愛德士 (IDXX) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to the Idexx Laboratories third quarter 2008 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 Susan Ostro, Director, Investor Relations.

Idexx would like to preface the discussion with a caution today regarding forward-looking statements. Listeners are reminded these 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 expectation 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 March 31, 2008, and Form 10-K for the year ended December 31, 2007 in the section captioned Risk Factors, which are on file with the SEC and also available on Idexx's web site, 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 would like to turn the conference over to Merilee Raines. Please go ahead.

Thank you, Lisa. Good morning and thank you for joining us today. I'll start things off with a review of our third-quarter financial results, an update on 2008, and a first full look at 2009. I'll then turn it over to Jon for further comments on the business.

As reported in our earnings release this morning, our third-quarter revenues were $251.1 million, a year-to-year increase of 9%, and diluted earnings per share were $0.42, a year-to-year increase of 5%. The bottom line performance was largely in line with our thinking, though lower than anticipated revenues were mitigated by lower operating expenses. Before I get into the details of the P&L, I will also mention that in our press release, we indicated that we have signed an agreement to sell certain product lines comprising the majority of our pharmaceutical business. In the 10 years since we entered the pharmaceutical business via acquisition of an R&D startup company based in Greensboro, North Carolina, we've worked hard to balance the necessary investment in pharma with the overall imperative to manage Idexx to create shareholder value. We've built a small, dedicated team of talented individuals who have developed some niche companion animal therapeutics, and some very interesting delivery technologies.

We believe that for our pharmaceutical division's portfolio of products and people to have greater success in the market, we must place them with an owner who is equipped to devote the appropriate level of resources, especially commercialization resources. The sale allows us to focus management attention on our core diagnostic and information technology portfolio. We expect the transaction to be completed in the fourth quarter. The product line sales, which include a product still in the regulatory approval process, are expected to not have a material impact on our fourth-quarter operating results. We will call out the specific financial impacts for the fourth quarter when we report our earnings in January.

We will retain a couple of small products with annualized revenue of about $3 million that are complementary to our core diagnostic offerings and require little to no incremental commercial effort. We will also retain the intellectual property associated with our novel delivery technologies and a small R&D team who will enable us to take best advantage of outlying opportunity. In fact, late yesterday we signed an agreement with a top-tier animal pharmaceutical company to outlicense one of our promising pipeline products. The agreement includes development milestone payment and revenue-based royalties once the product is commercialized.

Let me now provide some further highlights on our third-quarter P&L. The revenue growth of 9.5% included 2% growth from currency and no impact from acquisitions to organic growth with 7.5%. The growth for the third quarter was 10% as compared to 11% for the first half and 13% for the full year 2007, when we further normalized applicable periods for impacts of last year's pet food recall and the acceleration of pharmaceutical sales into the second quarter this year.

This is a good time for a couple of notes with regard to the macroeconomic environment. Specifically, currency fluctuations and the weakening economy. First the impact of currency. Everyone is aware that the dollar has strengthened dramatically over the past three months, and in particular the past few weeks. Although currency had a modestly favorable impact on the third quarter, the 2% benefit was significantly less than the nearly 5% positive impact we had experienced over the previous three quarters. Given the approximate 20% strengthening of the US dollar versus the Euro since the Euro's peak in the third quarter of 2008, we expect currency will have a negative impact on our performance as we look forward to the fourth quarter, and our initial 2009 guidance reflects an assumption that the dollar will remain at current levels. I will discuss currency further in a moment.

Second, concerns over the financial markets and the economy have clearly exacerbated over the last quarter in the US and have spread to other parts of the world, which is affecting certain areas of our companion animal businesses. We estimate that the economic environment slowed our overall growth rate by about 2 points in the third quarter. I will discuss other factors influencing organic growth now as we look at revenue performance by each product and service line.

Sales of instruments in our Idexx VetLab suite totaled $17.8 million in the quarter, a year-to-year currency-adjusted increase of 21%. In the third quarter, we continued our controlled launch of Catalyst Dx, our new chemistry analyzer, and placed nearly 200 analyzers. The customer feedback is very positive, and our focus during the controlled launch continues to be on improving the scalability of the manufacturing process and reducing cost. In fact, our sales force generated in the third quarter more orders than we have made as deliveries, and as a result we now have a book of catalyst orders that comprises about 90% of our fourth-quarter planned sales of the instrument. Production of SNAPshot Dx, our new quantitative immunoassay reader, is scaling well and we are no longer in limited launch. Customer interest is strong, and we've placed nearly 350 instruments in the third quarter. Given our supply status and the book of orders in hand, we believe that we are on track to place about 700 catalysts and about 850 SNAPshot Dx instruments in the second half.

As the fourth quarter is traditionally the highest placement quarter in the calendar yearn, reflecting customer year-end tax planning, we have been checking with our leasing partners to see if there is any lease financing environment for our base. Our leasing partners have indicated that they continue to perceive this market segment as very creditworthy and have not seen any appreciable change in the very high rate of financing approvals. Additionally, leasing interest rates, though slightly higher, remain attractive for our customers.

To this point we have not observed that the worsening economic environment has had much impact on sales of our in-house diagnostic instruments. We believe this is because our customers increasingly view the broad offering and new additions to the suite as a means to not only practice better medicine but also to improve efficiency in their work flow and enhance practice profits -- very important objectives at this time. However, lower foot traffic in our customers' practice has impacted sales of our recurring revenue streams from instrument consumables, laboratory services, and to a lesser extent rapid assays in North America and beginning in the third quarter in Europe as well.

In addition to reduced testing, primarily related to routine wellness checks and elective procedures, we believe that a portion of the veterinary practices have worked to reduce their on-hand supplies of our kits and consumables in an effort to control spending. We estimate that the current economic environment has impacted the growth in these product and service lines in North America and Europe overall by about 3%. As these revenues account for approximately 60% of total company revenues, this is how we arrive at the estimate that the economy produced a drag on our total top line growth of about 2% in the third quarter.

Instrument consumables with sales of $54.6 million grew organically 7% in the third quarter. When adjusted additionally for changes in distributor inventories, the growth was 9%. Our rapid assay sales of $36.2 million grew 7% organically or 14% after adjusting for changes in distributor inventories. As we have indicated for some time, we are seeing a slowing in the conversion rates from heartworm only to our [3Dx] and 4Dx parasitic panels as penetration rates have progressed. We anticipate that this, in conjunction with the lapping of price increases in certain customer segments and changes to marketing programs, will result in lower growth, exclusive of economic factors, in the fourth quarter and ensuing quarters. Our new product innovations such as Feline Triple, which will move to full launch in the fourth quarter, and the additional of SNAP read capability on SNAPshot Dx, anticipated to phase in over the first half of 2009, should provide a somewhat offsetting favorable impact to unit volume growth rates.

US distributor inventory levels for instrument consumables and rapid assays averaged 3.5 weeks at the end of the quarter based on forward-looking demand, which is in the normal range. Our laboratory and consulting services, with revenues of $73.5 million have reported growth of 13% with acquisitions contributing 1% and currency contributing 2% to produce organic growth of 10%. This growth is about 1% less than the organic growth we experienced in the first half as adjusted for the estimated impact of the pet food recall.

With regard to longer term growth rates for our major companion animal recurring revenues, we will provide more specific thoughts on those at the time of our fourth-quarter call. At that point, we will have completed our planning process for 2009, and we will also have more visibility to the impact of the rapidly changing economic environment on our business.

Our practice information management and digital radiography systems, with third quarter revenues of $13 million, grew 9% organically compared to 18% for the first half. We have launched a next-generation upgrade to one of our companion animal radiography offerings at the beginning of the fourth quarter. In conjunction with the launch, we made the decision in the third quarter to transition orders for the previous generation systems to the new system with its enhanced functionality. While this depressed third-quarter revenues by about $2 million and year-to-year growth by about 15%, we entered the fourth quarter with a record book of orders.

Our computer systems and digital radiography installations require more planning with the customer and time for configuration and training than do installs of our Idexx Vet Lab suite. It is not atypical to see a one to two month lag between system order and installation. For this reason, we do not anticipate being able to deliver and install all of our current backlog in addition to orders received in the fourth quarter, and we expect that we will enter the first quarter of '09 with a strong backlog, as well.

Production animal sales of $17.8 million had 2% reported growth, yet a 3% decline in organic growth in the third quarter. Year to date, organic growth is flat. As noted in previous quarters, a key driver for this year's performance has been declining prices on BSE tests in a very competitive bidding environment. Additionally we have seen delays in government spending on some programs, which may be attributable to focus on other priorities and economic factors. We also recently learned that Europe is raising the mandatory testing age of cattle for BSE to 48 months from 30 months, effective January 1, 2009. We expect that the resulting reduction in the volume of testing will reduce our BSE revenues by about $6 million in 2009.

Our water business had a very strong quarter with revenues of $20.3 million, and organic growth of 15%. Our collaboration with Invitrogen, which anniversaried in September, added 6% to growth. Testing related to cryptosporidium outbreaks in the UK, the launch of the product line extensions, and continued solid growth in other regions outside the US also contributed to growth.

Looking at the rest of the P&L, gross margin at 51% of revenues was in line with our thinking. To remind, we indicated last quarter that gross margins in the second half would be down about 3 points from the first half margin of 53%, largely due to revenue mix. We expect that the gross margin will be about 49% in the fourth quarter given the relatively high portion of instrument sales. In particular, the growth of catalyst placements will have a more significant unfavorable impact on the overall gross margin as we continue to come down the experience curve in both the cost to manufacture and provide aftersale support.

Our operating expenses at 35.5% of revenues were in absolute dollars and as a percentage of revenues meaningfully below our thinking at the end of the second quarter, resulting from our continuing effort to control spending in light of slower revenue growth. This is all the more impressive given the investments we are making to support the catalyst and SNAPshot Dx launches. We will continue to closely watch spending in the fourth quarter and expect that expenses will be down sequentially 1 point or so as the percentage of revenue, exclusive of any restructuring costs associated with the sale of the pharmaceutical product lines.

With regard to taxes, as you may know, in early October, Congress extended the federal research and development tax credit for 2008 and 2009. This will result in a tax savings of about $2.2 million or $0.035 of earnings in the fourth quarter. We now project our full-year tax rate will be about 30% as reported, or 31% excluding the first-quarter discreet items. As for the balance sheet and cash flow, we ended the quarter with $85 million in cash and $164 million of debt on our revolving credit line for net debt of $79 million. Free cash flow as defined in our earnings press release was $22 million or 85% of net income for the quarter, and we expect that free cash flow for the full year will be about $70 million or 60% of net income.

For our latest outlook for full-year 2008, we project revenues of $1.025 billion to $1.03 billion. This would represent reported growth of 11% to 12% with acquisitions estimated to contribute 1% and currency to contribute 1%, so organic growth of 9% to 10%. This guidance is down from our previous range of $1.06 billion to $1.07 billion and is driven primarily by currency, in light of the recent significant strengthening of the dollar, and to a lesser degree a somewhat larger anticipated negative impact of the economy on our companion animal business combined with lower production animal service revenues and timing of digital radiography system placements as discussed.

With about 40% of our revenues from outside the US, our rough approximation for our 2008 currency exposure is every 1% strengthening of the dollar negatively impacts revenue growth by about $4 million on an annual basis or about $1 million per quarter. So the greater than 15% strengthening of the US dollar versus the Euro and other major currencies since the time of our last guidance in July impacts our fourth-quarter revenue estimates by about $15 million, assuming as we have that currency rates remain at current levels. This incorporates a baseline assumption for the Euro at $1.30. This, combined with the approximately $5 million lower than anticipated favorable impact of currency in the third quarter, results in $20 million lower guidance from our second-quarter call being the result of currency.

Though currency movements and the current economic environment present challenges, we believe the fundamental growth drivers in all of our businesses are solid. We project full-year GAAP EPS of $1.88 to $1.91, or $1.86 to $1.89 adjusted for discrete items. Year to year, earnings per share growth adjusted for discrete items in both years would be 18% to 20%. The lowering of our guidance range by $0.01 is the result of the following. The extension of the federal R&D credit will produce $0.03 to $0.04 earnings benefit, not previously anticipated. This benefit is offset by the unfavorable impact of currency estimated at $0.02, and lower organic revenue growth estimated at $0.02 to $0.03. As noted in our press release, this guidance is exclusive of the impact of the sale of pharmaceutical assets.

Given the rapidly changing landscape of the financial markets and global economies, it is quite a bit more challenging to give guidance on next year's financial profile than it has been in previous years at this point in time. As we are still in the midst of developing our 2009 financial plan, we will update our guidance and provide more details on the components of the P&L balance sheet and cash flow at the time of our fourth-quarter earnings release in January. At this point, for 2009, we are projecting revenues to be $1.05 billion to $1.07 billion and earnings per share to be $1.82 to $1.92.

It is important to note that our guidance assumes currency rates remain at current levels with, for example, the Euro equal to $1.30, which implies a US dollar strengthening of about 16% from the average rates experienced in the first half of 2008. The movement in the dollar since the first half essentially reduces our forecast of 2009 revenues by about $70 million, and our forecast of 2009 earnings per share by about $0.20, relative to what those forecasts would be had the dollar remained at first half levels. The earnings per share impact is harder to estimate than the revenue impact, as it is influenced both by expenses based in local currencies and the volume and pricing of financial hedges we have in place.

The earnings-per-share impact is so meaningful next year because of the rapid and large movement of the dollar, and the fact that at this point in the planning cycle, we have only partially hedged our 2009 currency exposure. Our customary practice is to layer in hedges over the course of the year for the succeeding year, and typically we put in place a good portion of the hedges in the fourth quarter as we finalize our operating plan. I also note that the sale of a portion of our pharmaceutical products reduces 2009 revenue by about $20 million and earnings per share by about $0.04 as compared to 2008.

Excluding the impact of currency and lost pharmaceutical revenues, our 2009 guidance implies revenue growth of 8% to 11% and earnings per share growth of 5% to 12% as compared to our updated guidance for 2008 adjusted for discrete items. The revenue growth is essentially on par with that we are expecting for 2008, i.e., the 9% to 10% that I spoke of earlier, as the strong growth from catalyst, SNAPshot Dx, and digital offset somewhat lower growth rates for production animal services and rapid assay for reasons discussed. We assume that the economic impact on our business remains about the same as what we are observing in the second half of this year and will have a modest negative impact on growth for 2009 primarily in the first half. As this factor is obviously very difficult to predict at this time, we will continue to revise and update our outlook over ensuing quarters. Our goal remains to provide investors with as much transparency as we can regarding the factors influencing our performance.

The expected earnings growth is relatively equal to revenue growth and is reflective of the increased significance of our new instrument offerings on our 2009 financial profile, with a relatively lower profit contribution as we come down the learning curve. We view them as an investment in 2009 that is key to driving continued strong growth in our high-margin consumables for the coming years.

So key factors in our 2009 top and bottom line performance will be our ability to successfully ramp new product launches including Catalyst, SNAPshot Dx, and Feline Triple, improve the cost and scalability of our new instruments, and increase testing volume and continue to identify operating efficiencies in our worldwide network of reference laboratories. These activities have been part of our fundamental strategy for some time, and we believe that the strategy is as solid as ever. As we have done throughout 2008, we will continue to closely monitor expenses in conjunction with revenue growth, and ensure that we are making the appropriate investments to support our strategy. And now to Jon.

Thank you, Merilee, for that comprehensive review. Given all the turmoil in the markets, we are pleased that we were able to comfortably hit our bottom line target this quarter, although there were some puts and takes as Merilee has described. Of course the turmoil is likely to continue for a while. And like everyone else, we will be grappling with market factors outside our control and unrelated to the strength of our business. The recent and significant currency market moves are very much one of those factors. The currency volatility is an unfortunate fact that we and indeed all US companies with international operations supported by exports out of the US operations must deal with.

Under the current circumstances, 2009 guidance is especially difficult to pin down, and some companies are opting not to do so at this time. However, we have always felt that our investors are better served if we share our thinking and the significant assumptions behind the numbers. And so as always, we're providing a preliminary look on the upcoming year even with all the caveats.

In offering 2009 guidance, we have assumed that the dollar will retain its recent strength, notwithstanding the unprecedented run-up in the past few weeks and months. We felt that this was the most straightforward and understandable assumption for our investors. We have tried to separate the currency impact from the more fundamental business performance such as constant currency growth rates -- in other words, the growth we see in our international operations in local currency. This is just what we have done during the many quarters over the past several years when we were a net beneficiary of currency movements. In addition, Merilee has provided the sensitivity of our revenues and earnings to changes in currency rates. Obviously currencies can and do move around quite a bit and thus it is not possible to know how the currency will ultimately affect 2009 performance or even indeed the fourth quarter this year.

As to the economy, we are clearly seeing more weakness today than we did in the first half of 2007. Yet at the same time, we continue to see attractive organic revenue growth in our businesses. For example, in September we had a very strong capital order and placement month in the companion animal group worldwide. Our focus on our product, market, customer, technology, and cost management strategies continues. Make no mistake about it, we believe we are positioning Idexx to emerge from these turbulent times in an even stronger, competitive position. We're building a great franchise valued by our customers, and one which will provide our shareholders an attractive return on investment.

Let me elaborate briefly on some of the exciting developments in our business fundamentals before we open it up to Q&A. In the companion animal group, we are on track with the controlled launch of our next-generation instruments, catalyst Dx and SNAPshot Dx. Both instruments are being well received by customers who have incorporated them into their practices. Snapshot is further along in its maturation and is now out of the controlled launch phase. In fact, we installed nearly 350 instruments in Q3 and our backlog of Catalyst Dx is large enough to fulfill 90% of our Q4 targets. We continue to target placing 700 Catalyst Dx and 850 SNAPshot Dx in the second half of this year. In Q3, we sold and installed instruments in the US, in Canadian, and UK veterinary practices. We are also on track to expand the capability of Catalyst Dx before the end of the year with the addition of electrolytes, automated dilution, and automated urinalysis as a result of continued advancements in software. Overall, instrument revenues were up 21% in Q3 in constant currency over the same period last year.

In the quarter, we also formally launched Idexx Smart Service for the Idexx Vet Lab station. Idexx Smart Service is an e-support application that allows the customer's instrument suite to be remotely accessed through the Idexx Vet Lab station and through the North American for service, and in the future for software updates and other service. We have 250 customers on line with this service as of today and expect to have 700 before the end of the year. This capability is yet another unique service offering for users of our in-house instrumentation and our customers are very excited about the convenience and comfort that Smart Service provides them. It will also allow us to be more proactive in identifying and addressing potential instrument issues and enable us to become more efficient at providing ongoing customer support.

We continue to win new customers and expand our relationship with existing veterinary customers through our strategy of electronic integration of our diagnostic and product services, with the practice management computer system used in the practice. We call it the integrative practice. For example we now have a full two-way integration capability between our Cornerstone practice information management system and our suite of instruments, lab services, and digital radiography. This integration supports better medicine through the use of electronic medical records and eliminates paper handling and redundant data entry, thus increasing staff efficiency. It also helps our customers capture revenue otherwise lost because of some medical services provided by the practice don't make it onto the invoice when part of an unintegrated practice. In these challenging economic times, our customers are very appreciative when our solutions help capture lost revenues. These newly captured revenues go directly to profits. Integrated practice is one of the value-added practices that help us grow our instrument and consumables business, reference lab services, and digital radiography systems sales.

We also launched a new specialized test in our reference laboratories on October 1 called Spec fPL. This offering helps a vet with a cat that is vomiting or otherwise, as we call it in the profession, ain't doing right by providing a differential diagnosis for pancreatitis. This test complements a similar specialized test offered by our reference lab and in a SNAP form for dogs called Spec cPL and Snap cPL -- the C standing for canine and the F standing for feline. This new feline version continues to build our unique and valued menu of specialized tests only available from Idexx referenced laboratories around the world.

I would also like to congratulate our water business, which had an outstanding quarter of 15% organic growth, benefiting from high-single digit core growth as well as the growth coming from our partnership with Invitrogen signed last year. The water testing business, as profitable as it is, appears to have little to no sensitivity with the economy.

I'm also very pleased with the agreement we've reached to divest our on-market pharmaceutical products. While the decision to divest this business was not one that we made easily, we believe that it is the right move for our shareholders and consistent with our focus on diagnostics and information technology -- markets where we have a great deal of experience, very strong global market positions, and a long track record of success. We've also signed a separate agreement with a different top-tier pharmaceutical company under which they will continue the development and commercialization of a very promising pharmaceutical product that was in our pharma pipeline. Under this agreement, we'll receive various development-related milestone payments and attractive royalty on product sales if and when the product is brought to the market.

We'll be retaining a small group of R&D that developed the novel delivery technologies, and we'll also be retaining the core intellectual property. Not only to continue to see the potential for future licensing opportunities for this technology, but we'll also see this group playing a key role in development of diagnostic tests that might work with pharmaceutical products marketed by big animal health pharma companies.

I'd like to wrap it up by commenting that our business continued to perform well in Q3, where we did a good job at prudent cost management while continuing to drive 10% organic growth in our core businesses. Our business model also generated strong pre-cash flow as Merilee has enumerated. This free cash flow gives us the flexibility for cash deployment in shareholder value-added ways including our ongoing share repurchase program. At current values, we see our stock as an attractive use of this free cash flow. Of course during these times of uncertain credit markets, we also keep in mind the need for prudent balance sheet management.

So Lisa, at this time, we'd like to open it up to questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes from the line of Ryan Daniels from William Blair. Please go ahead. Please go ahead.

Thank you, good morning, everyone.

Good morning, Ryan.

A couple quick questions on the FX changes. Merilee, can you walk us through what the benefit you're expecting on the EPS basis for 2008? I'm trying to get a feel for how much that boosted income this year with your hedges in place relative to the detriment of next year.

Thanks, Ryan. It's really -- the impact year to date has been pretty insignificant. I haven't actually calculated that, but I would -- would guess it's probably in the neighborhood of $0.02 to $0.03 or so. The reason for that is a couple. First of all, you know, the dollar had basically weakened very gradually over quite a period of time. And as we entered 2008, we had put pretty much full hedges in place. We don't hedge 100% of our exposure. We don't ever plan to do that because we don't ever want to risk the situation where we've overhedged and could be considered speculative.

True.

But in any event, we -- we entered the year with a good amount of hedges. So that I guess what I can tell you is that at this year for every -- our rule of thumb is that for every 1% strengthening or weakening of the dollar vis-a-vis the other currencies -- I mentioned the top line impact of $4 million or $1 million on a quarterly basis of revenues -- the bottom line impact really ends up being something more in the neighborhood of for operating profit of about $500,000 on an annual basis, again for a 1% change or in the neighborhood of $100,000 to $150,000 on a quarterly basis.

All -- 2008.

2008. Which was the question.

Okay. So really not much of an impact.

No.

And then if we think of your hedging strategy, I mean, where do you stand now? Obviously no one anticipated that the dollar was going to appreciate like a skyrocket. I mean, did that leave you sitting here saying let's wait and see if this settles down. Do you hedge at this level and just say we'll take our lumps and take the $0.20 year-over-year loss, if you will -- or what's your thought process on how you're going to look at that?

Well, I think our philosophy first of all with hedging has always been that we use it to help provide predictability to our financial plan as we finalize the financial plan. And that's why we have had a practice that we have done for a number of years that we layer in a small amount of hedges over the course of the year incrementally. But really as we finalize our plans for the year, which is in the fourth quarter of the year, that's where we top off our hedges and do a fairly significant amount of hedges. It -- at this point, we are probably again -- our financial plan isn't finished, so I can only estimate. I would guesstimate that we have hedged about 50% of exposure and typically we would look to hedge something in the neighborhood of about 85% of our exposure as we enter a year. And so I think when you have this volatility in the currency markets, I mean the horse has sort of left the barn. So I think that we'll have to wait and see, and we will conclude our planning process, and that would be when we would normally again revisit hedging at this point. And we'll just I think at that point determine what we want to do with hedging.

Okay. No, that's very fair. And then if we think of your '09 guidance, obviously the two big blips or the -- the currency for it sounds like $0.20 and I guess '09 the pharma for $0.04 to $0.05 -- what level of conservatism in that, however, is for the economy? You mentioned that you anticipate you stay at current levels which is weaker. Does that assume it stays there through the entire year, or are you just saying for the first couple of quarters, and then as comps gets easier and hoping thing improve, you've got better expectations for the back half?

That would be right, Ryan. Again, we're -- and obviously things are very dynamic right now. But we're presuming in this guidance that things stay about where they are manifesting in the second half, which is worse than the first half was for us obviously as we have been stating in previous calls. And so what we would see then is that impact, the first half of the year, and then hopefully we would lap that as we got into the second half.

Okay. Fair enough. And then two more quick ones, and I'll hop off. Jon, you mentioned the Snapshot's no longer in a controlled launch period. I'm curious what your thoughts are on Catalyst, when we might flip the switch there and move out to a broader launch or not limiting the sales force on those product sales.

Well, we will just be continuing to monitor our ability to service customers with a high degree of satisfaction and also manufacture a quality product. I don't anticipate that we'll be through that process at the end of this year. And so what I'd like to do is provide you the next update on that in January.

Okay. That's fair. And then, the last one I had, Jon, you mentioned share repurchases obviously with the stock weakening here. Can you just remind us two things -- one, how much you have left on your revolver, and number two, how much you have on your share repo, which I think is pretty significant?

Yes. Merilee is pulling the share repo. I would say with regard to that, that's something that we evaluate at every board meeting. And if we have a limit on that, then we can always evaluate expanding it. And the Board can make that decision. With regard to the revolver again, I'll let Merilee give you the individual numbers. What I would say is if you look at our net debt position today and you look at our free cash flow, we basically have just about enough free cash flow in a year to go to a zero net debt position. So we're in a fairly strong position in terms of the balance sheet.

Okay. And Merilee, you can get back to me later if you want to move on.

I can do it pretty quickly. The specifics on the remainder of our shares under our repurchase program is about 4.5 million shares, Ryan. And as far as the revolver goes, I did mention the net debt -- or that the position on that was $165 million. The revolver limit is $200 million. However, I would say subsequent to the end of the third quarter, we got pretty conservative on our cash management as credit markets tightened up. And we have -- the balance on that revolver is now about $115 million. So we have some pretty good capacity there in addition to the free cash flow.

Okay. Great. That's all helpful. Thanks a lot.

Thank you.

Thank you. Next we'll go to the line of David Clair with Piper Jaffray. Please go ahead.

Hi, thanks a lot for taking the questions. I guess the first question is if you guys can just give us some color on what you're seeing as far as the appetite for capital equipment spending in the vet clinics.

Well, of course our major capital areas are in the instrument line and in digital radiography. And we're in very favorable technology cycles. These are products that are very important to the practice. They're ones which provide efficiency and incremental revenue and opportunities. And I would say it's a very healthy environment at least for our product because people appreciate our technology. Merilee mentioned that we ended the third quarter with a record backlog in the digital area. We're very pleased with our product line, where it stands now, in digital radiography, both on a hardware and on a software side. And of course we also stand in very, very good shape with regard to the backlog and book of order for Catalyst Dx at this time as we look at our fourth quarter. So these are -- this is I think a technology cycle story.

Okay. Thanks a lot. And I guess the next question would be just an update on the overall competitive landscape. Are you seeing any promotional activity from your competition in front of the Catalyst Dx launch?

It's always a competitive environment. I think I wouldn't characterize it as any different today than it has been in the past. When we're talking about catalyst, there really is no, as an example, there really is no alternative anywhere near to the capability of what that provides a practice. And it has impacts really on -- whatever the practice cares. Medicine, productivity, and profitability. And so I don't think there's any -- I would just call it a very competitive environment, but really no different than we've seen in past quarters.

Okay. Thanks. And then just one last question from me. And the reference lab business continues to be pretty solid here. I was hoping you could give us a little bit of color on pricing versus volume there. And if you believe you're taking market share. Thanks.

Yes, well, of course, our reference lab business is a global business. We operate in eight or nine different countries, probably even more than that if you just consider where we provide services. And the competitive landscape is different in every country that we're in, and the -- but I would say that in general, we're very pleased with the global growth in the reference lab business. It's an area that is supported both through price and through volume. Both of those are contributors if you were to go around the world.

So I guess more specific to the US? Are you seeing any pricing pressure there, or any color you could give us there?

I generally don't comment on the individual geographies of the line of business that's within a segment. Certainly the US business of our lab is our largest contributor to the lab business. But we're in all these other countries, too. And they collectively are significant portion of the lab business. So I would say that it's always a competitive environment in lab services in the US, and in the other country markets that we're in. I make the same characterization that I would say in the equipment business -- that it's always competitive.

Okay. Thank you.

Thank you. We'll go to the line of Jonathan Block from SunTrust Robinson. Please go ahead.

Thank you and good morning, guys.

Good morning.

Jon, I think this first one is for you. I think just trend by region and maybe just a broad brush -- in other words, if you look at the US and I think you said about a 2% or 3% hit from the economy, were there some regions that stand out? In other words, where you're seeing the housing crisis? And then you alluded to some softness US -- are there some markets you could point to that were more prominent than others?

The US is just such a -- we actually don't really look at the US from the individual geography point of view. I would say it's more collective impact on the US. And we've seen people of course are concerned about the economy. And we've seen that, as Merilee has enumerated and in the -- what I would call the recurring revenue portions of our companion animal group, that are directly related to the amount of services that are provided by our customers. I would say with regard to international, the biggest contributor there, of course, is Europe. And Europe I think has more recently felt the economy -- it was more of a lagging impact in Europe if you looked at over the course this year versus the US. I think certainly the US people started feeling certain aspects of a change in the environment in the first half of this year. And I think that that in Europe was really more started in the third quarter.

Okay. Great. And then maybe just shifting over to Catalyst. It seems like in the placement certainly ramped and your guidance implies certainly a solid fourth quarter. Just wondering in terms of the manufacturing, I think during your investor day it was things that really hit the ground running early in 2009, that there wouldn't be any constraints in terms of manufacturing. So just maybe if you could update us there, where are you in terms of manufacturing? Has there been any other small glitches that have popped up that's been incremental in the past few months that may preclude you from really ramping this thing in the very beginning of '09?

It's -- the interim business and starting a new platform and a point of care setting is -- it's always -- you always see things that are unexpected even in a very, very experienced company as we are in the instrument business. And so we've seen things that we've needed to respond in terms of manufacturing and customer service. Certainly nothing which have precluded us from meeting our targets and achieving a high level of customer satisfaction. It does cost us to ensure that we have a high level of customer satisfaction in terms of customer support and making sure that we're investing in quality in the manufacturing line. But I would say that it's a learning process, and what always gates us here is we will ramp as fast as we can without putting customer satisfaction in jeopardy. And I'm very pleased with what we're seeing with customers using Catalyst. They're realizing that with Catalyst there is a paradigm shift in their practice. The morning is just different. All of a sudden, it's -- one practice said, gee, it's like we have an extra tech in the morning. Or gee, all of our surgeries start earlier. We can't believe it. That it's almost they didn't really appreciate it until they started having the Catalyst in operation. And that's we expected that ultimately it would be our customers who would be our best salespeople. And that's why we've always focused on customer satisfaction as the most important gating part of the launch.

Okay. Great. Thank you for that. And Merilee, one or two for you. I think you gave out a lot of numbers. I might have missed a couple, my apologies. I think when you spoke to some of the revenue growth, rapid assay I believe reported was maybe 7% organic, if you would just for distributors. And I haven't seen the queue yet. I believe you mentioned 14%. And I know consumables seemed a little depressed, as well. Number one, is that the case? Number two, are you seeing a shift from the distributors where they're carrying less inventory, and is that due to maybe a tightening of the credit markets?

Well, first of all, Jon, your numbers are right. Rapid assay, 7% organic and then 14% adjusted for change and distributor inventories. And then instrument consumables is 7%. And -- as additionally adjusted for distributor inventories, it was 9%. So, these numbers -- I wouldn't say that we've necessarily have really seen any changes in distributor activity up to this point. These numbers tend to bob around 1 to 2 points across product lines and so it just sort of depend on the mix. It depends on what promotions and other things they might be running and things like that. And that's why we just always break that piece out. So that folks can see what the growth rate is adjusted for these things. But we haven't seen any issue with our distributors with regard to any kinds of payment issues or anything like that. I mean, everything is solid. So --

And I would just complement that comment by saying that we're certainly very pleased with the relationships and the partnership that we have with our distributors today. I don't think it's actually ever been stronger. And what they're carrying in terms of our inventory is basically the same levels that it's always been for the last several years and that's within three to four, within the middle of the three to four-week range. It's hard to run a distribution operation with much less than that for a sustained period of time. And you don't really need much more. So that's -- that's just a situation normal. The other factor just to delineate, once the distributor sells our supplies, our reagents and our kits to our customers, then our customers have a small portion in their refrigerator. And what we think may -- some of what have been happening was that they were reducing their on-hand supplies which of course would be reflected in the sales of our products to our distributors. It's hard to tell. We have no idea what our customers have on hand. And generally not that much because they get same day or next-day service from our distributors. But, there's probably a small factor there.

Okay. Great. And just last one if I may. Merilee, I guess just trying to get an apples to apples for bottom line, $4.09, seems like you got the $0.20 hint from FX and $0.04 from pharma, but you did say you got a tailwind this year with FX. When you net everything out, do you think sort of like a 6% to 10% bottom line growth rate for '09 is fair once you wash everything out?

Well, again, I had cited what we think the growth rate is apples to apples, adjusting for currencies and the pharma sale. So I would just stick with those numbers. But it's a 5% to 11% bottom line is -- I'm sorry, the 5% to 12% bottom line impact is what I think is apples to apples. And I just want to be clear with that. I know that all of this gets complicated for people, but when we look at that, we really are then trying to compare with '09 in a constant currency with what we think the average rates will end up being for all of 2008. And of course, the dollar has appreciated here in the second half of '08. We were giving numbers that were reflecting currency changes as of the first half of the year. But when you look at the full year, probably the average rate for the Euro, again, assuming as we did that the Euro in the fourth quarter is -- averages out at about $1.30, that the average for the Euro versus the dollar for the year ends up being about $1.45 or so. So that's what -- that's how we're computing the year-to-year growth is based on 2009 looking as if it were at the same rate as 2008, which is again approximately $1.45. So that's -- that clear? That's how the 5% to 12% is derived.

Okay. Got it. Thanks, guys.

Thank you.

Thank you, we'll go to the line of Dawn Brock with JPMorgan. Please go ahead.

Good morning, guys. Quick question. I think and I'm not quite sure, I think Merilee, this is going to be for you. You've gone through so much detail which has been great for us. Can you take us through your thinking and the incremental decisions or moves you've made to control costs -- I mean, throughout the first three quarters, but whether there are any bigger investments say in R&D or in sales force size or in product development that may change because of this environment?

Dawn, let me take that question and thank you for that question. It's an important one in this environment -- of course, as you have noticed for the first three quarters, we continued to try to manage costs in the context of the environment that we were seeing at the time. And yet, still having the appropriate investments, particularly technology investments or investments which generate the organic growth that we're able to achieve. And so we're always on the margin evaluating that, and you can see those decisions over the first three quarters, and we would show that as an example of the way that we manage our business. Probably the only thing,it was more of a strategic question -- that decision that we made over the course of 2008. I'm not sure it was really related to the economy as more of a strategic focus was the decision to put the pharmaceutical products in the hands of a pharmaceutical company that has got the scale, sales and distribution and development capability. We had some very innovative technologies, but we think that we are not as strong on the pharma side as some of the big animal health pharma companies. It's different to commercialize pharmaceutical products than it is to commercialize diagnostic and information technology products. And so we're really strong on the diagnostic and information technology, and we're going to benefit with some royalty income and such with these agreements that we have on the pharma side by putting those products in the hands of others. And yet, we've still retained the core delivery technology which is a generic delivery technology applicable to a number of different type of things. And some of that might be an example of change in investment.

Okay. That's helpful. And I mean, maybe if I could ask you just to dig a little bit deeper into that, Jon, and I don't want to push. I think that I'm just looking at the way that R&D has ramped over the years and maybe just the kinds of thing that you guys are working on. Whether or not you would I guess consider pulling back. Whether it was the investment in the manufacturing plant or not necessarily growing the sales force, or rationalizing staff labor at the reference labs. I mean, has it gotten to the point where you're looking at that stuff? Have you been looking at that stuff already?

Well, there's -- that's a good list of things to talk about. Certainly we are absolutely dedicated to increasing the efficiency of our operations, whether it's manufacturing or reference lab operations. And we have ongoing and detailed programs to do that around the world and in our main manufacturing location here in Westbrook, Maine. At the same time, we have a very attractive opportunity in the innovation area, R&D, for advanced diagnostics and information technologies. The pipeline is very exciting. I think you'll see products and new things coming out with us every quarter, and we have absolutely no intention of pulling back on the investment on those things which we have a great track record of bringing to the market. And we think the cumulative impact of those product launches that we've had in the pipeline for some time and other that we have in the pipeline for the future continue to improve our competitive position because we're offering more and more that our customers very much value in the way they practice medicine or on the veterinary side or in our other diagnostic market. So we're looking to improve efficiency where we can take out non value-added work, but we're not -- we've just got a very attractive portfolio, and one of the things about being a growth company as we are today and continue to expect to be is that we can dial the rate of growth forward or back, and -- and still retain the core investment strategy that we have.

That's excellent. Thank you very much. My last question is over the last week or so, there have been some news articles out about you opening a new lab in Memphis. Could you give us a little bit of color about that and the choice to be there? I mean, I think that it's off of one of your distribution plants?

In fact, you're exactly right. We have a very significant distribution operation in Memphis we've had for many years. We expanded it in a couple of years ago. I don't exactly remember when. But as a result of really continuing to be more efficient in distribution, it turned out we had some extra space there. And that's a very handy place to put a reference lab, and so we've -- we are opening a lab in that area which will use the same logistics network and FedEx network that our product distribution uses.

Okay. Thank you very much.

Thank you.

We'll go to the line of Daniel Owczarski with Avondale Partners. Please go ahead.

Thanks, good morning. Hi, Jon. Hi, Merilee.

Good morning.

Wanted to go back to the Catalyst. I was wondering over the last month or so just thinking about potential customers, nd if -- where they're headed for as far as what they need in order to make a purchase of a Catalyst. Are they looking for maybe bundling the Catalyst with other equipment? Are they looking for deep discounts? Are they looking for creative financing? I guess in this environment, what are the potential customers? What do they need to make that purchase?

Thank you for that question. We have such a deep market for catalyst that we are not discounting -- we are not doing any creative financing. We are not, if you will, having to bundle this with something else that they would have purchased. Catalyst is a franchise product that customers have been waiting for. And really it's the lead horse in the product portfolio. And with regard to financing, they're either purchasing it with cash -- some customers like to do that, other customers like to use a -- third-party leasing as Merilee mentioned. We don't really see any change in the ability of our customers to access third-party leasing. That's all nonrecourse to us, still a sale for us. So these are -- these are to us cash sales. And the market is so deep that we are not demand constrained here. We are really controlled launch constrained. So we're very pleased with the position that we're in with Catalyst.

Okay. So is it fair to say that you're pretty confident about that 90% that you've got locked in for the rest of the year, that's in the bag?

I'd say we're pretty confident.

Okay. And then just, I don't know, if you could add any commentary just since October 1. Are there any particular pieces of your business where you really have seen any acceleration in the slowdown at all?

That's a good question. It's one week or even one month does not a trend make. We use that saying in our business because things can really -- you have to normalize for a lot of things to really figure out a good year-over-year compare. And when you have these short periods of time that can be -- it can be noisy. But I do think it's fair to say that it's been a pretty noisy financial market. The consumer has been reading the headlines of this and that in the paper over the course of October. And I'd say that October has been marginally little bit lower rate of growth than it was -- that we've seen in the third quarter to the extent that we are able to accurately measure that. And so that's how I would characterize it.

Okay. And then just last question around that production animal segment. You talked a little bit about the pricing pressures. In the price release, it also noted a product mix. Is there any details or color that you could add, product mix, how that was difficult for you there?

There's one particular product that we're really referring to there. And that is our product for the BSE market. That's a unique market where the bovine market that is testing post mortem -- after the slaughter. It's very different than all of our other types of production animal services tests which are typically herd health or flock health. This is an after-slaughter market. And what's happened in Europe which is where this market is they've raised the age for 2009 of mandatory testing. And when you raise the age, that means you have fewer cattle being tested post mortem. And so that's -- that combined with a competitive bidding as these markets usually tend to get particular products get in the mature phase of their cycle. We see a $6 million decline year over year expected in that market. And it's factored into our 2009 guidance. But other than that, we're a world leader in production animal service diagnostics. This is the same technology group that develops our -- our SNAP tests for -- because it's the same -- very same technology, amino assay technology for the companion animal market. And it's just a great market for us, although probably a little bit affected by the economy even though these are government funded programs for the most part. Governments are challenged, European governments are challenged in other ways. So a little bit of economic effect there. But very strong, profitable business for us.

Thank you.

Thank you for those questions. Thank you.

Our last question will go to the line of Ross Taylor with CL King. Please go ahead.

Most of my questions have been answered. Staying with the last topic you discussed, would there be much impact on EPS for the $6 million hit you expect to take for the BSE product? Making some assumptions, I'm coming with maybe $0.02 on EPS. Is it even that much?

I think it might be a little bit more than that, Ross. I think it might be $0.03 to $0.04.

Okay. And also, the pharmaceutical product that you discussed directly where you might get future milestone payments and royalties -- is that going to be the new insulin product that you have in development?

Well, we have agreements with these parties not to talk to the specifics. But you can assume that our strategy going forward is really the technology development, not the product development. Not the part that -- where you go through the FDA to get regulatory approval, and manufacturing and all that. That's what we think that our partners are better at. And so that's the portion of our strategy that we will be partnered -- that we have partnered with as opposed to the really up-front idea generation, intellectual property, and technology development that we -- that's really been the best part of that business. Most innovative part of that business.

Okay. And last question, you talked about some of the SNAPshot numbers. Can you talk at all about what current market acceptance is of that product compared your expectations back at the beginning of the year? Is it better than expected, in line?

Yes, I would say it's -- we were certainly pleased that it is doing as well as it is. I wouldn't say that it's different than our expectations. It's nice to see that we have customers who are prepared to take, install, and start using a SNAPshot Dx while they're waiting for their Catalyst Dx. And what I would say with regard to SNAPshot is the field performance of the instrument has been outstanding. As Merilee mentioned, we're going to be continuing to add capability to SNAPshot Dx, and subject to approval that we need for rapid assay products, we'll have that capability added to the SNAPshot Dx in the first half of 2009. But the acceptance rate even before that capability is added has been very good. It's not as big or as important a product as Catalyst because it's a smaller AUP and it uses less reagents. It's still a -- still nice to see this acceptance.

Okay. All right. Good. Thank you very much.

Thank you.

Thanks, Ross.

And did you have any closing comments?

Well, thank you very much, I appreciate everybody on the call. These are certainly turbulent times. On the other hand, we're very pleased with the fundamental performance of our company in the third quarter and we and our entire team are dedicated to our strategy going forward of being a technologically innovative company. Thank you all. That ends the call.

Thank you. Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may disconnect.