愛德士 (IDXX) 2009 Q3 法說會逐字稿

Good morning everyone, and welcome to the IDEXX Laboratories' third-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 regarding management's future expectations and plans and IDEXX' 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 a IDEXX' quarterly report on Form 10-Q for the quarter ended June 30, 2009, and Form 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' website, IDEXX.com.

In addition, any forward-looking statements represent IDEXX' estimates only as of today and should not be relied upon as representing the Company's estimate as of any subsequent date. The Company disclaims any obligation to update or revise any forward-looking statements in the future, even if its estimates or expectations change.

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

Good morning and thank you for joining us today. I will start things off with a review of our third-quarter financial results, an update on 2009 and a first look at 2010. I will then turn it over to John that for further comments on the business.

As we noted in our earnings release this morning, revenues for the quarter were $259.1 million, a year-to-year increase of 3%. And diluted earnings per share were $0.52, a year-to-year increase of 24%. This quarter's revenues were slightly above our thinking at the time of our second-quarter call, the net result of favorable currency and timing of quarter-end distributor shipments, partially offset by somewhat lower than expected revenues to our end-user customers, principally in our dairy and Production Animal businesses.

Earnings were about $0.06 above our projections, with $0.02 coming from higher than expected distributor shipments, $0.02 from a more favorable tax rate, and $0.02 coming from continued progress on operating efficiency initiatives and cost savings. Changes in currency rates from those assumed at the time of our second-quarter guidance did not impact earnings in a meaningful way.

I would also note that our strong earnings growth in the quarter over the prior year is the result not only of operating expense leverage in our core businesses, but also due to the divestiture of the majority of our pharmaceutical product lines in the fourth quarter of 2008.

Let me now provide some further highlights on third-quarter performance. Organic revenue growth was 5% in the quarter, with currency reducing reported growth by 2%. The net impact of acquisitions and the divestitures was virtually nil.

The third-quarter organic growth is on par with what we achieved in the second quarter, and up a couple of points from the first quarter's 3%.

Despite somewhat improved sentiment and the recovering stock market, virtually all of our businesses continued to be challenged to some extent by the economy. With regard to the US veterinary market, we have continued to analyze trends using data derived from clinics using our practice information management systems.

Looking at third-quarter statistics from the same sample set that we did in the previous two quarters, we see that patient visits were down by 3% year-to-year, and clinic revenues were down 2%. This is essentially unchanged from the first and second quarters. Though the trend within the quarters shows some improvement in both metrics, we are not inclined to draw a positive conclusion at this point, as changes were slight and could be influenced by noise in the data year-to-year.

As we have noted previously, the vet markets we serve internationally appear to have been impacted to a lesser degree by recessionary pressures; however, the impact can vary quite a bit from country to country. Generally we have not observed any significant change in the third quarter from the first half.

Beyond the Companion Animal Group segment we continue to see economic impacts on our Production Animal services business as producers reduced testing to control operating cost, and some government agencies shift money from testing programs to other initiatives as they face lower revenues.

The market sectors of our Water business not driven by government regulation have also seen a reduction in testing, driven by a decline in new home construction and reduced consumer willingness to spend on discretionary items such as vacation cruises.

Sales of instruments in our IDEXX VetLab suite at $18.7 million grew 6% in constant currency in the third quarter. As in the first half, Catalyst was the driver of year-to-year growth. On a relative basis Catalyst's impact on growth is becoming less prominent, given the ramp in sales with each successive quarter in 2008.

We placed 469 Catalyst instruments in the third quarter, bringing the year-to-date total to nearly 1,300, and cumulative placements to over 2,000. Our efforts to enhance Catalyst performance and customer experience have been tracking well, and orders were strong in September.

Our salesforce feels positive about the momentum going into the fourth quarter, traditionally the strongest instrument quarter, due to tax incentives available on capital expenditures. Accordingly, we expect that we will be within 5% of the 2,000 placement number we forecasted at the beginning of the year.

Combined unit placements of our chemistry offerings, Catalyst and VetTest, grew in excess of 25% year-to-year, and roughly 25% of the Catalyst placements were to new and competitive accounts in the third quarter. Both of these metrics are important and encouraging for projecting future consumable growth.

Instrument consumable sales of $55.9 million grew organically 5%, or 4% when normalized for changes in distributor inventories. This normalized growth is consistent with what we saw in the first half.

Our Rapid Assay of $37.8 million grew organically year-to-year 4%. When further normalized for changes in distributor inventory levels, revenues were down 1% in the third quarter compared to flat during the second quarter.

Our comparison versus the third quarter of 2008 was impacted by a recent revamping of our annual SNAP canine loyalty marketing program, which we expect will result in a more level loaded purchasing behavior by our customers over the second half of 2009 than we experienced last year. In 2008 program enrollment incentives favored third-quarter purchases. Overall year-to-date growth is now 1%, as normalized both for currency and distributor inventory.

Our canine 3 and 4Dx test combined to represent approximately 75% of our canine SNAP unit testing volume. We see this as an encouraging sign that despite the impact of the recession, which has resulted in a fewer practice visits overall, clinicians and pet owners continue to see the value in multi-analyzed parasitic disease screening.

In the feline market we continued to make progress with our SNAP Feline Triple Test. In the third quarter greater than 50% of our combined combo and triple sales were from this three test feline assay -- leukemia virus, immunodeficiency virus, and heartworm. As more practices find feline heartworm positives in their regions practices are encouraging one another to share their experiences with this disease, which was previously not monitored in any significant way in cats and to reinforce feline heartworm prevention in their hospitals. We now expect approximately two-thirds of our combined combo and triple volume will have transitioned to triple by the end of the year.

US distributor inventory levels for instrument consumables and Rapid Assays average 3.9 weeks at the end of the quarter based on forward-looking demand. This is at the high end of our typical 3 to 4 week range, and is largely a function of the timing of orders at the very end of the quarter. Order and shipping patterns are sensitive to the day of the week.

Our laboratory and consulting services, with revenues of $76.4 million, had organic growth of 6% in the third quarter compared to 5% in the second quarter. Slightly more than half of this revenue growth resulted from the impact of higher testing volume, with the remainder due to price increases.

Higher testing volume was driven primarily by new customers and new proprietary test offerings.

We continue to leverage our integrated diagnostic services products and information management offerings to drive new business in all geographies in which we operate. As an example, sales of our newest proprietary test, Cardiopet proBNP, grew in the third quarter by nearly 60% over the second quarter. Cardiopet proBNP is a simple blood test used by veterinarians to aid in the early detection and management of heart disease in dogs and cats.

In the third quarter we also completed the acquisition of VDIC, a leader in veterinary radiology consulting services. This business is a strong complement to IDEXX' existing cardiology telemedicine service, and positions us well in this growing market moving forward.

During the quarter we also continued to make steady progress in reducing our reference lab operating costs and leveraging our global lab investments over higher volumes. A key component of our lab strategy is the implementation of lean and efficient sample processing in our labs, a process of systematically eliminating non-value-added activity.

We have initiate the rollout of lean processing in multiple worldwide locations, and are starting to realize meaningful reductions in our cost per test, as well as improvements in our results turnaround time. Operating margin improvement will continue to be a key focus within our reference laboratory network.

Our practice information management and digital radiography systems with revenues of $16.4 million grew organically 23% in the third quarter. The year-over-year growth was strong, even taking into consideration a relatively easy comparison to the third quarter of 2008 when we were transitioning to a new generation computed radiography system.

As we have discussed last quarter, orders for digital imaging systems started to accelerate in the second quarter. This trend continued throughout the third quarter, which is encouraging given the current challenging environment for such high-priced capital equipment. We believe this activity reflects the increased value customers are seeing by moving their practice from film-based to digital technology.

We entered the fourth quarter with a solid order book, and project continue order momentum as a result of our complete product portfolio, engaged channels, and the seamless way our digital systems link to our Cornerstone practice management software to provide workflow efficiencies and revenue capture.

Production analyst services sales of $15.9 million declined 8% organically year-to-year. The quarter's performance was primarily impacted by lower BSE revenue. Though we are gaining new BSE business, the market is declining due to lower pricing and also lower testing volumes, primarily from changes in regulations. As we discussed upfront, this business is also experiencing lower testing as a result of recessionary pressures.

I note that the operating profit for this business in the third quarter at 6% was significantly lower than what we have seen in prior quarters. This is due to sales volume deleverage on the fixed components of operating costs.

In addition to the impacts of the recession and BSE market dynamics, third-quarter revenues are seasonally low due to the large portion of revenues coming from Europe, where testing activities are reduced due to summer holiday schedules. The lower sales volumes were exacerbated by some manufacturing variances, which were unique to the quarter. We expect margins will improve in the fourth quarter; however, the amount of improvement will be influenced by what we see for topline growth.

Our Water segment had sales of $19.7 million for the quarter, which translated to flat organic growth. This is down from the 2% growth experienced in the second quarter, and the 3% growth in the first quarter.

In addition to the comments I made upfront about the impact of the economy on the nonregulated parts of the water business, we are also seeing that pressure on capital budgets, particularly for public health labs and utilities, has slowed the conversion from traditional testing methods to Rapid test formats.

The shortfall in our dairy business revenues that I noted earlier, was due to a slower than anticipated ramp in China of our new melamine detection test that we launched in May. Our dairy antibiotic residue test offerings have been a key driver for our 70% increase in China revenues year-to-date, and we are hopeful that melamine will become a more significant contributor to this growth in ensuing quarters.

Looking at the rest of the P&L. The gross margin at 50% of revenues was 1 point below our thinking. Revenue mix was the primary driver for the shortfall. And the secondary factor was the manufacturing-related variances in our Production Animal services business that I just mentioned.

Operating expenses at 33% of revenues came in nearly 2 points below our expectation. Though we expect a modest step up in the fourth-quarter spending, we are pleased with the focus our worldwide organization has maintained on driving for efficiencies in all areas of spending. We expect continued diligence in this area as we move forward.

Our tax rate, up 28% for the quarter, was about 3 points lower than our thinking, primarily due to benefits we received from the expiration of certain statutes of limitation. As mentioned, this contributed $0.02 to our above expected earnings.

Turning to the balance sheet and cash flow. We ended the quarter with $107 million in cash and $143 million in debt, for a net debt position of $36 million. The $1.6 million increase in inventory from our balance at the end of the second quarter was primarily the result of chemistry slide consumable receipts. Inventories, exclusive of slides, were down by just over $5 million, which is consistent with our efforts that we described last quarter to reduce non-slide inventories.

We will be continuing to focus on inventory in the fourth quarter and in 2010, as we believe that there is further opportunity in this area.

Our accounts receivable remain in good shape at 41 days. Our free cash flow was $32 million, or 102% of net income.

Looking forward over the remainder of 2009, we continue to project full-year revenues of approximately $1.02 billion, as modest additional benefits from currency are offset by further caution about the impact of the economy on the more discretionary testing volumes in our Companion Animal, Production Animal and Water businesses, as well as capital sales.

On a reported basis our revenue guidance implies relatively flat revenues year-to-year, which translates to organic growth of approximately 4%, as we adjust for the 2% anticipated negative impact of currency year-to-year, and the 2% negative impact of the divested pharmaceutical products.

We now expect full-year gross margin to be approximately 50 basis points below previously thinking, or about 51%. This change in guidance is based on our third-quarter results and the impact of lower volumes and revenue mix continuing into the fourth quarter.

Operating expenses should average out to approximately 34.5% of revenues for the full year, or about 50 basis points below our previous guidance.

We now project the tax rate to be about 30.5% for the full year, net interest expense of $1.5 million, and the weighted average share count for the year to be down 2.5% to 3% from full-year 2008 levels.

All this leads us to increase our full-year EPS projection to $1.92 to $1.95 from the $1.88 to $1.92 projected in July. The increase is comprised of $0.01 of currency benefit, the $0.02 tax benefit in the third quarter and projected lower operating expenses. These favorable items are partially offset by the projected lower gross margin and a modest decrease in organic revenue growth, reflecting our continued caution with regard to the economy.

Our guidance provided today assumes the euro at $1.45, the pound at $1.60 and the Canadian dollar at $0.95, compared with the rate issued -- assumed in July of $1.40 for the euro, $1.65 for the pound, and $0.91 for the Canadian dollar.

To remind listeners, every 1% weakening of the US dollar vis-a-vis our basket of currencies yields approximately $4 million of higher revenues and approximately $600,000 of higher operating profit on an annual basis.

We expect days sales outstanding to remain at approximately 40 days and inventory to be down by about $10 million from third-quarter levels, driven primarily by lower chemistry slide consumable. Capital expenditures are now projected to be $55 million for the year, and free cash flow to be 105% of net income.

As we look to 2010, we project revenues of $1.08 billion to $1.1 billion, a year-to-year increase of 6% to 8%, or 4% to 6% organic growth, and earnings-per-share of $2.15 to $2.25.

Because we are still in the midst of our internal planning process, I will provide more detail on the components of our P&L, balance sheet and cash flow at the time of our fourth-quarter call.

Our projected revenue growth assumes only a very modest recovery in the economy and consumer spending. Given the approximately 2% contribution to growth projected for 2009 from Catalyst, the organic growth projection of 4% to 6% for 2010, reflects a step up in demand across our product and service portfolio generally from 2009.

With regard to currency, our 2010 guidance assumes that currencies remain at the rates implicit in our latest 2009 guidance. As these rates reflect a relatively weaker US dollar versus the average for 2009, currency is projected to add 2% to our 2010 revenue growth. Similar to 2009, every 1% change in the US dollar vis-a-vis our basket of currencies changes revenues by approximately $4 million on an annual basis.

Because we have not fully hedged our 2010 currency exposure at this time, the impact of a 1% change in the US dollar has a slightly larger annual impact on operating margin of approximately $750,000. Our customary practice is to layer in hedges over the course of the year for the succeeding year.

We anticipate operating margin expansion in 2010, reflecting both gross margin improvement and further operating expense leverage. Growth in operating margin, combined with continued share count reduction, will drive earnings per share growth above revenue growth.

Key factors in our 2010 top and bottom line performance will be continuing to increase the installed base of our in-house laboratory suite, led by Catalyst, to drive the growth of our proprietary consumable revenue streams. Improving the cost profile to manufacture Catalyst and provide support after sale. Achieving efficiencies and economies of scale in our worldwide network of reference laboratories. Increasing the value to our customers by enhancing the integration of our product and service offerings. And continuing to closely monitor expenses in conjunction with revenues, and ensure that we are making appropriate investments to support our strategy.

Now I will turn it over to John for further comments on our business.

A pretty comprehensive review, so I am going to just touch on a couple of topics of interest before we turn it over to the Q&A.

So my summary on the quarter, it was a solid quarter financially for IDEXX -- good earnings, strong cash flow. Revenue was generally within expectations, although we remain cautious on the revenue outlook for the year, given the economy.

Of course, currency trends right now are in our favor. And at current levels foreign-exchange impact on revenues flips from a tailwind in Q3 -- from a headwind in Q3 to a tailwind in Q4, assuming current rates continue.

Our free cash flow and our balance sheet continues to be extremely solid, with net debt of $36 million at the end of the quarter, down actually from $54 million in Q2.

So the US economy and its impact on our business I know is a key topic in the mind of our investors. Merilee has provided a view that our markets, particularly the US healthcare market, did not see any meaningful improvement in Q3 from first-half trends. Recall that last year, while the general economy was in a mild recession during the first three quarters, we still saw some growth in pet had healthcare.

While we don't expect much improvement for the foreseeable future, given unemployment and consumer spending trends in general, we would note that the compares will start getting easier towards the end of the year.

For us it appears that had pet healthcare spending in 2008 dropped significantly in December, and then stayed generally at a lower level in 2009 -- December of 2008 and then stayed at a lower level in 2009. So this would suggest this market will start seeing some year-over-year improvement in growth, if nothing else just in the compare, towards the end of this year and into the next.

Our year-over-year growth guidance for 2009 and 2000 thus reflects this very -- I would like to say very modest improvement in the US pet healthcare market, along with these easier compares. To be clear, our guidance also includes the sum of the IDEXX specific factors that Merilee has enumerated.

Of course, the macro trends of unemployment and consumer spending in 2010 are anyone's guess. However, we will continue to keep our costs in line with revenue trends as they unfold, and this is factored into our guidance. And of course we are going to continue to be investing in our business, as we have done throughout the whole period.

In the meantime we are driving organic growth at IDEXX that is higher than the market growth through continued technological innovation and associated commercial strategies, both domestically and internationally, both to bring these innovations to the market.

In our IDEXX VetLab line of instruments and consumables the flagship product is Catalyst Dx. We are on track with the program from the point of view of the instrument performance in the field. Two software updates have essentially solved some intermittent bugs that caused problems in communications between the analyzer any IDEXX VetLab station. Several other improvements have been shipped to the field over the course of Q3.

Our salesforce, both domestically and internationally, have strong confidence in the instrument line and the value it brings to customers in terms of productivity and the opportunity to practice real-time care. Therefore, we expect to wrap up 2009 with a strong quarter and with a momentum into 2010 despite the economy.

Of course, the economy has provided strong headwind along the way and is one of the causes for us to adjust our 2009 targeted number of placements for the year down 5%. However, I would note that this is a capital sale, not a reagent rental, and we have been able to hold our expected average unit price of the instrument.

In addition, our segmented strategy of offering a dry slide chemistry analyzer, both the high and at the value end of the market -- that is Catalyst Dx and VetTest -- has allowed us to increase unit sales of chemistry analyzers 25% year-over-year on a global basis, as Merilee had mentioned. So we don't really consider that too bad a result in this economy.

While impact will -- what impact will these placements have on IDEXX VetLab consumables growth? Of course, it is an important question in this razor and blade business model. Every quarter we gain more experience regarding this utilization trend with Catalyst Dx. We are seeing that a customer that upgrades from a VetTest to a Catalyst exhibits midteens growth in VetLab consumable revenue demand, which corresponds to low teens growth in gross profit growth to IDEXX.

Of course, when we place either a VetTest or a Catalyst with a customer who has not previously an IDEXX VetLab chemistry customer, or one with very low volume, because they're getting most of their in-house work done with a competitive instrument, we get a much larger incremental benefit of consumable revenues from this customer.

As Merilee has mentioned, this second category of customers accounted for about 25% of our Catalyst placements in Q3, and of course the vast majority of our VetTest placements.

A strong Catalyst platform is only one of the reasons why we have a truly differentiated offering in point of care diagnostics. VetTest, LaserCyte for hematology, along with the instruments for urinanalysis, blood gases, electrolytes, endocrinology, infectious diseases and coagulation, all integrated with the IDEXX VetLab station, gave a complete, flexible and fully integrated in-house lab. As we look forward we will continue to be increasing the capability and the differentiation of this integrated lab offering with additional innovation.

Another business with a recent innovation is our practice information management and digital radiography business. First, we are quite pleased with the momentum we have in these product lines. This week we have launched Cornerstone 8.0, a new version of this leading software system. A version that has been under development and in beta test for over a year.

This release has a number of new capabilities that will facilitate our customers' desire to go paperless with their medical records. A switch that brings so many benefits to the practice in terms of quality of care, staff productivity and bottom-line impact.

I note that the adoption of digital radiography has highlighted to our customers the benefits of having medical data that is electronic instead of film or paper-based. Going to electronic medical records is an emerging megatrend in veterinary medicine, just as it is on the human side, and our technology offerings are leading the way.

Just turning to another topic is our global footprint, one of the hallmarks of IDEXX. In Q3 we derived nearly 40% of our revenues from international markets. Organic revenue growth for our international markets was 4% higher than in the US in Q3 for all of IDEXX.

Our Asia Pacific region is the star of the international show, with 17% organic revenue growth. Again, I know that China is leading -- the leading country of the region, with over 100% year-over-year growth for both the quarter and a year-to-date basis, with good growth contributions across five different lines of business that we have in China. We see Asia Pacific generally, and China in particular, continuing to play a growing role in our global portfolio of markets.

So with that, Cynthia, we will turn it over to the question and answer portion.

(Operator Instructions). Ryan Daniels, William Blair.

I just want to get a couple points in clarity upfront. Could you just discuss the Catalyst and VetTest combined placements? I am curious if the revenue was up 25% year-over-year or if it was placements that was up 25% year-over-year.

Unit placements.

The placements are up. Do you think -- to a certain extent is the placement of a Catalyst actually driving more VetTest placements in that you might be swapping those out for three-fourths of your business, refurbing those and sending to another marketplace? So do those two work in tandem naturally?

That is very much a phenomenon that they do -- that they do work. Many times when we place a Catalyst in a VetTest account, maybe it is in the US, we take that VetTest back, and we can recertify it as good as new for a customer. And then place it in another customer, maybe the international customer, with a fairly low cost.

It is not the only type of a VetTest. We actually have a new version of the VetTest. I think it is just a combination of a lot of different factors, really having to do with the entire capability of the IDEXX VetLab suite.

Jon, you have mentioned a few times, both in this call in the last call, that maybe in the absence of an economic rebound that your technology innovation is really going to lead IDEXX' growth going forward. Can you talk a little bit, maybe just some color on what segments in particular we might see more growth?

I know you probably don't want to talk about specific products that you will be launching, but maybe what areas you are focusing on within the broader business model?

The couple of themes that I would highlight, really three areas -- pillars of our technology strategy. One is new diagnostic tests. And those could be in any modality, if you will, and in fact, could be of course in the pet health market as well as the Production Animal market. So it is really a very similar type of R&D activity that happens with new diagnostic tests and markers.

The second category is of course advances in our suite of point of care instrumentation and the capability. And there are a lot of different ways that we can continue to provide and drive the real-time care strategy.

And then third is information technology in general. We really see a significant opportunity, particularly in the Companion Animal market, for the application of information technology to move to electronical medical records, to move to integration to drive productivity, quality of care, and bottom-line results for the practice. And that is really -- that is a longer-term megatrend and something that we have been working on for a while. So those three pillars.

Okay, great. That's helpful. And then one more quick one and I will hop back in the queue. I'm curious if when you talk to the vets that you are servicing, if you have heard anything about it being easier maybe to do point of care testing and the ability to sell that in this environment.

What I mean by that is just the ability to actually give them real-time testing to walk out with results, etc. Is that an easier sale? And do you think that is kind of supporting your growth a little bit more given the tough economy?

Well, I think it is an easier sale of Catalyst, because you can get results in eight minutes off a couple of different patients. And so Catalyst is really spurring that. And that is probably why we see the midteens uplift in VetLab consumables when somebody goes from a VetTest to a Catalyst. That is more real-time care right there across the whole profile, if you will, for the pet.

I am not sure that is economic related. I know that many customers are appreciating the benefit of actually providing the results to the pet owner at the time of the visit. That increases compliance. It increases follow-on work. We are seeing our customers who moved more to a real-time care strategy see growth in their practices.

But of course the reference lab is also always continuing to increase its capability. And so I am not sure that the economy is having an impact one way or the other on that.

I guess I mean, just to maybe clarify my question, but do you think it is easier for a veterinarian to sell a point of care test, because he knows he is going to get results immediately and give it to the consumer, versus trying to talk them into reference lab testing, which would have to get sent out and they can get back the next day. They're not exactly your equipment sales, but maybe the end market sale, if you will.

I do think it is easier to sell point of care testing when they can show the results right there and people know what they're paying for. Because the doctor can have the conversation with the pet owner on what the results are face-to-face. We have seen -- face-to-face communication is just so much more powerful than a telephone call the next day, which doesn't -- isn't quite the same.

Sure. Okay, great. Thanks for the color.

David Clair, Piper Jaffray.

I guess the first question is just a question on the 2009 outlook here. I am just trying to tie out, given the weaker dollar that we are seeing now and the benefit that we saw this quarter from FX, and I'm assuming that -- well, we didn't see a benefit but a less negative impact in the quarter, and then it is going to be tailwind next winter, I am trying to reconcile that. Are there some segments where we could see sequential slowdown -- or just try to walk me through that, if you could.

Okay, just to clarify then. You're looking at that -- the impact of currency versus our last guidance.

Yes.

In July. The fact is we are -- there hasn't been that much movement. The rates that I mentioned from July, I think we had the euro at $1.40, and now -- and our guidance right today it is at $1.45. Of course, the euro is a bit higher than that. It has been -- currencies have been strengthening against the dollar in the last couple of weeks here. I guess there is -- obviously then if they were to remain at current levels today then there is a little bit more upside than what we talked about.

But really it is -- just what we have said with our guidance is just a function of the currency rates being at the levels that I mentioned. We really didn't see any impact, any kind of material impact, to the bottom line in the second -- in the third quarter from currency. It rounded to less than $0.01.

But at the rates that I mentioned, we did expect that we would get about $0.01 of benefit from currency for the full year. So obviously then as a result in the full second half we would see that round to $0.01. Again, with rates where they are today, perhaps that would be a little bit more. It probably makes it just a solid $0.01.

It is a moving target, obviously. The other thing, of course, that I would add to Merilee, currency strictly. Most of our bottom line exposure to currency is hedged for the fourth quarter. Just as it was for the fourth quarter of 2008 when the dollar dramatically strengthened associated with a crisis, and yet we were able still to deliver on our guidance. So that obviously mutes the impact of currency.

Given the fact that we are an exporter, but the vast majority of that export exposure in the near term is hedged.

Then maybe a quick one here for Merilee. You mentioned that there was some favorable order shipment timing in the quarter. Is there any way you could quantify that?

It was about $2.5 million. And really that was just orders right at the end of the third quarter, so we consider that timing that just is revenue in the third quarter that we won't have in the fourth quarter.

It is the way the calendar falls.

Then just a quick one here on the competitor front. One of your competitors received approval for heartworm on their instrument, and I just wanted to get your take on that. If you are seeing any kind of -- hearing anything in the field and if you expect any kind of impact from that, and if you have any plans to make a similar move.

Well, we have already -- we already have heartworm on our instruments with 40x with SNAPshot Dx.

Right. I was talking more on the chemistry side, just on -- like a panel.

I think we do have a panel. That is what SNAPshot is all about. Of course, the vast majority of our canine parasitic disease testing is full parasitic disease testing, not just heartworm. And Merilee mentioned that 75% of our units and actually 83% of our revenues get a higher price on the full parasitic disease, the 3Dx and 4Dx.

And of course the customers appreciate the fact that endemic territories, which is most of the country, heartworm testing is not adequate. Ticks are around and there is a lot of news about ticks and there is a lot of tickborne disease that needs to be part of your parasitic program. So that our first comment. Of course we have that on the SNAPshot.

The second comment I would make is we understand and have designed our products to reflect customers' needs in the area of workflow. You have to recognize in heartworm season they are doing a lot of quick visits, and the workflow is very, very important. A SNAP test is eight minutes. It is eight minutes when you run it manually. It is eight minutes when you run it on a SNAPshot. Of course we have two ports on a SNAPshot, because you start seeing these things come in.

We have found that even for a very modest size practice that two ports and eight minute time result is sometimes not even enough capacity. You get kind of any reasonable size practice, and they're going to run this thing on the instrument, they're going to need -- they are going to maybe need two SNAPshots. So you get a sense for the workflow. If you can't meet that kind of timeframe, it doesn't really work in that kind of -- where you've got that wellness testing type volume.

So basically nothing beyond the Rapid test that you have. You think that is good enough?

Well, our Rapid test of course can be read manually and on the instrument. I think it is not just good enough, I think it is a very differentiated offering in a number of dimensions. So we feel very good about our competitive position and differentiation in the area of canine parasitic disease testing.

(Operator Instructions). Jonathan Block, SunTrust Robinson.

First one, Jon, maybe this is for you. Just can you help us out and define what a competitive win is? I think you mentioned that 25% of Catalyst were competitive wins. Then if we listen to ABAX call, they will stay competitive wins. And in the duopoly everyone is stealing competitors and etc. Is that a point of care win? Is that a lab win from Wolfe? Could it possibly be your lab win? Could you be more specific here?

When we are talking about -- very specifically when we are talking about Catalyst placements and we use the 25% metric, we are doing it in the context of the razor blade business model. So this is a customer who isn't buying blades from us. Meaning -- or very many chemistry consumables. They are playing non or very low volume, because they are doing most of their chemistry testing with a competitive instrument. They may have a VetTest, but they don't use it very much. There are a couple of those -- there are some customers out there that like that.

Then, of course, when they get the Catalyst that is clearly a superior -- they switch all their volume to Catalyst because that is what it is good at. So what we are saying is 25%, our customers that aren't really buying any or any meaningful chemistry consumables. Is that helpful?

Yes, it is. So just let me clarify. That could actually be an IDEXX VetTest that really wasn't utilizing it?

It could be.

Okay. Great. Then just moving on, Rapid Assay, I think when you flush out -- Merilee, I was jumping around -- but when you flush out the inventory you said year-to-date maybe right around flattish. And just wanting your sentiment there.

Clearly the consumer has something to do with that, but it is lagging just your overall lab and consumable growth there. Was this still just purely a saturation thing or do you think there has been any headway by competitors out there?

I think it is really economy related with regard to that type of testing as well as saturation. We were also able to, as part of the upgrade, realizing price on the upgrade from heartworm only to a full parasitic disease -- so that is part of that saturation story too. Those are the primary factors.

Maybe just one or two more. I think, Jon, this is a big picture question. You have had so much success here and you have grown this business to north of $1 billion. The old IDEXX was sort of this 15% top, 20% plus bottom. I know we are dealing with a rough economy, but you are seeing this morph into sort of low -- well, let's call it mid-single-digit on rev and maybe low double-digit EPS, even though you just rolled out two huge products. Is this the new IDEXX? Can Catalyst and SNAPshot get you back to the old growth rates? Are there other areas that you are pursuing that you think could come onboard in '10 or '11 to meaningfully re-accelerate the growth rate?

We feel very good about the fundamentals of pet healthcare and the fundamentals of our technology and strategy. We are in a pretty big recession and pet healthcare is a consumer expense. And consumers have pulled back pretty dramatically year-over-year. I think we are seeing that in our business and others that participate in the market in various ways are also seeing that. But I think that is a cyclical phenomenon, not a secular one. And the secular story of pet healthcare and an attractive place to be, I think is intact.

And it is of course why we continue to have a significant investment in product development on R&D. You can see the R&D line on our P&L, and that is to continue to drive innovation.

In addition, big picture, longer term, we see the opportunity for margin improvement in the business driven primarily by our two biggest revenue contributors, contribute over 50% of the revenues of the Company, the VetLab suite, as Merilee has mentioned in the concluding remarks that she made upfront, And also in driving synergies and efficiencies in our global reference lab business.

We are really finding that it is a global business model. And there are opportunities for significant scale and best practices and synergies across the five continents and ten countries that we operate that will drive margin improvement in that business.

Perfect. And the last one if I can just slip it in. You guys put up a great DR number, exactly the opposite of your competitor last night. They made an acquisition, they have had a tough time integrating. Did you capitalize any from some disruption from the primary competitor, or is this something where you think the market is picking up and you've got a differentiated product out there? Thanks guys.

On our DR we feel very good about our DR product line and where it is today. Recognize that there are two segments. There is the CR, which is a lower entry cost. Same image quality, but a little bit more involved workflow -- not much more, but a little bit more involved workflow. A minute instead of seconds. Then you've got the DR, which also is -- really the both are equivalent image quality, but you've got -- it is better for a higher volume.

The vast majority -- not the vast -- the large majority of the market is really in the CR right now. That is where that mid tier is. And we have just a great product offering across both those. Of course, we have a differentiated software called a PACS, which is the software that runs it. It is also integrated into the practice management software.

We believe that that is all part of the story. People are not going to want to have a different medical record system for their digital images as they have for the medical notes. They are going to want to go to one place. It certainly makes things easier. And we are the leader in providing integrated offering.

So both from a software, and really having the full CR and DR product line, everything is working for us today. So we are excited about the opportunity in that business.

Ross Taylor, CL King.

I just have two or three questions. I don't know if you want to talk at all about projections for how many Catalysts you think you could place in 2010. Do you think it would be materially different than the 1900, 2000 instrument number you're talking about for this year?

I don't want to get into specifics, but I do want to give an indication. We will probably talk more about that in our fourth quarter call. If you look at the progression when we got to a full year on LaserCyte, the second full year was up about 10% from the first full year. I think that is probably a good guideline for where Catalyst would go. The first full year might be this -- 2009 second full year would be 2010. So it just gives you kind of a ballpark.

Okay, that's good. The Rapid Assay product line, this is going to be similar to the question that was just asked. But I kind of look back over the last four quarters, and if you adjust for the inventory, demand looks like it is flattish, maybe down a little bit. Conversely your instrument consumables, I think, were up low single digits over that same period. Is this really just a reflection of the reduction in wellness testing compared to other visits to the veterinary office.

I guess the second part of this question -- what needs to happen to get growth back in this product line?

It is a good question. I think one of the things that we are seeing in the market is that people are -- they are trading down whether it is good or not. We are seeing the, if you will, the average client transaction charge year-over-year in the industry is dropping -- is not growing as it was historically. I think that is because of the -- you know, customers just want to do less. And one of the areas that is optional is wellness testing.

So the thing about our in-house equipment is a lot of it is sick animal testing. But if you think about parasitic disease screening, by the definition it is screening. Most of that is wellness testing. That combined with the fact that we enjoyed significant penetration and substitution of full parasitic disease from only heartworm for a number of years and the price realization associated with that, kind of coming to the end of that. We see that Rapid Assay business is a great business for us, but really as we think about growth drivers in the near term -- near term meaning the next year or two -- we see it in -- other portions of our CAG portfolio are probably going to take over, where -- we've got a whole catalyst launch going on, as an example -- will become the growth drivers, where the Rapid Assay business had been the growth driver in the past.

Maybe just one question. It is a minor one related to that. Do you see any opportunity for pricing with Feline Triple now that has become such a big percent of your mix?

I think the real question with -- that we are seeing -- that we would see with Feline Triple wouldn't necessarily be pricing, it is potentially utilization.

What is going on is when a customer gets a positive, whether they're using Feline Triple -- they are using it maybe the way they have always used it, and all of a sudden they find a heartworm positive cat. That is like a religious experience. All of a sudden they get the fact that feline heartworm exists. They've got the cat right here. They say, wow, this is -- this really does exist, maybe we ought to be doing more testing.

So I think the opportunity -- and we are still -- it takes a while, because the prevalence of feline heartworm isn't that different than canine heartworm, frankly, but it is low. It is maybe on the ballpark of 1%. So you've got to test 100 cats before you may find a positive. So it takes a while for each clinic to have this experience. It could take them a year.

So we are seeing really just the beginning of adoption of Feline Triple. But the opportunity might be that they decide that they want to do more testing, not really as much for us a pricing opportunity.

Okay, I understand. Okay, that's all I have. Thanks very much.

(Operator Instructions). Daniel Owczarski, Avondale Partners.

Jon, you talk about the fourth quarter is typically a strong quarter for you, especially with instrument placements. What is different about this year, or what gives you confidence that vets are not going to be a lot more conservative in their purchases towards the end of the year?

That's a great question. It certainly is a more challenging year for capital in general; we feel that. The fourth quarter of course always is the largest capital quarter of the year for a variety of reasons. But I think the primary one is in the US vets realize they can take a tax deduction and reduce current year taxes. And if they put this thing on lease they actually get positive cash flow from having invested in a piece of equipment, provided they are in a taxable situation.

You don't need that many customers to buy equipment. If 50% of the market isn't feeling so good, but the other 50% is feeling fine, and 10% of them buy a piece of equipment, or 15%, that is fine.

So the interesting thing about the veterinary market is that there are clinics that are all over the map. There are clinics that are doing very well this year, up 15%, 20%. We talk to them every day. And there are clinics that are down 15% or 20%. So you only need to get the ones that feel well.

Secondly, is that we have momentum with our product technologies -- digital radiography, we talked about the release of Cornerstone 8. And of course Catalyst is really establishing some nice momentum as we have progressed on our launch, and full ramp objectives. So really a combination of everything against the economic headwind.

But now for Catalyst, I don't know if you said it in your prepared comments, is that backlog growing? Is it about the same? Do you have visibility there, that you can do the 600 placements in the fourth quarter?

What we are doing is we have pipeline management with our salesforce. They have an idea where they are going to sell them. It is not really a backlog business at this point, and that is very typical in the instrument business. After the early launch period you are in a situation where you walk into a veterinary practice and many times it is a one-time close and we install it a week or two later. So I think the visibility is more because of the pipeline of prospects that we have in our very fine domestic and international commercial sales organizations.

It is Merilee. The other thing that I would add is that in the digital business, where we do tend to have more of a backlog situation in a quarter -- at the end of the quarter, we did see that we entered the fourth quarter with a strong quarter book, as I mentioned. And I think given that that is the highest priced piece of capital that we have, that is a good indication of at least willingness to make these investments.

Yes, that is a good question. The digital and the computer systems are backlog business, whereas the instrument business is as I characterized it.

Merilee, I don't know if I missed it, but the SNAPshot Dx, can you just remind us where you are as far as installed base and where that is going, or how that is building through the year here?

The installed base now is almost 1,900 instruments, and we placed just over 1,000 this year.

That was actually -- our placements were up sequentially quarter over quarter in Q3. So the great thing about SNAPshot is it has got a variety of different values that it adds. One of the main values, of course, is endocrinology testing. And we are doing very well on that dimension. And I -- that is part of that consumable [uplift] we see with a Catalyst placement.

With that, I would like to turn it back over to you, Mr. Ayers. Please continue.

Thank you very much. We have had a full hour. I appreciate the questions. And we look forward to updating our full-year guidance -- full-year performance and, of course, more details on 2010 guidance in our January call. Thank you, and that concludes the call.

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