愛德士 (IDXX) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the IDEXX Laboratories first-quarter 2008 earnings conference call. Just as 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 Moraldi, Director, Investor Relations. IDEXX would like to preface the discussion 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 expectation and plans and IDEXX'sfuture prospects constitute forward-looking statements for the 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 Form 10K for the year ending December 31, 2007, 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 of any subsequent date. The company disclaims any obligation to update or revise any forward-looking statements in the future even if it -- excuse me, even if its estimates or expectations change.

Now at this time I'd like to turn the conference over to Merilee Raines, please go ahead.

Thank you, Art. Good morning, and thank you for joining us today. I will start off with a review of financials for the first quarter and our thoughts for the year. Jon Ayers will share with you an update on the business, and then we will welcome your questions.

As you have seen in our earnings press release today, revenues for the quarter were $249.1 million, a year-to-year increase of 18%, and diluted earnings per share were $0.43. Revenues, though essentially in line with the street, were slightly below our thinking at the time of our fourth-quarter call in January. Earnings per share were favorably impacted $0.02 by tax-related discreet items this quarter and negatively impacted $0.01 by acquisition-related discreet items in the first quarter of 2007. Adjusting for both of these impacts, earnings per share growth was 21%. Earnings excluding the discreet item were essentially on par with our thinking due to lower operating expenses and a somewhat more favorable growth margin as a percentage of revenues and a couple of pennies above street consensus. Before I provide further financial highlights, I would like to let you know that we will be filing our 10Q today. The first time we have done this filing concurrent with our earnings call. This accomplishment is the result of a focused, coordinated effort between our finance team and businesses, and we hope that providing more timely, detailed financial and business information will be of greater relevance and value to our investors.

Now on to the first-quarter P&L. The first-quarter revenue growth of 18% included just under 5% from currency and just over 3.5% from acquisitions. So organic growth was 10%. The [tough] compare resulted from last year's pet food recall negatively impacted year-to-year growth by about a point so the organic growth adjusted for that event is 11%. This adjusted growth is a couple of points lower than the 13% organic growth we experienced for the full year 2007, when normalizing for the estimated impact of the pet food recall. As the US economy shows continuing signs of weakness, we believe that we are seeing some tangential impact in a couple of our companion animal group product lines, and that is a contributor to the modest decline in our overall organic growth rate as adjusted for the pet food recall. Nonetheless, our companion animal segment overall experienced 12% growth adjusted for currency, acquisitions, and the estimated impact of the pet food recall.

Our IDEXX VetLab Instrument revenues were $14.6 million, and unit placements were up 12% over year, despite a very strong first-quarter 2007 comparison and seasonal high fourth-quarter placements. As we announced, we successfully launched our chemistry platform Catalyst Dx and [amino] assay reader SNAPShot in the last quarter. We placed literally a handful of each instrument so there was minimal impact from these launches in the quarter. The careful launched planning and execution across our entire organization has yielded the kind of customer experience we were striving to achieve, and our first sites are pleased with the performance of the instruments. We will continue with our controlled rollout, ramping placements gradually over the remaining quarters, and we feel that we are on track to place 1,000 to 1,200 of each instrument type in 2008. We have learned much from the launches of several instruments over the last few years, and we are successfully incorporating those learnings into the introductions of these two major instruments.

Our instrument consumable sales up $53.1 million grew organically 5% for the quarter or 10% when adjusted additionally for changes in distributor inventory and the estimated first-quarter 2007 impact of the pet food recall. Our point of care rapid assays with revenues of $38.2 million had organic growth of 20% or 18% when adjusted for changes in distributor inventories. As noted in previous quarters, price including price realized from the movement of customers to our canine parasitic disease panels from heartworm only tests is a significant contributor along with unit volumes to overall revenue growth. We expect this price impact will decline over time as the rate of conversions slows. In the first quarter of 2008, SNAP 4Dx accounted for nearly 50% of the unit volume of our multi[annalied] panel from the first quarter of 2007. US distributor inventory levels for rapid assays and instrument consumables remained in the three to four week range based on forward-looking demand. This is consistent where they have been for some time.

Our laboratory and consulting services have reported growth in the first quarter of 21%, with currency contributing 5% and acquisitions contributing 8% to yield organic growth of 8%. As with instrument consumables, this business was impacted by the pet food recall in the first and second quarters of 2007, and we estimate that the pet food recall reduced year-to-year growth by about 1%. So organic growth as adjusted for this factor would be 9%. At the time of our fourth-quarter call in January we had indicated that the near-term lab services growth rate could be a couple of points below the low end of our longer term 13% to 15% growth rate projections due the tough compare with the first half of 2007. It appears as though this area may additionally have experienced a slight drag from the US economic situation. While we continue to feel very positive about the fundamental growth drivers for lab services yielding low teens revenue increases over the longer term, we expect that lab services' organic growth will average out more in the 10% to 11% range for the full year 2008 with growth rates lower in the first half due to the tough 2007 compare and rebounding by three to four points in the second half. We've reaffirmed the longer term growth rates of 9% to 11% for instrument consumables and 8% to 10% for rapid assays.

Our practice information management and digital radiography systems had organic growth of 18% for the quarter. The digital business in particular is gaining momentum a result of product and service enhancements and a stronger commercial team. We ended the quarter with a healthy backlog to carry into the second quarter. The 4% decline in our pharmaceutical revenues is the result of the timing of a couple of large orders falling in the fourth quarter as we noted at the time of our January call.

This is a good time to update you on the status of PZI VET, our treatment for feline diabetes. We have indicated for some time now in our public filings that we had a finite inventory of raw materials for this product and once the raw materials are depleted, we will no longer be able to supply the product. We are currently seeking FDA approval for another feline diabetes therapeutic using different raw materials. Earlier this month, we informed our PZI VET customers about the limited supply in order to allow them to plan for an orderly transition of their patients to another therapy. Regulating diabetic tests on a new treatment regimen can be difficult so veterinarians need to determine how to best utilities the remaining product over their patient base. Given the customer response to this information, we project the vast majority of our year's sales will accelerate into the second quarter. Our financial plans had anticipated sales of this current product essentially ceasing by the end of 2008, so there is no impact to our full-year guidance from this event. However, we will see a spike in revenues from this product in the second quarter.

Our production animal services line was greater than 80% of its revenues in 2007 derived from international sources benefited strongly from currency in the first quarter. Additionally, we've still had acquired growth benefit from Institut Pourquier in the first quarter, hence the reported growth of 26% translates to organic growth of 2%. The main driver for this slow growth is continued price erosion in the BSE market, where most of the revenue is derived from competitive bidding processes. We project the price impact will be smaller in future quarters and that we will continue to see growth in testing volumes. We estimate the reported growth rate for PAS for our production animal services to be approximately 15% for 2008, with organic growth in the mid-single digits. Water sales grew organically 12% in the first quarter with our new collaboration with Invitrogen contributing 6%.

Looking at the rest of the P&L, growth margin at 52% of revenues was nearly a half point better than our expectations, driven by some process efficiencies in instrument service and in part by the strong revenue performance in our relatively higher margin rapid assay and water businesses. Operating expenses including R&D and SG&A were 36.6% of revenues. This is 20 to 30 basis point lower than our expectations and given the lower expected revenue, a couple of percentage points or so lower in absolute spending.

We give a lot of credit to our worldwide organization for their proactive management of expenses. In late of the economic uncertainty in the US, people worked to ensure that key priorities such as new product launches received the appropriate focus and investment and yet at the same time spending was controlled so that expense growth was in check with revenue growth. Our effective tax rate at 27.9% was a couple of points below our guidance in January, the net effect of two offsetting factors. First, we received a noncash benefit of approximately $1.5 million, due to a reduction in deferred tax liabilities as a result of lower international tax rates. This benefit was discreet in nature and produced the $0.02 benefit in our first-quarter earning per share that I mentioned up front.

Second, our January protection had assumed the extension of the federal research and development credit into 2008, as has been the case in past years. This credit was not extended in the first quarter, and, therefore, not reflected in our tax rate. Our effective tax rate for the quarter excluding the discreet benefit was 31.8%. As for the balance sheet and cash flow, we ended the quarter with $60 million of cash and $140 million of debt for a net debt position of $80 million. Free cash flow as we define in our press release was a negative $18 million. As has been the case in previous years, the first quarter tends to show a use of working capital for regularly occurring events such as tax and annual compensation payments, and increases in receivables due to the ramp in some of our more seasonal businesses.

With regard to our latest outlook for the full year 2008, we now project revenues of $1.06 million to $1.075 billion, an increase from our previous guidance of $1.05 billion to $1.07 billion. This would represent a reported growth of 15% to 17%, with acquisitions estimated to contribute 1% and currency to contribute 3%, so organic growth of 11% to 13%. Given the concentration of pharmaceutical sales in the second quarter, we expect revenue growth of about 20% in the second quarter and growth in the second half of the year to be lower than the first half by about five points. We continue to project gross margin as a percentage of revenue to be 51% to 52% for the full year, with the highest gross margin in the second quarter, perhaps a couple of points above the full-year percentage. This is due to the seasonality of our rapid assay products and the anticipated timing of pharmaceutical sales. Both product lines have relatively high gross margins.

Operating expenses are projected to be about 36% of revenues for the year, consistent with our thinking in January. We will continue to closely monitor spending in the context of revenue growth as we did in the first quarter. Our thinking about gross margin and operating expenses leads to a projected operating margin for the year of 16% with the first half margin one to two points above the full-year percentage, and margins in the second half a point or so below the full year. Of course, we will be watching the costs to manufacture and support catalyst and SNAPShot, as unit sales ramp up over the year. Ensuring a good customer experience remains a key priority, and the launch learning curve is one of the reasons we are not expecting operating margin expansion in 2008 over 2007, as it was adjusted for discreet items. We continue to feel confident about the achievability of margin expansion over the next several years from improving cost profiles on our instrument platforms, scale economies and operating efficiencies in our labs, and revenue mix shift toward increasingly profitable instrument consumables.

We now project the effective tax rate in ensuing quarters to be approximately 32%, to produce a full-year rate of about 31%. As noted previously, our January rate projection assumed the extension of the federal research and development credit into 2008, and we are now longer assuming this to be the most likely case. We project the weighted average share count for the year to be about half a million shares lower than first-quarter levels. All of the aforementioned factors lead us to a full-year earnings-per-share projection of $1.84 to $1.87 on a reported basis or $1.82 to $1.85 as adjusted for the first-quarter discreet tax item. Our previous guidance was $1.83 to $1.87, exclusive of discreet items. In looking at the components driving the change in forecast net of discreet items, the $0.02 to $0.03 favor ability that we expect from higher operating profit is more than offset by a $0.04 to $0.05 negative impact from the higher tax rate. Our updated projections translates to a year-to-year growth of 15% to 17% from 2007 earnings per share as both years are adjusted for discreet items.

With regard to the balance sheet, the only change in thinking of significance from our January call is that we now project capital expenditures of approximately $100 million, down from the $120 million to $130 million we had previously cited. The decrease relates to reduced spending on our primary facility in Maine. While we are on track with the initial phase for expanded, improved R&D and manufacturing space, we have put on hold development plans for expanded administrative space as we work through zoning issues. We anticipate that free cash flow will be approximately 60% of net income, below historical levels of 80% to 100% of net income, given that the projected capital spend remains high relative to previous periods. And now to Jon.

Okay. Thank you, Merilee. We're very pleased with the first quarter as revenue finished close to our expectations, clocking in at 18% year-over-year growth. In addition we achieved an impressive earnings-per-share growth of 21% on a nonGAAP adjusted basis, resulting from careful management of the rest of the P&L and declining share count. As investors who follow us know, we are first and foremost a company focused on driving growth and shareholder value by investing in and bringing innovation to our markets. Including our largest market, the veterinarian, who provides health care to our canine and feline family members. Our historical investments in R&D, which for example total $67 million last year, allowed us to launch a stead stream of new products and services. And in the first quarter of 2008, it was no exception.

The most important innovation achievement was the release and first customer shipments of Catalyst Dx and SNAPShot Dx instruments. We're on schedule for disciplined ramp for placement of these instruments over the year. Early customer feedback has been excellent, and Catalyst Dx has the potential to create a paradigm shift in how lab work is performed in the veterinary practice. Catalyst Dx is so easy to run that it not only saves time versus other existing, in-clinic chemistry platforms, it also provides a tech productivity advantage when compared to the time required to prepare the sample for sending to the outside lab. And of course the lab work is available in eight minute. The reference lab is able to conduct tests that cannot be conducted in practice such as pathology and molecular diagnostics. And yet for core chemistry work nothing beats the convenience, speed, and tech productivity of Catalyst Dx as part of the IDEXX VetLab in-house suite.

Catalyst Dx will be an important addition to the veterinary practice and will generate an incremental stream of instrument revenue for IDEXX as the average unit price will be similar to laser site hematology analyzer. And while our long-term plan does not incorporate increased utilization of consumables by Catalyst customers who upgrade from vet tests, its ease of use might provide upside on consumables as the install base of catalyst customers expands over the next few years. In other instrument news from the quarter, we ramped sales of the Coag DX instrument as expected. We launched a faster, easier thyroid test for the IDEXX VetLab suite and we rolled out a new release of software for the IDEXX VetLab station that provides advanced laboratory management capabilities. Each of those advancements continues the steady improvement to the functionality, efficiency, and speed of our point of care diagnostic offering, the IDEXX VetLab suite.

In our rapid assay line of business all set to introduce an important product advancement for feline patients. This spring we will begin shipping on limited basis an upgrade to our SNAP feline combo test kit which we call Feline Triple. Where feline combo tests for two important infectious diseases and that would be feline immunodeficiency virus or FIV and feline leukemia virus or FELV, triple adds a heartworm spot to this SNAP test kit. Heartworm is an underappreciated and underdiagnosed parasitic disease in cats, as our industry colleagues in the heartworm preventives business will tell you. Our full launch of Feline Triple will begin this summer. Feline Triple providing expanded value to our feline combo customers and for no increase in price. And so for this reason, we'll be simply replacing the combo offering with triple for most market segments.

Speaking of the rapid assay business, we continue also to be on track with the introduction of expanded capability of SNAPShot Dx, which we've just launched, later this year. We anticipate that by the end of 2008 subject to USDA regulatory approval deadlines, SNAPShot Dx will have the ability to read, interpret, and log the result of all SNAP devices including Feline Triple, Canine SNAP 4Dx and our other rapid assay SNAP test kits. This increased capability significantly broaden the ability of the IDEXX VetLab instrument suite capture in the electronic medical record and report out critical diagnostic information on the patient. It also further drives technician productivity. Even with these important product launches happening in the first half of this year and the ones that I've discussed for the second half of the year, our product pipeline remains full with other launches scheduled for later this year and in the out years.

It seems these days we frequently get asked the question what impact is the US economy having on our business? We've looked at this for Q1 and we think the net impact is that it took off 1% from our revenue growth. So not that appreciable. To understand why, I might comment a bit on the composition of our business portfolio. First, several of our businesses have growth drivers unrelated to the US consumer, including, of course, the international markets for all of our products and services, as well as our business segments outside the companion animal group, principally the water and production animal segments. In addition, several of our companion animal business lines, such as the canine rapid assay and digital radiography offerings are in a favorable technology adoption cycle that comes in part as a result of our innovations, and thus are not affected by clinic traffic. When you add these elements of our revenue profile together they make up to over 60% of our revenue. Even the remaining 40% has a heavy emphasis on innovation and expansion that is driving our growth.

As Merilee's mentioned IDEXX's overall revenue growth was driven in part by 10% organic growth. Adjusting for the tough compare created by last year's pet food recall that we pointed out in the first quarter, our organic growth in Q1 for all of IDEXX was a strong 11%, and our companion animal growth led the way with an adjusted 12% organic growth, which I consider solid performance. Our bottom line results reflected solid cost management and margin realization while keeping the focus on key investment initiatives. We've quickly and effectively adjusted our cost structure on operating expenses to the changing US economic environment and will continue to keep a close eye on costs in this economic environment going forward.

So in summary, a combination of continued double-digit organic growth from a diversified portfolio of technology-based businesses, and important new product cycle in our instrument business with Catalyst Dx and SNAPShot Dx, and a strong future new product pipeline all give us really good confidence in our updated financial guidance for the full year 2008. And for the same year we remain quite confident with our longer term financial objectives, low double digit revenue growth, and mid-teens earnings per share growth. So before I open it up to questions, I'd like to take this opportunity to congratulate our employees on the strong operating performance and the innovation achievements that we achieved this quarter. Our results are a testament to our team's capability and the robustness of the IDEXX business model Art, we'd now like to open it up for question and answer.

Thank you. (OPERATOR INSTRUCTIONS) One moment. And our first question comes from the line of Ryan Daniels with William Blair. Please go ahead.

Yes, good morning, guys. Congratulations on the great quarter. Merilee, wanted to ask you a quick question on guidance just to make sure I understand everything. First on the revenue guidance, I know you took it up a little bit on the low and high end. And just trying to figure out what was the primary driver there. I know you had indicated that while within your range it was toward the lower end in Q1, yet you're still taking up your annual outlook. Is there anything specifically driving that?

Thank you, Ryan. Yes, the primary driver there is really I think the strength we're seeing from currency. If you look at that and kind of harken back of what I had projected in January was that the impact of currency would be about 2%. And now we're thinking it's going to be about 3% for the year, so --

Okay. And then on the EPS side if we adjust for the tax change, it also looks like you're taking up your earnings guidance a bit. Net-net on our operating basis. And you mentioned that the margins are going to be a little stronger there. But it seems pretty similar to the margin profile you gave us in Q4. Is there -- again, is there anything in the works there that's kind of taking up that operating EPS guidance, or is it just a better start to the year?

Well, at the year -- the start of the year, I think was pretty much in accordance with our thinking in terms of bottom lines. I mentioned, that we did have some upside from our thinking on gross margin. And the operating expenses were a little bit lower. I think what we're feeling, Ryan, is we've got a pretty good handle on things. We have the ability to really monitor our costs and keep those in check. And so I think we're just feeling like the business is solid and strong and all that's contributing, to, $0.02 to $0.03 of upside for the rest of the year from operating performance.

Okay.

Cutting that is the impact in the change in our thinking about the impact of the tax rate.

Okay. That's helpful color. And then during the quarter you guys obviously looks like you expanded your revolver pretty significantly, especially if we consider the accordion feature. And I know you took up the share repurchase by another two million shares. Are those two in tandem where maybe you're getting more aggressive on the share repurchase, or, other uses of cash, are you seeing a little more activity in the M&A pipeline going forward that you might want to capitalize on? Any color there would be helpful.

I think it was just normal prudence with regard to the balance sheet and financial capacity. The M&A pipeline is typically in our business model very modest The bigger use of cash is the share repurchase program. We were looking at this, Ryan, and we've looked at the -- we've actually brought down a share count by about 3% per year since 2003. And if you look at the annual share price appreciation, since the inception of the program in 1999, it's been pretty good. I think it's been a good investment, and we continue to think that to be the case today.

Okay. Fair enough. And then any early commentary, Jon, from catalysts in the field? It sound like from all our channel demand as you indicated remains very strong. But I'm curious for the people you place it at, what the feedback has been early on about ease of use or service levels, any issues in the field, etc. If you can give us more color, that would be great.

Well, thank you for that. As we expected we've been focused on every last feature. But just the thing that hits customers is just how easy it is to run, combined with the fact that there's absolutely no compromise in the capability of instrument either in terms of menu or flexibility or accuracy. It's just incredibly easy. And of course it has additional capacity. So if you've got a busy practice in the morning, you don't have to wait to add the second patient while the first one's processing. And if it's a preanesthetic profile, it could be just process both of them same time with no expanded time. So the ease of use really has been the paradigm shift I think for people. As with any instrument launch and totally expected in this case, we've always got early feedback with regard to software improvements that could be made and such. And everything is really -- that kind of feedback is consistent with what we expected and part of our disciplined ramp process.

Okay. Great. Thanks a lot for all the color. And congratulations again.

(OPERATOR INSTRUCTIONS) And we have a question from the line of Dawn Brock, JPMorgan. Please go ahead.

Good morning. Very quickly, you saw some considerable strength in the rapid assays. Is there anything outside of the SNAP 4Dx test that's driving some of that?

Dawn, thank you for that question. That's certainly the largest offering product line in our SNAP offering. But we have, I don't know, maybe close to I think -- I couldn't name it off-hand, eight or so other products in the companion animal business. And we know one of them for example is the SNAP cPL, which is a product that we launched last year for pancreatitis, it's getting a nice pick up in adoption. Not a big factor in the overall -- because it's just not -- the 4Dx is such a big product for us. And we have a -- we just really -- a good strength across the whole portfolio. But the movement to full parasitic disease screening, I think the appreciation for the fact that tick-born diseases are prevalent. I know that even the cover of one of the recent veterinary medical journals pictured ticks and anaplasmosis, which is of course the fourth spot on SNAP 4Dx. And it's in a good technology adoption cycle as I've mentioned.

Okay. I mean, let me ask you this, Jon. Are you guys seeing the -- any sort of shift between maybe higher utilization of point of care tests against the diagnostic tests?

You mean point of care versus lab tests?

Exactly.

I mean -- I think people have asked that question over time. I don't see any particular shift one way or the other. In general, parasitic disease screening is much more prevalently a point of care test. I think there's value to providing that result to the client at the time of the wellness visit. And -- but I don't think there's any particular shift one way or the other.

Okay. I guess maybe sticking with the labs for a second, the growth rate was definitely lower than what your annual guidance as you went through that. Can you give us an idea of how much of the growth was associated with the new corporate contracts that came on line in the fourth quarter?

Dawn, we have an international lab business. I think it was a little over $250 million last year in total. And I will tell you there are a lot of puts and takes. We have offered lab services actually in 15 different countries around the world.

Right.

Some are like doing great. And others a little disappointment. We got -- I think we have 11 -- over 11,000 customers in North America. And so I think it -- it's just there's a lot of moving parts, and I think it would be inappropriate to pick out any one part without looking at the other parts. And so we're really look at the lab business as a whole and felt it was a good quarter.

Okay. Fair enough. Just one more thing. On the instrument side, you noted -- you said that there were a handful in the first quarter, and kind of gave us a little bit of an idea of how it's going this quarter. Let me ask you this, are you seeing or how are you seeing the translation of previous VetLab station placements? Are you seeing any correlation between those prior placements and the ordering of Catalyst machines?

Well, thank you for that question. We have -- we actually had another very successful quarter in terms of placement of the IDEXX VetLab station both to new customers of the IDEXX VetLab and to existing customers around the world who are upgrading to more information management and reporting capabilities that leverage their existing investment in IDEXX in-house instrument. That has just been a very, very successful program. And it gives more value to the customer, and therefore, it gives us very, very strong retention of our existing customers in the install base and is a nice driver for growth. With regard to impact on catalyst, we're very, very early days. So, I think -- it's -- certainly we have a ready base of customers who are very anxious to upgrade to Catalyst Dx, who already have the VetLab station. There will be probably customers who don't have the IDEXX VetLab station or don't even have IDEXX equipment that we'll be upgrading to IDEXX over the course this year and future years. And we really don't believe that we're going to be demand constrained in 2008 during our disciplined launch ramp process.

Okay. Very good. And then just one quick question, Merilee, accounts receivable was up a bit this quarter. Can you just elaborate on that? It looked like DSOs were up obviously, as well. Can you just comment a little bit on that?

Sure, Dawn. Yes. This is something that we typically see, and I think if you were to look back at last year, you would have seen receivables actually run up by an even greater amount. What we start to see here is that is we ramp into the tick season and start to see sales there. That they're tending to come later in the quarter. And so you have the impact of the receivables are still there because they're later in the quarter sales. And so it just tends to drive the metric up. Overall, I think that the receivables and DSO are really on track, and we don't see anything out of line or anything -- we aren't seeing any weakness or having any concerns about the balances and any reflection on economy or customers' ability to pay.

Okay. That's great. And then just two quick seconds on working capital, that was up significant as the use of cash in the quarter. Anything that we should be aware of there?

Again, this is a very typical pattern for us. If you were to look back over several first quarters, we see -- what we intend to see is in addition to receivables going up, you'll see payables coming down and that relates to things like annual -- tax payments, compensation payments from year end, and -- so just all very normal stuff for us. And I think, it's something that, we expect that working capital will, that piece will improve over the course of the year.

Okay. Just wanted to make sure we weren't missing anything. Thank you.

Thanks.

And our next question comes from the line of Ross Taylor with CL King. Please go ahead.

Hi. Had a couple of questions. The first one is as you all change to a new feline insulin product, does that cause any challenges in terms of customer attention once you have the new product introduced?

The feline insulin product that we are working on that we're seeking FDA approval on is specifically designed for cats, and the clinical data would suggest that the transition from what has been a very highly popular existing product that we had on the market is quite smooth.

Okay. And can you say roughly when you anticipate the FDA approval for that product?

First half of next year.

Okay. And second question, Jonathan, you mentioned during your remarks that you thought even with the new feline triple test you'd keep the price on that unit constant. And I just wondered, what of the strategy behind that because I thought usually as you added more tests to the SNAP kits that you'll raise the price a little bit. And I wondered what your thoughts were there.

Yes, I think there is a little bit different strategy, Ross. Thank you, again, for the question. And the strategy here is, if you looked at what we did when we introduced -- actually 2Dx, that was a long time ago, and then we introduced 3Dx, and then we introduced 4Dx, but as we introduced 3Dx and 4Dx, we kept the heartworm product on the market and as we introduced 4Dx we kept 3Dx on the market, because it was a little bit different disease incidents in different geographies and then we went through a process of a significant amount of marketing investment to convince people to pay a little bit more to upgrade to the next product.

In this case, we've made a slightly -- we're taking a slightly different approach. Instead of taking additional marketing dollars to try to upgrade them, we're saying we're just going to keep the price the same. It is at the retail level, meaning at the level that the veterinary practice purchases from the distributor, about a $16 average unit price. And we want to give more value. And because we're able to give more value and because we are giving more value at the same price, as I said for most market segments, we're just going to offer the -- the triple instead of the combo.

Okay. And is there any chance that unit could go up because of the addition of the heartworm under the feline product?

That's a great question. I think what we're going to find as people start snapping with triple instead of combo, which they will because that's what they'll get, when they order it they're going to find heartworm. And we call it a tip of the iceberg, a philosophy that suggests as they realize that heartworm is more prevalent in the cat that they had any appreciation for that maybe they'll think more about heartworm management in the cat which would include preventives or more regular testing. It is not in our number. We don't have any in our number. But some people have speculated that that could change the protocol.

Okay. All right. That's helpful. And just two other quick questions. Merilee, I missed some of the numbers you gave out just trying to absorb it all. Could you go over for me what you expect the tax rate to be for the balance of this year. And also I think you gave out some numbers for the consumable component of the instrument and consumable line. I just wondered if you could give those again.

Sure, Ross. First of all, with regard to the tax rate, I said 31% for the full year and what we will see in the second through the fourth quarter is a rate of about 32%. And then for instrument consumables, the organic growth rate was 5%, and then when we adjust for changes in distributor inventories and for the impact of the pet food recall, it was about 10% in the quarter.

Okay. And did you give out an absolute dollar figure there, or not?

Yes. I did. It -- just grab that. It was $53.1 million.

Okay. That's all I have. Thanks very much.

Thanks, Ross.

And Mr. Ayers, there are no further questions. Please go ahead with any closing remarks, sir.

Okay. Well, thank you, everyone. Thanks everybody for joining our call. And again, thank our employees for a -- for delivering a great quarter for us. And we look forward to having our conversation with you all as our second-quarter results come in in July.

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation, and thank you for using AT&T Executive Teleconference Service. You may now disconnect.