愛德士 (IDXX) 2009 Q1 法說會逐字稿

(audio begins in process) to the IDEXX Laboratories first quarter 2009 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 Astro, Director Investor Relations. IDEXX would like to preface the discussion today with a caution regarding forward-looking statements. Listeners are reminded that statements that members of IDEXX management may make on this call regarding management's future expectations and plans and IDEXX's future prospects constitute forward-looking statements for the purpose 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 can different materially from management's expectations.

Factors that could cause or contribute to such differences are described in IDEXX's Form 10-K for the year ended December 31, 2008 in the section captioned Risk Factors, which are on file with the SEC and also available on IDEXX's website, idexx.com. In addition ,any forward-looking statements represent IDEXX's estimates only as of today and should not be relied upon as representing the Company's estimates as of any subsequent date. The Company disclaims any obligation to update or revise any forward-looking statements in the future, even if its estimates or expectations change.

At this time, I would like to turn the call over to Merilee Raines. Please go ahead.

Thanks, Bonnie. Good morning, and thank you for joining us today. In our press release this morning, we reported revenues of $236.5 million and diluted earnings per share of $0.43. As has been the case for the last few quarters, revenues were somewhat below our original thinking. However, through continued discipline and managing costs, we delivered earnings that were a few pennies above our thinking. This quarter's earnings, which were not impacted by any discreet events, grew 5% over first quarter 2008 earnings per share as adjusted for a discreet tax item. This is detailed in our press release.

So let me get right into the detail on our financial results. First quarter revenues declined 5% on a reported basis. Organic revenue growth was 3% after taking into account a 6% negative impact from currency and a 1% negative impact from our fourth quarter 2008 divestiture of pharmaceutical product lines. This compares to the 6.5% organic growth we reported last quarter. Our revenue growth continues to be negatively impacted by the economy, which as we all know all too well was pretty weak during the quarter. As mentioned last quarter, with regard to our Companion Animal market, we are able to analyze trend data from a sample of US veterinary practices using our practice information management systems, and those data indicate that patient visits were down year-to-year about 4% on average in the first quarter and revenues were down by a slightly lower percent.

We have seen other surveys done in the US that are directionally the same, indicating a low to mid single digit decline on average for patient visits and revenues. That being said, there's wide variability in data as one might expect given that this is a market comprised of predominantly small geographically disbursed businesses. We do not have comparable data for areas outside the US, but anecdotal evidence indicates that the European and Asia-Pacific markets are seeing somewhat lesser effects from the economy, though still negative, and the impact varies from country to country. We had noted in the past few quarters that the primary areas of our Companion Animal business influenced by the recession were those related to routine check ups and elective procedures, and those are instrument consumables, lab services and to a lesser extent our point of care rapid assay.

In the first quarter, we also saw a deceleration in orders and placements of capital equipment. Our in-house suite of blood and urine analyzers, digital radiography and practice information management system. So the level of interest is high and seemed to picked up late in the quarter. Customers still appear hesitant to commit to investments until they are more confident about their cash flow. The only exceptions are Catalyst Dx and SNAPshot Dx, our new analyzers.

Beyond the Companion Animal group segment, we also saw some economic impact in our production animal services and water businesses for sectors of those markets where testing is not driven by government regulation. Sales of instruments in our IDEXX VetLab suite at $14.7 million grew organically by 10% in the first quarter. Catalyst and SNAPshot Dx were the drivers of year-to-year growth, and we saw year-to-year declines in placements of other components of the IDEXX VetLab suite. This is in part due to the aforementioned impact of the economy and also due to our commercial focus on catalyst. So now a significant factor impacting year-to-year growth, I note that the first quarter tends to be a relatively lower placement quarter for us following the heightened market emphasis on capital in the fourth quarter and the timing of events such as major trade shows and our North American sales meeting that take reps out of the field for several days. We placed approximately 340 Catalysts in the quarter, which was about 10% more than we had expected. Additionally, we entered the second quarter with a strong order book of over 200 instruments. We are making good progress on our goals to improve scalability of our manufacturing processes and after sales support. Accordingly, we feel that we remain on track to place about 2,000 Catalysts for the full year and with each successive quarter, to increase placements into accounts which do not currently have an IDEXX chemistry analyzer. Such placements were less than 10% of our total for the first quarter.

Instrument consumable sales of $49.1 million were down organically 1% in the first quarter. Given that the vast majority of our instrument consumable and rapid assay sales in the US are through distributors, our best proxy for growth and end customer demand is to normalize our revenues for fluctuations in distributor levels within the quarter. When we make this further normalization, the year-to-year growth for instrument consumables becomes 4%. This compares to a similarly normalized growth of 3% in the fourth quarter. Our rapid assay sales of $37.7 million were down organically year-to-year 1% compared to a 2% decline in the fourth quarter. When further normalized for changes in distributor inventory levels, revenues grew 4% in the first quarter compared to 5% in the fourth quarter. As we approach the heaviest period for parasitic disease testing, we conducted a couple of marketing programs in the quarter, one in conjunction with a pharmaceutical company with a heartworm preventative line. Though these programs help us to retain existing customers and to reach new customers, we believe that they have also accelerated some revenues from the second quarter into the first. Accordingly, we anticipate that second quarter rapid assay growth rates will be negatively impacted by these programs. We do not expect further timing effect from these programs beyond the second quarter.

To remind you, we anticipated a step down in growth rates for rapid assays irrespective of the economy due to a couple of dynamics. First, we are experiencing lower price realization from a combination of lower price increases, marketing programs and higher relative volume growth from larger multi practice accounts and shelters who receive more favorable volume based pricing. Second there's been a slowing in the rate of conversion from canine heartworm only testing to our multi parasite disease panels 3 and 4Dx. These panels now account for roughly 75% of our unit testing volume in the canine line and a higher portion of the revenue due to their higher selling prices. We are pleased with the market acceptance of our feline triple test for feline leukemia virus, feline immunodeficiency virus and feline heartworm. The full commercial launch of this panel was in December, and it accounted for nearly 40% of the combined revenues from combo and triple in the first quarter.

US distributor inventory levels for instrument consumables and rapid assays averaged just under 3.5 weeks on forward-looking demand, right in the middle of the historically normal three to four week range. Our laboratory and consulting services with revenues of $68.7 million had organic growth of 6% in the first quarter. This compares to 8% in the fourth quarter. Though a slight deceleration due to a slowing in the rate of growth in the test -- in volume of testing, we are pleased with the relative strength of this performance given the challenging macroeconomic environment. We attribute it to our multi pronged efforts to enhance our service levels, broaden our range of proprietary specialty tests and provide our customers with the ability to avail themselves to the benefits of lab services, which are part of an integrated product and service offering. Our practice information management and digital radiography systems with first quarter revenues of $15 million grew organically 3% in the first quarter. This is down in a meaningful way from the 15% growth that we saw in the fourth quarter and for the full year in 2008, primarily due to slower digital sales.

As I've stated up front, we saw a reluctance from customers to commit to this relatively significant investment, particularly the higher priced direct digital systems. Despite lower than anticipated placements, in the field we are seeing a lot of interest for digital radiography and the way it can be integrated with our practice information management system to enable work flow efficiency and revenue capture. Additionally, our distribution partners have recently shown interest and effectiveness in selling these systems in conjunction with our sales force. So we believe we have all the fundamentals in place for this part of our business to reinvigorate once sentiment about the economy improves.

Production animal services sales of $18.3 million had a 4% decline in organic growth in the first quarter. This compares to the 2% to 3% declines we saw in the fourth quarter and third quarter of last year. Although we see some continued though moderating price erosion on BSE test prices as a contributor to the year-to-year decline in revenues, other factors also come into play. One was the ending of a 2008 eradication program in Switzerland for another livestock disease for which we were the supplier, and we are seeing some impact from lower testing volumes for diseases where testing is not mandated by governments. Our water segment had sales of $15.9 million, which translated to organic growth of 3%. This is down from the 7% organic growth we experienced in the fourth quarter and as I mentioned earlier, we believe that the economy has had a modest impact on this business as well. Ranging from private labs experiencing a decrease in testing due to a drop off in new construction to decreases in testing of recreational water and cruise ship water. We also have seen some lower business in Latin America.

Looking at the rest of the P&L, the gross margin at 52.6% of revenues was about 50 basis points better than our thinking due primarily to favorable margins in our reference lab business as a result of pricing, efficiency and cost containment initiatives. Operating expenses at 36.4% of revenues were about 2 points below our expectations as a percentage of revenues. This reflects our continued efforts to control spending as we monitor top-line growth. In our fourth quarter call, I noted that the first quarter includes some significant commercial activities including two large trade shows and a sales meeting, and the organization did a very nice job finding ways to make these events effective while trimming budgets. Additionally, there was good cost containment of other discretionary spend such as hiring, travel and the like. Our net interest expense of $400,000 and effective tax rate of 31.5% were essentially in line with our thinking.

As for the balance sheet and cash flow, we ended the quarter with $86 million in cash and $166 million in debt for a net debt position of $79 million. Our free cash flow was $3.5 million for the quarter. Free cash flow historically has been lowest in the first quarter of the year due to regularly occurring events such as compensation payments and increases in receivables due to the ramp of some of our more seasonal businesses. Additionally in the first quarter, we saw an increase in our inventories, and this was related to our new instruments, lower than anticipated revenues and builds for the parasitic disease testing season.

Looking forward, we now project full year revenues of approximately $1 billion. This is down from our January guidance of $1.02 billion to $1.04 billion due primarily to a greater caution about the impact of the economy on growth rates given what we've experienced in the first quarter. On a reported basis, this implies a low single digit decrease in revenues which translates to organic growth of approximately 5% as we adjust for the anticipated 5% negative impact of currency year-to-year and the 2% negative impact of the divested pharmaceutical products. The major driver of this change in organic growth rate assumption is the impact of the economy that we are now seeing on capital sales and non-regulated water testing. Implicit in our thinking about full year organic growth is that the impact of the economy provides the toughest compare in the first half and eases gradually in the second half.

For the second quarter, we expect reported revenues to decline year-to-year in the mid to high single digit range as pharmaceutical sales at $15 million were a significantly larger contributor to second quarter 2008 revenues, due largely to the final sales of the feline insulin product. The negative effect of the pharmaceutical divestiture is 5% in the second quarter versus 2% for the full year. As with organic growth, we expect reported growth rates to increase with each successive quarter in the second half as impacts from the divested pharma products, the economy and currency lessen. We continue to expect full year gross margin to be approximately 52%, equivalent to that achieved in 2008. This is the net result of greater prominence in our revenue mix of recently launched instruments carrying lower margins offset by productivity improvements in our labs and manufacturing operations.

For the second quarter, we expect gross margin to be a bit higher given is the somewhat seasonal revenue profile of the rapid assay business, similar to the pattern seen in prior years. Hedging gains are also projected to gradually decrease over the course of the year as forward currency contracts maturing in the second half of the year are at less favorable exchange rates versus the dollar than contracts maturing in the first half of this year. Our production learning curves for Catalyst and SNAPshot Dx will also continue to be important factors in our ability to achieve our anticipated gross margin performance over the year. Operating expenses should average out to 35% to 36% of revenues for the full year which implies a slight reduction as a percentage of revenues from our first quarter spend. Though we have and will continue to make investments we feel are necessary to support key initiatives such as new product launches, we will keep a close eye on discretionary spend as we go forward through the year.

We expect a full year operating margin of approximately 16% of revenues. As we remind you, we are not expecting margin expansion in 2009 from 2008 given the increased significance of our new instrument offerings in our 2009 financial profile. Catalyst and SNAPshot Dx are near term investments in our longer term strategy to ensure a profitable proprietary consumable stream and to increase our market share not only for in clinic instrumentation, but also for other offerings in our Companion Animal portfolio. We expect the tax rate to be 31% for the year, net interest to be $1.5 million to $2 million and the weighted average share count for the year to be down about 3% from the full year 2008 levels. All this leads us to modestly tighten our full year earnings per share projection to $1.86 to $1.90 from the previous range of $1.84 to $1.90 that we cited in January. Though first quarter earnings came in modestly above our thinking in January, we are not raising the top end of our guidance in light of the lower revenue guidance and the anticipated sequential decreasing favorability from currency hedge contracts.

Our guidance provided today assumes the euro at a $1.30, the pound at $1.40 and the Canadian dollar at $0.80, consistent with the currency rates assumed in January. We completed a small number of hedges for the second half of the year, which changes our currency sensitivity slightly from what we communicated in January. And every 1% strengthening of the US dollar vis-a-vis our basket of currencies yields about $4 million of lower revenues and about $600,000 of lower operating profit on an annual basis. We continue to project DSO to remain at approximately 40 days and though inventories increased by about $7.5 million in the first quarter for the reasons I noted, we have targeted efforts to bring levels down by approximately $10 million over the remainder of the year. We continue to project capital expenditures to be approximately $55 million, which is down from $89 million in 2008 and free cash flow to be approximately 100% of net income. And now I'd like to turn it over to Jon for some further comments on the business.

Thanks, Merilee. Given that Merilee has covered a thorough review of the business and our P&L performance, I wanted to spend just a minute on some of our new product strategies that are defining our growth going forward before opening it up to questions and answers. Let's first turn to our largest business line, the point of care instruments and consumables business we all the IDEXX VetLab.

Our ramp of our new analyzers, Catalyst Dx and SNAPshot Dx over the course of new one -- Q1 is a little ahead of plan. We ended up with a few more placements than our expectation, primarily because the instruments are coming along nicely in reliability, supportability and cost. We've had some very significant improvements, including the design of the hardware that improves field reliability and survivability. We have sent to all of our customers the next release of software that solved some bugs and improves the customer experience. We'll never be done with making further improvements, but we have come to the point where I would say that we can exit the controlled launch days of Catalyst during the second quarter. Our customers continue to comment that Catalyst Dx is a real workhorse in the practice and dramatically accelerates the work flow in the busy mornings that define the rush hour in the in-house laboratory of the hospital. SNAPshot Dx, our other new analyzer, continues its superb track record in the field. One of the new features of the recently released software is SNAPshot's ability to read and interpret the results of two of our rapid assay products, SNAP feline combo and SNAP cPL. In addition, we have already received USDA approval for SNAPshot Dx to read SNAP 40X, our most important rapid assay test kit. We expect to launch the next release of software in the field to support the addition of SNAP 40X to SNAPshot before the end of Q2. We are also seeing that Catalyst Dx, as part of the complete IDEXX VetLab is bringing the promise of point of care testing to the clinic in a way never before possible.

Catalyst Dx makes it easy to run blood work immediately instead of preparing to send to the reference lab and wait for results. This real time care, if you will, generates several benefits to the practice. First, pet owners' compliance with a veterinarian's recommendation is proven to be much higher when the conversation about follow-on treatment recommendations happens face to face during the pet visit. This higher compliance increases follow-on revenue for the practice and is a powerful economic outcome. Second, real time care can be a huge convenience to the pet owner by reducing the number of visits to the vet while not negatively impacting the practice's revenue from these visits. Finally, the standard of care delivered is often higher when blood work is run fresh, and results are available within minutes and on the same day as the surgery. The CBCs, in particular, can change from day to day. While there will always be a role for the reference lab, particularly for more esoteric tests, the larger profiles and some other testing protocols, Catalyst Dx and the full IDEXX VetLab suite are bringing new attention to the medical and economic benefits of real time care.

One of the features of the IDEXX VetLab and Catalyst that is helping us and our customers a great deal is what we call SmartService, or our ability to connect electronically through the web with the customer's instrument system that is running in their clinic. In this way, we can track performance of the instrument. Our customer service representatives in our call center and in the field use SmartService to insure that instruments are operating optimally at the customer. In fact, we have found that we can determine when an instrument is going to have an issue beforehand and can address it without the customer even knowing. We have also begun to provide certain software updates through SmartService to our customers over the web. When customers see the value of SmartService, they realize that IDEXX is in a league of its own in terms of technological innovation that keeps the work of the practice running smoothly. We now have over 800 customers online with SmartService, a good many of them Catalyst Dx customers, and this number is growing every day.

We entered Q2 with a backlog of Catalyst orders that in the US consist mostly of upgrades of existing IDEXX VetTest customers, our chemistry -- existing chemistry analyzer. However, in addition to delivering on this backlog, we also expect to generate orders in Q2 that will now include a larger percentage of customers to the IDEXX VetLab line that are new and our chemistry analyzer in particular. Of course, when we acquire a new in-house customer, 100% of the consumable sales become incremental revenue to IDEXX in the first year.

We've been planning a long time for this phase of the program, and we are now ready with a IDEXX VetLab experience that is fully up to the task. Our sales organization has been anxious to begin taking orders from more than just our large friends and family, as we call our existing VetTest customers, and we have now directed our sales force to begin closing competitive accounts. One of the interesting aspects of Catalyst is it has such a superior value proposition in mid to high volume practices in relation to anything in the practice today. The larger the practice, the more compelling the benefit of Catalyst and the entire IDEXX VetLab suite of instruments. As a result of the system's high throughput, ease of use, complete menu and integration with the practice's software system. These new accounts typically get outfitted with the whole line of IDEXX VetLab instruments including, in addition to Catalyst, the chemistry analyzer, LaserCyte for hematology, SNAPshot for endocrinology and now infectious diseases and instruments for urinalysis, coagulation and blood gases. Sometimes customers even get more than one LaserCyte or SNAPshot in their configuration. Of course, all of these instruments run off of one IDEXX VetLab situation, the information hub of a suite.

Turning to our reference lab businesses, we have now launched our new cardiac test with an improved and easier shipping protocol for both feline and canine species in North America. We call this test Cardiopet ProBNP. There is no question that Cardiopet ProBNP is our most important and largest special test launch to date in our global reference lab line of business. The reception has been universally positive from cardiac specialists to general practitioners who are looking for a way to diagnose cardiac cases and differentiate them from other potential conditions. We know this even though we are very early in the launch of Cardiopet ProBNP with easier shipping protocol. We started with this new protocol with feline in Q1 and added canine this quarter.

The Cardiopet ProBNP test is revolutionizing the diagnosis and early detection of heart disease in dogs and cats. With only a minimally invasive blood test run as part of routine blood work, the Cardiopet ProBNP test gives vets a clear and accurate picture of the patient's cardiovascular status to support patient management decisions. So far, we found out about 1 in 7 of our customers for the test, even at the initial stage of this launch, were not previously customers of IDEXX reference labs. Obviously, the test's adoption is benefiting from a strong word of mouth.

Our computer systems and digital business also had very good momentum despite the impact that the economy has had on our customers and their willingness to commit to large capital purchases. While this line is not growing as fast as we expected in Q1, as Merilee had mentioned, in retrospect, we are very pleased with the 3% organic growth. We believe this growth was driven primarily by three factors. First, a superior full line product offering in both computer systems and digital imaging and our value proposition integration between the two. Second a strong sales force execution in selling this IDEXX value proposition including good -- showing good return on investment. And third, our strong alliances in the field with our long time distribution partners.

I want to take a moment to comment on our European Companion Animal group business. I am amazed how well we are doing in this region given what you hear in the news about Europe. Catalyst has already been launched in Europe and is moving out of the control ramp phase and parallel with the US over the course of Q2. We have a particularly strong reception for our new instruments in the UK where we've already been aggressively pacing systems with accounts that were using competitive systems. In addition, our reference lab offering in Europe continues to show good growth. It appears in some ways as if the European pet owner is less influenced by the economy than in the US, although every country is a bit different. In addition, our strategy of growing through technological innovation is as successful in many ways in Europe as in the US.

To sum up, we accomplished some important objectives during the quarter that position us well for the year and more importantly, for the long term. Our expectations for 2009 assume muted market conditions around the world for most of the rest of the year. However, the motivation of our team at IDEXX is high because we know our strategy of technological innovation and a solutions based approach can offset modest declines we are seeing in base demand, and that is the basis for our 5% organic growth guidance for the Company in 2009. In addition, our organization continues to do an impressive job managing costs and gaining efficiencies in line with this revenue outlook as we have demonstrated in Q1. So Katie, at this time, Merilee and I would like to open it up now for the Q&A portion.

Thank you. (Operator Instructions). Our first question comes from the line of Ryan Daniels. Please go ahead.

Good morning, guys. I was hoping to start with a handful of questions around Catalyst, and I guess I'll give you a couple up front and then follow up. But first Jon, I'm curious based on your comments if one, you have seen more consumable use to date with the clinics with Catalyst and then number two, as a corollary, have you seen them using less of your reference lab services?

Thank you. Those are great questions, always. We have seen more consumable use. Of course, the packaging of the chemistry panel in Catalyst does have more consumables in it than the panel in a VetTest. So just panel for panel, you would see more consumable usage. But we have seen a pick up in consumable usage. Certainly there are a lot of factors in evaluating probably what is underlying aspect of your question which is the profitability of one of those customers. You have got consumable use. You have got the average unit price for those consumables, the margin. You have got some extra menu in Catalyst Dx, most notably the electrolytes, different behaviors. I guess what I can say at this point is there is a positive effect.

I would just like to see a little bit more data and a little bit run way before I could quantify what the top line and bottom line impact is with regard to, if you will, a customer that used our existing analyzer, the VetTest and then compare it to that same customer that had upgraded to a Catalyst Dx, all other things being equal. With regard to the reference lab, we -- I think that is a harder call. We've never really felt that one modality would have any kind of a material impact on the other. We have just generally seen that testing begets testing. So, I don't think I can comment on any material impact there.

Okay. Fair enough. And then two more on that. When you talk about swapping out competitive equipment, you highlighted this a little bit in your prepared comments, but to date and in the future, do you anticipate that it's going to be a totally new customer, i.e., the bulk of those swaps will be going into a clinic that doesn't have any IDEXX instruments and that that will generally lead to future sales, or are there clinics that might have some of your hematology, blood gas but uses somebody different for chemistry? Any thoughts there?

I'd say -- that is an interesting question. The vast majority I think would be people new to our instrument line. Certainly, there are some people that benefit from LaserCyte and the unique aspects that that hematology analyzer has, and the point of care really being the only true five-part white blood cell differential instrument with an absolute reticulocyte count. So there are a very small portion of customers who might have our hematology analyzer and then have the opportunity to upgrade to the full suite with Catalyst, but I would say around the world, that the majority of new accounts would be new to our entire instrument line.

Okay. And then last question on Catalyst. Are you also going to allow distributors to start to sell that? You mentioned in your comments the DR systems, you are partnering more with distribution versus direct only. Have you thought about that with Catalyst too?

We have a great relationship with our distribution, and there are all different kinds of cooperation that we have with them, our reps in the field, and the distributor reps always have great relationships. At this point, we don't anticipate having our distributors sell the equipment. It's a pretty high end specialized sale that does require a specialized type of rep, but distributors certainly do play a role in the conversations with the account, and that is really true really across -- and has been true for a long time across the capital line, and of course more recently, over the last year or since beginning of last year, we've partnered with them more strongly on the digital side.

Sure, okay. Maybe a couple of questions for Marilee, and I'll hop back in the queue. Just in regards to margins, I know from Q1 to Q2, we typically see maybe a 100 basis points corporate gross margin improvement, and I'm curious if we should anticipate it will be lower this year because you've pulled forward some of your assay sales because of the hedges starting to contribute less, maybe mix shift towards more instruments in Q2. Can you give us any color on what we might expect there? Because that obviously is going to have a pretty big bottom line impact.

Ryan, for all the reasons that you mentioned, you made it easy for me, I do think that -- I wouldn't expect we'd see 100 basis points improvement from Q1 to Q2. Maybe more like 50 basis points or so.

And then also on margins, how big of an impact did the hedges have during the period? Trying to get a feel for what was true margin improvement from the labs and better production of Catalyst versus the hedges contributing. Can you quantify that, or is that too hard?

Actually, the hedges contributed about 2% to our gross margin in the first quarter.

Okay. Great.

We would expect that to be, as I mentioned, trending down over the year, so it would be in the fourth quarter less than a percent.

Okay, great. And then this would be the last question, I promise. But I'm curious with your systems, you talked a little bit about the health of the broader market up front. Are you able to analyze your customers and their revenue growth for the integrated practices versus maybe what the rest of the veterinary community is experiencing and seeing if there's any deviation? If so, can you use that from a selling perspective? I'm curious if you have any of that data.

Well, that's an interesting question, Ryan. We can measure and do measure a subset of our customers that use our Cornerstone software. We can measure a couple hundred and do year-over-year comparisons. Unfortunately, the second part of your question is comparisons to the industry. There is no industry data. There's individual bits and pieces here and there.

From what we can tell, our customers do actually do a little better than the industry, maybe a percent or more. But since the compare so difficult, it's hard to use that with any kind of validity, but certainly, what we do find is that our customers that are using our technology together in an integrated fashion, they are very enthusiastic and they are very successful and there are customers out there that have strong double digit growth rates because they put the whole thing together and are well managed as a result, and we use those as reference accounts. So it's more of kind of a visceral, personal type of experience that benefits us.

Okay, great. Thanks for the color.

Our next question comes from the line of David Clair. Please go ahead.

Hi Jon, hi Merilee. I guess the first question here is on Catalyst Dx. Placements looks like they continue to track favorable to plan. Curious if there are any incentive programs you are offering to customers that are purchasing these or if we are still tracking in the $15,000 range for the friends and family stage here?

We are getting good price realization, David. Good question. Just as you said.

Okay, okay. Good, good. And then one for Merilee here. Operating expense control was very solid in the quarter. Just wondering here if you think there are additional costs that can be trimmed here if necessary and the drop in R&D, just wondering if that impacted the timing of any of your pipeline projects.

Thanks, David. Those are great questions. First with regard to the R&D, the drop primarily as you are looking year-on-year it really because of the exit of the pharmaceutical business, so we just don't have that R&D spend. We are not -- that's an area where again, we are focused on the projects that are going to drive the near term revenue growth, and R&D plays an important role in those products. So we are committed there. As far as the total operating expenses, we -- there are certainly things that we would like to invest in and feel are appropriate to invest in. We will continue as we have for -- really throughout 2008 and through the first quarter of 2009 to watch the top line and just make sure we have the priority list well lined up as we need to if we feel that we are seeing differences in top line from what we project, we will work hard to control the operating expenses.

Okay, and --

Those comments by Merilee on the R&D, having said everything that she said with regard to good control, we have our core priorities well funded. And I think you can see that by the continual projection of, for example, the improvements in the instrument line, SmartService, the specialty testing in the reference lab. We are very excited about the pipeline. Based what we've launched over the last year, it takes a time for any product to gain acceptance. So product launches generate long term growth and second, what we have in the pipeline.

Okay. Great. And then a quick question on the lab business. You mentioned that pricing was favorable in the quarter. I was just hoping you could give us some color on price versus volume there.

Well, we have -- there's price, there's volume. We gave you an organic growth. Of course, we have adjusted out currency. That is another factor, because it's an international lab business. And so I'd say several points of pricing favorability in the lab business around the world would be a good overall indicator. I'm not sure we have that level of precision since it is made up of several different countries.

When you say several points, is it low single digit or mid single?

David, out of the 6% growth, the vast majority of that was price. There was a little bit of volume growth, but it was primarily price.

Okay. Great. Thank you.

(Operator Instructions). We'll go to the next question from the line of Jonathan Block with SunTrust Robinson Humphrey. Please go ahead.

Thank you, and good morning. First question, I'll also lead with Catalyst. Do you have the backlog number for Catalyst at the end of 2008?

About the same as the end of Q1.

Which was right around 200, is that correct?

Yes, plus or minus. It's certainly in that neighborhood.

Okay, so the orders equaled the placements for the most part?

Yes.

Great. And then on the lab, Jon, you mentioned OUS in general holding up better, I think the worldwide lab was up about 6%. Is there any direction that you can give us in terms of how it was domestic versus international?

We -- I guess what I was referring to particularly was that Europe was, I wouldn't say holding up better, I was saying Europe was holding up well. Given what you hear about Europe, I just heard this morning that the GDP in the UK was down 4% and yet the UK is doing pretty well for us in the animal business. And so it's sometimes not always related to the economy. But we don't get in a lot of detail about the growth rates by different countries, because then I'm just going to have to talk about every single country. So I'd say it was -- there was good growth in North America and in Europe.

Okay. Great. And then moving over to rapid assay, I think rapid assay was down 1% year-over-year on an organic. I know Merilee flushed out some of the inventory fluctuations, but if you look at rapid assay, clearly you had ABAX come in in January. Maybe if you could talk to, did that impact growth at all? I think in the press release you mentioned that you were running some, I believe, price specials on the single. I don't think the 3Dx, 4Dx -- was that in response to a competitor? And then finally would just be, is there anything that you are doing? You already have 75% on 3Dx, 4Dx platform, but is there anything that you are doing with an additional competitor out there to get them over to the multi -- to try to fend off -- protect the longer term?

We didn't really see any impact at all in the first quarter from the level of competition in the heartworm only sector. We've mentioned in the past, we've always had competition in that sector. So I don't think there was any perceptible difference from our point of view. Merilee did mention some programs, and really what we are doing there was getting people excited about the season and also, these programs were helpful in engaging our distribution's attention. We always like to have our unfair share of their attention and that helped. And that -- those are programs that we have done from time to time, actually over the last decade, in terms of getting the parasitic disease test into the clinics in anticipation of the season.

Okay. I guess my push back there is I think if I look at the first quarter of 2008, I believe in your Q you actually said that the unit prices was up because you did less promotion. So that was also in front of a big -- your usual seasonal 2Q. So last year you didn't do any promotions, or few. This year you are running promotions, it's with a competitor. So I'm just trying to flush out what is economy, what is competitor, that's where I was going with the question. Did you run promotions this time last year on rapid assay?

We have annual programs that we have done every year for a long time, and I think maybe one thing that -- I mentioned that there were with another program that we did with a pharmaceutical business that was wanting to do a promotion with us, and we thought that that was a good opportunity to partner up.

Right. It was a unique thing. I would say -- by the way, one comment I'd say is what we did this year and as we have done, maybe not last year but years before, these promotions aren't just heartworm. They were some 3Dx and 4Dx, too.

Okay, great. And then I just really have one or two more. I think DR was down, but certainly held up better than your competitor there. When we look at DR do you think the worst is behind us? The comp was difficult and maybe the big fall off because of the 4Q tax break? Do you think you are able to grow that business line in 2009?

That's a great question, and I think you did certainly tag that we all -- if you were going to buy a DR product and you didn't buy it in December, you probably weren't going to buy it in January because you probably should have bought it in December. So we did -- the fourth quarter is always a good quarter for capital, because of the tax breaks. These are larger capital purchases. I think the runway for DR longer term is very attractive as people substitute from film to film as there are a lot of economic benefits to do so. But it's going to be a challenging year for capital, particularly at the high end.

Okay. And last one --

And that's reflected in our guidance. Of course, the other piece of the equation is that when you put the DR in, particularly when it's integrated with our practice management software, you get a good return on investment. So we are trying to continue to convince customers that they are going to be making money by investing in that part of their practice.

Okay, great. Last one, then I'll jump back in the queue. Just bigger picture on water and PAS. I don't think it was talked about that much. You mentioned some weakness which is a function of the economy. Some seems to be some specific programs rolling off. So if you look out a little bit longer term, how do you view the growth rates associated with both these businesses if and when the economy returns? Thanks, guys.

Those are good questions. They are really completely different businesses. The water business grew 7% organically in the fourth quarter, 3% in the first quarter. The economy wasn't so good in the fourth quarter either, but we did feel that the drop, certainly it wasn't from a -- it wasn't a customer or a share or anything like that. We have thousands of customers as we looked at it, really, the only thing we can contribute it to were some discretionary testing on the water that may have dropped a few points of organic growth, but I would certainly caution investors that one quarter does not a trend make if you are trying to figure out the difference between 3%, 5%, 2%, 7% organic growth in any business, and the water business would apply. But we want to be conservative and cautious, given what we saw in the first quarter in the water business. The PAS business is a little bit different. The PAS business is a business that has sometimes very strong growth when you have a disease outbreak, and we have got the right product. We've got 65, 70 different products in that business. So there's a little bit of unpredictability in that business.

If you actually look at it over the last seven or eight years, you're going to see periods of high growth and periods of no growth, and it is not really going to be tracking the economy. Of course there is -- we are facing economy today that we haven't faced in any one's memory in these businesses, so we think there's an economy effect here on top of the normal ebbs and flows of that business. But we also think there's opportunity for innovation, continued opportunity for innovation and growth longer term in the PAS business through new product innovation, and that's really what makes it a little different than the water, which is more of a steady state business where we have a strong position in a very narrow and a very esoteric area of microbiology testing in water. It's a good business, but it's a harder platform upon which to build adjacencies.

Great. Thank you guys.

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

Hi. I have a couple of questions. Maybe I'll start with Europe, and I think in your comments you mentioned that the European pet owner might be a little bit less affected by the decelerating economy than in the US. I wondered what factors could conceivably be underlying that. The only thing I can think of is the trend in Europe of people treating their pets like family and spending more on their pets as lag what we see in the US. And I just wondered if you have any thoughts what might drive that different behavior.

Ross, I think you're -- that is actually a good observation. In particular, what I was referring to there was continental Europe. If you look at the UK its economy is in tough shape, and I think we are winning in the UK because we have got the right technology solution but pet owners in the UK probably aren't that different from pet owners in the US. They are pretty advanced in their thinking about them as family. But Europe may be a little earlier in that area, and also the European consumer has not been clobbered over the head with declining 401ks and a housing bubble like they have in the US, and the UK it is a different kind -- it's a recession with a different kinds of characteristics and not as directly impacting things that the consumer feels. So I think the combination of it being a little earlier, less mature, therefore more robust, and this different nature of the economy in continental Europe may be contributing factors.

Okay. You also related Europe or the OUS business -- you mentioned that the product offering that you're -- you have in the UK is really helping that market. Are there opportunities, or are you doing similar things in other markets outside the US with your instrument or product offerings that are helping to grow that business at say, an above average rate?

Well, I think our product strategies in different ways are in the Companion Animal group, which is what I assume you are referring to, are applicable in any developed economy, and it -- we just happen to be, I would say in an attractive competitive position in the UK where we have larger practices that -- where a high throughput instrument is particularly well suited. The practices in the UK are on average larger than they are in continental Europe, although we are placing Catalysts and have placed Catalysts in all the major countries in Europe to date and continue to grow that. So we are starting a good base of experience with our sales force and the instrument in the major countries in Europe.

And two other quick questions. First, going back to the computer systems and digital radiography. Did you see an abrupt fall off in demand once you got out of Q4 and the end of the tax year, and are you giving any forecasted organic growth rate for that product line for 2009 at this point?

I think we've been really just wanting to give an overall organic growth for the Company at this stage of the game. There are different moving parts, and we have some, if you will, diversity which I think benefits us. But back to your first question, January and February was miserable time for I think everybody, and I think you saw an improvement, just you felt better starting in that second week in March when the stock market started improving and it just -- I'm not sure that the numbers would suggest -- what I mean by the numbers is pet visits or whatever, retail or whatever kinds of numbers you want to look at in terms of actual consumer behavior, but certainly, everybody started feeling better in March than January and February. And I think that, combined with the fact that the fourth quarter is always a good capital quarter, meant that there was really a change in tone in the third month of the quarter.

Okay. And the last question. You might have answered it to some extent already, but the promotion that you did in your SNAP product line with the pharmaceutical company, did you learn much from that or you find that was a useful way to sell those products?

I think it was good cooperation. We are still putting the numbers together on that and what it achieved from us from a marketing objective, but one of the things it did was gave us another channel to place our parasitic disease tests with customers who may not have appreciated the benefits of multi analyte testing and when they start snapping 3Xs and 40xs and they get positives they say, well, maybe I'll continue with this, because I'm finding disease I didn't appreciate I had in my clinic pet population.

Okay. That's great. Thanks very much.

Thank you.

We have time for one last question, and that question comes from the line of Daniel Owczarski with Avondale Partners. Please go ahead.

Thanks and good morning.

Good morning.

Jon, I was wondering if -- I just have one bigger picture question. Are there things that you are doing in the last quarter or so with your customers as far as holding their hands as their practices are coming under this intense pressure? Either helping them reach out to their own customers and drive volume back into the clinics or, I don't know, help them improve cash management? Are there initiatives that you are going a little bit extra to entrench yourself with your customer base?

That's a great question. A couple of things. First of all, the -- we are encouraging customers to continue to have conversations with the pet owners that are coming in about a standard of care, which will increase the longevity and the quality of the life of the pet. We're finding that people who are coming into the practice still care about their pets and still are still willing to pay. And obviously, if you look at our industry in relation to other consumer related industries, we've held up amazingly well given the economy.

So it turns out that there's an opportunity here to continue to gain share of wallet if you just have that conversation which educates them about the value of medical care. And that's one of the reasons why, for example, the real time care initiative is important, because when you can actually sit down with them in the patient visit and show them the blood work and say okay, so here's what you are paying a hundred dollars for, and I'll give you a nice report with the values here, and here is how the pet's different organ systems are doing, and oh, I think we see an issue here and we need to take some action. Those are important conversations to have. Obviously, some people are not coming in. You can't have a conversation with somebody who isn't coming in. So what we're finding is that vets are actually spending more time with those who are coming in as opposed to just rushing through from appointment to appointment. Different kind of conversation.

The second type of conversation that we are having is -- I think we are getting greater pickup on our economics story and the benefit of the productivity and the lost charge capture that comes when they have an integrated approach to the diagnostics, the practice management and the electronic medical records. And it's interesting, the vets don't typically have a strong profit motive, but when you have an economy like this, they do have a strong survival motive. So they are more interested in that story maybe today than they were a year or two ago when they were in it for the -- obviously, always for the benefit of the patient, but profit, in the vet's mind may have seemed like a bad word or something. Vets are really different than most other medical practitioners in that way, and God bless them for that. But they do know the importance of having an economic success in the current environment. So they are more interested in our economics story, and that's -- so it's gaining some traction.

That's helpful. Thank you.

There are no further questions. Please continue.

Yes, I think those are all the questions. Thank you all for signing on, and we appreciate the attention, and we look forward to continuing through this year with our strategies and updating you in the next call in July. Thank you.

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