focus, maybe, on international markets and driving the strong growth there? Could you maybe give us a little color on what's driven that?

There are two perspectives with regard to the IDEXX VetLab strategy. One is the customer perspective. We want each customer to have as many elements of the Suite as possible. That way they can practice better medicine at the point-of-care and they are taking more advantage of our technology and of the ability to ingrate it and of course gives us a stronger, more loyal customers the more they add. But from an investor perspective, at the end of the day, the most important single instrument placement is a chemistry analyzer, because for any single customer that will be the one analyzer that will use more consumables, far more consumables than the other analyzers.

Okay. Great. I guess the last question I had is related to Catalyst. Can you just give us an update, not specifically on what is going on at IDEXX, it sounds like you are doing quite well kind of on the manufacturing and preparing for that, but more on the supply chain front, if you look at the suppliers to the key components, are you pretty comfortable that they will be ready for the launch and that they have the capacity to kind of get you to scale so there is nothing outside of your control, quote unquote, that could slip up the launch.

Yes, thank you for that question. Certainly a launch of an instrument has a number of complexities that need to be built into the development plan and one of them is the supplier readiness. And I'll tell you, over the last several years we have learned a lot about instrument design and manufacturing, certainly with the laser site launch in late 2002, we have learned the importance of having documented specifications and quality control and programs with our suppliers, so that the components and sub-assemblies that they are providing us are done so according to spec and consistent with our design and quality requirements. And that is one of the aspects of a development program which we have built into these product launches.

Great. That's very helpful color. Thanks again, guys. Great quarter.

Our next question will come from Rick Wise with Bear Stearns.

Hello. Hi, Merilee, hi, Jon, it's actually [Miraslava] for Rick, again. Again, congratulations on a great quarter. I guess I just want to kind of hit on operating expenses and operating leverage that you guys might expect to see in 2008. If you could give us an idea of how far -- are you still hiring in R&D (inaudible) and sales and marketing? And what will be the extent to which you expect you can leverage those investments in 2008?

Miraslava, we are not really prepared to give guidance on 2008 now. I think one of the things that's going to be critical for us is with the launch of Catalyst, just seeing how that goes and the level of resource it takes to make sure that we have the right customer experience when we launch that. So I think what we're going to stick to for right now is just giving our longer term guidance. And we do feel very confident and comfortable that with the strategies that we have in place today that we will see margin expansion over time in all of the areas that I talked about.

Okay, that means very modest margin expansion or -- ? I guess I'm trying to get an idea of the magnitude without necessarily quantifying

I think at this point, we are going to just stick with what we've said and say that we are looking at mid-teens earnings growth on low double-digit revenue growth.

Okay. Okay. And I guess another two quick questions. First, if you could update us on the share count that you expect for the end of this year, since there have been some share repurchases going on. And another question is why not be more positive? I mean, we've seen you do really, really well in the first and second quarter of this year. And you are raising the revenue guidance by a lot. But it seems to me like -- that you are being a little bit more conservative on the EPS. If you could give us a little bit color on what you think could go wrong in the next six to 12 months, that would be very helpful.

Okay. Well first of all on the weighted average share count, I would think for your modeling purposes you could assume that the weighted average share count will be maybe a couple hundred thousand shares or so down for the full year from what it was at the end of the second quarter. With regard to the guidance and the increase in guidance, I just want to reiterate that versus our internal expectations, Miraslava, we don't give quarterly guidance, the second quarter was really right on track in terms of EPS from where we had expected, so the street and models were calendarized a little bit differently from ours. I think as we look forward into the back half of the year, actually everything is tracking right on with what we had expected. We do see some strength in revenues. Some of that, as I indicated in the revenue growth guidance, you would have probably, if you went back and checked first quarter notes, we'll see a little bit longer impact from currency.

A lot of that is really muted at the bottom-line because we do hedge and we also have operating expenses in our international places that are in their local currencies. So we do see a very much muted impact on the bottom-line and I think the other things that we talked about really driving the second half were some compare issues that I addressed on the reach knew side. And as well, we are continuing to see the ramp in operating expenses and that is tracking really right in accordance with our expectations. So I think everything is again just as we have been planning.

Miraslava, I might give you kind of a more little bit more color on kind of the -- it is a very attractive market. And there have been some very recent articles, part of the continuing stream of articles I think, one that came out in Business Week and one that came out in Newsweek about pet healthcare from a couple of different dimensions. And it is an investable business and we are investing in long-term growth. And we think that served us well over the last five years of that strategy. And so we are -- we think in this business top-line growth has a nice impact on the bottom-line. So it is a virtuous cycle of investing for new product development and market expansion and market adoption. So that combined with the comments that Merilee said about the second year and combined with the fact that our business has a seasonal first half bias and certainly the volume is leveraged at the bottom-line gives us -- are the reasons behind the guidance that we are giving of an increase in the year at the low end of $0.06 on an adjusted basis and at the high end of $0.04.

Great. I appreciate the color. Thanks again and congratulations. Very, very good performance.

Thank you. (OPERATOR INSTRUCTIONS) Our next question will come from Ross Taylor with CL King.

Hi, have a couple questions. First of all, the practice management and digital radiography revenue growth decelerated a bit, can you elaborate a little bit more as to what caused that?

Yes. Thanks, Ross. We were -- had a little bit lower growth in that business and that was primarily in the digital radiography business. We had a little bit of weakness in equine. The other thing is our first priority in all of our businesses will always be the customer experience. That comes before short-term revenue and profit growth and we still have some investment to go to bring the customer experience in digital radiography at the level consistently across the customer base as it is in our other businesses.

Okay. And let's see, you mentioned that, I think, you expect BSE revenues to be about $15 million in 2007. Can you say how that compares to what you all did in 2006?

Yes, in 2006 we did about $11 million.

Just two other questions. First is do you think you have a lot more opportunities in rapid assay, like this recent introduction you just did for pancreatitis? Are there a lot of other niche opportunities out there that you can pursue?

I think we have an interesting and attractive pipeline in rapid assay, just as we have in our other businesses for the next -- in the five year strategic planning time frame. We have got -- we feel very confident with the long-term outlook for continued growth in that business. This one is more of a niche. More like -- we launched another product a couple of years ago, Giardia. But it really does -- it also builds a SNAP brand with our customers. And then I would also remind you, Ross and investors, next year later in the year we anticipate that the SNAP Shot Dx product that will launch at the same time that we launch Catalyst Dx, we'll be able to interpret our rapid assay products and add them to the electronic medical record, which will be a further convenience to our very, very broad customer base that we have for the SNAP franchise.

Okay. Good. And final question. Can you remind us kind of what your selling strategies are right now for the VetTest? With the Catalyst Dx coming out about six months from now, how do you convince vets to buy the VetTest now? Are they allowed to swap into the Catalyst Dx at a low price once it comes out? Or how does that work?

Yes. In fact, we are not -- I just want to say that we are not selling individual components of the Suite. We aren't really selling the value of an integrate Suite. That is one of the unique things that IDEXX has. So customers can add a -- start with a few components of the Suite, maybe the VetLab Station and the VetTests and a electrolyte and then start adding components to the Suite over time. Our strategists say ask -- suggest to the customer that they put the Suite in and then they can upgrade it a component at a time. A component in your vernacular is an instrument. So it is relatively little risk and we do give trade-in when a customer trades in one product for an upgraded product and we would certainly anticipate doing so with the launch of Catalyst. That is all built into our financial plans and projections with regard to the Catalyst launch. So if somebody becomes a new customer of the IDEXX VetLab today with a VetTest that is really no risk to them, at any point with the launch of the Catalyst, because they will be able to upgrade that one component of the Suite and of course they get the benefits of the full Suite today.

Okay. Great. Thanks very much.

Thank you, Ross.

That is all the time we do have for questions today. Mr Ayers, I'll turn the conference back over to you for additional or closing remarks.

Okay. I just want to thank everybody for being on the call and also congratulate our team here at IDEXX for a great quarter. And we'll talk to you all again in a quarter from now.

And that does conclude today's teleconference. We would like to thank everyone for their participation and wish everyone a great day.