愛德士 (IDXX) 2009 Q2 法說會逐字稿

Welcome to the IDEXX Laboratories second quarter 2009 earnings conference call. Just a reminder, today's conference is being recorded. Participating in the call this morning are John Ayers, Chief Executive Officer, Merilee Raines, Chief Financial Officer, and Susan Ostro, 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 (inaudible) management's future expectations and plans, and IDEXX's future prospects constitute forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. Such statements include but are not limited to statements regarding management's expectations for financial results for future periods.

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, 2009, and 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.

Thank you, Bonnie. Good morning, and thank you for joining us today. As we noted in our press release this morning, revenues for the quarter were $265.7 million, and diluted earnings per share were $0.55.

To remind you, our second quarter 2008 financials included results from our pharmaceutical business, and we subsequently divested the majority of the products in that line in the fourth quarter of 2008. Due to the sell-out of our feline insulin therapeutic, the contribution from the pharmaceutical product line was unusually high in the second quarter last year, $14 million of revenue and $0.09 of earnings. We have mentioned in this our press release as well to help investors evaluate year to year growth rates.

This quarter's revenue performance was above our thinking at the time of our first quarter call due for the most part to more favor favorable currency rates adding about $5 million versus our expectations. Revenue mix was somewhat different from our projections, with rapid assay and water making a somewhat lower contribution to the total, and other product areas relatively in line to slightly favorable.

The revenue mix, coupled with other factors that I will discuss, yielded a lower than anticipated gross margin. This margin shortfall was mitigated by lower operating expenses to yield earnings that were in line with our thinking, exclusive of the penny of earnings benefit we received from more favorable than projected currency rates.

Let me now get into a more detailed discussion of our financial results. Second quarter revenues grew organically 5%. A negative 5% impact from currency, combined with the 5% impact from the absence of pharma sales, yielded a 5% decline in reported revenues.

The second quarter organic growth of 5% compares to the 3% organic growth we reported last quarter, and the 6.5% organic growth we reported in the fourth quarter of 2008. The economy continues to impact our companion animal business, and portions of our water and production animal businesses not driven by government regulation.

With regard to the US veterinary market, we continue to analyze trend data from a sample of practices using data derived from our practice information management systems. Looking at second quarter statistics, from the same sample set that we did in the first quarter, we see that patient visits were down about 4% year to year, and revenues were down 1% to 2%.

This is similar to the decline we saw in the first quarter. While trends are stabilizing, and outlooks may have brightened somewhat, it appears that we are not yet seeing a pickup in activity in this market.

As noted last quarter, data for the veterinary market outside the US is difficult for us to obtain. However, based on anecdotal evidence, we continue to believe that European and Asia Pacific markets are somewhat less affected by the economy than the US market, though the economy is still generally a negative influence that varies from country to country.

Sales of instruments in our IDEXX vet lab suite at $18.4 million, (inaudible) 27% in constant currency in the second quarter. As in the first quarter, Catalyst and SNAPshot Dx were the drivers of year to year growth. Strong sales of these two instruments were offset somewhat by a decline in the revenue contribution of the other instruments in the suite.

Clearly it is generally a difficult environment for our customers to commit to more significant capital outlays, although Catalyst is achieving good acceptance in the market as we expected. Catalyst placements totaled 473, as compared to 340 in the first quarter, and we ended the quarter with a solid order book.

As planned, we exited the controlled launch phase for Catalyst in the quarter, as we continue to improve the system with a number of hardware and software enhancements. We continue to feel we are on track to place approximately 2,000 instruments for the year.

With the exit from the controlled launch phase, our sales force focused more attention on new and competitive accounts for our chemistry instruments. Accordingly, in the second quarter, nearly 20% of our placements were to such accounts, a significant increase from prior quarters.

Instrument consumable sales of $56.3 million, grew 4% organically, and also 4% when further adjusted for year to year changes in distributor inventories. This 4% growth is comparable to what we saw tin first quarter, after normalizing that quarter as well for distributor inventory changes.

Our rapid assay sales of $41.6 million, grew organically year to year 2%. When further normalized for changes in distributor inventory levels, revenues were flat in the second quarter compared to 4% growth in the first quarter.

As we discussed last quarter, we conducted a couple of marketing programs in the first quarter, aimed at gaining new customers for our canine multiparasite test 3 and 4Dx. And helping to ensure that current users of these tests continue with their established best medicine protocols rather than return to heartworm only testing during these times when there's heightened focus on lower price points.

We believe these programs accelerated some revenues from the second quarter into the first. The resultant year to year first half organic growth was flat, or 2% when normalized for changes in distributor inventory levels. We do not expect further timing impact from these programs in the second half.

As we have mentioned before, two additional dynamics not related to the economy continue to impact rapid assay growth. First, we are experiencing lower price realization from a combination of lower price increases, marketing programs, and higher relative volume growth from larger multipractice accounts and shelters who receive more favorable volume based pricing.

Second, there continues to be a slowing in the rate of conversion from canine heartworm only testing to our multiparasite disease panels, 3 and 4Dx, as we move further through the adoption cycle. These panels now account for roughly 75% of our unit testing volume in the canine line.

In the feline market, we continue to be pleased with the market acceptance of our SNAP 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 half of the combined revenues from combo and triple in the second quarter.

Practices are appreciating the additional clinical information that this test provides, and we expect that the majority of our customers will have transitioned to feline triple in the second half of the year.

As one last comment on the rapid assay franchise, SNAP 4Dx was approved by the USDA to be run on SNAPshot Dx, and this capability was subsequently launched to the market at the end of the quarter.

US distributor inventory levels for instrument consumables and rapid assays averaged just under our normal three to four-week range at the end of the quarter based on forward-looking demand.

Our laboratory and consulting services, with revenues of $77.9 million, had organic growth of 5% in the second quarter. This compares to 6% in the first quarter. Growth in this global business continues to be relatively strong, a function of our focus on enhanced service, proprietary specialty tests, our well-aligned commercial organization, and the integration of our diagnostic service, product and information management offerings.

Our practice information management and digital radiography systems, with revenues of $14.1 million, grew organically 2.5% in the second quarter. This is about on par with the growth in the first quarter. As we discussed last quarter, the slowdown in growth in this product line from 2008 levels of 15%, is due primarily to our digital imaging system and customers reluctance to commit to this relatively significant investment given the uncertain economic environment.

Second quarter revenue performance is largely a continued reflection of first quarter performance, and the fact that we entered the quarter with a lower order book than we had seen in recent quarters. Order rates did accelerate in the second quarter, and this gives us a more positive outlook for third quarter installations.

We believe the combination of a strong product portfolio, engaged channels, including our distributors, and the seamless way that our digital radiography and our cornerstone practice information management systems can be linked together to provide practice efficiencies and revenue capture, position us very well going forward.

Production animal services sales of $19.6 million grew 1% organically in the second quarter of 2009 versus 2008, and this compares favorably with the 2% to 4% declines we have experienced over the last few quarters. The relatively stronger performance in the quarter is the result of gaining a competitive account in Europe, and good growth in China.

We remain cautious about growth going forward, as the economy continues to affect the business, as manifested by lower funding for food animal testing generally in Europe, and challenging economics for producers in the US. We have also noted previously that changes to European Union regulations governing BSE testing will likely result in lower testing volumes in 2009 and beyond.

Our water segment had sales of $19.2 million for the quarter, which translated to 2% organic growth. This is down from the 3% growth experienced in the first quarter, and the 7% growth in fourth quarter of 2008. As we stated last quarter, though the water business appeared to be generally resistant to the economy due to the high portion of regulated testing, it has been impacted by lower non-compliance testing, such as cruise ship and recreational water testing, as well as softer conditions for compliance testing due to lower construction activity in the US.

Looking at the rest of the P&L, the gross margin, at 52% of revenues, was about a point below our thinking. This was in part due to revenue mix as I mentioned up-front, with our relatively higher margin rapid assay and water products coming in a little light of our expectations. But more significantly, due to activities in our manufacturing operations and inventory management.

We mentioned in our first quarter call that inventory levels had increased, in part as a result of lower than forecasted sales, and that we had targeted efforts to bring inventories down over the course of the year. The areas of primary focus are our instruments, excluding Catalyst and SNAPshot Dx, and rapid assays. In the quarter, we brought inventories in these areas down by over $5 million, and the lower build volumes associated with this effort gave us lower than planned absorption of labor and overhead.

In addition, our efforts to enhance the field performance of Catalyst created some rework and incremental spend, and have delayed our planned projects to achieve cost savings on some components of the instrument. We believe the focus on inventory reduction and Catalyst enhancements, though producing a near-term margin hit, are the right things to do for the business, and position us well for future performance.

I project, however, that we will see a modestly lower than previously anticipated gross margin in the second half, as we come down the cost efficiency curve a little more slowly than originally planned with Catalyst.

Operating expenses, at 33.6% of revenues, were about a point below our thinking, as we continue to drive efficiencies in all areas of spending, while ensuring that we are appropriately funding the initiatives most critical to our business. Our net interest expense, tax rate and share count were all essentially in line with our thinking.

As for the balance sheet and cash flow, we ended the quarter with $104 million in cash and $155 million in debt, for a net debt position of $51 million. Our free cash flow was $47 million, or 140% of net income.

Though I mentioned the success we had in the quarter lowering key components of our inventory, the balance was down by only about $650,000 from the end of March. This was due primarily to the timing of receipt of chemistry slide consumables. Our accounts receivable are in good shape with days sales outstanding at 40 days.

Looking forward, we now project full-year revenues of approximately $1.02 billion. This increase from our April guidance of approximately $1billion is driven by currency benefits from the weakening of the US dollar that has occurred since we reported our first quarter results.

On a reported basis, our revenue guidance implies full-year 2009 revenues essentially on par with 2008. Which translates to organic growth of approximately 5%, as we adjust for the 3% anticipated negative impact of currency year to year, and the 2% negative impact of the divested pharmaceutical products.

Our outlook for the economy and its impact to growth rates, remains consistent with the view that we provided in April. That is, we assume no significant improvement or deterioration in the macro environment, and so growth rates improve in the second half as a function of easing year to year comparisons.

We now expect full-year gross margin to be 50 to 75 basis points below our previous expectation, for a gross margin of 51.5%. This change in guidance is based on our second quarter performance and slower realization of cost efficiencies in the second half, primarily related to Catalyst.

Operating expenses should average out to about 35% of revenues for the full year, roughly on par with the first half. This is down from our previous guidance of 35% to 36% of revenues, and is a reflection of our sustained focus on driving efficiencies and controlling costs.

We expect the tax rate to be approximately 31% for the full year, net interest expense to be $1 million to $1.5 million, and the weighted average share count for the year to be down approximately 3% from full-year 2008 levels.

All of this leads us to increase our full-year EPS projection to $1.88 to $1.92, from the $1.86 to $1.90 projected in April. The increase is comprised of a $0.04 currency benefit, a penny from the second quarter, and an additional $0.03 in the second half, and projected lower operating expenses. These favorabilities will be partially offset by a lower gross margin and continued caution with regard to the economy.

Our guidance provided today assumes the Euro at $1.40, the pound at $1.60, and the Canadian dollar at $0.90, compared with rates assumed in April of $1.30 for the Euro, $1.40 for the pound, and $0.80 for the Canadian dollar. To remind you, every 1% strengthening of the US dollar, vis-a-vis our basket of currencies, yields approximately $4 million of lower revenues, and $600,000 of lower operating profit on an annual basis.

We continue to project DSO to remain at approximately 40 days. Over the remainder of this year, we plan to bring our inventory levels down by another $5 million. Accordingly, our inventory levels, except for chemistry slide consumables, are projected to be down by $10 million from our first quarter levels.

It is important to note that we receive slide shipments on a quarterly basis, and the timing of our receipt of these shipments often can vary within a few weeks on either side of a quarter end. That timing variability thus can impact our inventory balances, but not in a substantive way.

We project capital expenditures of $55 million to $60 million, and free cash flow to be 100% of net income.

And now we'll turn it over to John for further comments on the business.

Okay, thanks, Merilee. Let me give my summary of Merilee's extensive and helpful comments.

I think we delivered a very solid quarter financially, and also made good progress on our strategic objectives designed to achieve continued sustained growth and profitability in the quarters and the years to come. We met our own expectations for performance in Q2 without any help from the economy, and before the benefit of currency.

As Merilee indicated, the trends in our end markets in Q2 did not show any change from Q1, other than perhaps improved sentiment. In this light, organic growth of 5% in revenues, and earnings growth from the ongoing business, and free cash flow that was 140% of income, are very satisfactory numbers.

While our outlook for the second half of the year is somewhat cautious as far as the economy is concerned, the weakened levels of the US dollar versus our key international currencies over the last two months, assuming these levels hold, allow us to increase our range of EPS guidance for the year to $1.88 to $1.92, up from the prior guidance of $1.86 to $1.90.

Well, let me turn now just to one or two highlights on the business before we open it to Q and A. Our largest business, point of care instrument and consumable business, we call the IDEXX vet lab, showed 9% constant currency growth in Q2, powered by Catalyst Dx placements, as well as modest growth in consumables. As Merilee noted, we placed 473 Catalysts in the second quarter, as we moved to a more aggressive placement plan.

Catalyst Dx, our flagship chemistry analyzer, is a key part of our IDEXX vet lab business model. Users of this instrument become steady purchasers of our proprietary Catalyst consumables, which use the dry side technology common to our vet test analyzers, generating favorable long-term economics for IDEXX.

In addition to Catalyst placements, we've also accelerated placements of our VetTest chemistry analyzers. While the VetTest instruments themselves have much lower realized instrument revenue contribution, these customers also generate steady profitable consumable demand. For this reason, VetTest is a key continuing part of our instrument product line strategy.

Of course, many times we receive a VetTest in trade for a new Catalyst analyzer, which gives us the opportunity to recertify and place that VetTest instrument at a low cost at a new account.

Catalyst and VetTest placements together are up over 20% in the quarter from a year ago, making for one of the strongest chemistry system placement quarters in recent history. This achievement shows the power of our product line strategy of having both a high end flagship model for larger volume accounts, and a highly capable lower cost unit for the smaller volume segment that exists both domestically and even more so internationally.

And both instruments are inter-changeable components of the IDEXX vet lab in house suite of instruments. In other words, if a customer starts with a VetTest as the chemistry analyzer in their suite, they can subsequently upgrade to the Catalyst without losing the investment they have made in the rest of the IDEXX in house lab.

We're very pleased with the progress of the Catalyst Dx launch. We continue to he refine the hardware and software design with the object of improving the field reliability and manufacturability of the instrument.

For example, we modified the motors that insert the slides with a higher torque version that virtually eliminates an infrequent intermittent failure mode. This new design improves both customer experience and the flow on the manufacturing line.

Some of our costs that impacted gross margin in the second quarter were involved with rework of instruments with the new motors prior to sale, so customers got only the best we could deliver. We also have been able to upgrade our customers in the field with the new motor, using our field force of field tech support.

In addition, we also have developed two additional software releases since late April that have addressed other miscellaneous issues as well as added certain desired features. Moving a new instrument system to world-class field performance is a continuous process of field feedback, prioritization and engineering upgrades.

Having said that, I believe we have, as a result of the work we did in the second quarter, made a major jump in Catalyst reliability and field experience. This is evidenced by our ability to ramp the placement of Catalyst to 473 units. We're on track for 2,000 Catalyst placements for 2009, with each quarter being stronger than the one before and leading up to the traditionally strong fourth quarter.

In the quarter, we also launched, as expected, the capability of our SNAPshot Dx analyzer to read and interpret SNAP 4Dx devices. Our customers are more and more appreciating the unique capabilities of SNAPshot Dx, including not only accurate and convenient point of care thyroid testing and SNAP 4Dx interpretation, but also cortisol and pancreatitis tests, two important tests that are unique to the IDEXX point of care system.

We continue to expand the number of customers that have had their instrument systems connected on-line with IDEXX through our smart service offering, with now about 1,000 customers connected. The ability to collect instrument performance data from 1,000 customers real-time is one of the reasons we are able to achieve such a rapid cycle time of engineering improvements and product upgrades.

We're often asked whether customers use more chemistry slides when they trade up from a VetTest to a Catalyst Dx. While it is still early days, we believe that our customers are running both the higher number of patients on the analyzer, as well as a higher number of chemistries per patient. This is true in part because the standard panels on Catalyst have more chemistries and slides than the panel they replace on vet tests.

However, we don't charge any more per equivalent panel, so the net effect is a high single-digit growth rate in the consumable revenues for IDEXX with the trade-up. Since the gross margin on the larger chemistry panels are a bit lower, the gross profit increase for IDEXX is even more modest, call it low single-digit increase.

However, our total system profit increase is greater, when we take the revenue from the instrument placement into account. We sell the Catalyst instrument for cash with a positive gross margin, whereas many markets, including the US, we place the VetTest instruments under a reagent rental type arrangement, where we receive the value of the instrument through the consumable sales.

Bottom line, the instrument sale and follow-on consumable usage for Catalyst is more profitable than the VetTest at the same customer. This is one of the drivers of margin expansion that we expect to see in this line of business over the next several years.

Of course, another key driver of IDEXX profitability is placement of Catalyst to customers not previously chemistry customers of IDEXX. In these accounts, all the consumables are incremental sales at an attractive gross margin to IDEXX. These customers represent an increasing percentage of Catalyst placements, as Merilee mentioned.

Catalyst opens the door to us approaching these high-volume accounts with a new, powerful and unique value proposition, where we would not have been as nearly successful with vet test. We expect the number of Catalyst placements to these new customers will increase in the second half of 2009, as our sales force becomes more experienced in selling the unique capabilities of Catalyst, including work flow, expanded menu, flexibility, integration and dry slide accuracy.

As I indicated, customers do run more patients with Catalyst and more chemistries per patient when they have a Catalyst. As our customers -- and our customers' cost per chemistry result on Catalyst is less than it is with VetTest. These points demonstrate the greater medical and economic value of Catalyst to the practice, and that becomes a powerful selling tool for a sales force.

In addition, our customers also experience greater technician productivity, throughput and speed of results when the in-house lab is upgraded to a Catalyst.

Finally, we sell the productivity benefits of integration with the rest of in the-house lab equipment and with the practice management software. Of course, a new Catalyst customer also typically purchases a full integrated suite of instruments, including a laser site hematology analyzer, generating more instrument revenue and reagent revenues for IDEXX.

In addition, we find that the opportunity to place a Catalyst in a customer can also generate sales across the broader IDEXX product line, including digital radiography, new practice management software, SNAP tests and our reference lab services. All of these IDEXX products and services work together in a way that increases our customers' productivity, profitability and the ability to move to electronic medical records.

We are finding these integrated deals a very compelling value proposition for our customers. In this way, Catalyst Dx lives up to its name in a way, by being a trigger to a much larger customer sale and ongoing relationship. And that is why we're so excited to have moved beyond the controlled launch phase of Catalyst in Q2.

I wanted to switch gears for a minute and comment on our Asian operations. Asia Pacific makes up about 8% of our revenues, and yet is growing 15% in constant currency the first half of the year, as a result of a particularly strong Q2. All the geographies of the region contributed to this growth. China, however, was the star.

We have many of our lines of business represented in China, with our production in animal services and dairy businesses being the largest. As a whole, China grew 50% year-over-year in the first half of the year. It appears that our investments in China over the decade have begun to really pay off with substantial growth.

The second half of the year also looks very strong in China, as we will be ramping sales of our recently launched melamine SNAP test in the dairy line of business.

So before we open up the call to questions, I would like to conclude by saying that we continue to have a very strong outlook despite generally tepid economic forecasts. For 2010, for example, while we're not giving any specific guidance at this time, we expect to see both gross margin expansion from 2009, continued operating expense productivity, and continued share count reduction contributing to solid earnings growth. Again, this assumes that the US dollar is relatively unchanged from levels observed over the last two months.

Our continued growth in revenues and profitability will come from a technology oriented strategy of a very strong, differentiated product portfolio, and a global footprint that is able to leverage this portfolio of technology around the world.

So I think we'll open up to questions at this time.

Thank you. (Operator Instructions). Our first question is from Ryan Daniels from William Blair, please go ahead.

Good morning, guys. I had a couple of quick (inaudible) on some of the instruments. I'll start with Catalyst. John, I know you guys kind of constantly work to advance the systems and lower the cost of service over time, and I'm curious, kind of with the developments you made during the second quarter on Catalyst, how close you think you are to having the instrument kind of where would you ultimately like to see that, if you have any color there that would be helpful.

Yes, sure. Of course, we strive for perfection, so that may take a little bit longer, and may not actually be engineeringly possible, but we made a major step forward. We've got a couple of miscellaneous issues that are actually being addressed as we speak, and we're really gearing up for the second half of the year.

That doesn't mean that we're not always finding kind of very minor types of things that we're always working on to improve the experience, and to continue to expand the features and capability of the instrument system, and those are in the queue kind of a steady number of those that will be coming over next many quarters. But we really do feel like we made a major step forward with the achievements that we had in the second quarter, and the performance that we have with the instrument in the field.

Okay, that's helpful. If we look at Catalyst, I know you mentioned that it ticked up from about 10% competitive swap-outs in the first quarter to roughly one-fifth of the placements this quarter. I'm curious if that was more US-based or overseas, then I don't know if you want to provide color on this, but the second question would be, looking forward, you said it should be a little bit more. Do you eventually see that being more than 30%, 40% of the placements being swap-outs, or will it probably stabilize here in the low 20s?

Well, first of all, the tick-up to 20% was -- I think we're well under 10% prior to that. And we're just really learning how to sell the instrument. The interesting thing about Catalyst, it has so many different differentiators that our sales force is -- takes a little bit longer to figure out which one works for which customer, because they have such a wide variety of things to talk about.

Our competitive improvement, placements in new customers really was broad based. I wouldn't say it was particularly US or international. We do see, as we've said, a pickup in the total number of placements in the Q3 and Q4, and I'm not sure that I can predict what percentage will be competitive versus VetTest, other than certainly Q2 establishes the benchmark for that.

Okay, that's fair. And then a little bit different one on SNAPshot Dx. I know you got approval to add 4 Dx to read and interpret. I'm curious what you still have left on SNAPshot to get approved. And then, I guess the follow-up to that would be, is there pent-up demand, where some of the clients are waiting for more of these things to be approved, and maybe it becomes a more easier sale, if you will, as more and more gets added to the system?

Again, just to answer your first question, we do have a couple of other major assays in the pipeline, including our heartworm only test and feline triple and 3 Dx, but 4 Dx is our highest volume single test, so that's a major step forward. But with SNAPshot, SNAPshot has some very powerful capabilities today. Thyroid, cortisol, (inaudible) pancreatitis, feline combo, 4Dx, I think we have enough ways to sell that instrument.

I think probably what we're really more talking about going forward would be greater growth in utilization of the instrument for SNAPshot, as more and more SNAP tests are approved. But we do feel like there's a lot of reason, a lot of very powerful reasons. In fact, some of our sales reps can justify the entire vet lab sale just on some of the assays that are available on SNAPshot Dx. Shows the power of that piece of the product portfolio.

Great. Then the final question, and I'll get back in the queue, just on the global reference lab business. I know you guys mentioned in the press release, you've seen some strength there on pricing. I'm curious if that is the revenue per requisition going up because of actual price increases, or is it some of the proprietary stuff that you're launching like cardiopet bmp being added in addition to existing tests, kind of moving that up? Any color you can provide there of why you're seeing strength in that division.

I would say it's just general -- I couldn't say it would be a factor of the proprietary tests. We certainly are excited about our portfolio of specialty tests.

Of course, the pancreas franchise, which we've been developing for quite some time, the cardiac franchise that you mentioned, vector born disease franchise, and of course, the whole large menu of molecular diagnostics (inaudible), we've been in the market for a number of years, and continue to expand the menu for molecular diagnostics. And we benefit globally, but I don't think that would be a particular factor, a meaningful factor in our price and volume. It's a contributing factor.

Okay, great, thanks a lot, guys.

Thank you. And our next question is from David Clair from Piper Jaffray. Please go ahead.

Hi, good morning, John and Merilee and Susan. Just a quick one here. We recently completed a survey, it really showed growing optimism among the vets we talked to. Just curious here if you can share how some of your conversations you're having with your customers are going. How are the vets looking at the back half of the year?

That's a great question. I think there is a growing optimism and sentiment.

Vets are not trained as businessmen. They don't close necessarily the books every month on their practice. They are trained medical professionals that happen to have ended up in business.

And I think they're, like everybody else, stock market is up, and things stop getting worse, and people feel a little better, and they probably got control over their costs versus the free-fall that we were all experiencing in the end of last year and early this year, but the traffic isn't improving.

So, while they feel a little better, and of course, there's a wide variation. You've got people who can be up strong double digits and people who can be down strong double digits. So there is a wide variation.

So again, sentiment is one driver, but of course with regard to our business trends, the actual traffic is an important driver, too. And that's why you may see a divergence between what might be a survey of respondents and what we actually see in the numbers.

Okay. And then just a quick one on Catalyst Dx here. What was the mix for Catalyst Dx versus VetTest?

It was a little higher Catalyst Dx, but VetTest was a meaningful contributor, but a little bit higher Catalyst then VetTest.

Okay. And then just kind of given the current state of the economy, are there any plans for a reagent rental program for Catalyst Dx? Do you think that that would even increase the placement rate higher?

I don't think -- we wouldn't typically see that this early in a product launch, there are no plans in 2009 for anything like that. I think we feel that we have a strong enough demand on a cash sale basis.

Of course, we do have reagent rentals for some of our other instrument systems, we have had, and with the weakness in some of our other systems, we may be expanding some consideration for that. But with regard to Catalyst, it really is a flagship model, we feel pretty good about the ability for cash or, of course, as you know, many people buy them on third party leases, and that's worked out pretty well for them because of the low interest rate.

Okay. And you also mentioned that Catalyst Dx, the people that are buying the instrument are buying additional pieces of equipment as well. Can you give us any kind of color as far as percent of Catalyst Dx that people are actually bundling with additional equipment?

Well, in particular, if it's a new customer to our IDEXX vet lab, they actually are required to get an IDEXX vet lab station, and very typically they get our laser site hematology analyzer and maybe some of the other instruments, the coag, what we call a full vet lab preferred partnership deal. Obviously if they're an existing customer, they may just be trading up the VetTest chemistry analyzer because they already have some or all of the other equipment.

Okay, thanks a lot.

Thank you. And our next question will come from Jonathan Block from SunTrust Robinson Humphrey. Please go ahead.

Thanks, and good morning, guys.

Good morning.

First question, just on consumable growth, I believe, Merilee, you mentioned organic was up 4%, and I think you said the channel was essentially flat. So I guess part A is, just want to make sure that there was no change in the channel, and then B, is that up 4% is certainly an impressive number. There was some comments last night that I think maybe your biggest customer said point of care may have been down 6% or 8%. So, A, do I have all my numbers correct? And then, what are you doing, do you believe, to get point of care growth, which seems to be well north of where the industry is?

John, I'll just start off with the answer to the first part of your question. Your numbers are correct, there was no impact to organic growth from changes in distributor inventory levels. So the 4% is a number that's good for both.

Since we have a broad base of customers that -- and your surveys have shown, our representation in the market with our chemistry, I would say that that's probably more reflective of the industry than any particular other piece of information.

Obviously point of care is a valued diagnostic methodology for the benefits of having the results announced out of waiting later. There are a lot of situations where that's either medically necessary, or at least very, very convenient to the practice.

Okay. Then, John, do you think some of it is also where, to your point, you're now able to take that VetTest and place it internationally, and so you're getting the incremental, which is helping get to you that 4%?

Certainly the international placements of VetTest in the second quarter were very good, which was -- contributed to that -- to the overall success of chemistry placements fourth quarter, and that could be a contributor. But we saw a very -- I don't think the trends internationally, taken as a whole, were substantively different than the trends domestically.

Okay. Just moving on, Merilee, again, just to check numbers, I think you said FX, if you sort of re-marked to market, would help you by about $0.04 for the balance of the year. You beat by one, and then you raised by two pennies. So, core EPS was essentially lowered by $0.03, and that was due all to the lower gross margins on the manufacturing of the instruments?

The correction I would just make to your numbers is the impact from currency. We calculated as being a penny in the quarter, in the second quarter, and then $0.03 in the back half of the year, so it's $0.04 in total.

Got it. And then just quickly on Catalyst, one or two more questions, quickly on Catalyst, did you hold price for the quarter, and if so, what is that price?

Yes, we did hold price, and net realized average unit price is about $15,000.

And maybe one more. I'll just jump back in the queue. There seems to be just some different numbers out there where some consumer oriented names are snapping back, some aren't. And John you mentioned that people are feeling better but you're not quite seeing the volumes go through the hospitals.

Is there anything larger at play here, where maybe someone didn't take their pet in for 12 months, and nothing happened, and so instead of going in every 10 to 12 months, now they're lengthening to every 16 to 18, and that might be the new dynamic going forward? I would just love your thoughts there.

I can only speculate. We do our own analysis of the market, and the benefit of our analysis, it's a couple hundred practices, and we're looking at their actual data, and -- from their systems, and they actually like that because we provide them some analysis back, and that shows a 4% reduction year-over-year in patient traffic.

And as Merilee mentioned, a little bit less in terms of revenue realized, because they're getting a little price. I can only speculate what that is. Maybe it's when somebody becomes unemployed, they stop going to the vet unless they have a problem, or people stretching it out.

That could be any number of things. I would tend to think that, correlate it to growth in unemployment, and it's a pretty good correlation. But it's only speculation on my part. We don't have that kind of analysis. We only have the analysis of the number of people actually coming into the practice using our sample data.

Okay, great, thanks, guys.

Thank you. (Operator Instructions). Our next question will come from Ross Taylor from CL King. Please go ahead.

Hi. I think I have three questions for you. First of all, I'm not sure if I heard your prepared remarks correctly, but are you all seeing any kind of slowing demand or decelerating demand for in-house diagnostic instruments in general? I just wondered if kind of the contraction in capital equipment spending is hitting your business a little bit harder in that regard, excluding Catalyst.

Well, we've had -- our sales organization, of course, is, the focus on Catalyst is an important product for us, and it's a new product. And as a result, and maybe -- and probably partially related to the economy because people are concerned about capital investments in general. We saw a decline in the revenues associated with our other instruments, but when you add it all together, we've got obvious growth in instrument revenues. So is that a mix issue? Is that an economy issue? It's probably all factored into the number.

And would it be fair to assume that maybe just more sales force attention on Catalyst is hurting some of the other products also, or is that not --

That's very fair to assume. And especially as they're really learning how to sell it. It takes -- there's a learning curve. As much as we'd love them to figure it out day one, there's always a learning curve on how to do it. And that takes some time and productivity, too.

Okay. And just one question related to Catalyst. You mentioned there's -- or your customers sometimes have a hard time trying to figure out what to talk to with the customers about Catalyst because it has so many features, but can you all identify maybe some of the primary reasons that customers are interested in Catalyst or why they are buying it?

That's a great question. Thank you very much for that. There are probably three or four key ones. First is that it's new and it is from IDEXX, and we have a lot of credibility in the market. It's new but they also know the IDEXX in-house suite of analyzers, and the benefits of connectivity and customer service and integration, all the things that we've been selling all along. Surprisingly even that, just in and of itself we had a sale.

Second is the extraordinary impact that it has on the productivity in a busy practice in the morning, and the dynamic here is kind of interesting. The Catalyst has two stations, and it also processes patient samples simultaneously.

So, any time a tech goes up to put another sample in, if they can just load it on the instrument, whether the instrument is ready to run it or not, they can queue it up. That's much better than going up to the instrument and seeing it's busy with a current sample and to have come back later. Basically, it's on your time, not on the instrument's time. So that's a big productivity.

The other one is expanded menu, the biggest clip volume is a chem 17. Frequently they will add electrolytes to that. You're able to run a chem 21. There's no other way to run that kind of extensive panel in-house. There's no comparison.

And so the standard of care is able to be expanded. They're appreciative of that. And of course, they can do it very, very easily without any tech time. So, just load the entire pre-loaded clip.

So, it's amazing, little things, the fact that you can run a urine on it automatically in a much easier work flow than you can run a urine on the VetTest, automated dilutions. These are important features to techs who otherwise have to spend a lot more time to do that kind of thing with any existing analyzer on the market. It's amazing, it's usually, there's something that capture's their imagination, and it can be any variety.

Okay. And just two other questions. First of all, the VetTest placements. In the US, were those primarily to new IDEXX customers or to existing users of the VetTest? And second question, you mentioned in the press release, and I think also mentioned in your prepared remarks, that, quote, operating expense productivity is becoming a way of life at IDEXX. I don't know if you can quantify or make any comments about what some of your long-term goals or expectation might be in terms of where operating profit margins could go over several years.

Okay, so let me -- two different questions. What was the first one again?

Just asking about the VetTest placements, just in the US.

Those are -- generally to new customers, of the VetTest. They're usually entry level, and coming in, and appreciate the benefit, not only of VetTest but of course the whole vet lab and some of the benefits the other instruments get. They're not ready to make the capital investment in a Catalyst but they want to get the benefits of the IDEXX -- the vet lab in whole, and the chemistry analyzer is just fine for their needs because they're not a high volume practice. So again, primarily to new customers.

With regard to operating expense, I think what we're trying to say there is, we're at a sort of a new normal. It's not a temporary holding back on expenses or travel. This is fundamental productivity that we're finding in the operating expense line. Of course, the environment helps that, but as we focus on the productivity in that part of the P&L, I think what we would expect to sustain the levels of run rate percentage of sales that we've been able to achieve. And even perhaps over time, leverage it even further, as the Company grows.

We're not giving any particular guidance beyond 2009, other than what I said for 2010, but our plan is, as you would expect, being a technology oriented company, and as we look at the opportunity to grow our products and introduce new products in the future, our plan is for strong earnings growth over the next several years.

And we're not making -- we're not making large assumptions about economic rebound. I think most of the economists say it's going to be a slow sort of extended type of recovery, so we've got to earn it the hard way with our technological innovation, and we fully expect to do so.

Okay, all right, thanks very much.

Thank you.

Thank you. Our final question will come from Daniel Owczarski from Avondale Partners, please go ahead.

Yes, thanks, good morning. Just had a couple of quick specific questions. John, you talk about the smart service, can you give us an idea about how you charge for that? Is that a premium on the instrument price? Can it be meaningful from a revenue perspective, and how many customers are starting to go with that option?

Thank you for that question. We actually don't charge for it. It actually gives us productivity as well as the customer productivity. It's really a differentiator with in the-house lab.

Our challenge is just getting people connected up. They've got to have Internet access, somewhere close to the in-house lab. They don't always have that. More and more they do.

So it's a productivity enabler for us and our customers, not a revenue generator.

Okay, should we assume that your competition doesn't have that option or does have that option?

I'm not aware of anything remotely similar to that in the industry with regard to diagnostic equipment. I think computer systems, practice management systems, I can't speak to. We, of course, have that option in our practice management software, too, it's fairly standard, but I'm not aware of anything like that in the diagnostic systems.

Okay. And then on the SNAPshot 4 Dx, does that have a price premium, and what's the advantage for the customer? Is it simply because the billing and the recording, or is there actually a -- maybe a performance improvement versus just the rapid stand-alone?

Yes, it's not a performance improvement. It is a -- basically it's exact same SNAP test, but instead of manually timing it, and then reading it, and then recording it, and then billing for it, you stick it in the analyzer, and it times it, it reads it, it records an electronic medical record, and if it's -- if the vet lab is integrated with the practice management software, it sends up the notice to charge for it. And so it is a big productivity tool, and we also find that stand-alone tests are prone to lost charges, because of the extensive amount of manual work that has to happen.

Another, just productivity benefit, is that people, the practices are generally required by the American Animal Hospital Association or their own quality systems to record in a logbook all of the results of their SNAP tests. And they like to do so because they like to see what kind of prevalence for infectious disease they have in their pet population. And, of course, the system automatically does all that recording for them so it eliminates the need for the manual logbook. Just eliminates a lot of manual tech, and therefore the techs really like it when they change their work flow.

One thing I will say, though, not to get everybody totally thinking that the world is going to move to this overnight, anything in the vet industry, anything that involves a work flow or behavior change, happens very slowly. Adoption cycles, they're long, they're extended, they're very powerful, but -- they're long, they take a long time for adoption so we expect this to be a very attractive, but it will be a story that we're talking about for years to come.

Okay, and then just price-wise, or margin-wise to you, is it similar, the same as the stand-alone?

Yes, it's the exact same. There's no difference in the -- if you buy a box of 4 Dx, you buy a box of 4 Dx, and you can either SNAP them and run them manually or SNAP them and put them in SNAPshot Dx.

Okay, and margin-wise, to you, does it matter which one they go with?

No.

Thank you.

Thank you.

Thank you. And speakers, you may go ahead with any closing remarks.

Well, thank you, everybody, for the great questions and for signing on to the call. Also want to congratulate our employees, a very challenging environment. I think we did a good job for the first half of the year, and we're all set up to look forward to our goals for the full year. Again, thank you, and that concludes the call.

Thank you, and 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.